Good Business Ideas.

Since leaving Yammer, I've spent a month or so away from work. It's been nice to step back and get some perspective on things. One of the things I want to work on over the next few months is to come up with some good business ideas, release a very minimal version, and see if any of them stick.

But ideas are cheap, and most of them are bad. One of the things I've been thinking about is how to characterize those that have potential, versus those that simply scratch a personal itch, but would not be successful businesses.

The following is adapted from an email I sent to some friends defining what I am looking for in a business idea.

Profitability

The days of building massive user bases, and then worrying about money are over. If they weren't already dead, the Facebook IPO killed them. Business models are really hard and really important. You can't just bolt them on when you start needing to get paid.

Businesses make money. Otherwise, it's just a hobby.

The less funding you take, the more of your company you can retain for yourself and employees - and when hiring is hard, equity is far better used to gain loyal and productive employees, than to sell for money. Your runway is directly proportional to your profit - the earlier you start making money, the longer you can go, and grow, before you need more money. The ideal scenario is that you can bootstrap yourself all the way out, but scaling a product is expensive enough that there is a point where most people need to take funding. Of course you want that point to be because you are so successful, not because you've reached the point of desperation. And the only way to do that is to make money early.

Virality

I've been lucky to work at two big companies that get virality, but most people don't - and it's one of the most important concepts in modern society.

The web brings potential eyeballs to anything - net-neutrality means that everything has the potential to be seen by anyone. That alone is the real reason the web has changed the world. But additionally, it means that the future belongs to those who can get the most eyeballs.

The core of virality is that if every user of your product has a n percentage chance of bringing another user to your site, then the power law means that small increases in n have massive increases in the number of users you get.

This is really the only way to grow a user base.

Facebook is one of the few companies to get this, it's really at the core of their business, and that's why they have the most users.

Now advertising is the weakest form of virality - with an ad, the most you can hope for is a single response. Traditionally, people use advertising when the lifetime value of a user exceeds the cost of getting a user, discounted by the effectiveness of the ad campaign. But virality means that you can also add the potential value of all other users that user brings to your product. Even still, if your product requires advertising to grow, you're doomed to be unseen.

Word of mouth is the second worst form of virality - to spread, it requires that your product be truly exceptional, enough that people talk about it. Most of the time this isn't the case, so if a product relies on word-of-mouth to grow, it's probably not going to work.

What you're really after is a model where the concept of other users is implicit in the value of that product, so it is in your interest as a user to bring them aboard.

As an aside, I refuse to work at a company that exploits game dynamics to bully people into being spammy. I've done it before and I was ashamed of it. Moral integrity is too important to sacrifice for market share.

Originality

This criterion may be my most controversial, but I believe in it strongly. Out-executing should only ever be a plan B. The ideal situation when you are building a business is that you are able to grow that business to the point where you have an economic moat before you even have competition.

Of course this isn't often the case - successful ideas spawn competitors, and in that situation out-executing is a solid way to win your space.

But a lot of people seem to think that they can enter a space with a powerful incumbent, and out-execute that competitor from scratch. I think that that is almost never the case - unless you have some underlying novel idea - and by that I mean something genuinely novel, not just a prettier UI or a simpler flow - then you are starting from a massive disadvantage and will most likely be beaten.

Big incumbents don't get beaten because a small company out-executes them

• they get beaten because by being big, they've lost sight of one of the core reasons they dominate that space - and a smaller competitor with fewer distractions has an insight as to where they went wrong.

Even from a point of insight, it's an uphill struggle, because that incumbent has resources and expertise they can leverage in playing catchup to your novel idea. So the novel insight has to be so against the flow that it causes major soul-searching in the larger company - large companies have a lot of momentum, but once their ship is turned around they can move very quickly.

The reason Instagram were so dangerous to Facebook is that they had a key insight that pictures are more valuable than text in a news feed - and because they executed on that before Facebook had really understood the value proposition, they had a chance to build a moat.

The best targets for insightful disruption are companies that are trying to do too many things at once - companies with identity crises don't know how to stand up to confident upstarts.

Alternatively, companies that are thinking without technology are also easily disrupted. But either way, you have to have some original thought. Copycat companies are parasites, and unless the host is weak, parasites don't win.