Startups As Chemical Reactions

Originally written in 2014, updated with a new example in 2021 (Homejoy →  Robinhood)

I'm sometimes envious of people who studied subjects in college that correspond to their actual careers. Finance majors who become bankers. Computer Science majors who become software engineers. Must be nice to actually apply the knowledge you spent four or more years studying. As a guy with two biology degrees, a career in marketing and (non biotech), startups is a fairly orthogonal direction. However, I have discovered a few ideas from my academic studies that come in handy when thinking about startups. One of them is how a chemical reaction is a great model for a startup idea. But let\'s first take a step back.\r\n

The Four Key Points Needed to Discuss a Startup Idea

I was recently in a conversation with a coworker about some of her startup ideas. She had one idea around revitalizing musicals that, while not her main startup idea, got me thinking about the best way intelligently discuss these types of ideas. [1] It boils down to four major questions / answers.

1. What does the world look like now? What's wrong with it?
2. What would the world look like if your startup is successful? Why is it better?
3. What are the barriers that have historically (and perhaps still) prevent this world from existing?
4. How are you / the team uniquely positioned to overcome or circumvent these barriers?

If you want a productive, intellectually honest conversation about your startup where the goal is learning, not persuasion, then you both need to have a shared understanding of each point.

Of course, some startups don't have particularly strong ideas backing them, or become successful mainly through pivoting into the idea rather than "thinking it up" and then going after it. Not every successful founder could have answered all of these questions at the outset. But there will likely be an "after the fact" story that can answer what these things are.

So, having established these four parts to a complete startup idea, let's return to the chemistry.

Chemistry 101: Modeling Reactions

A chemical reaction is a process by which initial substances (Reactants) undergo a transformation to become something different (Products). Reactions that happen quickly at a given set of conditions (a certain temperature, pressure, chemical concentration) are called spontaneous because they basically happen without any prompting. Think Mentos and Diet Coke or the water plus iron turning to rust. Non-spontaneous reactions are ones that happen so slowly that they need additional energy to really get going. There is typically some amount of Activation Energy required to make the reaction happen.

For instance, to split water (H2O) into hydrogen (H2) and oxygen (O2) you typically need an energy source like a battery. Reactions can be sped up via aCatalyst, which lowers the activation energy, requiring less energy to make the reaction happen. For instance, most people who are lactose-intolerant lack a particular a biological catalyst (or enzyme) called lactase, which helps the digestive system accelerate a chemical reaction. In this case, the reaction is the breakdown of lactose into more basic compounds that can be processed by the intestines. So catalysts make a big difference. To see how all this comes together, check out the handy diagram below\r\n

Chemical Reactions as a Framework for a Startup Idea

So now that chemistry class is over, let's get back to the big picture. I think the model of a chemical reaction is a good way to think about a startup.

1) Reactants = Status Quo:

Both are the starting points before the transformation. Both have untapped potential that can be released if the right circumstances are available, but require additional energy. Entrepreneurs typically have a problem with the status quo, and that should be addressed here too. But most importantly, both parties need to have an accurate grasp of reality.

2) Activation Energy = Barriers to Entry:

Every founder faces the same problem when they share their great idea: if it's so smart, why hasn't someone done it already? A real discussion of a startup idea includes significant and non-obvious hurdles that have prevented this idea from already happening, similar to the activation energy required to trigger a reaction.

3) Catalyst Effect = Strategy + Trends + Secret Sauce:

So having identified the barriers, the key element here is what the heck you bring to the table. Do you have massive connections in the industry that have prevented others from taking this on? Do you have a much better understanding of your users? Can you recruit a really strong technical team? This is what Peter Thiel calls the secret.

4) Products = Ultimate Vision:

If you are trying to execute a chemical reaction, it's because you're looking to produce an end product. And similarly, the work you are trying to do in your startup is leading to this ultimate vision of a better world (or at least a new world where your company is super successful). But what does that world really look like? If you're going to talk to someone about your startup idea, you both need to have a shared understanding of these four points if you want to have a productive, intellectually honest conversation. You will probably disagree on some of these points, particularly 3 and 4, but you have to first acknowledge that they matter before you can debate the answer.

Examples of the Startup Framework in Action

Because I find that I understand ideas a lot better when I've got some context, I'm including two examples of successful startup ideas and how they might answer the startup-as-chemical-reaction framework. [2]

Airbnb

1) Status Quo: Hotels are expensive, sterile and shield people from a genuine travel experience. Also, people don’t have a way to make money from one of their greatest assets, their living spaces.

2) Barriers to Entry: legal hurdles around renting out space, trust among people, building a critical mass of hosts / travelers,

3) Special Sauce: strong design instincts to make booking fast, focus on conferences and big events to create early critical mass, simply operate below the radar (Later: realizing that vocational rentals like VRBO are big and lucrative businesses, realizing that they can get laws changed in time)

4) Ultimate Vision: A global network of hosts who are willing to share their rooms and homes with travelers who want more stimulating, human travel experiences

Robinhood

1) Status Quo: Most financial products are boring, staid, not interesting. Young people should save more but it's more fun to spend money on stuff, experiences.

2) Barriers to Entry: financial regulation prevents banks from marketing in certain ways. Historically banks needed to seem stable, trustworthy, long-lasting. Branches are expensive to establish and maintain. Commission fees on trades are discouraging to people who don't have a lot to invest.

3) Secret Sauce: realizing that young people are more comfortable transacting completely online. Gamifying investing to be more fun, almost like a video game, emphasizing riskier leveraged trades, options, and products like cryptocurrencies that have higher upside than just putting it in the S&P500. Offering zero commission trades via payment order flow revenue. (Also, out of their control but pandemic emergency payments, not being able to go out and do anything, r/wallstreetbets and meme stocks)

4) Ultimate Vision: The go-to financial institution for the Millenial and Gen Z audience, from saving, checking, investing, lending,

So What?

Why does all this matter? I think a lot of people are thinking about starting or joining a startup. That's because the barriers to entry have been lowered for everything, thanks the massive social platforms that can help get distribution, the reduced cost for building and shipping a piece of web technology, and the accessibility of capital. Hopefully, this model can bring some clarity to their thinking. Ultimately, some great startup didn't go through a model like this, and even if you've "figured out" every piece of the puzzle, you still could execute poorly and fail. But having a clear and promising answer to each of the four questions / elements is going to be helpful!

Footnotes

[1] Discussing a startup idea is not the same as pitching it. Pitches are designed to convince people that your company is worth investing in / partnering with / joining, which is different from actually thinking through the idea rationally. For more on pitches, see my post:Eleven Compelling Startup Pitch Archetypes

[2] I didn't ask the founders exactly what they were thinking when they started their companies, and their idea has probably evolved a fair amount during development, but you can still start to understand the four part structure I've defined.