“Meaningful” startups

There is generally a lot of enthusiasm in the startup world these days. But some observers worry that too many startups are working on “features” instead of world-changing ideas. Founders Fund published a provocative article summed up by the subtitle: “We wanted flying cars, instead we got 140 characters”. Alexis Madrigal writes in The Atlantic that “we need a fresh paradigm for startups”, and dismisses the significance of recent “hot” startups:

What we’ve seen have been evolutionary improvements on the patterns established five years ago. The platforms that have seemed hot in the last couple of years — Tumblr, Instagram, Pinterest — add a bit of design or mobile intelligence to the established ways of thinking.

One thing these critics need to be careful about is that, as Clay Christensen has long argued, many important new inventions start out looking like toys. Twitter (Founder Fund’s headline example of a “trivial” startup) started out looking like a toy but has since transformed the way information is distributed for tens of millions of people. Madrigal dismisses cloud computing as “a rebranding of the Internet” whose only effect has been to make “the lives of some IT managers easier,” overlooking that cloud-based services solve the “third party payer” problem of enterprise sales, thereby completely changing how enterprises adopt new technology.

That said, I generally agree with the sentiment that the startup world is too focused on chasing trends. I don’t think this is the fault of entrepreneurs. I meet entrepreneurs all the time who are working on ideas that seem quite meaningful to me. Some of them are building futuristic new technologies. Some are trying to disintermediate incumbents and thereby restructure large industries. Others are trying to solve stubborn problems in important sectors like education, healthcare, or energy.

The problem I encounter is that many of these “meaningful” startups have trouble raising money from VCs. An entrepreneur working on groundbreaking robot technology recently joked to me that he’d have an easier time raising money if his robots were virtual and existed only on Facebook. He was only partly joking. His startup will require a lot of capital and doesn’t have an obvious near term acquirer. Only a small group of VCs today will even consider such an investment.

What jobs are users hiring your product to perform?

One of Clay Christensen’s favorite concepts is that instead of dividing your customers into segments and asking which features each segment would like, you should think about what “job” the customers are “hiring” you product to perform. Here is an example:

A fast-food restaurant chain wanted to improve its milkshake sales. The company started by segmenting its market both by product (milkshakes) and by demographics (a marketer’s profile of a typical milkshake drinker). Next, the marketing department asked people who fit the demographic to list the characteristics of an ideal milkshake (thick, thin, chunky, smooth, fruity, chocolaty, etc.). The would-be customers answered as honestly as they could, and the company responded to the feedback. But alas, milkshake sales did not improve.

The company then enlisted the help of one of Christensen’s fellow researchers, who approached the situation by trying to deduce the “job” that customers were “hiring” a milkshake to do. First, he spent a full day in one of the chain’s restaurants, carefully documenting who was buying milkshakes, when they bought them, and whether they drank them on the premises. He discovered that 40 percent of the milkshakes were purchased first thing in the morning, by commuters who ordered them to go.

The next morning, he returned to the restaurant and interviewed customers who left with milkshake in hand, asking them what job they had hired the milkshake to do. “Most of them, it turned out, bought [the milkshake] to do a similar job,” he writes. “They faced a long, boring commute and needed something to keep that extra hand busy and to make the commute more interesting. They weren’t yet hungry, but knew that they’d be hungry by 10 a.m.; they wanted to consume something now that would stave off hunger until noon. And they faced constraints: They were in a hurry, they were wearing work clothes, and they had (at most) one free hand.”

The milkshake was hired in lieu of a bagel or doughnut because it was relatively tidy and appetite-quenching, and because trying to suck a thick liquid through a thin straw gave customers something to do with their boring commute. Understanding the job to be done, the company could then respond by creating a morning milkshake that was even thicker (to last through a long commute) and more interesting (with chunks of fruit) than its predecessor. The chain could also respond to a separate job that customers needed milkshakes to do: serve as a special treat for young children—without making the parents wait a half hour as the children tried to work the milkshake through a straw. In that case, a different, thinner milkshake was in order.

