innovator dillema – Brian Roy

Are you looking to hit a 5 run homer?

I love a good baseball metaphor. There is nothing better than using the lens of baseball to make a point simple, clear and biting.

So let me tell you what I’ve been thinking today. You can’t hit a 5 run homer – it just can’t be done. Doesn’t matter how smart you are; doesn’t matter how talented you are; doesn’t matter how many twitter friends you’ve got.

I’m an optimist – some would say annoyingly so. I believe the best developers among us can code just about anything we want them to. But that isn’t really the point – is it? The point should be bringing the greatest value to the largest number of people possible.

Often, however, you are faced with a dilemma. Your “power users” want functionality that no one but a power user will ever be able to (or more importantly willing to) use. In short – they want you to hit a 5 run homer.

Why is that a 5 run homer? Because you can’t exert 80% of your effort satisfying 5% of the target market. You can’t convert the masses by catering to the few.

So you make a choice – you swing for the fences, or you shorten up and take the ball back up the middle. But no matter how hard you swing… you aren’t driving in 5 runs with one swing.

Innovation

You just don’t get me…

The thing about innovation – is that it really isn’t innovation if everyone you pitch it to immediately “gets it”.

Which creates a nice piece of circular logic – I’m innovating, so no one will understand. Since no one understands I must be innovating. Which is – as my grandmother used to say – happy horse-shit.

Innovation is built on commonly held premises. If you want to know if your problem is people not “getting it” because it is innovative – and thus beyond the range of their current world view- talk to them about the premises that led you to the innovation.

I spent lunch today talking to two very smart people about the future of communications – and that applications are the future, networks will be commodities. And that conversation was ok… where I think I lost them is when I moved to a user centered application development approach for communications.

All of a sudden we weren’t talking about how to let users use features of the network (as an application) and instead we were talking about leveraging the network as a tool to solve important problems for the customer via applications.

The innovation is an application first (as opposed to network first) communications model. A model that assumes the network is commoditized and ubiquitous. This breaks hundreds of years (in telecommunications) of business model and world view. Generally speaking that world view gap is what allows – or prevents – a person from “getting it” when it comes to your innovation.

The important part is that the premises you based the innovation on still garner nods of agreement. If they do – you are innovating. If they don’t it might just be an idea that legitimately makes no sense.

AZ Small Business, Business Model Innovation, Experimentation, Innovation, The Future

Can we please stop talking about monetization?

I can’t take it anymore – I just can’t.

NOTE – this post was triggered by a fine post (and subsequent FriendFeed discussion) by Mark Evans – which you can find here.

The idea that you can create a “cool” service, attract massive numbers of subscribers, and then monetize the subscriber base is insane. Always was, always will be. But it is the Google model. They created a web search service (cool) and then once they became a powerful player in web search they became an ad platform (monetization) – right?

That however, is a myth. The reality is Google was solving a real, important problem. The web was growing really fast. Creating a way for people to find the content they were looking for was a known problem with existing solutions (remember Yahoo and Excite were already out there). The existing solutions were already generating revenue – by placing adds in their content (remember the whole aggregating eyeballs thing?). What Google did was create a better search solution (product innovation) and refine the exiting business model from ad placement (putting ads on your blog) to becoming an ad platform (business model innovation).

So the reality of Google is that they solved an important problem via product innovation and solved an important problem via business model innovation – by creating an advertising platform which could be leveraged by any advertiser.

But the myth is so much more fun – couple of guys create a really cool way to index the web for relevance and everyone wants to use it. Now they can figure out how to make money. We all took the bait. The Bubble 2.0 story became “create a cool service, generate buzzz, aggregate tons of users, and then generate revenue”.

Here is the bad news – that is the same myth that created Bubble 1.0 – remember? Bubble 1.0 said – “Don’t worry about revenues – just grow really, really fast – once you have lots of growth revenue and profits will come.”

As Britney Spears would say “oooops, I did it again“.

What is real is that the winners solve important problems that have enough value that people will pay for them. Finding a business online (Google) – huge problem, great solution = $$$. Selling stuff I don’t want/need to someone, anywhere who does want/need it for as much as possible (eBay) – huge problem, great solution = $$$.

So let’s make a deal. Let’s stop talking about “cool” services, how fast they are generating page views or subscriber growth or any other measure until they tell us how they are going to make money. Let’s get back to creating services that generate value for the prospective customer – value that they are willing to pay for (again – ad placement is just a way of getting your user to pay for the service).

It isn’t important that the first business model is the “right” business model. What is important is that we are re-focusing all of our frenetic energy on what really matters.

VALUE = REVENUE

AZ Small Business, AZ Tech, Business Model Innovation, The Future

A Return to Sensibility

In some very important ways the current financial crisis is a good thing. First, it will preemptively pop the Web 2.0 bubble. Why is that important? Well – and this is just my opinion – we’ve returned to the same type of fundamental philosophy we saw in the Dot Com bubble – version 1.0 was “get big fast”; version 2.0 is “business model isn’t important – figure that out once you’ve aggregated lots of subscribers”.

When you boil both of them down you see the same fundamental flaw – failure to plan for success. To be clear – by success I mean a profitable business.

Second, it will – hopefully – result in a fundamental change in the US economy. For the last three years American families have been spending more than they make. Our government has been doing the same thing since 1980 (with a brief respite during the Clinton administration). We have to start balancing consumerism with savings. That means credit will be harder to get and more expensive. That means that businesses will have to be prepared to face stiffer competition for scarce consumer dollars.

But most of all, it means innovators and entrepreneurs will have to begin by determining if they are creating and delivering something that adds value and, as importantly, is that value something their customers will be willing to put hard dollars on the counter to get.

