The traditional steps of startups are: find something people want, build it, tell them about it, then charge for it.

The internet has radically changed this. It is now easy enough to churn out experiments, and it’s cheap enough that you don’t need to charge much, if at all.

For a lot of web markets, the steps are now: build it, tell people about it, learn if they want it, then maybe charge for it. 

The hardest step of this is usually telling people about it. The downside of cheap and easy development is that others can do the same, cluttering the web with competitors for attention. It sounds counter-intuitive but it’s usually better to create a product with uncertain demand and killer marketing than a product with certain demand and costly marketing.

Succinctly, on the web, market risk is better than marketing risk. 

Market risk is uncertainty of whether people want your product:

-How many people want your product? 
-How much do they want it? 
-How much will they pay for it?
-How many times or how long?
-How fast is that demand growing?
-Is competition saturating demand? (This could be separated into competitive risk.) 

Marketing risk is uncertainty of whether people will learn about and try your product:

-Where can you reach your target users?
-How much will it cost to acquire a user?
-Is your product inherently viral or word-of-mouth viral? 
-Is it new and sexy or old and boring?
-Is it easy or hard to understand?

While an idea’s risks depend greatly on the details, they tend to fall today into a matrix:

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From worst to best types:

High market and marketing risk: these are the worst type of ideas. Not only are you unsure people want the product given alternatives, even if they do, it’s costly to get them using it. For instance, there are a ton of search engines, people are generally happy with their current one, and search isn’t viral. That’s why Microsoft is spending $100 million to market its new shiny toy. This type needs to be really useful and well-funded/well-marketed.

High marketing risk, low market risk: these are typically large and established markets where it’s clear people have a deep demand or like innovation, but they aren’t viral and have a lot of competitors. People will want porn, gambling, and dating until the end of time, but because these ideas monetize well, incumbents are well-funded and targeted marketing is expensive. If a marketplace gets initial users, more come and the network effect takes over, but getting initial users is often tough.

High market risk, low marketing risk: these are experimental ideas that are inherently viral or have strong word-of-mouth. When the Facebook platform launched, developers launched a flood of programs to figure out what would stick.  When Twitter launched, it was unclear people wanted it, but its virality took over once it was clear people did. If your idea is a unique twist of this type and can be created quickly, it’s worth trying.

Low marketing and market risk: this is the promised land. Niche services can often fill an ignored need and are cheaper to market due to fewer competitors and a focused audience. Copyrighted content is in high demand and goes viral, as it did on Youtube, but has high legal risk. 

If your idea has low market and marketing risk, it’s a good candidate to start today.

In a recent coffee with Steve Blank, the topic of entrepreneurial personality traits came up. We talked about the Myers-Briggs scale, which classifies our preferences and tendencies on a spectrum of four traits:

–Extroversion (E) vs. Introversion (I): Where do you put your social attention and get your energy? Extroverts get it from socializing, introverts from being alone or in small groups. Introverts are not necessarily shy; they just enjoy solitude more. 

–Intuition (N) vs. Sensation (S): Where do you put your mental attention and how do you process information? Intuits favor patterns, theory, and focusing on the future. Sensates favor details, sensations, and focusing on the past and present.

–Thinking (T) vs. Feeling (F): How do you make decisions? Thinkers favor facts and principles, feelers favor personal concerns and harmony. 

–Probing (P) vs. Judging (J): How do you organize your life? Probers are more spontaneous and flexible, judgers are more deliberate and structured.

Myers-Briggs doesn’t say people are all one side of the spectrum or the other. It posits we have natural set points for each trait, and while we can exert effort to temporarily be more one way or the other, at rest we tend to resort to our set point.  

Controversially, it does say people should strengthen these tendencies and find the best environmental fits rather than try moving to the center on all traits and being all things. For example, introverts shouldn’t try to gain energy from socializing, but strengthen their ability to reflect and enjoy solitude.

What set of traits do you think most favors entrepreneurialism? While any combination can succeed, I think there’s a clear combination most predisposed to startups: ENTPs. These folks are only ~3% of the population and classified as Inventors: 

“Inventors are keenly pragmatic, and often become expert at devising the most effective means to accomplish their ends. They are the most reluctant of all the types to do things in a particular manner just because that’s the way they have been done. As a result, they often bring fresh, new approaches to their work and play.

They are intensely curious and continuously probe for possibilities, especially when trying to solve complex problems. Inventors are filled with ideas, but value ideas only when they make possible actions and objects. Thus they see product design not as an end in itself, but as a means to an end, as a way of devising the prototype that works and that can be brought to market.

