I was just reading Don Dodge’s post, How to get accepted at Stanford or Harvard, or how to get a job at Google or Facebook, which reminded me of the people who asked me about how to deal with the MIT Problem for Startups. The problem that Don describes is exactly that which we are facing in the startup world. There are way too many perfect SAT score, straight-A valedictorians vying for not nearly enough Ivy school entry slots; how does one get into the top school of their choice? Don’s suggestions are eerily the same advice I would give today’s group of super-genius MIT/Stanford/whatever graduate entrepreneurs trying to get funding.
Work on Something Truly Unique
Don says to Do something special. I agree.
There are way too many people chasing the same thing, or similar thing (even if you think you’re different and better, or more importantly can your customers figure out if you’re really better or different).
To woo an investor, you should find something to work on that is totally something NOBODY else has thought of. That not only makes you stand out because of your idea, but also it means that you’ve got a head start on any competitors that may follow or copy you.
Defensible, Unassilable Competitive Advantage
Along with uniqueness, you can think harder and work on something that has some truly defensible element to it. This is back to old school roots on building companies which is to have some sort of technological or business advantage that is very hard to replicate, requires rocket scientists (time to put your MIT/Stanford degree to work now!), and potentially can be patentable (even as much as we hate the current patent system). If nobody can copy you, or if it’s amazingly hard to copy you, or you make them pay you if they copy you, then you’ve probably got something there.
Some of you have complained that this is really hard, or even said that it would be an easier path to some sort of measure of success (ie. early exit, get a job at Google via acquihire, etc.).
First, entrepeneurism has never been easy. It could quite possibly be the hardest thing you’ve done. The genesis of entrepreneurism is the idea you come up with to work on. Given the proliferation of entrepreneurs today, you’ve got too many great minds chasing after ideas. All the easy ones are already being worked on. So you need to think harder and more creatively on a market need and/or problem to be solved that someone else hasn’t worked on yet.
Second, while there are many angels and early stage funds who would back you if your idea was smaller reaching, my goals with investing are unfortunately incompatible with startups whose trajectories are not world dominating. As a director of Launch Capital, I must think on how to maximize return for my investor all the time and the risk of failure at early stage means that a super-high failure rate forces me to invest only in ideas with large potential outcomes. And yes, finding world dominating ideas is very, very hard.
Don then offers up advice on what to do next, if you didn’t get into your school of choice:
There are many paths to success
Never stop learning
When a door closes a window opens
All this says to me that you should not quit, and that you should keep at it until you find something that makes sense to work on. This could mean that you should branch out beyond your current areas of experience to find that elusive idea that nobody else has worked on. It could mean that you should join up with someone who has found that elusive idea. Or perhaps you should work on something that is completely different than the area you’ve trained in. Entrepreneurism is not all internet or tech!
Certainly being patient can also bring rewards. Sometimes stepping away from all this idea generation can spark your creativity more than concentrating your brain on it until your head hurts from hours and hours of trying to figure out an idea to work on.
Or perhaps in a few years, entrepreneurism won’t be in vogue any more, and you may find that you’re one of the last few entrepreneurial folks standing. All those MIT/Stanford/etc. geniuses competing for money might just go do something else and it might become a great time to work on whatever idea you have.

When I started angel investing, staying stealth seemed to be partially in vogue. There were still a lot of entrepreneurs who wanted to stay stealth and they would ask me to sign an NDA before talking about their startup. Unfortunately, I can’t sign NDAs in my business; if I did, I would quickly not be able to talk to anyone! But the world seemed to move to a more open working relationship and those who really wanted to stay completely stealth seemed to dwindle in face of the hordes of startups who didn’t care.
Staying stealth was also a barrier to many startups working in the consumer space. At one time, if you could get on Techcrunch, you’d find yourself instantly with 100K users within a week and things would take off from there. You wanted to get out there as fast and as broadly as possible so that users would know about you and come and try you out. More importantly, there were not as many startups back then; thus, competition was always a danger but the rate at which competitors popped up seemed manageable.
Lately, though, I have found myself advising at least two recent startups to now stay stealth as long as possible. While their stealthness wasn’t during the fund raising or development process, I thought it was now a bad idea to announce themselves to the organizations that cover or announce startups and is normally read by other current and near current entrepreneurs. This is because now the world has changed: it is much easier with today’s tools to create a startup, and since so many people want to become entrepreneurs today, the likelihood of somebody just copying you is much higher than ever before. Internationally, there are already teams working solely with the aim of copying US based startups and launching them in their local countries.
