As VCs dedicated to seed-stage investing, we are among the earliest believers in companies when they are still in their beginning phases.
We get to see what many later-stage investors do not: where great startup ideas really come from and how, exactly, companies are born. Rarely is there a moment of divine epiphany. Rather, most top Founders go through a rigorous ideation process to come up with the ideas we know them for today.
We’ve previously shared 5 frameworks to help Founders refine their startup ideas. Over the last year of our NFX podcast, we’ve also interviewed dozens of the world’s leading Founders and CEOs from the U.S., Europe and Israel, and we’ve gotten to hear their ideation frameworks as well.
We ask them about the genesis of the company, the earliest sparks: How did you come up with the idea? What cultural and technological shifts had to happen to make your idea possible? And the big one: How did you decide it was worth spending an enormous amount of your time on?
This essay is a curation of just some of the often unheard founding stories from the best of the best — including Craig Newmark of craigslist, Jeff Lawson of Twilio, Manish Chandra of Poshmark, Heather Fernandez of SolvHealth, Micha Kaufman of Fiverr, Elad Gil about Color Genomics, Ben Rubin of Houseparty, Assaf Wand of Hippo, and Austen Allred of Lambda School.
It’s our hope that future Founders can use this to best determine what their next startups should be.
4 Signs That You’re “On To Something”
What you’ll hear over and over in the Founder stories below are these common patterns that we at NFX have also observed about the genesis of great startup ideas.
1. Obsession is a filter for good vs. great
We often tell Founders: “Don’t start a company unless you can’t not do it. Unless you can’t sleep at night and your brain is exploding with the idea.”
Founder-Market Fit means you would choose to work on the idea in your free time. It’s the kind of thing where, when you’re working on it, you don’t notice the time passing. There’s nothing you’d rather be doing.
World-class, iconic companies are almost always founded by Founders with that level of obsession, because it equips them to endure for the long haul that it takes to build a company without burning out or losing faith.
Obsession is a great litmus test for knowing whether your idea is merely good or really great — and if you are ready to commit a big chunk of your life to making it happen.
2. Something is obviously broken
“The dirty secret of every startup ever is that when you look at companies with these big, world-changing missions…those are usually retroactively put in place.” – Jeff Lawson, Founder & CEO of Twilio
Contrary to popular belief, the best ideas do not start from a sweeping desire to transform an industry. Rather, they start by solving one problem very well. World-class Founders often see what is broken or missing and build a simple solution to change that.
Time and again we hear a great startup idea come from someone saying: “This shouldn’t be this hard.”
3. Potential customers “get it”
You may think you have a great idea, however, if it is not focused on the customer experience and simplifying their world, somebody else is going to come and take over in that market.
Make and take every opportunity you can to engage with and understand your potential customers. What can you do for them that changes their life or that makes their life better?
Talk to people, listen to people. Are you the only person in the world with this problem? If they come up with even more use cases than you imagined, you’re on to something.
Make sure that the customer problem you’re solving can solve many customers’ problems, or you won’t have a meaningful business.
4. You’re an outsider
Founders and VCs tend to over-index on experience, but experience is a double-edged sword. On one hand, it’s hard to have good ideas when you don’t understand the problem well enough to try to solve it. But on the other hand, if you have deep existing domain knowledge, you run the risk of cognitive entrenchment. “When Founders get too attached to their existing patterns of thinking, they become prisoners of their own prototypes.”
For Founders, the mental model of being an outsider to your industry can be an asset in the early days. It’s unlikely Uber would have originated from within the taxi drivers association, or Airbnb from the hotel management ─ these disruptive innovations came from the outside.
The best Founders we see at NFX know when to rethink the assumptions that they and everybody else have made about an area, technology, or market. This unlocks breakthrough thinking in order to make the seemingly impossible, possible.
Startup Idea Stories & Frameworks
The below stories are excerpted from conversations with world-class Founders on the NFX podcast.
1. “This is hard. It shouldn’t be that hard.”
Two or three things were driving Color Genomics. First, Othman Laraki, my co-founder who’s now the CEO of the company, had hereditary cancer in his family. His mother had breast cancer twice and other family members were affected. So part of the impetus for Color was just asking ourselves — how do we make sure that people have better access to their health information and important genetic or other medical information about themselves? Because it was really hard to get it for his family. And it shouldn’t be that hard.
