Why your riskiest assumption is a great place to start with any new product or idea

source: Wikipedia

“First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you.” Nicholas Klein commenting on a strike at the Amalgamated Clothing Workers of America conference in 1914

This quote is often misattributed to Ghandi. In fact, there was a festering conflict between thousands of garment workers and the clothing industry. The strike action pitted workers against management and against Chicago police on horseback. It also exposed divisions in the union. The organization did not support its unskilled members. This culminated in striker deaths by gunfire, wounding, and mobbing of a 10 year old over a period of a few years. The industry bosses made a risky assumption. They assumed their employees will accept difficult working and financial conditions.

Also, they assumed that employees would remain productive under these conditions indefinitely. In practice, the workforce was ignored and ultimately attacked. Angry, the employees fought back. Once the dust settled, a social shift occurred. Employees earned the right to fight for reasonable conditions. In this case, the change went through these four phases, as Klein observed in his quote.

And it’s a pattern for social change which has been followed by tech startup outliers. If you think about startup unicorns from the last three decades, many of them have undergone a similar process . If you look at the ex-China unicorns since the dot com crash, most of them came about by following that pattern. A pattern that would seem counter-intuitive to the average person in 2001. When they first started out, the very idea in its basic form seemed crazy. “Access your files from anywhere” by Dropbox. Send cyberpayments via PalmPilots for PayPal. And so on. Many of these startup ideas are based on a social or behavioral premise. One that would have been hard to believe for the average person at the time. As a result, there is an implicit social conflict many of these companies had to overcome. This is in addition to all of the other business and technical challenges they had. At the heart of this conflict, you’ll often see critical assumptions about customer behavior.

Let’s look at AirBnB, to see why risky assumptions matter in practice

AirBnB is a two-sided marketplace. They match landlords and homeowners with spare capacity to short term travelers. In this case, there is at least one risky assumption for each side.

  1. The travellers
  2. The homeowners or landlords.

“Air” stands for air mattress. In the very early days, the founders monetized their spare capacity using an air mattress.

You should have imagined when I called home, and told my mom about this idea. She said, “OK, so you built a website so that strangers could sleep in your home, because you don’t have enough money for rent? I guess you don’t have that job with health insurance anymore.” I said, “No, I don’t, but that’s not why I’m doing it.” –Brian Chesky

Using a paraphrase of his mother’s words, Brian articulated their risky assumption about landlords. Well pretty close. The idea of letting strangers sleep in your home was quite counter-intuitive back then. Particularly given that you had very little to go on. And that you needed to trust you’d be safe.

Proving the risky demand side assumption (as they were ignored)

At the time, the website looked approximately like this:

source: airbnb.com, waybackmachine.com

They wanted to prove that consumer travelers would be interested in paying for such an arrangement. Just because the founders were keen to earn a few extra bucks at conference, it didn’t mean they would be able to find a consistent stream of prospects. Ones who would be willing to not stay at a hotel. According to Brian Chesky, a co-founder and CEO of AirBnB:

We look on the hotel section, and all the hotels they were recommending are sold out. It’s like the Marriott’s sold out, the Hyatt’s sold out, sold out, sold out, sold out. Joe and I, we look at each other, and we say, “Well, why don’t we just create a bed and breakfast for this conference? That seems like it makes sense. We’ve got all of this extra space.” We’ve got a living room, a kitchen, two bedrooms, and no furniture. There was no furniture in the apartment. A bed and breakfast without a bed, it’s like a floor and breakfast, and we couldn’t really afford breakfast, so it wasn’t really super romantic. I said, “Joe, this is a problem. We don’t have any beds.” Joe said, “Don’t worry. I just went camping.” He brought some air beds out of his closet. I have no idea why he had all these air beds. He said he went camping. We pulled these three air beds out of a closet. We inflated three air beds, and we called it the “Air Bed and Breakfast.” We eventually cooked people Pop‑Tarts, yeah. They were really, really good Pop‑Tarts.

Even if these same tourists travel under “air mattress” conditions when visiting their own family, would they be willing to pay for the right location? (but not necessarily a hotel). This also turned out to be true.

In Brian’s words:

To my surprise, three people wanted to stay with me. They broke every one of my assumptions. The first was a woman, a 35‑year‑old woman that wanted to stay in our apartment. If you knew anything about me growing up, you would be very surprised that a woman would want to stay in my apartment. That was the first thing that totally surprised me, or surprised everyone who knew me. The second thing that surprised me was a 45‑year‑old father of five from Utah ‑‑ he was Mormon ‑‑ came, and he wanted to sleep on an air mattress in our kitchen floor. The third person that wanted to stay with us was from India. At this point, I’m like, “This is like a United Nations. This is a wide range of people. What is going on here? Why do they all want to stay with me?”