There are at least three obvious ways to apply this concept: 1) when searching for startup ideas, think about jobs people want done that they can’t currently get done, 2) when thinking about how to fix or improve your product, understand why existing users are hiring your product (or should be hiring your product) and try to improve those experiences, 3) when analyzing markets, segment companies by the jobs they are hired for. Sometimes products that might appear similar (e.g. two photo sharing apps) are actually hired for very different purposes, and are therefore misclassified as competitors.

Seth Godin on “organizational momentum” acquisitions

Seth Godin left an insightful comment on my post yesterday (“Three types of acquisitions“) describing a type of technology acquisition you might call an “organization momentum” acquisition:

I think the most common form of tech acquisition is a variant of the [business acquisition], in which the acquirer wants to inject forward motion into the organization. It’s far more difficult for a public company to rally around a launch into what might seem like a small sector… it just doesn’t seem worthy of the biggest brains and bravest folks, so it gets shunted aside.

On the other hand, once a smart tech company acquires a smaller company with momentum, it gives the company permission to drive, perfect, polish and grow that business. I’d argue that this what actually happened with YouTube.

The logic underlying organizational momentum acquisitions can be found in Clay Christensen’s disruptive technology theory. Smart CEOs of large companies realize how hard it is to shift internal momentum away from developing sustaining technologies. As a way to avoid this trap, Christensen recommends that large companies set up internal startups that are as organizationally separate as possible. But, as Seth points out, acquiring startups with momentum is another way to get the same result.



Non-linearity of technology adoption

When I was in business school I remember a class where a partner from a big consulting firm was talking about how they had done extensive research and concluded that broadband would never gain significant traction in the US without government subsidies.  His primary evidence was a survey of consumers they had done asking them if they were willing to pay for broadband access at various price points.

Of course the flaw in this reasoning is that, at the time, there weren’t many websites or apps that made good use of broadband.   This was 2002 – before YouTube, Skype, Ajax-enabled web apps and so on.  In the language of economics, broadband and broadband apps are complementary goods – the existence of one makes the other more valuable.  Broadband didn’t have complements yet so it wasn’t that valuable.

Complement effects are one of the main reasons that technology adoption is non-linear. There are other reasons, including network effects, viral product features, and plain old faddishness.

Twitter has network effects – it is more valuable to me when more people use it.  By opening up the API they also gained complement effects – there are tons of interesting Twitter-related products that make it more useful.  Facebook also has network effects and with its app program and Facebook Connect gets complement effects.

You can understand a large portion of technology business strategy by understanding strategies around complements.  One major point:  companies generally try to reduce the price of their products complements (Joel Spolsky has an excellent discussion of the topic here).   If you think of the consumer as having a willingness to pay a fixed N for product A plus complementary product B, then each side is fighting for a bigger piece of the pie. This is why, for example, cable companies and content companies are constantly battling.  It is also why Google wants open source operating systems to win, and for broadband to be cheap and ubiquitous.

Clay Christensen has a really interesting theory about how technology “value chains” evolve over time.  Basically they typically start out with a single company creating the whole thing, or most of it.  (Think of mobile phones or the PC).  This is because early products require tight integration to squeeze out maximum performance and usability.  Over time, standard “APIs” start to develop between layers, and the whole product gains performance/usability to spare.   Thus the chain begins to stratify and adjacent sections start fighting to commoditize one another.   In the early days it’s not at all obvious which segments of the chain will win.  That is why, for example, IBM let Microsoft own DOS.  They bet on the hardware.   One of Christensen’s interesting observations is, in the steady state, you usually end up with alternating commoditized and non-commoditized segments of the chain.

Microsoft Windows & Office was the big non-commoditized winner of the PC. Dell did very well precisely because they saw early on that hardware was becoming commodotized.  In a commoditized market you can still make money but your strategy should be based on lowering costs.

Be wary of analysts and consultants who draw lines to extrapolate technology trends.  You are much better off thinking about complements, network effects, and studying how technology markets have evolved in the past.