Five questions to ask when starting a company

Posted on January 10, 2016

In 2004 my co-founder, our small team, and I launched a product in a new category, one that would soon become widely known as social networking. While the company we started, if(we), was eventually far outpaced by Facebook, which launched only months before, we have a lot to be proud of: We served hundreds of millions of members on our products, first on Tagged and later on hi5; we were the first social network to become profitable, a status that we have maintained since 2008; we were in early on a space that would see Silicon Valley’s biggest success of a decade.

How did we know to go all-in on building a social network, early on, before the promise became apparent? There is no sure-fire answer for finding “the next big thing,” but the questions below reflect, with some benefit from hindsight, the analysis my co-founder and I did before dropping out of the Physics Ph.D. program at Stanford. It is not an exhaustive list, and we should never discount factors such as luck, but I believe it reflects some important criteria that can indicate when a startup is set up to capture a massive opportunity.

Five questions to ask when starting a company

  1. What are the trends? - For us, the key trend in 2004 was more eyeballs on the internet and fewer on television. We concluded that advertising revenues must eventually follow. In addition to this multi-decade trend, there was the digital photography revolution, which made putting photos online much easier. It’s important to look for both short-term and long-term trends. The former create opportunities and are critical for initial traction, whereas the latter sustain growth over time.
  2. What are the network effects? - The best social network is the one that your friends are on. Communication tools, marketplaces, ridesharing products, platforms, and businesses of all sorts benefit in varying degree from this form of increasing returns to scale. Network effects often create a winner-takes-all dynamic, or something close to it, and many of today’s most lucrative businesses profit because of strong network effects.
  3. What are the pain points? - Finding old friends, sharing fresh photos, giving and receiving love and validation, these are all human problems that social networks address. Skype built its success on saving people money on international calls, WhatsApp on saving SMS fees. Uber solved the often acute challenge of finding a cab. Occasionally great companies come about from providing for needs that people didn’t know they had, but more often there is some really obvious problem that they solve.
  4. Where is the magic? - Magic is that which belies belief, that which at first seems impossible, but that we quickly can come to take for granted. Consider entering a few words into a simple web form, hitting the search button, and getting the result you’re looking for, in a fraction of a second, on the first try, and from among billions of possibilities; what could be more magical? Keeping up with all of your family and friends on a daily basis? Calling half-way around the world for free? Watching a car come to pick you up and knowing exactly when it will be there? Magic reshapes our view of the world.
  5. Why us? - Do you and your team members have the right skills to win in this space? Do you care enough about the problem to make the sacrifices of startup life, to push past the inevitable low points? Will you, when matched against talented competition, end up the winners?

If you don’t have awesome answers to all five of the questions above, don’t despair. For example, if network effects are weak then perhaps intellectual property can protect against competitors. Plenty of good businesses can answer only three or four of these questions well, and others lack answers early-on but discover them over time. The more compelling your answers are, though, the better your chances are of starting something really, really big.