I actually welcome both of these changes. Will it make the odds of success longer, yes.

That being said, if you can return to the fundamentals:

Solve important problems
Meet unmet needs
Create value added services over commodity services
Focus on delivering value your customers will trade for dollars
Focus on long term growth (not next year’s exit)

You can still found and grow a successful company.

AZ Small Business, cosinity

More bad news for Startups.

Today Stacey Higginbotham of GigaOm wrote an article about the deterioration in VC and Angel funding in 2008. While the picture she paints is far from rosy – I think she understates the issue in some ways. With others calling for a startup depression I think we need to be realistic.

That’s not great news, and it’s also likely that overall investment for the year will drop for the first time since 2003, Tracy Lefteroff, a managing partner at PricewaterhouseCoopers LLP, told Bloomberg this morning. Last year, venture firms put $30.69 billion into startups. During the first half of 2008, venture firms invested $14.89 billion, climbing to $20.6 billion if we add in the preliminary third-quarter numbers. It’s unlikely that venture firms are going to put more than $10.09 billion in portfolio companies between this month and Christmas. The last time that happened was in 2000.

Mark Heesen, president of the National Venture Capital Association, says that skittish investors are helping create a poor exit environment for VC-backed companies. So far this year there have been just six initial public offerings and 199 acquisitions through the third quarter — 72 fewer than this time last year.

“We have not seen a reduction in the number of first-time financings in the first two quarters, and we may see some lag on those deals decreasing,” Heesen says. “I believe it will be the fourth quarter that we’ll see the impact that the lack of an exit market has. I am certainly hearing anecdotally that venture capitalists are doing fewer deals.”

Quite honestly that isn’t the scary part. What is scary is that while VCs are doing fewer deals – and that means more deals that involve bigger investments and bigger ownership stakes – they will be demanding that the companies they invest in have cleared “seed stage”. In other words that they have revenues (and preferably profits). Why is that scary?

Venture investors aren’t the only sources of startup capital that are feeling cautious. Data out today from the Center for Venture Research at the University of New Hampshire shows that while in the first half of this year angel investments were up slightly, the number of deals getting funding was down. Total investments in the first and second quarters of 2008 were $12.4 billion, an increase of 4.2 percent over the same period last year. A total of 23,100 entrepreneurial ventures received angel funding in the first half of 2008, a slight decrease of 3.8 percent from the same period last year.

This combination results in a significant problem for the entrepreneur. The bridge – seed stage funding – to move a product or service to viability is gone. We will all have to bootstrap (self fund) to profitability.

Now for the really bad news. Even those with significant capital of their own available to bootstrap will need to seriously ask themselves if they are willing to take that risk right now. Those factors – when viewed a cycle – can lead to exactly the kind of startup depression that the country can not afford right now.

Innovation, The Future

Tech Making Traditional VCs Obsolete

Via Wired.

Bob Rice gives us his take on the VC landscape:

Well, the classic V.C.’s simply have too much money under management, and too expensive a talent pool, to waste time looking at investing anything less than $10 million in a project. Meantime, no entrepreneur wants to give up equity by taking in more money than he absolutely needs. So, when it only costs a few million to get a serious new company off the ground, how can the V.C.’s really play? They have to find places to make gigantic gambles, usually overpaying because the other big V.C.’s are also trying to invest in the few really big-dollar opportunities out there. It has become a system doomed to failure.

I think Bob hits the nail square on here. What it takes to start an online service today is quite small (I know, I’m doing it). It isn’t millions… really, to get started it isn’t even hundreds of thousands. Given that what start up is going to give up a huge share of the company to take a massive VC investment – and all that goes with it.

All too often what comes with the large investment is an over-emphasis on growth (specifically subscriber growth). That in and of itself isn’t a bad thing – provided you are ready for it. Often what is required is small amounts of cash to invest in determining how to tap massive growth – while ensuring that both the technology and the business (processes and people) scale. If they don’t scale what is the point of the rapid growth?

All too often this is what drives the fad/flash in the pan tech sector. Find something cool… publicize the heck out of it… grow really fast… disenchant users because the company isn’t mature enough to handle the growth. I refer to this growth stage as “chucking them off the back of the bus as fast as you can load them on the front”.

More after the jump…

Continue reading “Tech Making Traditional VCs Obsolete” →

Innovation

America’s Innovation Deficit

Judy Estrin – former Cisco CTO – has written a book entitled Closing the Innovation Gap.

She is Featured today in a article at Wired.

America is facing an innovation crisis. To fix it, corporations need to find new ways of funding fundamental research into physics and environmental sciences.

There is no question this is true. If you operate outside the echo chamber of the Bay Area you know this is the case. We have completely abandoned fundamental research in basic science. With China and India churning out advanced degrees in science and engineering at fantastic rates the numbers in the US continue to decline. While we continue to price our children out of higher education while other countries seek to educate their way of third world status.

It is even worse in the corporate world:

“Corporations focused on efficiencies and productivity started to make research more short term and tailored to the company’s needs,” says Estrin in an interview with Wired.com, “with the result that most research done at corporations now is applied research.”

…

Neglecting research in basic science also has big repercussions for computing and other applied science areas, because many innovations, such as the transistor, originated in basic research, not applied research.

So new innovation models have to be created to fill the vacuum created by the cutbacks in corporate research spending, says Estrin.

The net effect of this is that the base innovation fired by research is being done outside the US. Most of our large established corporations are openly hostile to innovation (see the behavior of the telecoms where VoIP is concerned). Our patent system has become a significant barrier to research and innovation – not because you might get sued by a patent holding company, but because of the risk injected into the process of innovation.

This is what happens when you are so busy protecting what you have that you fail to recognize what comes next.

Read the article and the book…