Second, we saw this big trend in digital health, genomics, and other sorts of big trends. And in general, healthcare tends to adopt technology 10 or 15 years after everybody else. So it felt like it was time for a lot of these different services to really become virtualized in terms of patient care delivery or other aspects of the healthcare stack. So the impetus for Color was really a mix of personal experience plus recognizing this macro shift.
2. Keep close to your organizing principle
Ben Rubin on the genesis of Houseparty — from Meerkat
From the very beginning, our organizing principle was “Bringing people together — in the most human way possible — when they are physically apart.” That’s where we started. We initially built two livestream apps: AIR and Yevvo with an audience of hundreds of thousands of students, but they stopped growing.
While we were brainstorming new use cases, we noticed users live-streaming concerts on Twitter with the app. So we pivoted to become Meerkat, a mobile broadcast service that made one-click live streaming simple. We built the product in 60 days. Launched on Product Hunt in February 2015. Meerkat was the darling of SXSW in March 2015 and hit 2 million users.
But at SXSW, Twitter shut Meerkat out of the API because it competed with Periscope. A usage analysis revealed that we need to pivot Meerkat because only few users were persistent broadcasters, and the majority of frequent broadcasters were influencers, media, or celebrities. We knew that Twitter and Facebook would dominate those groups, and if we were cut out of Twitter, it would leave Meerkat limited room to grow. We also realized that users could not easily engage and connect with each other inside the app — so it was not clear that it was fulfilling our organizing principle for the company.
In early 2015, I told investors that Meerkat was not going to work and we pivoted to Houseparty. We came up with the product concept around the idea of a houseparty — a social network built around live streaming that allows groups to quickly jump online with friends and also makes it easy to discover and join ongoing house parties.
Houseparty took off, growing to 1 million DAU within a year. The company raised a $52M round seven days after launch. And while Houseparty was growing, it wasn’t enough to monetize or raise more. We faced the choice of another pivot or a sale and ended up selling to Epic Games in June 2019. Then Houseparty’s growth skyrocketed during COVID-19 and global shelter-in-place orders, becoming the No. 1 Social app in 82 countries, including the U.S. App Store.
Going back to our organizing principle of bringing people together when they are physically apart enabled us to keep pivoting on our core idea.
3. The big reveal of a 2×2 matrix
An early observation for us was that startups in healthcare were littered with tons of stories of companies with really great products that really got the go-to-market wrong. And go-to-market in healthcare is very important because titans exist, because blocks exist — both regulatory blocks, as well as some consumer emotional blocks.
And so we did something that was very business schooly, which is we took the billion ambulatory visits (ambulatory = non in-hospital visits) that happen in the United States per year. We put them on a wildly oversimplified two by two grid. So on the X-axis was frequency of visit. The Y axis was fidelity/loyalty to one specific provider. So the top of the Y was low fidelity to a provider. The bottom of the Y was high fidelity to the provider. So, thinking about marketplaces, you want high frequency and you want low fidelity to the individual person. You want to believe that it’s high quality or other criteria, but you need the personnel resource itself to be more flexible.
And we discovered something that I’d realized in my day-to-day life, but all of a sudden we were seeing in numbers on this grid, which was that the top right quadrant was a box that we called “convenient care.” Which basically meant urgent care, retail clinics, and telemedicine. We sized it at roughly 150 to 170 million visits of the billion. And it was growing rapidly.
And as a mom of three kids, I am a frequent visitor to urgent care clinics in between the pediatrician because access and convenience is more important to me than a known provider for that particular visit. Being able to go between my meetings or in the morning or in the evening after work.
And so just going around on the two by twos, if you want the bottom right… that was your primary care. The bottom left was your specialists, that’s where I have low frequency and high fidelity. And then the top left quadrant was low fidelity and low frequency like your ER, or your lab. And we’re like, well, this is very interesting. This top right quadrant was the tip of the spear of something that was happening in healthcare that was driven by consumers.
And we validated that by doing a second thing, is we went to Google Trends and we looked up searches for urgent care in the United States, versus primary care, versus Viagra, versus birth control, versus what felt like the things that people would search for. And our search was huge and growing by comparison. And I thought, “Holy shit, this is really big.”
So those two validation points made our idea and our go-to-market very clear.
4. Talk to people, listen to people
I had just recently taken a job in the emerging dotcom industry. ’95 is when it all began. I wanted to connect with my community more, so I started a very simple CC list about arts and technology events.
