This blog post was originally published on Medium. Its author Sean Johnson is a developer in Chapel Hill and founder of Snooty Monkey, a Ruby on Rails consulting agency. He and colleague Andrew Shindyapin developed the concept of this post after years of frustration about the Y Combinator founder’s popularized comments.
A couple years ago, in an essay about startup investing called Black Swan Farming, Paul Graham said, “the best startup ideas seem at first like bad ideas.”
“…if a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realize are good.”
In the article Paul combined this theorem with another, “returns are concentrated in a few big winners,” to make a point about startup investing: every investor, including Y Combinator, is too conservative. Despite knowing these two theorems at an intellectual level, it’s very hard to invest in ideas that seem bad.
Good Ideas that Seem Bad
In the essay, Paul describes a Venn diagram Peter Thiel once drew (pictured above).
There’s a certain idea we all know (we saw the movie) that seemed bad, but now has a $215 billion dollar market cap and has changed the very nature of human social interaction.
There’s another bad seeming idea that sounded stupid to everyone the first time they heard it, but that has gone on to help topple regimes 140 characters at a time, and has a $25 billion dollar market cap.
Good ideas that seem like bad ideas…black swans. This is where the aggressive, and therefore the successful startup investor should be farming. The startup community was abuzz about Paul’s essay. I’m naturally skeptical of anything getting a lot of buzz.
Does the Data Support It?
It was a great essay, but it was sparse on examples. It’s easy to think of a few examples that are top of mind, such as Facebook and Twitter, as a confirmation, but we risk availability bias, so I decided to draw Peter’s diagram and fill in more products and startups. I filled the circles with every startup I could think of, the bad ideas, good ideas, and the intersection of the two: the good ideas that seemed like bad ideas.
In order to do this, I had to decide what we mean when we say something seems like a bad idea. Here are some possibilities:
- The problem it solves is not real or significant
- The solution is worse than the problem (in cost, hassle, risk, etc.)
- It’s something no one wants
- It’s something no one wants from you
This is not an exhaustive list. We can certainly come up with other criteria for what makes an idea seem bad, but the primary criteria I used is the one that Peter and Paul most likely had in mind: “It’s something no one wants”. In fact, this criteria, in a more specific formulation, “It’s something no one wants because it’s inferior to existing solutions to the problem”, was made famous by Christensen in his treatise on disruptive technologies, and it applies to many of these good ideas that seem bad. Twitter certainly seemed inferior to blogging. Craigslist seemed inferior to any website that didn’t make you go blind with its ugliness. Sleeping in a stranger’s bed seemed inferior to staying at the Holiday Inn.
This exercise of filling in examples brought Paul’s essay and Peter’s diagram to life for me, but I found there was a problem. There were so many successful examples that I couldn’t put into Paul’s intersection. These were good ideas that just seemed good. It seems we should be farming there! A small sample of the ideas I put in Peter’s Venn diagram.
Too Good to Be True
It’s not that Paul is wrong about black swan farming (despite my link bait title), it’s that he paints an incomplete picture about where successful startups come from. It is true that some successful startups come from seemingly bad ideas that turn out to be good (e.g. Facebook, Twitter, Airbnb, or Instagram), but many successful startups come from ideas that seem too good to be true, but aren’t (e.g. Amazon, Google, Netflix, Dropbox or Tesla).
As an investor, especially of other people’s money, you should be taking Paul’s advice and investing in some seemingly bad ideas. A very small minority will turn out to be very good ideas indeed. But as a founder or an early employee? You have a lot more skin in the game; you’re investing 3, 5, or maybe 10 years of your life! You should bet on one particular kind of idea, the idea that seems too good to be true.
A bet on a too-good-to-be-true idea is a bet on people making the seemingly-impossible possible. Go make a too-good-to-be-true idea happen. Bet on yourself.