Transcription
Right now is one of the riskiest times I've ever seen for entrepreneurs. I mean, I've been building businesses since 2007. And since I sold my startup, my full-time job is investing in founders, and the things that I'm seeing right now have me quite concerned.
So, I felt compelled to make this video because frankly, I'm worried that if you're an entrepreneur right now, you might end up wasting years of your life going down the wrong path. And I hope this video can help you course correct before it's too late.
So, there are four things you need to know. And the first is actually what's going on right now because things are getting a little weird. If you've been paying attention, you're already well aware that sweeping layoffs are ripping through tech. Just recently, Microsoft laid off 15,000 employees after laying off 9,000 a couple weeks before. And they send a memo to everyone saying, "Listen, if you want to stay here, you need to be investing in AI skills." And then you hear quotes like, "Programmers are going extinct in the next 18 months." And as if that wasn't already crazy enough, you hear all these rumors, everyone's going to be out of a job. What are we going to do for work? AGI is coming, etc.
But then there's some conflicts. For example, Apple's new study, the illusion of thinking, just came out. And what they found is that these AI models that we think are revolutionizing the world are not actually AI at all. They don't have critical thinking abilities. They've just absorbed all the information that we have available and they're spoon feeding it back to you based on what they think you want to hear. And if you poke around a little bit into AI, you'll see this is actually quite true. AI constantly hallucinates, people are able to trick it into believing truths that are not true or just flatout lies to you.
And so what's really going on? Well, I like this quote from Warren Buffett. "Only when the tide goes out do you discover who's been swimming naked." And I think that really sums up what's going on in tech right now. If you go back to 2021, all these companies were hiring like crazy. It was 0% interest rates. And then '22 rolls around and the markets start tanking and all of a sudden all these public CEOs are laying off people constantly. And with this AI wave right now, there's a bit of fear in the markets both on the investor side, on the entrepreneur side, and on the public side, which is what if this is just like '21 again where we maybe we overhire or we get too hyped up and these massive layoffs.
So tech hiring is slow. Investors are being cautiously optimistic with their money, but the reality is no one knows where this AI thing is going to go. The only people actually telling you that we'll have AGI by 2026 or people will be out of their jobs are the people who own large percentage of AI companies and have a direct monetary interest in getting you to believe that. And so it's really important to keep this in mind. These are not objective statements that are out in the market. These are people trying to convince you because it directly benefits them.
Having said that, there are four businesses that I think you should absolutely avoid right now in this AI wave and all the craze.
So first is what I call a hustle business. And to give you an example, I want to give you a pitch that I actually got a few years ago and I said no to. So at the time, uh, this founder came to me and he basically found kind of a glitch in the market. It was around 2021. And what he found is that car dealerships in the US were literally selling used Teslas for more than you could buy them new. And the reason for this is that in the US, dealerships legally cannot buy Teslas new. They have to be bought by consumers. And so his business idea was pretty simple. I'm going to go buy Teslas new from Tesla, sell them to the dealerships, and make a cut between. And on paper, it made sense. Quick way to make some easy money. But I really pushed back on it cuz I was like, listen, yes, you can probably do this now, but what happens when Tesla catches you? What happens if you buy, let's say, five Teslas and then the market shifts and all of a sudden the dealerships don't want to pay more than MSRP? Now you're stuck with five Teslas and you're out of money.
So, it was a business that had no downside protection and it was only going to work for maybe a specific moment in time. And these kind of specific moment in time businesses are what I call hustle businesses because yes, it's a way to make maybe 10 20k. And I'm not saying that that's not valuable. I I've been there. I needed that money. But you can spend a lot of time and energy building something that just doesn't last. The average business takes 7 years to go from beginning to actually selling or exiting. So if you're building something now, stay away from these hustle businesses that are kind of popping up in the age of AI.
The second is what I would call a task outsourced service. So this is something that's just taking an obvious task that is sort of low cost, low pay, and saying, "Well, it's that, but now it's AI." So like live chat, but now AI. These businesses are fine, but there are going to be so many copycats that it's just going to be a bit of a bloodbath. And what will actually happen is they're so obvious that you will get crushed on price and it will end up being kind of a business where there's no margin left for anyone. Everybody kind of loses and it just goes to the floor. So again, while tempting right now, I would avoid building those cuz it's not really a long-term play.
Third is market size limitations. And this is something that unfortunately I have a lot of conversations about where I'll meet with a founder, they're doing really well, they're successful, they're making money, and then they realize that the market that they're in is just actually not that big. And yeah, they can grow this thing, but it's not going to reach the goals that they actually intended. The simple formula, I've been over it before, it's the market size needs to be a billion dollars or more. And the way you calculate that is number of customers that want to buy your product times the price that you think you can charge greater than 1 billion. Really 2 billion if you're raising venture capital.
The reason this matters is it's kind of the same effort to build a $1 million business or a $100 million business. And so you might as well build in a big space that gives you ceiling to grow as you actually build the business. You don't want to be capped by your market size. It's such a crappy feeling as an entrepreneur when you're actually winning and you just kind of have run out of road to travel. there's nowhere for you to go and you have to either kill the business, sell it for less than you hoped and move on. And it's just so much work to get that initial zero to one phase that you should do it in a space that's worth it. And what that also means is that shrinking markets are inherently bad. With the AI wave and revolution and all this stuff that's going on right now, there are certain market types that are just going to get smaller year-over-year. The last thing you should do is enter one of those markets, even if it's a good opportunity today.