Today, in my search for startups, I try always to work with startups with no or very few competitors; it’s one of the most basic concepts for investment selection and in today’s climate, it is back to being one of the most important. But given the ease at which competitors pop up, it now benefits a startup to keep from announcing themselves to other potential entrepreneurs for as long as possible so that you can get a headstart on your operations, customer acquisition, product development, and dominance. This is much easier if you don’t have the typical 5-10 guys who seem to suddenly pop up every time a startup with a new idea gets funded (Or think Groupon, who has HUNDREDS of competitors).
My new word is: stay stealth for as long as possible to the places where other entrepreneurs tread often; go public only because you have to in order to gain customers and in those places which reach the general populace, which unfortunately does contain entrepreneurs but you can’t really do anything about that.

Definition:
Accelerants play a major role in chemistry. Most chemical reactions can be hastened with an accelerant. Accelerants are catalysts which alter a chemical bond, speed up a chemical process, or bring organisms back to homeostasis. An accelerant can be any substance that can bond, mix, or disturb another substance and cause an increase in the speed of a natural, or artificial chemical process. [source: Wikipedia: Accelerant]
It is probably obvious that the economy can act as an accelerant to a startup’s success. It is more obvious when the economy is rocketing skyward. Rewind back to the dot-com boom years of 1995-2000; the stock market was rising on the backs of tons of internet IPOs. Confidence was high, people had money and to spare. No matter what people did, it seemed that they could make money and spent it accordingly, confident that more money was coming in. Thus, startups of all shapes and sizes can ride an economic boom to success because there is free spending power to jump in the path of, from both individuals and corporations.
When the economy is bad, most people think that this puts the brakes on businesses and startups. However, I don’t think that is completely true. I think that a crappy economy can also act as an accelerant to startups and their success, even as those companies built to last in booming economies falter.
Let’s take a look at a snapshot of our current crappy economy, as posted by 24/7 Wall St. in http://ds.ly/lXDPgt:
1. Inflation is rising, despite the Fed’s efforts to keep it in check.
2. Investments have begun to yield less.
3. The auto industry seems to be coming back, but prospects aren’t good. Auto sales are a sign of consumer confidence and if sales don’t rise, then the auto industry will tank again.
4. Oil prices are at their highest, putting a huge dent in consumers’ wallets just to get around and to work.
5. The federal budget sucks and the Republicans and Democrats are sparring with our livelihood on trying to get a measure passed to deal with the debt ceiling, and how to reduce spending overall.
6. The Chinese economy seems to be slowing down, which will cause American companies to earn less.
7. Unemployment is still super high. And unemployment benefits and checks are ending.
8. The debt ceiling will probably be reset but austerity measures to reduce debt aren’t going to have a positive effect across the economy.
9. There is lack of access to credit across the board, hurting small businesses especially.
10. Housing and mortgage issues still abound. Huge numbers of consumers can’t pay their mortgages, and distressed mortgages are still on banks’ balance sheets and can’t be rid of easily.
We’re in a world where a lot of the population have lost their jobs (and their unemployment checks are ending), can’t find new jobs, or are earning less in their current jobs. But, the price of everything is rising, like gas. People need to make at least minimal ends meet but can’t find jobs anywhere. Or their current company is downsizing and moving operations elsewhere, or eliminating them. If consumers don’t or can’t spend, there is the trickle down effect to all corporations down the chain, and eventually all these positive earnings that companies are reporting are going to stop.
You’d think that early stage startups would have little chance of succeeding in a world where consumers have no money to spend, or corporations are unwilling to spend even if they have large hoards of cash (although perhaps this is changing finally?).
However, I don’t think that’s the case. There is evidence that startups that are built on the backs of the crappy economy are thriving. Here are some:
Flash sale sites (Gilt Groupe, Ideeli, Rue La La, Hautelook) given consumers their luxury brand goods, but at much lower prices than normal. Despite having less or no earnings, people can still get their goods at least until their money *really* runs out.
Deal sites (Groupon, Living Social) are enormous juggernauts, again, where people can get deals on anything from restaurants to interesting things to do, to great places to travel to.
Sites that allow you to make money off your own stuff or skills (Etsy, AirBnB, GetAround) are flourishing because people under pressure to make money to survive may find it much more worthwhile to just start renting out their extra rooms or cars, or start a business themselves.
