Wrong business ideas are an expensive hobby. A case for starting small and thinking smart

We’re bringing you a series of valuable tips and thoughts on a venture’s success. In this first installment, we’ll talk about the much-needed focus on product-market fit.

Our message for hopeful entrepreneurs is to forget saturated, functional markets. On the contrary, business opportunities grow in areas plagued by a lack of effectiveness. “More often than not, marginal improvement is not enough to keep a company of young, inexperienced entrepreneurs afloat – however passionate they are,” says Vit Hanus, Partner at Zero Gravity Capital.

This piece will look at companies that got it right and some that took wrong turns that derailed their success stories.

How the giants solved our pressing problems

„You need to identify market hunger and strong demand first. When you look at today’s unicorns, they started small in concentrated space of clients and by solving real problems,“ explains Hanus. „Disruptive innovation starts from selecting a small cumulated target audience – scaling comes later,“ he adds.

Looking at Facebook, the social media network now more powerful than Mark Zuckerberg could have ever imagined, that’s 100 percent what happened. The billionaire started small in his dorm room by enabling Harvard students to connect online. Fast forward to today, and we are looking at a network that can influence entire elections. 

The social network keeps shaking off the scandals, regulations, and whistleblowers, and now we’re left to wonder how will the metaverse plans unfold. Some say it’s another step towards a corporation fully owning our digital self; others suggest it’s a desperate attempt to cover up the existing problems and Facebook losing its edge. Whether it’s the beginning of an end or not, Facebook’s story is already the one for history books.

Let’s not forget Zuckerberg and co. hold several cards, including Instagram and WhatsApp, both of which have remarkable success stories of their own. While Instagram capitalized all those photos waiting in private albums and made sharing simple, WhatsApp solved an annoying problem: paid text messages. Essentially, the company made SMS practically obsolete in most markets. Just as Uber angered the owners of overpriced, unreliable taxi services and replaced them, attracting customers with a user-friendly app.

And with all these tech companies solidifying their place in our daily lives, it’s only natural that we needed to move payments to the digital world. This is where Paypal paved the path and challenged banks with speed, flexibility, and convenience that was unthinkable at the time.

However, the company’s staggering growth can’t only be attributed solely to hitting that sweet spot of good timing, a breakthrough idea, and smooth execution.

Paypal also went for a bold customer acquisition strategy. Essentially gave its users cash upon registration and as a reward for referrals, which was unprecedented at the time and has been copied ever since. PayPal was incredibly lucky to have pulled it off. “7 to 10% daily growth and 100 million users was good. No revenues and an exponentially growing cost structure were not. Things felt a little unstable. PayPal needed buzz so it could raise more capital and continue on. (Ultimately, this worked out. That does not mean it’s the best way to run a company. Indeed, it probably isn’t.),” wrote Peter Thiel.

Those on the bumpy road

Not all who come up with breakthrough innovations are built to last: especially if the companies get too full of themselves.

Who wouldn’t remember the ICQ’s legendary „uh oh“ sound? The instant messaging platform saw its peak in the 2000s, but today it’s rather far from its former glory. The number of users decreased ten-fold since it reached 100 million registered accounts. On top of that, its current home is the heavily sanctioned Russia, where intelligence agencies seem to have had access to users‘ private conversations. What went wrong?

Similar to another „it“ platform of the 00s, Myspace, ICQ failed to innovate and keep up with the users of demands heavily migrating to the likes of Facebook. Myspace’s decline is perhaps more shocking, considering it was the most visited website in the US, surpassing even Google. It remains a prime example of an unsuccessful startup transformation that couldn’t weather clumsy attempts to turn itself into a corporate giant.

The company’s former VP admitted hundreds of wasted millions on doomed features, defeatist approach towards competition from Facebook, and an utter lack of focus with too many verticals. According to him, changing the name and pivoting fully to music could have saved Myspace. Instead, the platform refused to admit that they’d „lost the social war“ to Facebook, and the rest is – literally – history. That being said, both platforms have been acquired, and both still function on a much smaller scale.

Talking about great ideas and bumpy roads, we can’t forget WeWork. The giant provider of coworking spaces was snowballing, beating rigid, inflexible leases of traditional offices. Their designer spaces and cult-like status only delayed the inevitable downward spiral that came with a failed IPO in 2019. Lesson learned: you can’t build a lasting business on shaky foundations and an unreliable founder.

In 2021, WeWork reported a loss of over US$2 billion, and now the company hopes that the post-pandemic interest in hybrid work will get them back on track.

It will also surely be interesting to follow what’s next for Clubhouse. After the initial hype amplified by the pandemic isolation and illusion of exclusivity, the social audio app rooms are no longer the elitist places packed with successful entrepreneurs and celebrities. Clubhouse’s CEO already acknowledged that the social audio app grew too fast. Now we’ll witness if they can refocus on steady, sustainable growth amidst multiple copycat attempts.

„Even brilliant ideas slowly fade out if they are not innovated or lack a great execution,” concludes Dušan Duffek, Partner at Zero Gravity Capital. „The market reinvents itself constantly, so we see it repeatedly: arrogance or negligence is a sure-fire way of initiating a freefall, regardless of how huge you get.“

Related reading recommendations:

Peter Thiel, Zero to One ​​(Notes on Start Ups, or How to Build the Future)

Matt Ridley, How Innovation Works: And Why it Flourishes in Freedom