Innovator’s Dilemna

December 15th, 2013 by Matthew Rosenhaft Leave a reply »

The biggest challenge for truly disruptive technology companies is how to fund their market adoption. “Do we bootstrap it or do we raise funding?” I admit it was much easier almost 15 years ago when I was raising money in the dot-com era. There was a lot of investments getting done on concept, but not anymore. Rule of thumb these days seems to be that entrapenuers are responsible for design and prototype, while angel investors fund on proof-of-concept and early market validation. Series A seems to be primarily for funding adoption. Now, there are always exception to the rule; either the founder has prior experience , the technology is sufficiently complex and expensive, or there is sufficient differentiation to drive displacement within an existing market sufficient to reduce risk for the investors that they will fund earlier. But, for most early stage technology companies, funding is tied to business performance. In reality, the management team needs to plan for bootstrapped growth to survive until you thrive.

It has been surprising to me to see how many technology companies that still believe that investors generally invest in your technology innovation. It is even more surprising to find how many of those same companies think their buyers do the same. When we talk to the investors and the buyers, the conversation is about adoption; investors are focused on how to drive market adoption, buyers are focused on their problem adoption. The key to understanding how to help the business grow, solve the buyers problem, and mitigate the investors risk is simply understanding the inverse relationship between disruptive technologies and adoption. The more disruptive the technology, the harder the adoption. The harder the adoption, the more risky to buy for the buyer and the investor. The harder it is to buy and invest, the harder it is for the business to survive, let alone thrive, and reach wealth creation for the founders.

So here are my Top 5 Myths /Misconceptions for Disruptive Technology Companies

1. Market Adoption Takes 18-36 Months – Look, the reality is that new markets don’t just form. They are expensive to build. Truly new concepts are even harder. In reality, markets are an aggregation of buyers. Markets for when a critical mass of buyers starts to use the same language to self-identify with a a category. After a while, new buyers will use that language to find the category and the vendors in that category. The misconception is that it takes a long time to build a critical mass of buyers. It takes a long time for the buyers to ADOPT your solution language, but they are discussing business problems today. Investors look for short-cuts that lower their investment costs in building the market. That is why they look for sales relationships, OEM deals, ready made buyer relationships, competitors who have already invested in building the category, etc. Anything to shorten the time it takes to get in front of the buyers and get the critical mass of sales. They know it is expensive to pioneer a market.

2. “I just have to survive long enough for the hockey stick to kick in” – The reality is that every market forecast that you make prior to the market developing is based upon a percentage of possible, available, and reachable opportunities. In short, potential is bullshit. They know it, you know it, etc. In reality, the investors are looing at your assumptions, variables, and your mitigation strategies. Put in a healthy dose of skepticism, discounting, and portfolio approach to investing and they are betting that the law of averages for you or your peers in their portfolio, coupled with their advice, help and luck will pay off with an exit at a higher rate of success versus their peers when it comes time to raise their next fund. But, that doesn’t help you while your “waiting for the hockey stick to kick in.” You need a plan to find, sell, and close more buyers faster. The hockey stick should be your ACTUAL historical sales for the last 3 years rather than your FORECASTED sales model.

3. “Our technology is so good that we don’t have competitors” is a good thing – RISK, RISK, RISK for buyers, investors, and business. Competitors help give a contrast, soothe the buyer or investor into feeling ok with change, and basically helps everyone feel ok that what you have is valuable. But, in reality, if you can’t answer what problem you solve for the buyer, why that is an unique problem for the buyer, and why you are the best in the world in solving that problem for them; “better” is a subjective. Calling something “unique” and making up your own category doesn’t help the buyer make informed decisions, it just tries to channel them to your sale. Talk to CIOs who have been there and done that. You won’t do THAT again.

4. First Mover Advantage gives you an advantage in the market – My research into my MBA was on First Mover Advantage on The Web. Looking at the economic literature on first mover advantages in markets, entry and exit barriers, and the cost of awareness and distribution via the web. My case study example was Netscape’s web browser. In 1995. There wasn’t any economic research at the time on the subject as economists, as a group, weren’t up to the advances in technology at that point. Not enough research subjects. But the reality was that Microsoft was able to catch Netscape from behind because there were much lower barriers to entry for them on the web, but more importantly, there were much lower barriers to exit for Netscape. A well-funded competitor could catch a first mover with enough investment. That lesson has stayed with me. It has now become less about speed-to-market and more about understanding how to construct exit barriers for competitors and sustainable lower entry barriers for ourselves.

5. “Just Get Me In Front of the Buyers and We Can Sell Them” bodes well for the scalability of your business – If the business needs your CEO/SME face-toface in front of a buyer, you are in trouble. Buyers are doing “exploratory” discovery sessions anymore. Don’t have time, too much information overload, don’t have to. For established markets, where buyers know that it is going to come down to a short-list of mature proven vendors, they will do the direct. For most undeveloped markets where there isn’t a well-worn path, they will poll their peers, do online research, and focus on problem solving. If you don’t show up in their research on their problem, you don’t show up. Doesn’t bode well for any company that needs 2 hours with a whiteboard to figure out what problem you solve for them.

Its A Mouthful, But True

So, if you haven’t gotten an indication that your disruptive innovation is just a “ticket to the start”, then this won’t speak to you. Buyer Adoption and Problem Clarity are the keys to success. If you can find and sell more buyers pre-market; it lowers your cost of customer acquisition, speeds up your market development, lowers your risk of reaching critical mass, lowers your entry barriers to creating a market, increases the barriers to entry for new me-too entrants, reduces the amount of money that you need to raise to drive market adoption, increases your valuation, lowers the investors risk, and increases your odds of being there exit, increasing your odds of making lots of money, and increases your odds of being able to do it again.

If you are with me, then you should be asking “How”. See the next post…. 5 Leading Questions for Disruptively Innovative Companies. http://www.socialgastronomy.com/?p=1941

Matthew Rosenhaft

Matthew is a Social Marketing Executive and is co-founder of Social Gastronomy, LLC and the Social Executive Council. Prior to founding Social Gastronomy, Matthew has over 18 years’ experience as an executive in marketing, product management, and sales. Matthew has an extensive background in the SaaS Software, Social Media, Mobile, IT Services, and Telecom industries. He has prior entrepreneurial experience as a founder and executive in several early-stage venture-backed technology companies, as well as, holds several US patents for a mobile marketing technology. Matthew is a prominent blogger and regular industry speaker on social marketing and strategy topics. Matthew’s blog can be found at www.socialgastronomy.com/blog. For more information on Matthew, you can check out his LinkedIn profile at www.linkedin.com/in/rosenhaft or contact him directly at mrosenhaft@socialgastronomy.com.