Small business and crowd funding sites (Kickstarter, Profounder, IndieGoGo) are also doing well because people who want to start businesses can’t find funding anywhere else in today’s bad economy where banks won’t lend.
Given the crappy state of the economy today, what other ideas can flourish besides those above?
HOWEVER, if you try to start a startup in today’s crappy economic environment which requires a great economy as an accelerant, you might as well be trying to start a fire in a pouring rainstorm. Ignoring the economy when designing your startup could be fatal; in my post, Mark Fletcher at Startup2Startup and the Evolution of Startup Business Strategy I talk about Mark’s advice on startup building in different economic conditions and how he changed the way he approached his startup due to the conditions at the time. I now add that the state of the economy has a dramatic effect on what you’re building too – if you choose something that does not take advantage of the economic conditions at the time, then you could be doomed to fail no matter what you do.
[Still, this also means that if you launch the same idea in a different economic climate, it could work beautifully – is it time for the new pets.com to emerge yet?]

I was on a panel at Fundingpost’s, Silicon Valley VC and Angel Conference this last Thursday and once again the topic of how important the startup’s idea was, relative to other factors, in an investor’s decision process to invest.
Overwhelmingly, the panelists’ response that super smart and entrepreneurial people were much more important at early stage. This was because of the fact that almost always their initial idea was going to be wrong, or needed to be adjusted, and that someone needed to be smart and adaptable enough to pivot their activities into a viable entrepreneurial direction. So like war, the initial plan seldom survives contact with the enemy, or the marketplace.
However, I think I was one of two folks who said that we bet on superior people that were ALSO working on a great idea.
There are numerous documented cases of investors who bet almost solely on rockstar entrepreneurs and will invest in a team that has genius credentials, even if the idea is underdeveloped. Why they would execute such a strategy:
1. Their past experience has shown that smart entrepreneurs has been more predictive of a successful outcome, but relatively independent of the idea they are working on or where they started.
2. They have enough capital to spread their bets among many smart teams and be less sensitive to exactly how good their initial idea is.
3. Given enough capital, a strong team/entrepreneur has enough runway to take a less developed idea and iterate until it is a strong idea. So those who qualify for item 2 above will readily support strong teams/entrepreneurs because the initial capital outlay is large for the startup, but still miniscule relative to their entire fund.
3. In today’s world, there is a huge movement to create and nurture entrepreneurs. Joining up with this effort aligns with their own thinking that more entrepreneurism is good for the world, as well as generates positive public relations with the outside world on these efforts. Thus, to support rockstar entrepreneurs at early stage is a positive thing for them and the world.
Many big names are executing this kind of strategy right now. If they are doing well, then shouldn’t I also worry less about the idea and just bet on super strong teams, even if their idea is relatively weak?
Why I look for strong entrepreneurs AND great ideas:
1. I have met strong teams but with underdeveloped ideas and walked away from investing. This is a personal choice, where I like to support them in their direction and especially if I have experience or an affinity for the direction they took. If the direction they take is very fuzzy, then I feel less of a connection with their project.
2. Personal experience plays out here, but I have seen many super smart people fail at their ideas. So for me, it’s not enough to just bet on rockstars and be more lax about the idea. I want to maximize my odds of success by finding strong entrepreneurs who are at least starting with some breakthrough idea. If they do not start with a breakthrough idea, then it is just as possible that they will pivot their way to one as it is to pivot to nowhere.
3. Now that I am at Launch Capital, I have more capital to deploy but still it is not at the level of other funds who have much deeper pockets. So there is a practical strategic consideration I need to make in the face of what Launch Capital can bring to the table. It is not possible for us to make the number of bets into smart people as others are making, and therefore I must be more discerning in my decision process.
4. Today, we are seeing an explosion of entrepreneurism. People are graduating from top universities and taking their genius-ness out to Silicon Valley to create a startup. However, this has generated what I call the MIT Problem for Startups where *every* team I meet is super-strong and smart. Even those in the valley who execute the invest in strong teams strategy can’t invest in everyone. So what differentiates you from the next team? Not everyone from MIT has what it really takes to become an entrepreneur, even if you have genius intelligence. One of those differentiating factors is your idea, especially if it is a superior one.
