I have a feeling this is much, much easier said than done. How do you even determine "potential" of a startup, when, according to Paul Graham, "the best ideas look initially like bad ideas".
The key is to look at the total addressible market for a company or product. It has to be large, or growing quickly, or both. For example, AirBnB might have looked like a bad idea, but the hospitality market is huge, so if it did work out then they could grow to become a giant company. On the other hand, you could create a transformative product for blind people, and build a business around it that makes you a multi-millionaire. But VCs will never invest in your company because there just isn't a big enough market. You might 3x or 5x an investment but you'll never deliver the kinds of giant returns VCs need in order to make their LPs happy.
Of course, I'm talking about traditional VC firms - like the one the blog post's author runs. There are all kinds of investors out there with different motivations.
Or was Zuckerberg already envisioning opening it up and spreading it far beyond college (and maybe high school) campuses?
Even if that's true and they pitched investors on a kind of online campus hub for students, they woukd still have been going after a pretty big market - they could sell software/functionality to schools and/or they could sell advertising (reaching young people is quite valuable for brands since young people tend to have less fixed opinions and loyalties as consumers).
It may well be that investors thought it could grow to compete with MySpace. Others might have just thought being an essential part of every student's life would be a good enough outcome. (After all, there's plenty of VC in "ed tech" these days).
For example, snapchat started with LA teenagers. Facebook started with harvard, then ivy league colleges, etc. Uber was licenced black car services in SF only at first, etc.
And it's funny - the startups that try to start with "we're revolutionizing the world" end up over-promising. The ones like you mentioned actually do. Not only just in starting in one market, but focusing on one customer segment, or one feature, or one vertical.
This is really hard advice to take ..and in my limited experience also hard to convince investors of. But I think he's right ...and it amounts to getting in the game / get out of the building etc.
> The key is to look at the total addressible market for a company or product. It has to be large, or growing quickly, or both. For example, AirBnB might have looked like a bad idea, but the hospitality market is huge, so if it did work out then they could grow to become a giant company.
Again, this just feels like post-hoc rationalization. The guy who wrote this blog post declined to invest in AirBnB despite Paul Graham himself practically begging him to. So maybe it actually is hard?
He might have just thought the team wasn't very good, or the product wasn't quite right, or any of the other reasons investors pass on companies. The potential was there, but it just wasn't very likely given the details of the company.
I think what Thiel is getting at with his rule is to not bother with companies that don't have the potential to ever get huge, given their product and market. That rules out a huge number of businesses, so following it prevents you from wasting a lot of time.
Ah, a lifestyle business. Just kidding -- I'm a fan.
I found PG's take on them in the footnote of Black Swan Farming (http://paulgraham.com/swan.html) refreshing:
> Nor do we push founders to try to become one of the big winners if they don't want to. We didn't "swing for the fences" in our own startup (Viaweb, which was acquired for $50 million), and it would feel pretty bogus to press founders to do something we didn't do. Our rule is that it's up to the founders. Some want to take over the world, and some just want that first few million. But we invest in so many companies that we don't have to sweat any one outcome. In fact, we don't have to sweat whether startups have exits at all. The biggest exits are the only ones that matter financially, and those are guaranteed in the sense that if a company becomes big enough, a market for its shares will inevitably arise. Since the remaining outcomes don't have a significant effect on returns, it's cool with us if the founders want to sell early for a small amount, or grow slowly and never sell (i.e. become a so-called lifestyle business), or even shut the company down. We're sometimes disappointed when a startup we had high hopes for doesn't do well, but this disappointment is mostly the ordinary variety that anyone feels when that happens.
And they look even worse to those of us in the peanut gallery (and the pundits) who don't have access to all of the facts that someone who is actually investing has. They at least have answer to questions. A bit like investing at a higher level in the stock market (and taking major positions which often allows you to glean info from people that work at the company).