AirTree Ventures

Find a problem or assess the existing experience – value propositions in the new economy

By Paul Bennetts via paulbennetts.co

Most startup pitches dedicate a slide to the problem they are solving. They seek to explain how painful the problem is. Or, how big and broad a problem is – say logistics. I guess this is a result of investor feedback. What problem are you really solving here?

I’m not sure the problem perspective is the right one. When assessing startup investments I think more on the delta to the existing experience. Or, creating a new experience.

Amazon is a fun example to explain my thinking. Before Amazon arrived, the existing experience was to travel to your local neighborhood bookstore. They would only hold 5 to 15 thousand books at a time.

The reason being inventory was their biggest investment. Excess inventory sitting on shelves gathered dust. Increased profitability came from higher inventory turns per annum. And higher returns on equity invested. Think of it this way, do you want to own a store that holds $50k of stock that turns over 40 times per annum. Or, a store that holds $500k of stock that turns over twice a year. All else equal, they both generate the same amount of profit. But the second suffers from ageing stock that at some point gets written off.

The rational way to solve small catchment areas is the 80/20 rule. They could please most customers by holding only the most popular titles. If they didn’t have a book you wanted they could order it in. This would take 2-4 weeks though – but what’s the rush. Their systems weren’t geared up for these marginal sales.

Larger catchment areas allowed superstores to open holding more and deeper stock levels. These superstores could hold up to 200,000 titles. Bookstore chains could invest in warehouses to serve as resupply hubs for their stores. During the 1970s and 1980s, Barnes & Noble even began publishing their own books. These books and those sitting in their large warehouses facilitated a significant mail-order business.

The existing experience for the more popular books was pretty good. A bookstore offered a place to step out of your day. Browse. Enjoy a brew. People watch. And book prices were low relative to your discretionary income. Most store locations were convenient.

The existing experience for the less popular wasn’t that great. You had to search for the book on their shelves. Disappointment awaited. Then you had to tell a judging stranger about your obscure interest. Then order it without getting to see and feel it. Then wait. Then come back to pick it up.

In 1995, Amazon arrived. Even in its early days, the delta to the existing experience was large. You could search or browse hundreds of thousands of books. You could pull up every book by an author. You could browse the most popular books of any category. Instead of recommended retail prices, Amazon discounted prices. You could see the cover of any book. You could order your obscure book from any computer terminal.

That was 20 years ago. Along the way the delta to the existing experience has increased. In a bookstore it’s difficult to judge a book other than by its cover. Some books would get a hand written card recommendation by staff. On Amazon, you got crowdsourced ratings and reviews. Both positive and negative. Having negative reviews was controversial at the time. Customers could even vote on which reviews were helpful bubbling those to the top. Amazon then released their “Search inside the book” feature in 2003. Now you could sit for as long as you wanted reading a part of a book without getting hassled by the staff. Or how about the “customers who bought this book also bought this” feature. This meant you could get recommendations from customers like you.

Amazon also opened their platform up to third-party sellers. These sellers would compete with Amazon on price. But also offered used versions of the same books.

And what about the kindle. Now, you can download any book you want in less than 60 seconds and read the first chapter before deciding to buy. You can’t do that in a bookstore.

In my mind, these features were becoming more of a new experience. As opposed to a better version of the existing experience. Shopping for books had changed.

To be fair, Amazon solved the problem of assessing long tail books. It’s not clear what exact percentage of sales actually came from this. And it’s not like mail-order books weren’t available.

It took until 2012 for online sales to surpass sales in brick and mortar stores. But why do roughly half of book sales still occur in the existing experience? Perhaps there are elements of the existing experience that still trump the new experience. Holding a physical book versus turning pages on a kindle. The enjoyment of holding a brew and walking the isles. For 20 years Amazon has been improving on the existing experience and trying to create new ones. Now though, Amazon has opened its first brick and mortar bookstore. What problem are they solving?

Another example, I’m not sure the problem 140 characters solved. Beaming out your location. Opening up blogging to everyone. Allowing you to receive content direct from people you admire. Were these painful problems in 2006? To me, this was a fundamentally new experience rather than a solved problem.

Another example, Uber with transportation. We’ve always been able to hail a cab. But it’s clear after using Uber that they have taken a poor existing experience and amplified it.

Perhaps, startup pitches would be better to map the existing experience and the delta to the new experience.

So for me, it’s not so much about finding a problem as about articulating the existing experience versus a new one. There’s a rule of thumb that this delta should be 10x otherwise don’t bother.

If it is a much better experience or a compelling new experience, people will talk about it. And that solves the next gating problem for startups.. getting the word out.