Why Insights Are the Secret to Outlier Startups

Part 1: What are Insights and Why Are They So Important?

The Pattern Breakers book is now available wherever you buy your books.

In my last post, I talked about the power of inflections and how founders can harness them to overturn the assumptions of the status quo. But inflections on their own are not enough. The potential of an inflection must be converted into a pattern-breaking product that changes how people think, feel, and act in the future. 

The insight is what connects the two; without it, the inflections that surround you will not be harnessed effectively to create a breakthrough.

Insights are fundamental for the success of startups - so fundamental that explaining them adequately requires two posts. This first post will define insights and explore their importance. A follow-up post will discuss methods for evaluating whether startup ideas you are considering embody a significant insight.

Founders invent insights

The presence of a powerful new technology doesn’t guarantee that it will be used to maximum effect. Consider the wheel, which existed for hundreds of years before it was used for transportation. For centuries, people mounted wheels horizontally to streamline pottery-making. Let’s give the Mesopotamians their due: After all, before the pottery wheel, pots were made from strands of clay that were rolled into long threads and manually coiled. The use of the wheel for pottery was, therefore, an insight as well. But for the wheel to realize its potential as we understand it today, someone needed to have a new insight: that the wheel could also be mounted vertically to enable transportation. 

Few people recognize the transformative power of inflections all around us. We get stuck in our ways, dealing with the same people, the same things, the same places. It blinds us to what might be. Yet, now and then, someone comes along who doesn't see the world in the usual ways. In the field of startups, these are the founders who spot what no one else does, who see a chance to create radical change. They find insights.

Insight Example: Ridesharing

Uber and Lyft’s insight, for example, was that it was possible to apply the sharing economy to cars; just as Airbnb had allowed people to share an extra room in their houses, Uber and Lyft proposed to let people share an extra seat in their cars. It was possible, in other words, to radically change how people traveled from one place to another through an app that harnessed the power of GPS-enabled smartphones together with people’s willingness to share their location.

This seems obvious today, but it wasn’t obvious at the time. Why would someone be willing to get into a stranger’s car? That’s crazy! This leads to the other vital aspect of insights…they have to not only be right, they must be non-consensus and right.

Insights are Non-Consensus and Right

Inflections, as we covered in the last post, aren’t caused by startups; instead, they are external events. Insights are different. They come from the minds of startup founders who see what others don’t yet see. 

So, then, why are insights so crucial to breakthroughs?

My favorite explanation comes from a combination of two well-known investors, Howard Marks, and Andy Rachleff. 

Howard Marks, the founder of Oaktree Capital, is renowned for his perceptive memos that explore the keys to successful investing. He has authored two significant pieces that highlight the crucial role of insights in enhancing investment returns. The first, titled  Dare to be Great, was published in 2006. His more recent work from 2022, I Beg to Differ, expands on these concepts.

Andy Rachleff, the co-founder of Benchmark Capital and CEO of Wealthfront, applied Howard’s ideas to the field of startups. His idea was that startups can be placed in a two-by-two matrix. On one dimension, the startup idea can be right or wrong. On the other dimension, the idea can be consensus or non-consensus.

It’s probably obvious that if you are wrong, you won’t succeed in building something people want. So you fail.

But it also turns out that being right is not enough when it comes to creating a breakthrough startup. You have to be right and non-consensus. This holds true of where an investor puts his or her money, and it’s equally true of where a founder decides to invest his or her time.

Here's why. If you're right but within the consensus, you're in for a tough time: more competitors, pricing pressure, longer sales cycles, faster incumbent responses, and many other factors that can all contribute to arbitraging your profits away.

Being both non-consensus and right gives you the best shot at a breakthrough. But it's a tougher road, emotionally speaking. You've got to break free from the herd and fight the urge to be like others. When your insight doesn't fit the mold, it requires you to acknowledge that most people won’t like your insight at first. After all, if too many people like your insight too soon, it's probably not far off from what they already think. That means it might not be much of an insight at all.

Insights let startups escape the comparison trap

Being non-consensus also lets the startup compete based on being different, rather than being better. Think about it: If an incumbent product exists and you enter the market and say you are better, why should anyone believe you? The incumbent has been in business for a while. They have a lot more resources than you. They have more proof points of making customers successful. In order to win, your startup will need to offer something completely different that a specific set of customers desperately want and can’t get elsewhere.

The power of different favors the startup because it forces a choice and not a comparison. Suppose incumbent companies sell apples. As a breakthrough startup, you don’t want to offer a 5-times-better apple. You would be better off saying, “I have a breakthrough—the world’s first and only banana.” Not everyone will want your bananas. But 100 percent of the people who do will only be able to get them from you.

This example may seem overly simplistic, so let’s consider real examples of technology breakthroughs. 

• When Apple introduced the iPhone, people didn’t ask “How does that compare to the Blackberry?” 

• When OpenAI introduced ChatGPT, people didn’t ask “How does that compare to Google search?” 

• When Tesla introduced the Model S, people didn’t ask “How does that compare to a Mercedes?” 

All of these products escaped the comparison trap by forcing a choice, not a comparison.

