Martin Leon Barreto
Soon after Brian Chesky graduated in 2007 with a degree in industrial design, he moved from Rhode Island to San Francisco. He was shocked by the cost of living, at one point owing $1,200 for his share of the rent for an apartment, but with only $1,000 in his bank account. Chesky saw an ad for an international design conference being held in the city, which mentioned that all the nearby hotels were completely booked up. He immediately saw an opportunity: designers needed a place to stay, and he needed rent money. So he set up a website and advertised that his roommates had space to accommodate three visitors, if they would sleep on inflatable air beds. What would later become Airbnb was born.
The following year, Chesky was reading an article about the Democratic National Convention, which was due to be held in Denver. How, the article wondered, would Denver, which had some 28,000 hotel rooms at the time, accommodate about 80,000 convention goers? The entrepreneur immediately recognized that this could be a big break for his fledgling startup. “Obama supporters [could] host other Obama supporters from all over the world,” Chesky recalled three years later. “All we did was become part of the story.”
As well as being a memorable origin story that explains their name (air mattresses were the air in Airbnb), this is an instructive lesson in entrepreneurship. Chesky and his cofounders identified a twofold problem—lack of affordable accommodations and sky-high rents—and thought creatively of how they might be able to solve it and make some money at the same time. In the startup world, it isn’t necessarily the best product that ultimately wins out. Rather, it’s the best way to solve the problem. Once you do that, you can figure out how to scale it.
Too many startups try to do things the other way around. They develop technology that they think will solve a problem, rather than first identifying and understanding the problem and then thinking creatively about how to solve it. Typically, it matters very little that the technology is proprietary, clever, cool, or new: without a problem to solve, it will struggle to find a market, and, therefore, to become a profitable venture.
Airbnb is far from alone in being among the Silicon Valley startups that we think of as technology companies but which began with very little technology, and, instead, had a strong focus on what I would call getting orders. The correct way to think about these startups is not as tech companies but, more accurately, as problem-solving companies. Where they have used technology, it has been done to aid the solution to those problems, not the other way around.
Uber is another such example. Like Airbnb, it grew out of a problem that one of its cofounders had experienced directly. Not long before Uber’s founding, Garrett Camp and a few friends decided to hire a private driver for New Year’s Eve. The bill had come to $800, which struck Camp as too high. His solution was that sharing the cost could bring the price down. But Uber realized that the more immediate problem than cost was how difficult it was to hail a taxi cab at certain times. So in the first few years after it launched, in 2010, the company went after sporting events in New York City and San Francisco, where it was really hard to get a cab. At that time, all the cars it used were black luxury automobiles, and the price of a ride was more than a taxi. It had an app, but on the other end of the app, things were very low tech. Like a taxi company, it had real people coordinating with the drivers about how to pick up all its orders.
The danger of starting with technology, rather than a problem, is that startups can quickly overbuild, spending too much time and resources on perfecting the technology itself rather than focusing on problem-solving. By retaining a problem-solving lens, successful startups are able to adapt and troubleshoot as they go along, rather than continue to tinker with their technology or try to build further scale.
Early on, Airbnb noticed it had a smaller market than it had expected in New York City compared with other locations. The company realized that one problem was that the photos that went with the postings did not make the accommodations look welcoming. Again, the solution wasn’t based on technology. Airbnb simply hired photographers to take great pictures of these New York apartments. This in turn helped grow that and other markets, as people could see that better photos meant a better chance of getting bookings, and at better rates.
Another early challenge for Airbnb was its lack of inventory. It didn’t have a lot of listings in some of the markets where it was operating. The solution it came up with was to limit how many options a search turned up. The website would offer just three places in order to get a visitor interested. Meanwhile, behind the scenes, employees were calling around trying to find more places to stay in that city to give visitors more options. Again, a tech company was employing a low-tech solution by keeping its attention on problem-solving.
Startups that aren’t focused on problem-solving often find they aren’t generating as much revenue as they would like. In many cases, they respond by trying to sell the same thing, but harder. They hire a seasoned head of sales from a big company, assuming, “If that person was successful with them, they’re bound to bring us success too.” In such situations, that person typically leaves within a year, because the product still hasn’t yet found customers prepared to pay to solve a problem.