I just tried that and that worked out pretty well. People wanted more, I listened, did more, and it just kept getting bigger and bigger. Then it added apartment listings, and people said, “Hey, Craig, could you tell everyone on the list that I’ve got my apartment for rent?” I actually asked people to announce that because we started to see an apartment shortage in San Francisco.
Two hundred and fifty addresses was just too much to handle as a CC list. They do have finite sizes. I had to use a listserv, and I had to give the thing a name too. Since I’m pretty literal, I wanted to call it San Francisco Events. People around me, though, told me they were already calling it “craigslist.” I had inadvertently created a brand, and they were right. I didn’t know what a brand was, but I learned fast.
Within the year I realized that I had all these emails from people and I could write some software which turned emails into web pages. I had instant and for-free web publishing, and that worked out pretty well, particularly since it was just me doing the whole thing.
I was talking to people, listening to people, and that set the pattern for the whole history of craigslist.
5. Look for a number that really, really nags you
I knew I had another company in me. But I didn’t know yet what it was.
I had to go through an ideation phase. I sat and read for three months, tons of stuff. My process was to try to find four outliers and rank them. And then ask myself, am I excited about this? Am I thinking about it when I go to bed, in the shower?
I also asked myself: Can I take some components from my past expertise and answer a need that I have? One idea I came up with had to do with disrupting logistics. Try to ship something from China — it’s a freaking mess. Try to find a manufacturer, try to cover custom orders, try to ship, it’s not easy.
I usually find a number that really, really nags me. The number that I found was that 73% of the trucks were coming back empty. And I thought, that’s crazy. Maybe there’s a new bill for trucking. There are actually several really, really interesting companies that popped up in that space, but after all that thinking, I just couldn’t get myself excited.
I was also generating ideas about insurance, which I brought back from my back pocket from 2007 when I was a consultant with McKinsey in New York. I had done some projects for financial institutions and insurance companies. As a consultant, you get to open the kimono of the potential customers and see exactly what’s going on — and it’s all broken.
So I looked for the numbers that would show me the problem and nag me.
The gist of the idea that led to Hippo came from the facts that:
The average agent was 58 years old in 2015. Now it is 61.
Fewer than half of the agents worked in the field than there were 10 years ago.
And 87% of new agents to the profession are leaving the profession within less than three years.
And I thought, it’s like social security — not enough people coming in and a lot of people are leaving. Therefore, there needs to be a change, and the change is going to be direct, similar to what happened in the auto insurance industry. The two insurers that have the market share in the US are Geico and Progressive, and we thought, let’s build a Geico for home insurance.
There were 3 things that had to happen all at the same time to make it possible to start Hippo.
Off the shelf technology: I actually looked at starting this business in 2007 and I put it on the shelf because I couldn’t build the backend. I’m not going to go to Accenture and I’m not going to go to Guidewire. Back then, it was going to take me four years and $300 million to build it. I picked it back up 8 years later in 2015, and I figured, wow, we can actually build everything on AWS on either microservices and do the payment with Stripe and do the chat with Intercom, and I can build it to whatever scale I want in a faster manner and not have legacy. So the technology is done.
Abundance of Data: The second thing holding people back, originally, was lack of data. How can you compete with fill in the blank, who has 5 million customers while you don’t have anybody? But now we are in an era of abundance of data. I don’t just have five or 10 million customers. I have 130 million households. With Trulia and Zillow any transaction that happened in the last 25 years is all documented.
Newcomer brands earning trust: The last component was, there’s a point of realization that every other aspect of your life has basically moved to a newcomer, especially on the financial side. Insurance is just one more thing in this world and there’s a higher level of ability to trust a new brand or a lower barrier to trust a brand that is coming in.
So all of these three things came and I thought, wow, the barriers are low, and incumbent competition can’t really react — let’s launch something.
6. “Would you have a use for this?”
What I knew from the very beginning was: I’m a developer. I’ve been a software developer and I learned to code in the ’90s. I started three companies before Twilio, and I was one of the first product managers of Amazon Web Services. When I left Amazon, I knew I wanted to build my next company around something that I was passionate about, something that I get really excited about.
I thought back to my time as a developer and as a company builder. I realized that every company I had started prior to Twilio, had two things in common:
1. We used the power of software to really build a great customer experience, a differentiated product, and iteratively understand our customers and build better and better and better solutions using software. To me, that’s the super power of software, your ability to listen to a customer and quickly iterate your way towards a better and better customer experience or product or solution for that customer.