In other words, despite all of the reasons it could go wrong, the end consumers were fine with it. With the idea of renting someone’s spare room. And sleeping on a mattress and eating Pop Tarts for breakfast. Regardless of what they said their preferences were, clearly they were ok to act as if it was ok. Because they wanted the freedom to be at the conference or in San Francisco, despite limited hotel space.

Proving the supply side (as they were ridiculed)

For the supply side, the team needed to confirm that they could acquire landlords. But also that landlords would be interested in following the model the founders pioneered. An extra income on the side might not entice enough landlords to make it all work. AirBnb found conferences to be a clear case of insufficient supply. So they continued down that route. When they launched the company “officially” at SXSW in 2008, they made 2 bookings. But then when they managed to get blogger coverage around the Democratic National Convention in 2008, they made 80 bookings. (official company history). That was enough to confirm that–under the right conditions–people were happy to rent out extra space. Yet the marketing was still a struggle:

And we don’t blow up. No one wants to use the site after the DNC. Most people think we’re crazy. My mom thinks I’m out of my mind. All of our friends later tell us they thought we were crazy.

So with risky assumptions on both sides of the market validated, it made sense for the team to shift gears. To start investing time and effort into the product.

Now imagine if either the demand or supply side of those assumptions had turned out false. For example that homeowners didn’t want to do short term lets. And to be fair, most people in 2001 would probably have felt awkward about it. The team could have built the product, yet they would have found it next to impossible to grow it. Because they wouldn’t be able to offer tourists anything. And vice-versa.

Building something nobody wants is one of the most common reasons for product failure. If not the single biggest reason (depending on which survey result you look at). At the time, it would have been somewhat hard to believe. Part of commercializing the product is convincing everyone that counter-intuitive beliefs are true.

Then when estimating market size while raising funding, they were ridiculed some more…

For example, this comes up when raising funding. Initially, the founders thought the breakfasts were the draw. But breakfasts were a smaller market than beds.

How to you get serious investors to believe that the market size for “people willing to sleep on air mattresses” is a multi-billion dollar market? Or that it will be in 10 years, even if it isn’t that big now. Chesky quips, “Suddenly, the market size was huge, except we were still selling air beds. Like, “We’re going to make $30 billion with these air beds. Everyone’s going to live on air beds.” This is a classic conundrum for these wonky startups which navigate a social change cycle as they grow. How do you estimate the future market size of a market that doesn’t exist yet, but may end up being huge.

Then AirBnB were attacked as they drew attention scaling up

For a long time, hotels claimed they were serving a different segment than AirBnb. They didn’t need to acknowledge the presence of the rapidly scaling startup. AirBnB maintained close to 100% growth annually for 10 years. This growth came from having proven the risky assumptions before everyone else. Then built a product and a platform to capitalize on that insight. This ensured they were relatively unique.

source: statista.com

Suddenly, hotels woke up to the fact that this startup is here to stay. And they attacked, primarily taking a regulatory angle, according to the Boston Hospitality Review:

American Hotel & Lodging Association (AH&LA) attacked Airbnb by sponsoring research to demonstrate its negative impacts on the economy and lobbying governments to impose taxes and regulations on homesharing. The association is arguing for a level playing field between homesharing and hotels.

They were implictly trying to frame AirBnb as running illegal hotels, and therefore as a company that was ignoring regulation.

Finally, they built monuments to AirBnB.

Now let’s zoom back to AirBnB today. They have about 6% market share of the hotel industry. Their potential capacity totally flexible based on demand.

source: statista.com

This is due to the inherent flexibility of their two sided marketplace. A marketplace freed them from needing to own hotel buildings. Among many other successes, they’ve normalized what seemed like risky behaviors. These are ok because there are thousands, millions of people already using it. There are strictly defined parameters for this exchange. And it’s a pleasant alternative to a hotel. For example, families want to cook healthy for themselves, so a hotel can feel limiting.

Hotels accepted that AirBnB is here to stay. They try to get in onthe action. They have bought up, partnered with, or tried to create direct competitors:

The hotel industry has acknowledged the longer secular trend that airbnb was riding. And started cashing in on it. AirBnB’s valuations are comparable to Marriott’s.
But most importantly, there is an aikido like paradox. Because AirBnB capitalized on these risky assumptions, these same assumptions now shield them from disruption.

They have finely optimized systems which are tuned to this. Eating their lunch requires a lot more resources.

Key Takeaways

Even though many of the major breakout successes have this kind of social and behavioral change trajectory, most won’t. Assumptions about people, particularly those in the target audience, are critical. But it’s fair to say that:

  • every startup will be making assumptions, before they know exactly how their business will work.
  • Thinking through and deliberately checking any big assumptions, especially ones related to human behavior, you’re making is the most level-headed way to begin a startup journey.

“One thing I learned is big ideas sound stupid in the beginning. I’ve always heard that if your idea is any good there is no problem with sharing it because people will dismiss it. ” Chesky

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