Problem-solving startups find it easier to learn, and to adapt their offerings to the market. In the early days of a venture, entrepreneurs are trying to figure out what their product is really all about. Every early sales call has two parts: first, you’re trying to get the order; and second, you’re trying to learn what you need to do in the future to get the order. This is an important distinction. In many cases, startups don’t actually know why their customers bought from them. Some assume they know why, but don’t ask. Others really are not interested in the reasons. This is a mistake. Asking good questions, listening, and learning are critical to long-term success.
Technology is a tool, not a vessel. It is only useful to the extent that it can get you to where you want to go.
A lot of entrepreneurs think about their startups on the revenue side, the same way they think about product development. If you think about developing software, it’s a linear process. You can figure out your requirements: you’ll develop a minimum viable product, tweak it, come out of beta testing, make your changes, and then go to general release. We can put a time frame on all of this. Unless we’re breaking brand-new ground, such as making a carbon-fiber aircraft for the first time, most software development has two main inputs, time and money, so it can typically be well defined in a linear fashion. This is why entrepreneurs try to make their revenue models linear too. If an entrepreneur knows her product will be released six months from now, she knows it’ll be in beta in four months. She calculates that two months in, she will need to have a head of marketing so the company can start to define the leads and get the process going. A month later, she needs a head of sales, to bring on sales reps and train them, so that within the first 30 days of the product’s general release, her marketing team is generating leads, and she’s got 40 salespeople selling, and we all hit our numbers, and we’re a big success.
But in reality, generating revenue for a startup follows a process that resembles the Customer Development cycle, a model developed by Stanford’s Steve Blank. Blank identified that customer development is an iterative rather than a linear process. Very few businesses finish where they started, which means at some point, they were wrong about something. In order to get a good fit, the best startups end up in an iterative process involving what they are offering and to whom they are offering it. That means their first customers may not be the customers they really want. They might have to tweak their targets to get the right target and alter their value proposition a little bit, all to get a good fit. This needn’t be what we typically think of as a pivot, a big moment where we started out selling meals and ended up selling bikes. Instead, what make our product offering stronger are lots of small tweaks that shape the offering and the way we sell it.
Selling skills are essential for entrepreneurs and need to be taken seriously.
Startup Founders, Put On Your Sales Hat
It’s possible to grow that fast, but wildly optimistic to bet on it.
The Elusive Hockey-Stick Sales CurveNone of this should be understood to mean that if you have an idea, develop some great technology, and ultimately fail, the idea is necessarily a bad one. Take Webvan, the online grocery business founded in 1996 by Louis Borders, the cofounder of Borders Group. Webvan raised hundreds of millions of dollars from investors such as Sequoia Capital and SoftBank, and through an initial public offering. It spent $1 billion building unbelievably efficient robotic distribution centers all around the United States, plus a fleet of delivery trucks, so it could deliver within 24 hours at low cost. But the business needed a ton of volume to stay alive, and ultimately, the market wasn’t ready to buy groceries online, because not enough shoppers had broadband internet at home, and because they weren’t comfortable transacting online or buying groceries on the web. So Webvan went bankrupt in 2001, not because the idea was terrible (companies such as Instacart are proving that it wasn’t), but because the market just wasn’t ready. They had put their faith in technology, scale, and disruption, and had failed to focus enough on problem-solving.
Technology is a tool, not a vessel. It is only useful to the extent that it can get you to where you want to go. That destination must be meeting a need that customers will pay for. Better to start your venture with finding and serving that need.
Michael D. Alter is clinical professor of entrepreneurship at Chicago Booth.
An expert panel discusses the valuations of A.I. startups, and what those valuations mean for entrepreneurs and investors more broadly.
Are A.I. Startups Worth the Investment?
Science sheds light on the importance of familiarity.
What Venture Capitalists Can Learn from ‘Racist’ Rats
Long before Apple was a corporate behemoth, it was a small venture that had been started in a garage in Los Altos, California.
Many Entrepreneurs Don’t Need SubsidiesYour Privacy
We want to demonstrate our commitment to your privacy. Please review Chicago Booth's privacy notice, which provides information explaining how and why we collect particular information when you visit our website.