Two weeks ago I had a meeting with an entrepreneur who has built an interesting startup. It was our first time meeting one another to discuss his startup. Before we met I had spent about 10 to 15 minutes studying the startup’s website. After doing that I sent him a list of questions that occurred to me based on other startups I had studied in the past which could be seen as pursuing a solution to the same problem he seeks to solve. You may have encountered his product on the internet without realizing it. I am impressed by what he has accomplished so far given the resources with which he started.1
Don’t you want to know what I think is the best thing about our meeting?
We talked for about 90 minutes. I wanted to make sure that I did not leave our conversation before learning enough about the market he is pursuing, the problem he is solving, the product he is developing to solve that problem, the team he has formed to do those two things, and the basic characteristics of the financing round that he is now raising. I also wanted to make sure I understood whether or not he has found any customers willing to pay for the product in its present incarnation. If yes, I wanted to understand what their reaction has been so far.
But, I digress.
It was not until we had discussed his work for well more than an hour that it hit me. What they are doing could be disruptive to a legacy set of tools and product suites that people have relied on for many years now to do some rather important work – making sense of proprietary and non-proprietary data. I should know, I used to spend my working hours trying to do just that using tools that were a pain to work with then, but they were the best we had.
I do not know if he planned it that way. He did not tell me that he thinks he is working on something that could be disruptive. Rather he gave me an exhaustive explanation of the problem he is trying to solve and the various customer segments that have found what he is doing valuable enough so far that they have started paying the startup for access to the product. He connected the dots for me, and helped me get to my own realization about how disruptive his product could become without ever once using a phrase for which I have learned to keenly pay attention. He did not say: “I am going to disrupt the . . . industry.” By doing so he preserved his credibility. I will explain why.
I am teaching my self about entrepreneurship, startups, innovation and venture capitalism. To do that I am relying on the body of knowledge that many other people have accumulated. I read other blogs, I read books, I try to do more listening and less talking when I am in the company of other early stage startup investors, and I enjoy chatting with entrepreneurs.
Here are two things I have learned.
What is a startup? Steve Blank defines a startup as a temporary organization that is formed for the purpose of searching for a scalable, repeatable, profitable business model. A startup becomes a company after it has completed that search. You already know that this process is usually set in motion because the startup is solving a problem, and is doing so on the basis of an innovation or a set of innovations that is the consequence of someone’s thinking, observation and experimentation.
But how might one think about innovation? What kinds of innovation should I expect to encounter?
Brant Cooper and Patrick Vlaskovits answer that question in their book; The Lean Entrepreneur. They describe two forms of innovation. The first form of innovation is Sustaining Innovation. It is characterized by; a problem that is well understood, a market that already exists and is well defined and predictable, resultant performance improvements that are incremental in nature – lowering costs by a small percentage for example, customers that already know they want this solution, and it is reliant on traditional business processes that already exist within that industry or that can be adapted from an adjacent industry.
The second kind of innovation is Disruptive Innovation. It is characterized by; a problem that we know exists but that is poorly defined and not well understood, the potential to create a new and
unpredictable market, outcomes that are dramatic and potentially game-changing, customers that do not yet know they want the solution being developed, and non-reliance on already existing business methods in that industry or adjacent ones because such methods will fail.
So there is much that is unknown when it comes to startups and their ability to disrupt an industry. Entrepreneurs and founders of early stage startups who make the claim to investors that their startup will disrupt the dynamic already at play in their industry make a very bold and audacious claim that they often cannot yet defend. Why? Because they simply do not yet have have enough quantitative or qualitative data that would prove the point.
The lack of evidence is not necessarily a bad thing. After all if the evidence about the disruptive potential of the startup were so obvious for everyone to interpret, I might not have been offered the opportunity to discuss possibly making an investment in the startup. But, I think founders and entrepreneurs make a mistake when they eagerly declare, early and often, how they will disrupt something or another. Often, we just do not yet know. Here are some observations to illustrate the point:
The startup may be solving a problem, but how do we know that it is solving the right problem? If the solution is truly disruptive, how can we predict how customers will behave when they encounter the solution the startup has developed? Do we even know if we have identified the right market, and how can we say how that market will react? Early adopters are probably not representative of the market. The startup will not attain a profitable business model wholly on the basis of early adopter enthusiasm. Since we can’t expect to rely on traditional business methods how do we know what we have to do in order for the startup to become a company?
I know, I am making the case that there is a lot that is uncertain. But that is okay. Uncertainty is not necessarily a bad thing. The entrepreneur should be seeking investors that want to help the startup answer the questions every early stage startup must answer, in exchange for the potential financial rewards that the investor might realize once the startup accomplishes its mission.
The next time you are meeting an investor to discuss your startup don’t start by telling that investor how you will disrupt your industry. In fact, don’t mention disruption at all. Simply describe the problem you are solving – in sufficient detail that they fully understand the pain that your potential customers are experiencing because they do not yet have your solution available to them. Explain why you decided to start solving that problem – may be you were motivated by what you learned at a prior job. Tell them about your assumptions. Tell them about your hypotheses. Tell them about the experiments you have performed up to that point. Show them the results of those experiments, and describe some of the conclusions that you think can be drawn from those results. Tell them about your value proposition. Let them connect the dots. Most case studies that discuss disruption are backward looking. You want the investors you speak with to look into the future and imagine what might be possible if you work together. Explain why you believe you will succeed.
To get me thinking and believing that your startup might disrupt its industry try applying the less is more rule of seduction, because the more strident your declarations that you will disrupt your industry the more skeptical I become.
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