Start small and go long: an iterative approach to innovation
There is a broad discussion occurring in America around anti-trust. The root question that many seem to be asking is how big is too big? While many small businesses, communities, and individuals have struggled, the so-called FAANG stocks have thrived. The unprecedented gains of the largest technology companies since the beginning of the COVID crisis seem to be pulling the rest of the broad public equity indexes along with it.
While the FAANG and a few other technology leaders have been extremely powerful in the past, these recent gains, combined with increasing divisive politics in the United States, have only raised the scrutiny. There is a public focus on these companies that has not been seen since Bill Gates spent weeks on Capitol Hill in the late 90s.
With this scrutiny, a narrative is forming around technology ‘kill zones.’
The theory suggests if a challenger company’s product or service is in anyway threatening to one of the dominant players in the market, then the incumbent will either force-buy or clone it and destroy the startup’s opportunity.
In this scenario, there is no way for challengers to cross the moat and breach the walls of the empire. Innovation is squashed, consolidation occurs, and risk for monopolistic pricing emerges. The canonical example for why this is problematic is Standard Oil of the early 20th century.
Since the COVID crisis began in February, there have been seismic shifts in customer behavior. For some this has presented challenges and disrupted models of the past, but others have rapidly identified new opportunities. We have had more conversations with clients around innovation, new lines of business, and growth strategies than ever before.
Exploring these projects has never been easier, but because of the tremendous market share, network effects, and scale of the best and brightest in Silicon Valley, it makes maintaining and growing sustainable sources of innovation more difficult than ever.
Emerging opportunities in e-commerce, fintech, clean energy, and mobility (among others) all have incumbents. Too often we talk to clients about these ideas for innovation and hear back “well it’s a good idea, but what if Amazon enters? Or isn’t Google doing this already?”
While underestimating these major industry players is surely a mistake, it should not deter companies from stepping on the field.
For evidence, consider how some of the FAANG have evolved to get where they are today.
In a recent newsletter, tech analyst and investor Benedict Evans critiques some behaviors of modern-day venture capitalist. In his eyes, VCs have become too risk adverse to markets with large incumbents. He writes:
“Today, Amazon has won (for now) a certain kind of logistics-based e-commerce, but that’s not the only kind of e-commerce, as Shopify or Net a Porter show. Google won a certain kind of information management, but was utterly unable to have any impact on a new startup called Facebook. Facebook ‘won’ social and Youtube ‘won’ UGC video, and yet neither have yet laid a finger on Tiktok.”
The key points for companies to take home here are the importance of being different and not taking competition head on. Evans continues…
“The competitive challenges to big tech companies do not come from someone new doing the same thing — they come from something different. Your castle may be impregnable, but the river changes course, the harbor silts up or the trade routes move. Someone works out that if you can sail around the Cape of Good Hope you can go direct to the source and ship spices to Europe at a tenth of the price the Venetians are paying in Egypt and Syria.”
This is a core principle of successful innovation.
Far too many entrepreneurs and innovation officers view the ‘kill zone’ around large incumbents too literally. They avoid it at all cost. Instead they avoid innovating all together, continue to invest in ‘business as usual’, or try to create entirely new markets where there are too few customers.
Most large incumbents operate in markets so vast, that it is impossible to dominate them entirely. This creates opportunities to grow and win in the so called ‘kill zones’, as Evans concludes…
“So, when I read that VCs don’t invest in startups that compete with Google at search, or that there is a kill zone around Amazon, this is sometimes true, but it often feels like a category error. In 1950 you’d have been a fool to start a new car manufacturer, but McDonalds and Walmart are ‘car’ companies, and they didn’t worry about GM. Facebook wasn’t stopped by a Google kill zone…”
It just requires the right approach.
Every person or company has specific knowledge. Specific knowledge is the culmination of every past moment that has led the organization to where it is today. This includes customer interactions, management of processes, ideas, distribution, business models, modes of competition, etc. The intersection of all of these factors are the essence of competitive strategy and advantage, as the sum of each of these parts are nearly impossible to replicate or emulate. As Venture Capitalist and Founder of Angel’s List Naval Ravikant says, ‘nobody will be better at being you, than you.’
Within companies, we find the most valuable flavor of specific knowledge comes directly from customers. There are dozens of frameworks out there to help organizations capture these insights. Whether it be service design thinking, jobs to be done, or simply just surveying customers to extrapolate a product roadmap; listening to customers and using it to drive innovation is low hanging fruit for most organizations. And while most large organizations understand this academically, few have built the muscles to execute it in practice.
Understanding customers, diagnosing specific problems, and breaking off pieces of broader markets is done much better in the startup world.
Think of Shopify. Its meteoric rise has rivaled market leader Amazon over the last few years. Amazon offers a similar service to small businesses, has more capital to deploy, and had a major head start on brand, distribution, and the associated network effects. But against these headwinds, Shopify has succeeded by correctly diagnosing a specific customer problem and the challenge of building a digital storefront. This insight was rooted in Tobi Lutke’s (Founder and CEO) experience running an online snowboard shop. He quickly realized it was a problem that all small businesses struggled with during the rapid rise of e-commerce. Shopify provided an elegant solution to simplify building a digital storefront and has continued to grow its position with more tools and services like marketing, logistics, and distribution. Sure, many small businesses still flock to Amazon as the platform of choice, but Shopify kept a narrow focus on specific customer problems and carved out a huge piece of the market and continues to grow.
Shopify is not the only example. There are many market leaders today that once were the disruptor but are now being disrupted. Nike is a great example. When Phil Knight founded the company in the 1960s, there were deeply entrenched incumbents like Adidas and Converse who dominated. Over the years, Nike chipped away at the market share and eventually has become the overwhelmingly dominant player. But in more recent times it has ceded market share to new entrants. Companies like Lululemon, Gymshark, ON running, and All Birds have solved specific customer problems and leveraged secular trends involving technology and direct-to-consumer-distribution to grow into powerful market players, challenging Nike.
If these frameworks around disruption are understood in Corporate America, and have been successful for countless startups, why is it so hard for many large organizations to execute? Systemic incentives around capital allocation, annual planning, and career trajectory of executives create constraints around starting small, testing, and iterating.
The key mistake that many executives make is a cognitive bias around time. This is best put by author Matthew Kelly: “Most people overestimate what they can do in a day, and underestimate what they can do in a month. We overestimate what we can do in a year, and underestimate what we can accomplish in a decade.”
While we appreciate the constraints and incentives involved with corporate innovation, starting small and taking a longer-term view is the most sustainable path to success. The fact that each of the aforementioned companies now hold billion-dollar valuations, proves the point.
While there is a broader conversation to be had about anti-trust and kill zones involving the big technology conglomerates and the markets they inhabit, the shifting business landscape resulting from COVID has created new opportunities in every industry. To capitalize on these opportunities and to successfully innovate, large companies should borrow a key insight from the startup world: start small and go long. It means having a detailed understanding of who the customer is and what their problems are. This understanding needs to extend beyond the core product suite. In this broader view, opportunities to innovate will emerge, and when they do, the best companies use specific knowledge to solve them and have the patience to continue to build the position over the long-term.
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