2. Also, we needed communication, because we needed to reach out to customers and let them reach out to us for a wide variety of things. Sometimes it was in our marketing, sometimes it was during our sales process. Sometimes it was customer support. Sometimes it was while they were using our product. There were all these places where we’d say, “Oh, wouldn’t it be neat if a customer could reach out to us and we could get them this answer? Wouldn’t it be neat if we could practically notify them of this or that?” Every time we’d have these ideas, we said, “Yeah, that’d be really neat, but I’m a software developer. I don’t know the first thing about communications. That’s like copper wires and satellites and space.” You’d call the hardware companies or the carriers and you’d say, “Hey, we have this idea. We’re trying to build it,” and you explain it to them. The salesperson would say, “Yeah, we’re happy to help you with that. First step is to run copper wire from the carrier to your data center. Second, you’re going to buy a bunch of hardware and rack it up. Third, you’re going to buy a software stack to pop it on top of that telco hardware. And forth, you’re going to bring up a professional services army to come bang the solution into shape. It’ll take two to three years and two to three million dollars. Sign here, we’ll get started.”
This is the complete opposite of the software ethos. Everything we do in software, we can measure it in weeks. The world of communications was like the old waterfall model; an industry where they’ve been accustomed to launching satellites and putting up towers and buying spectr for billions of dollars and laying down millions of miles of copper wire all around the planet. Yet, how we get value out of communications isn’t about all that anymore. It’s about software now.
I started Twilio to bring about that relatively simple evolution: bringing communications into the realm of software and enabling every software developer in the world who has an idea like we had to be able to build it quickly and easily. And that was where we started.
The key thing though was to determine: If I was the only developer in the world who would have that problem, then we probably wouldn’t have built a meaningful business. And so, I did a lot of research, talking to other developers, describing the solution, and asking, “Would you have a use for it?” Every time I talked to a developer, they’d scratch their head for a minute.
Then eventually they’d say, “Well, wait a minute. I have a question. That idea that you talked about, the telephone API, could I notify my customers when a package ships for my e-commerce website so that they don’t keep calling customer support to ask for the packages? And I would say, “Yes, yes. That’d be really easy.” And they’d say, “Oh yeah, great. Well, let me try it when you build it.”
After having that conversation enough times, I realized that I was not alone in seeing these use cases needing a way to solve it. And that’s what gave us the conviction to start the company. It turns out now we’ve got over 10 million developers in our ecosystem and over 200,000 businesses who are customers of Twilio. And so, the key, to me, was:
Solve a customer problem, and
Make sure that the customer problem you’re solving has legs to be big enough to solve many customers’ problems so that ultimately it’s a big opportunity worthy of your time and energy.
I mean, I think the original vision was truly born out and I think there was a simple problem to solve. I think a lot of people didn’t realize how big an opportunity was. And the timing, obviously, with the rise of the smartphone was where you have this telephone meets software environment was hugely impactful.
7. Look for a huge market, and solve its inefficiencies & friction through software
The first 10 or 20 people I told this idea to, told me that it was either crazy or just stupid — which fueled me more to continue with it because I thought that people couldn’t really envision what this could be. And competitively, it also gave us a lot of room to grow before anyone understood the greatness of the basic idea.
Fiverr is my fourth company, and before I started it, I was forming a thesis about companies in general. It was about taking large existing markets that have intrinsic inefficiencies and friction and removing that through software.
And that was exactly the thesis behind Fiverr. We made the experience of buying a digital service online, as easy as shopping on Amazon. You browse, you do a search, you find what you need, you click order at a level of simplicity that never existed before.
The $5 was a gimmick to start with. And it created a single price point so that we didn’t have to deal with multiple price points based on quality. We knew that over time, we’re going to extend that, but it was all about simplicity and removing that friction and inefficiency using software.
When I was beginning I did reverse storytelling in my mind. So I asked what is Fiverr’s purpose many, many years from now? And this was to become an everything store for digital services, Amazon for services. So this is how book number one ends. Great. But how do you write page number one? And so essentially I was, I was thinking about the components that we had to have in place for that to happen.
And this meant, tens of thousands of different categories and verticals and metadata and the amount of data that we need to create these algorithms that would do sophisticated matching and the type of support that we need and the type, the rest of the search technology and all of that. But these components wouldn’t appear until Chapter six.
