The Real Reason "Stupid" Startups Raise So Much Money-Nir&Far-Episode#49

Hi, I'm Nir Eyal and this is the near and Far Podcast. This podcast is about business, behavior and the brain. On this show I do a few things. I read quick articles I've written about topics shaping your behavior. I interview authors of books I enjoy, and from time to time I devote episodes to answering your questions. If you want to ask me a question, visit the podcast page on itunes, go to Ratings and Reviews and ask me a question. By leaving a review, I promise to read it and possibly include your question in a future episode. So please ask me anything now. Enjoy the episode and for more, you can always Visit me@nearandfar.com.

The real reason Stupid Startups Raise so Much Money By Nir Eyal have you noticed all the startups raising massive sums of money recently? Perhaps you've scratched your head wondering how a company like Buzzfeed, known for its website full of animated gifs, litzicles and quizzes, just raised $50 million evaluating the company at a reported 850 million. Snapchat, a messaging app known for helping teenagers sex one another, reportedly received a 10 billion dollar valuation from its investors. Has the world gone mad? Some industry watchers see the recent boom in seemingly trivial apps and websites as a foretelling tech bubble 2.0. However, there's much more to the story. Our knee jerk reaction to classify innovation as either important or frivolous is exactly why many are left aghast when previously diminished companies reveal shocking valuations and ridiculous investment rounds. Vitamins and Painkillers Most people, including many professional investors, tend to put new products into one of two vitamins or painkillers. Painkillers tackle important problems. They solve an obvious need, relieving a customer's specific pain and addressing a quantifiable market. Think Tylenol, the brand name version of acetaminophen, and the product's promise of a reliable relief. It's a kind of ready made solution for which people are happy to pay. Innovators in companies big and small are constantly asked to prove their idea is important enough to merit the time and money needed to build it. Gatekeepers such as division heads and managers want to invest in solving real problems or meeting immediate needs by backing painkillers. In contrast, vitamins do not necessarily solve an obvious pain point. Instead, they appeal to users emotional rather than functional needs. When we take our multivitamin each morning, we don't really know if it's actually making us healthier. Efficacy is not why we take vitamins. Taking a vitamin is a check off your list behavior we measure in terms of psychological rather than physical relief. We feel satisfied that we're doing something good for our bodies, even if we can't tell how much good it's actually doing us. Unlike a painkiller, which we cannot function without missing, a few days of popping vitamins, say, while on vacation, is no big deal. Likewise, people tend to dismiss innovations like buzzfeed as vitamins, believing it's a nice to have product but not a must have. And for the most part, they're right. However, what we often fail to realize is that over time, vitamins can become painkillers. As BuzzFeed investor Chris Dixon wrote, the next big thing will start out looking like a Becoming a Habit Lets consider a few of today's hottest consumer technology products. Let's say Facebook, Twitter, Instagram and Pinterest. What are they selling? Vitamins or painkillers? Most people would guess vitamins Thinking users aren't getting much of anything important other than perhaps a quick boost of social validation before making up your mind on the vitamin or painkiller debate. For some of the world's most successful tech companies, consider this A habit is when not doing a behavior causes a bit of pain. Think back to before you first started using these services. No one ever woke up in the middle of the night screaming, I need something to help me update my status. Like so many innovations, people did not know they needed Facebook until it became part of their everyday lives. Until it became a habit. It is important to clarify that the term pain point, as it is frequently used in business school and marketing books, is somewhat hyperbolic. In reality, the experience we are talking about is more similar to an itch, a feeling that manifests within the mind and causes discomfort until it is satisfied. The habit forming products we use are simply there to provide some sort of relief. Using a technology or product to scratch the itch provides faster satisfaction than ignoring it. Once we come to depend on a tool, nothing else will do. Seeking pleasure and avoiding pain are two key motivators in all species. When we feel discomfort, we seek to escape the uncomfortable situation over time. The solution to the user's pain is found in the product's use. Habit forming technologies seem at first to be offering nice to have vitamins, but once the habit is established, they also provide an ongoing pain remedy. It is easy to dismiss these seemingly frivolous technologies when we don't understand the deeper psychology, compelling users to come back again and again.

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Sam.