If a startup decides to take venture capital, it not only needs to build a real business, but one that is valued in the billions. The question is how a startup can create a long-lasting and attractive business, with a transitory and short-lived technological advantage.
Many entrepreneurs assume that an invention has intrinsic value, but that assumption is a fallacy.
Here are examples of 19th and 20th century inventors Thomas Edison and Nikola Tesla They are instructive. Even as aspiring entrepreneurs and inventors hail Edison for his countless inventions and business acumen, they conveniently fail to acknowledge Tesla, despite having far greater contributions to how we generate, move, and harness power. Edison is the exception, with the legendary penniless Tesla the norm.
Universities are the epicenter of pure innovation research. But the reality is that academic research is supported by tax dollars. The zero-sum game to attract government funds is mastered by selling two concepts: technical merit and broader impact to benefit society at large. These concepts are generally at odds with the creation of a business, which succeeds only by generating and maintaining a competitive advantage across barriers to entry.
In rare cases, the transition from intellectual merit to barrier to entry is successful. In most cases, technology, while great, does not give a startup the competitive advantage it needs to exist among the incumbents and the inevitable imitators. Academics, who have emphasized technical merit and broader impact to attract support for their research, often fail to solve for a competitive advantage, thus creating a great technology in the pursuit of an enterprise application.
Of course, there are exceptions: Time and time again, whether driven by hype or the perception of an existential threat, big incumbents will rush to buy technology-only companies. Cruise / GM (self-driving cars), DeepMind / Google (AI) and Nervana / Intel (AI chips). But as we move from 0-1 to 1-N in a given field, success is determined by winning talent over winning technology. Technology becomes less interesting; The onus is on the startup to build a real business.
If a startup decides to take venture capital, it not only needs to build a real business, but one that is valued in the billions. The question is how a startup can create a long-lasting and attractive business, with a transitory and short-lived technological advantage.
Most investors understand this harsh reality. Unfortunately, while dabbling in technologies that seemed magical to them during the cleantech boom, many investors were lured into the innovation fallacy, believing that pure technological advancement would equal value creation. Many of them relearned this lesson the hard way. As cutting-edge technologies are attracting more attention, I believe many are falling back into the innovation trap.
So what should aspiring inventors solve when trying to invest capital to translate pure discovery into building billion-dollar companies? How can technology be turned into an unfair advantage that will generate huge margins and growth that sustain billion-dollar businesses?
Talent Productivity
In this era of automation, the human talent is scarce, and there is incredible value attributed to retaining and maximizing human creativity. Leading companies seek to gain an advantage by attracting the best talent. If your technology can help you make scarce talent more productive, or help your customers be more productive, then you’re creating an advantage internally, while establishing yourself as the de facto product for your customers.
Big companies like Tesla and Google have created tools for their own scarce talent, building products that their customers, in their own way, can’t do without. Microsoft mastered this with its Office products in the 1990s through innovation and acquisition, Autodesk with its creativity tools and amazon with your AWS suite. Supercharging talent produces one of the most valuable sources of competitive advantage: switching cost. When teams have the tools they love, they will hate the notion of migrating to shiny new objects and will stick to what helps them reach their full potential.
Marketing and Distribution Effectiveness
Companies are worth the markets they serve. They are valued for their audience and reach. Even if your products by themselves do not unlock the full value of the market they serve, they will be valued for their potential to, at some point in the future, be able to sell to customers who have received the order. with their brands. AOL took advantage of cheap CD-ROMs and the postal system to get families online and via email.
Dollar Shave Club leveraged social media and an otherwise neglected demographic to lock down a sales channel that was ultimately valued at $1 billion. The inventions in these examples were in the efficiency with which these companies built and accessed markets, which ultimately made them incredibly valuable.
Network effects
Its power has ultimately led to its abuse in startup fundraising pitches. LinkedInFacebook, Twitter and instagram They generate their network effects through the Internet and mobile. Most businesses in the marketplace need to undergo the arduous and expensive process of attracting sellers and customers. Uber identified macro trends (e.g. urban living) and leveraged technology (GPS on cheap smartphones) to drive massive growth creating supply (drivers) and demand (users).
Our Zoox portfolio company will benefit from each car benefiting from the cutting-edge cases that each vehicle encounters: similar to the population of drivers who learn immediately from special situations that any individual driver encounters. Startups need to think about how their inventions can enable network effects where none existed, so that they are able to achieve massive scales and barriers when competitors inevitably have access to the same technology.
Offer a comprehensive solution
There is no intrinsic value in a piece of technology; is offering a complete solution that satisfies an unmet need that customers are asking for. Does your invention, when combined with a few other products, produce a solution that is worth much more than the sum of its parts? For example, are you selling a chip, along with design environments, neural network framework samples, and data sets, that will enable your customers to deliver magical products? Or, conversely, does it make more sense to offer standard chips, licensing software or tag data?
If the answer is to offer solution components, then prepare to enter a commodity, margin-cutting, race-to-the-bottom business. The first “top-down” approach is characteristic of more nascent technologies, such as the operation of robot taxis, quantum computing and the launch of small payloads into space. As technology matures and becomes more modular, suppliers can sell standard components into standard supply chains, but face pressure from commoditization.
A simple example is personal computers, where Intel and Microsoft attracted huge margins, while other suppliers of disk drives, motherboards, printers and memory faced downward pricing pressure. As technology matures, early vertical players must differentiate themselves with their brands, reach differentiated customers and products, while leveraging what will likely be an infinite number of suppliers providing technology to their supply chains.
A magical new technology does not go beyond the resumes of the founding team.
What excites me is how the team will leverage innovation and attract more amazing people to establish a dominant position in a market that doesn’t exist yet. Is this team and this technology the core of a virtuous cycle that will punch above its weight to attract more money, more talent, and be recognized for more than your product?