If I look back on my own startup where we were selling software to car dealerships, the two things that made us really successful were one, the market was massive and it was growing. Car dealerships were selling more and more cars every year. But also the problem, which is people can't buy cars online, was only going to get bigger. And so we had a big wave of natural demand for our product that we were sort of just riding rather than working in a market where it's actually shrinking. That's the last place you want to be.
And finally, probably the most common thing I'm actually seeing from the companies that are pitching my VC firm today is that the product only gets better when the AI API gets better. For example, let's say you have an image generation company and if Midjourney or OpenAI releases a new API, then your product gets better. But if they don't, you're kind of stuck. Or if they raise prices, your prices go up, your costs go up. And so these companies that are the only value is the AI wrapper. I'm not against like using AI APIs. I think a lot of companies are doing this successfully. But if you're not actually building a product that gets better, even if the API doesn't get better, you're in a really tough spot and you're basically just building your entire business hoping that someone else figures it out. It's just a really risky place to be. I see it way too often in the pitches I'm seeing right now.
So, let's talk about what you should build right now. Well, we already covered massive market, but alongside that, you need a massive problem. It can't be a massive market with just sort of a minor nuisance that they're trying to solve. It's just not enough to get them to move. It needs to be a problem that is threatening either their topline revenue or their bottom expenses. Either of those is something that they will actually pay attention to right now. And on top of that, the solution needs to be flexible. And the reason I say flexible is what you're essentially doing is you're hedging your bets. Again, this is a 7-year play. And if new breakthroughs happen, your business should be able to take advantage of them and deliver a better solution to the problem. However, if breakthroughs don't come through, you're still in a good place.
And a good example of this is actually Palunteer. You know, Palunteer is essentially AI detection for threats against governments and things like that. And the playbook that they're running actually they learned from PayPal. Peter Teal was one of the founders. And what they found is that AI alone has limitations. But if you do AI plus a human intervention at the end, you actually get the best of both worlds where you're automating a lot of the um manual data entry and data crunching, but then you're having a human kind of verify the results and move things forward. And so as a result, as AI is getting better, Palunteer is ripping. They're up 1500% in the last 5 years in the public market. But if AI stops getting better today, Palunteer will still be a valuable company because they're not depending on an AI revolution. they're just taking advantage of it as it happens. Hopefully that makes sense.
And so the critical question to ask yourself is in the business that you want to start, if the AI hype dies down, if AGI doesn't come through, if nothing happens, do you still have a business? And if the AGI hype is real, does your business get better? If you can say yes to both of those, you're on to a really good business. And if you want a really practical step-by-step way on how to find those business ideas and validate them, I put together a 90-day playbook that breaks down everything we teach the founders that we invest in, I'll put a link in the comments below so that you can download it. It's totally free and it will help you actually run this process and find a business worth building today.
Now, with that said, I want to give you a few warnings for anyone who's actually operating a business right now or about to be because these are some of the mistakes that cost me personally millions of dollars and years of my life when I was building my businesses that I just want to give you in like 5 minutes and save you a lot of time and money.
So, first is in this sort of space where you are either building something new or today with the AI wave and everything there's a lot of uncertainty. One of the biggest mistakes you can make is to sign long-term contracts with what are known as fixed minimum costs. And these are usually seen when you're signing a deal where you're paying on usage, but the vendor is saying, "Okay, but like minimum $5,000 a month." We signed way too many of these at Prodigy. And we ended up with these bills on services that we ended up just not using as the business evolved. And I thought I was being really clever at the time cuz I'd negotiated good discounts, but they ripped our business to shreds and cost us so much money. So, make sure that you're keeping the business nimble. Try to keep contracts as short as possible and reduce or eliminate fixed fees when you can.
Second, don't get too distracted by the AI hype daytoday. As I mentioned in the beginning, there's massive massive conflicts of interest in this AGI AI wave that's happening right now. And to give you like a real behind the scenes how this works, it's kind of like a pyramid scheme to be honest. Because if I invest in an AI company and then I go release a press release saying this AI company is going to change the world, I know that if someone else invests in that AI company at a higher valuation, that makes me money cuz my investment is now worth more money. So I, as the investor, have a direct conflict of interest to go along with the hype and to say, "Yeah, this thing's the real deal." And the founder, of course, direct conflict of interest because they're promoting it, too. as well as the endowments, the media, everyone that is investing in VCs that's investing in these startups. So all the way from the media to the entrepreneurs to the education systems, they're all making a lot of money from AI hype right now without actually delivering on many of the promises. So don't get caught up in this. It is at the end of the day kind of functioning like a pyramid scheme and everyone's just getting too rich to really admit it. But here I am admitting on video for you.
However, you can take advantage of AI. See, I think the things that AI is really good at right now is actually helping you rapidly learn in the business, which is actually what will make you more successful as a founder. It's not the technology that you're going to like come up with overnight, but it's the small little iterations, the prototypes that you ship to customers and get quick feedback on the way that you test your go to market strategy. And AI is really good at this. Right? how you can do the quick zero to one phase and figure things out, learn faster, and that is ultimately what will make you successful as a founder.
If you like this video, you'll also probably like the one I did where I break down everything I learned at the Stanford Startex Accelerator. So, I'll link it over here. Check that one out, too. Hope it helps.