A skeptical reader might say “C’mon…everything ultimately gets compared. The Tesla Model S and the Mercedes got compared on some level. As did the iPhone and Blackberry.” There is some truth to this. But the problem arises when you get “trapped” in a comparison that makes you replaceable. This happens to startups that can’t convince customers to consider their offering according to different rules rather than the prevailing rules defined by pre-existing incumbents. The genius of the iPhone was that the customer bought into the rules defined by Apple as what a modern phone should be and evaluated it based on those rules rather than the rules of comparison that prevailed before the launch of the iPhone.

It’s important to escape the comparison trap for a related and crucial reason: It helps you avoid losing due to areas where you are weak. For instance, a Mercedes sedan had luxury features that the Tesla Model S lacked, especially in the early days. But by offering something exciting that Mercedes and all the luxury car incumbents had never offered before, early believers in Tesla’s difference were willing to overlook Tesla’s disadvantages.

Ironically, when a start-up has a powerful insight that translates to a novel product, it can often make several mistakes and still attain remarkable success. Customers, captivated by the start-up’s unique features, will often overlook flaws. For example, in the early days of Twitter, the "Fail Whale" became an iconic symbol of its early struggles with scalability and reliability. It was an error message that appeared whenever Twitter was over capacity or experiencing downtime, featuring an image of a whale being lifted by birds. The reasons for the Fail Whale's frequent appearances in the early days of Twitter and the solutions to those problems highlight the challenges of scaling web applications. But the tolerance and continued patronage of Twitter by its users, despite frequent appearances of the "Fail Whale," underscored the power of its novelty and uniqueness.

Insights Are Rare…Largely Because of Our Very Nature

Insights are rare to catch, much like a Marlin in the sea. In the startup realm, catching them demands the originality to find them and the courage to pursue them.

What makes it so hard? We’ve talked about how our minds by their very nature are programmed to seek and follow patterns. In a social sense, we yearn to belong, to fall in step with the rules set by others. Nearly twenty years back, Peter Thiel introduced me to the thoughts of the French philosopher René Girard. Girard spoke of a kind of pattern recognition deeply ingrained in our being. He argued that our desires are “mimetic,” echoing the wants we see in others rather than those we generate internally. From a young age, this mimetic desire guides us, almost reflexively. We compete for trophies. We’re rewarded in school for giving the exact answers the teacher expects. Those deemed "successful" often pursue this mimicry further, seeking validation through prestigious education, lucrative positions, and a lifestyle widely coveted and celebrated. For most, this becomes a subconscious guide.

Girard was a philosopher, historian, and literary critic, but Peter Thiel saw a connection between Girard’s thinking and the startup world. Mimetic desire is a faulty compass for those hunting breakthroughs. It's an incrementalist view of the world that emphasizes winning according to someone else’s rules, rather than reinventing the rules and transcending competition. 

Girard shows how most of us, having been programmed by mimetic desires our entire lives, find it hard not to be reactive to what others are doing. As an investor, I can relate to the many pitches with multiple competitors in a matrix, and their product has more checks than all the others. A typical “mimetic” person will think this way. But a pattern-breaking founder will notice that chart and immediately two words will come to mind — mindless competition.

Why Not You?

When you internalize that most people all around you are not authentically seeking insights, it can be a profound epiphany. It casts a different light on things around us, things even you might not have seen. Suddenly, you’re awakened to the fact that insights can be found all the time — but most people are too busy looking at each other to look in the right places. It also helps you realize that when you discover an insight, most people are not going to give you very much encouragement. If your goal is to create something truly legendary — don’t let the rejection of a lot of people or a lot of VCs discourage you. It turns out that a fair amount of skepticism can be a good sign. 

All the important ideas we take for granted today—Euclidean geometry, the roundness of the earth, its place in the universe, Darwinian natural selection, the mastery of electricity—were insights found by people once deemed heretics. Like those who made great discoveries across history, great founders are drawn to ideas that break patterns, flowing from their deep knowledge earned by obsessively independent thinking. Finding a real insight can be incredibly valuable.

How Can Founders Develop Insights?

We still have some more work to do in exploring how to improve our chances of finding insights and their role in facilitating startup breakthroughs. But we have a good initial set of first principles already in place:

• Pattern-breaking startups need a fundamental insight. Pattern-breaking startups need to be non-consensus and right if they are destined to change how people think, feel, and act in the future.It’s not enough to build a better mousetrap because lots of other startups and incumbents are doing this already. 

• Powerful insights leverage inflections, the underlying mechanism that gives an insight the power to create radical change.

• Powerful insights contradict conventional wisdom, which means that many people will (and should) disagree with yours. Things we take for granted today were once considered heresy in their time. 

Not many entrepreneurs are willing to be unconventional enough to achieve a legendary breakthrough. But that doesn’t mean you can’t be one of the rare few.

May you find your insight, while the rest of the world plays someone else’s game.

What questions does this raise for you?

• Looking at some of the startups you admire most, does it now make sense that some of them were based on fundamental insights? Do you have any favorite examples?

• Can you think of any startups that made it big without seeming to have any fundamental insights?

The importance of discovering meaningful insights raises additional questions. Where is the best place to look for them? How do you determine whether you are onto something or not? Where do insights come from? 

These are fun questions we will tackle next.

I want to get these thoughts to as many ambitious founders as possible. I'd be thankful if you could help share this with them if you found this helpful.