Tips and tricks to stay alive in the digital innovation business
Doing innovation is hard mainly because it is governed by the rule that doing “the right” thing is the wrong thing. On the other hand, it is so trendy these days to “think outside of the box” — everyone wants to be a disruptor, even though sometimes there is nothing out there to be disrupted.
We have prepared some lessons from the startup graveyard to illustrate selected causes of early deaths in digital innovation. We have experienced them first hand and they were really painful at times. Our hope is that at least some of this pain can be avoided.
Lesson no. 1 — Don’t do software! (unless absolutely necessary)
Have you ever observed a broccoli on a microscope? If not, please do — it’s fascinating. When you zoom in you would generally expect to see some more detailed and accurate picture of it that is way different from what you can see with a naked eye. Surprisingly enough, what you will actually see is the exact same structure and texture — the broccoli just gets bigger and bigger the more you zoom in.
Scientists were thinking hard to explain that phenomenon and realized that complex or “curvy” enough objects are governed by a strange mechanics — the more zoom-in you make on them — they look exactly the same but just get bigger in size so it’s virtually impossible to objectively measure them (it will always be scale-specific). Such objects are called fractals. Please see the picture below to see the point.
Now, how does that link to tech? Software is actually very “curvy” and complex. When you try to make a zoom-in and move from low-fidelity deck to a high-fidelity spec it will ALWAYS get bigger than you initially thought — no matter how hard you try. It is still the exact same product, it’s just bigger in a more detailed view.
Digital innovation is almost always a combination of tech and business. A lot of startups think that doing software is equally important to growing business at an early stage. At the end of the day, it’s a digital initiative after all, right? The truth is that software is like a black hole — it eats up your precious energy and resources when you start to focus on it too much.
It is much more clever to be business-first or business-only at early stages of digital innovation, no matter how tempting or seemingly unavoidable doing software might be. Virtually everything can be mocked or you can have real humans doing the actual work that was supposed to be done by tech. So, if you really cannot avoid making software at an early stage — at least make sure to have it in the zoom-out mode. The beast will immediately get bigger once you zoom-in. :)
Lesson no. 2 — There is no better unfair advantage than superpowers around user acquisition and retention
We work with a digital innovation lab of one of the key players in the education sector. After some ideation we have collectively chosen one particular product idea we want to nail — a platform listing promising startups in the edtech business under the umbrella of this big brand. We have considered the brand reputation to be the unfair advantage and we were opting for commision-based revenue on each 3rd party product purchase made because of the platform. The traffic was supposed to come from paid ads (Google and Facebook) because it was kind of tricky to drive it from the core business site because those startups were in some competition with the core business products which may cannibalise the sales.
And then we started to do the math and come up with the following funnel:
When we multiplied each part of the funnel we ended up with 0,15% total expected conversion. If you add a cost-per-click on ads of around £1 and an average commission on sales of 10% we came up with the figure of more than £4,000 and this was the supposed to be the average listing price of each product on the platform in order for us to break even on customer acquisition cost alone, not mentioning any software dev costs!
We needed this exercise to realize that even big brand is not always a good enough unfair advantage. It brings reputation to the product, true, but what was also needed to make it a viable business is close to free traffic. This is what this brand could not provide or was willing to explore in this context so we killed the idea.
A lot of digital products try to emphasize how useful their know-how is or how much more sexy user interface they have as compared to others. This is a potentially deadly logic, especially at an early stage. At the end of the day, customers don’t want a quarter-inch drill, they want a quarter-inch hole.
A handy rule of thumb is that you are ready to start building when you have at least 10 commited clients that want to buy it, even though the solution does not even exist. You may obviously use Google Ads to acquire users but by doing so you will not discover your real superpowers — those around customer development.
Lesson no. 3 — User research is ruled by a strange math
Every serious startup person will generally say that they do what they do not only because of their gut feeling but because they have done some research to prove that their intuition is right. As usual, there is good research that allows you to move on with your business, and bad research that either strokes your ego or provides you with false data.
Doing the right research requires acknowledging that if you want to understand your users and your business better, than 100 x 1 does not equal 20 x 5. Let me explain. Let’s assume that you have enough budget and time to research 100 people. How to do it? There is a rule telling that by researching 5 people only you accumulate most insights so even you had a bigger group you will not learn that much more. Please see the graph below:
The actual takeaway here is that it is much more efficient to run 20 iterations of research with 5 people on board than 1 iteration of research on a group of 100 people. Many startups feel excused because they have interviewed 100 people at once and they have a fancy Google Doc full of insights. So now it’s time to move on and build, right? If the actual goal was to have twenty 5-people iterations across some extended period of time — the actual process will be much more painful but at the same time insights will be an order of magnitude better.
Another interesting piece of math. If you really want to measure how certain you are about your business and what will be the potential impact of your next hack, you can follow the list below:
The credibility rating index can be used as a multiplier when you try to compare the potential impact of some competing initiatives from your backlog. By following it you may avoid pursuing wild-guess actions that hold promise of making you rich and your users happy overnight. Credibility rating index greatly helps us stay humble that we are often foolish in terms of understanding of the actual value of the product we work on and we will be much better off if we get actionable insights to move closer to 1.0 on the scale.
I hope that those lessons can be at all useful to act as an ammunition for your own battle.
Best of luck in creating products that generate lasting outcomes, not only some functional outputs!