In times past when entrepreneurism wasn’t so popular, a superior team would definitely have an edge over an average team since there weren’t that many of them. But I think in today’s world, there are too many people with superior credentials to pick from and it’s not possible for all of them to succeed. So there needs to be some other aspect which differentiates them from others – hence the presence of a superior idea.
5. Given that we are seeing not only an explosion of innovation, but an explosion of me-too ideas, many strong teams are working on the same or similar ideas. Even strong teams are not enough to dominate a marketplace if every team (who are also strong) is going for the same customer with a similar product. The chance is very great that you will all divide up the market and end up with smaller pieces of the whole no matter how much of a genius you are.
I don’t want to invest in a strong team working on a me-too product, or an incremental product, or building a product in a super-crowded marketplace of other similar or “blurry” products. I want a strong team working in an area that is game changing, exponentially different/better, or simply has not yet been worked on yet.
6. At early stage, you don’t have much time to operate. Your clock is ticking as your bank account runs down and you better have some sort of traction for your product/service before it does. Thus, if you start with a weak idea, you may need a lot of time to iterate to find a viable idea to turn into a business. But you’re early stage – you don’t have time! If you happen to start with a superior idea, then you’re at least pointing in a direction that has a lot of positive factors for success; undeveloped ideas are much less certain and I’ve seen a lot of people end up with nothing as their bank accounts ran out, no matter how smart they were.
It’s all about increasing my chances for creating a good outcome for my investment and time. Strong entrepreneurs are a prerequisite for success, but in the crowded startup world of today, it’s not enough to lessen the impact of weaker idea they are working on. If there are so many ideas being worked on, then I can wait for the right smart/superior team to come along who is also working on a superior idea. Then my probability for getting a great outcome for my investment is much higher than without a superior idea.
Footnote: In thinking further, it is obvious that even those who invest in super strong entrepreneurs are still looking at their ideas. Even though they are writing about the fact that it’s all about super smart entrepreneurs, they are still banking on the idea in their decision process because otherwise more people would get funded. Very rarely do entrepreneurs get funding to work on really weak, undeveloped ideas; usually these people are repeat entrepreneurs with a stellar track record and with a prior relationship with the funding source.

When I say MIT Problem for Startups, it’s probably not what you’re thinking!
The problem I’m referring to goes like this.
You’re in high school. You bust your butt and become valedictorian. You’re at the top in grades, and you’ve proven it through 12 years of school, beating out all your fellow students. You’re at the top of the top and feel great. You’ll probably get an award or two from the school. Maybe you’re Captain of the Math Team or head of Honor Society and gotten awards and/or recognition for that. You’re at the top of your mountain at your school and so you apply to MIT and you get in.
The day you arrive at MIT, you find yourself surrounded by valedictorians. They were all at the top of their class at their respective schools, all scoring 1600 on their SATs, and are all super-duper smart.
The day before you arrive at MIT, you were top of the top in your own world. The day after you arrive at MIT, you’re now…average…amongst your new peers. Everybody is equally smart and excellent, so you’re all now mediocre. And thanks to grading curves, those As you got in high school just turned into average Cs. Was your previous valedictorian greatness enough to get you more than average Cs in a sea of valedictorians?
Boy that sucks, doesn’t it?
This is the problem I’m experiencing with a lot of startups. Everybody says they’re great, except that when I look across all the startups I meet, you’re all kinda average now because you’re all equally great.
That sucks for both you and me.
It sucks for you because there are SO MANY startups and your current greatness is not enough – you have to be even better! This is at all aspects of your startup too. You need to now out-execute more, your product needs to be exponentially better to your customers, you need to out-fund raise everyone else. Everything you do must be even that much more superior to your startup peers. This is even more true against your competitors. Think of all the startups who are doing something that directly or closely competes with what you’re doing, or competes for a little slice of consumer attention – you can’t just be a little better, you need to be a LOT better.
This also sucks for me. My job is to pick which one of you startups is going to win next. But if you’re all great at some level, then even out of the set of greats, you look mediocre. That’s bad! Because for startups at early stage, the failure rate is very high. So no matter how great you really are and/or you think you are, if you are just merely great you blur into mediocrity against all the other startups competing for my investment. This is also a problem from a competitive standpoint since you’ll all have to execute against strong, motivated, super-smart peers. If you don’t become exceptionally great against your startup peers, what chance do you have to convince me that you’ll be the one that will win and not a competing startup?
This is the MIT Problem for Startups and it’s getting worse day by day.