Started by Kevin Ryan, AlleyCorp is the most successful venture studio you have never heard of — launching the likes of Business Insider, MongoDB, Gilt Groupe, Zola, and Nomad Health to name a few. Over this series of four posts, I will guide you through a method of ideation that I have learned while working at AlleyCorp to show you that new company (newco) creation can be systematized.
By the end of this series you will be able to use your own version of the above idea pyramid to generate newco ideas. Here is how we will get there:
- Post 1 (this post) will outline how we use data to systematically explore areas outside of our narrow scopes of personal interests to uncover promising themes / ideas for newcos
- Post 2 will discuss how to push and pull ideas at a minimum effective resolution between between people in your network to overcome the hurdle of deciding which ideas to put our limited resources behind
- Post 3 will explain why we focus on the quantity instead of the quality of ideas using anecdotes on Bach and pottery
- Post 4 will conclude by describing the difference between strategy (S-type) and product (P-type) innovations and why as generalists it is best to favor S-type
The first challenge faced in the ideation process is that each of us only have a relatively narrow scope of interests. If you imagine the space of all possible ideas, we are trapped in a few small areas. Once we have dug into these areas, it is hard to find new areas worth exploring. We thus need to design systems that get us to explore topics outside of our initial scopes of interest. With this explorative mindset, we can take insights and business models learned in one context and apply them to new areas.
One system we use to achieve this forced exploration is data-driven. The goal of the system is to produce a list of companies/categories that could be prime for disruption. So what do we mean by “prime for disruption”? Broadly, speaking we think these companies have the following characteristics:
- large known addressable market
- old enough to have accrued technical debt or lack technology
- failing to serve their customer base
We have built internal tools to gather data on public and private companies across the US. These tools aggregate a few key data points including; a short company description, industry/sector, founding date, and revenue numbers from the last five years.
Using this data, we perform a series of filtrations to produce a list of several hundred companies that meet the “prime for disruption” criteria:
- Companies doing less than ~$500M in revenue
- Companies started after ~2008
- Companies with compound annual growth rates greater than ~5% over the last 5 years
We take this list and mark the ones we find interesting for whatever reason — it could just be that you find it unbelievable there is a company called Big Ass Fans doing $240M in revenue each year. Yes, I know that's below the $500M threshold.
Looking at the ones marked as interesting, we bucket the companies into themes (mobile-first direct sales, next-gen property management, etc). This part is more art than science, but after reading through the list several times you will begin to see patterns emerge.
The goal of this process is to identify product categories or distribution mechanisms that are currently underserved or underutilized by incumbents and thus fertile ground for newcos. It is worth noting that there are many other methods for systemic exploration. Keith Rabois, the famed venture capitalist from Khosla Ventures and Founders Fund, has his own.
The point is that you just need a system for exploring this large search space and developing hunches as to where a newco could be launched. In the next post, I will walk you through how you can leverage your network to move from a theme/area of interest to a crystalized pitch for a newco.
Before you go — I have a few asks:
- Let me know if you do not feel this information is thorough enough to be immediately useful to you.
- If you have any questions, please send them my way so that I can either address them directly, update this post, or include the answer in a future post.
- If you want to stay in the loop for the rest of this series (and more), subscribe to the newsletter.