How do you write the, how do you write the book backwards? So you start removing the heroes and villains that appear in later chapters, and work back into page one and try to remember what’s the purpose of page one. It doesn’t matter which book it is, the sole purpose of page number one is for people to read it and get prepared.
So think about what, what would be, what would be that point of engagement that will buy you time to continue engaging your audience and retain them over time. So they’re willing to be patient to read your next chapters. That’s the general framework.
8. Identify what people want, before they even know they want it
My college experience was very unique. I mean, I went to BYU, a great school that was very difficult to get into, and it was among the cheapest schools in the country. My tuition was a couple thousand dollars a semester, which at the time felt incredibly expensive. I felt that for my time and my money, I would be better served opting out and going elsewhere, which both in a religious community and within my family was, I don’t want to say blasphemy in a literal sense, but not far from it.
But to me, I had a hard time wrapping my mind around the idea that there is no other way to obtain knowledge than within the four walls of a university.
One of the difficult aspects when we started Lambda School, is that everybody would tell you that they wanted a reputable school. They wanted reviews, they wanted social proof, they wanted you to be written about in the news. But as I talked to folks, what you kind of could suss out is what they’re really wanting was just to eliminate the risk. They’re afraid that it wasn’t going to work and they were going to be on the hook. So that’s one of the reasons we created the income share agreement and made it as popular as it is.
The students wouldn’t have ever told us, “Hey, you should use an income share agreement.” They didn’t even know what that was. They had a problem and they thought their problem was lack of money, but you have to get to know them well enough to recognize that the problem was actually risk and being unable to take risk. And so you had to find a way to enable them to take the risk without suffering the downside, and then everything starts to work.
If you look at the great creators over time, they can identify what people want more than the people themselves can. And that’s very, very difficult to do. And I wouldn’t profess to be an expert in that, but to the extent that you can, that becomes kind of the most important thing that happens within your company.
9. “The idea just wouldn’t go away”
In 2003 and 2004, we were remodeling our home and the shopping was really really hard. And so I started to see the need for a collaborative shopping process and I kept rejecting it saying, “Who am I to do this?” I’m an enterprise software guy.
For six, maybe nine, months I kept saying no, no, no. But the desire, the idea just wouldn’t go away. And it didn’t.
And so my first startup, Kaboodle, a social bookmarking app for commerce was born. Kaboodle was in many ways the predecessor to Pinterest, in terms of how we coined the term social shopping, but there were many sorts of things around simplification that we missed in that journey. So it was successful, but it could have been way bigger had my thinking been there. We were trying to do a lot of biz development, partnership and distributions, which don’t work when you’re still trying to perfect the consumer experience. There was stuff that we could tap into from a network effect perspective that we didn’t enhance in the Kaboodle days.
The thing I loved and learned from Kaboodle was the power of community. We built a very passionate community of a few million users who were very connected. The second thing I learned was an understanding of people’s connection to their products, and how they think about it. And third was the power of simplicity, how simplifying leads to scale.
Where the idea for Poshmark came from: I remember seeing my friend using an iPhone 4 in August 2010 during a vacation. And that phone was so powerful, both in its ability to capture pictures and transmit pictures and view them simultaneously that it felt like it would be transformative. Then I saw this app, the early version of Instagram. The combination of all of these things really clicked and the idea of Poshmark was reborn in my mind very, very clearly.
The difference between my previous journeys was, I was much shorter about my thought process, I was much more willing to bet all on a single direction, and the simplicity didn’t scare me. It actually delighted me. So it was a very simple process and we said we’re going to only do it on an iPhone.
We were going to keep everything very simple. We’re going to charge a flat commission. You’re going to have a flat shipping system. We’re going to take care of all of the daily things and the Discovery Model would be entirely social now. These are a bunch of bets – mobile, social, simplicity, etc. Each of them were somewhat contrarian to what the norm was at that time.
And so now today, at this point if you think about it, Poshmark has been successful at that. Your shipping is simple, your payment is simple, all of the government integration is simple, so you can focus on two things that sellers love to do — how to merchandise their product and have conversations with their customers. And that’s the magic we’ve created.
From a Founder’s perspective, you have to stick to the customer experience. If you’re not focused on the customer experience, in this case both the seller and the shopper experience, and simplifying the world for them, somebody else is going to come and take it over.
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