Inventors are confident in their pragmatism, counting on their ability to find effective ways and means when they need them, rather than making a detailed blueprint in advance. A rough idea is all they need to feel ready to proceed into action.”

Steve and I discussed the importance of both intuition and sensation for his concept of customer development. Steve says entrepreneurs should start with a vision (intuition), then collect data to validate their hypothesis and revamp the vision (sensation). Entrepreneurs without intuition will get lost in data and miss valuable patterns; entrepreneurs without sensation will chase ideas without supporting data and produce unwanted products. It’s a tough balance.

As a dyed-in-the-wool ENTP, I have felt the temptation to brainstorm in a dark room without customer data. I am good at seeing patterns of behavior and needs people may have, but I need to focus more on confirming these ideas by getting outside my head and the building, as Steve would say. 

It’s worth noting Myers-Briggs is itself the product of intuition. It is based on Carl Jung’s theories, which relied primarily on anecdote instead of controlled studies. Another prominent personality tool used to diagnose mental illness, the Minnesota Multiphasic Personality Inventory, is entirely empirical with no initial theory. The creators just posed a list of 600+ questions to people and observed what answers correlated to diagnosed mental illnesses. It is a sensate method.

Of course, any psychological theory is a simplification compared to the complexity of actual people. Yet, my (intuitive) observations are that ENTPs have an inherent advantage in entrepreneurship, and are at the very least, a lot of fun to be around. 🙂

P.S. I’m mainly focusing on the traits of founders. Early employees in other roles are probably optimized by other combinations, like architects (INTPs) and salespeople (ESTPs).

Who is more important in a business transaction: the buyer or the seller? It is tempting to believe they are equally important, but I will argue that buyers are a lot more important.

A thought experiment: go to a street corner and try to sell a bag of snot for $1,000. Would you have any takers?

From the same corner, offer $1,000 for a bag of snot. What would happen? You’d have people lining up for half a mile sneezing into bags.

This is a bit misleading because a bag of snot has a market value of almost zero, unless perhaps it’s celebrity snot. If you substituted “bag of snot” with “cure for cancer”, no credible research firm would accept a buyer’s offer of $1,000. The market value for a cancer cure would take a novelty-sized check to print.

The examples illustrate the source of power in business: demand. Buyers drive markets. 

A definition of a market by Merriam-Webster is the extend of demand for a product or service, not how much of it can be supplied. Sellers can influence demand, as the $100 billion TV ad market tries. They can even occasionally create demand, as much of the beauty industry tells you happiness is just a body wash, tummy tuck, or dick pill away. But this is very expensive. Sellers still primarily follow where demand leads them.

This is true even if there is scarcity or monopoly on a low-demand good. If you are the only person on the planet that can create a bag of snot, the demand for it is still limited to its novelty value, which is likely small (but probably above zero; items like Christ-shaped potato chips have a few buyers seeking entertainment, status, or some unique need).

Perhaps sellers had more power in earlier times when the means of production were limited. For our cavemen ancestors, food, water, and shelter were in high demand and low supply. If you could have created a paleolithic bed and breakfast, you’d have been the first billionaire. Today, demand is more varied but our means and productivity are even deeper, fostering multiple competitors in almost every market. Demand is scarcer and more valuable.

The implications of this are critical for entrepreneurs. The most important is to build something people want. The most common entrepreneurial mistake may be creating something just because it can be, not because there’s actual demand beyond the entrepreneur’s market of one. 

There’s also an important implication for creators of marketplaces, which have a chicken-and-egg problem of attracting buyers and sellers simultaneously and balancing their interests. Because buyers drive markets, they are generally the more key element in the long-run.

That doesn’t mean buyers are the best group to target first. One seller can serve many buyers. When Josh Kopelman started Half.com, he convinced dozens of book sellers to upload their inventory for potential leads. Those dozens let him launch Half.com with a million books, giving incoming buyers a lot to browse once they came.

Sellers are also easier to find: there’s literally an alphabetical list of sellers for most items, but unfortunately not the same for buyers. 

eBay reocgnizes the importance of buyers and has favored them with a host of policies, such as light penalties for non-paying bidders and only allowing sellers to leave positive feedback on buyers. It raises seller ire but without the cash of buyers, transaction fees wouldn’t be an issue because sales would be zero. 

It’s become a fashion to attack companies for selling something stupid, unhealthy, or over-priced, but no matter how true those complaints are, it’s worth remembering demand is the real source of business power.