Let’s face it. There are tens of thousands of super smart, tech-savvy, funded teams out there chasing the next Massively Viral consumer Internet phenomenon. Think of it like an incredibly parallel search algorithm where every conceivable customer acquisition twist and hook is being explored with effectively infinite resources of fine young minds backed by the greatest and most dependable crowd-funding source ever invented: Mom and Dad.
And the inevitable conclusion? If there’s any low hanging fruit left in terms of quick mashup tech hacks that can be thrown together in a jiffy, then it’s probably about to be plucked. And then what next?
Undoubtedly a lot of “founders” will end up getting ordinary jobs somewhere, but the core of entrepreneurship and the startup culture will continue on just as strong as ever. Only the focus will inevitably shift to all the areas that have been largely ignored by the current wave—namely more sophisticated business models enabled by solving harder technology problems.
Whipping out the ever reliable 4-quadrant graph, we get something like the following:
Most of the barrage of mobile and social app companies would fall clearly into the lower left corner, i.e. neither particularly technically challenging nor requiring much in the way of business sophistication or domain expertise. This is clearly the lowest hanging fruit, requiring neither years of business experience or years of technical development to approach. While there have been hundreds of billions of dollars of startup value created in this quadrant, given the sheer number of people pursuing these low entry-barrier businesses, it seems to me that the economics will increasingly resemble Apple’s App Store, where tremendous amounts of effort are essentially wasted in pursuit of a very few winning spots.
In the upper left, there are a bunch of companies that required quite a lot of esoteric knowledge and personal connections within an industry in which value was unlocked without a lot of new technology development, or by translating existing technologies and techniques from other domains. Groupon is a good example, where a fair amount of sophistication in tapping small business marketing budgets was combined with a very straightforward technology platform—essentially a big mailing list with some viral features. I’d also put most of the e-commerce and flash-sale companies in this quadrant, as the successful ones have been quite sophisticated from a supply-chain and merchandising perspective, but most have not been particularly innovative in terms of their tech platform.
The lower right corner represents the more “classic” invention-driven startups, for example, where IP that came out of academic research tries to find a commercial application, or a small group of techies develop something that’s pretty amazing but don’t quite know what it’s good for yet. These companies often live or die by who they bring in as their “business” guy/gal, and what their particular industry experience may be, as the business becomes about fitting the technology into an established sales and marketing channel typically focused on one or two verticals.
A recent example from my alma mater, MIT, would be LiquiGlide, a nanotechnology that makes surfaces incredibly slippery. Their initial commercialization idea was for a better ketchup bottle which would pour easily without leaving any wasted product at the bottom. I don’t know a ton about the business of licensing packaging technology to the food industry, but in a brief conversation I had with them, it did occur to me that (a) Heinz has maintained a de facto monopoly on the ketchup business for generations (see Malcolm Gladwell’s The Ketchup Conundrum), so there would be only a single customer for this technology, which is never a good scenario (not to mention that they have mostly solved the problem with their own innovative upside-down EZ Squirt bottle); and (b) for other domains where this may be applicable, for example, mustard or shampoo, businesses are probably materially benefiting from the wasted product at the bottom! The next time you use a pump-product and can’t get the bottom 1/2 inch out, just ask yourself why they didn’t make the straw a 7/16th of an inch longer!
Finally, that brings us to the upper right quadrant, which captures the hardest startups to approach: those that require a high level of business expertise combined with a high degree of technical sophistication. If you look at a startup purely from a team formation perspective, these are clearly the most difficult companies to put together because they require an eclectic group of experienced players as compared to the other quadrants. A lower right company typically brings in a business generalist to explore different value propositions and business models, whereas an upper left company typically starts with some experienced business managers and is content with industry norm technology. And of course, the lower left companies are typically made up of fairly junior teams all around.
On the other hand, the top right (and top left) companies may actually end up requiring less capital before achieving profitability because they are more likely to plug straight into a well defined market and can tap high margin transactions sooner. The clear advantage to the top right companies is that their positions are generally going to be more defendable from competition, not only because they are harder to build, but also because there will tend to be fewer founders even aware of the opportunity in the first place. I’ll throw my first startup, enterprise e-commerce platform ATG, into the upper right corner as a good example of defensibility. Once ATG and a handful of other competitors established themselves in the late ’90s, there have been basically zero successful new competitors at the large enterprise end of the market, even to this day. And, from a capital efficiency perspective, ATG only raised $13.5 million from inception to IPO, because we were able to plug into a steady stream of revenue built on our brand equity as a high-end technology consulting shop.
In terms of where our current meta-startup, Redstar, plays, we’ve tended to be somewhere in the upper left pushing towards the upper right quadrants. These are areas that both leverage our years of business expertise and technical know-how, but also help us focus on businesses that are not already overrun with competitors. Those quadrants also exploit the inherent advantages and capabilities of being based in Boston, where we have a hugely diverse and eclectic combination of business experience, technical innovation, and creativity, all supported by the world’s leading educational institutions. Not only do we have MIT, Harvard, Tufts, BU, Wellesley, and the other Boston major leaguers, we also have RISD, Brown, and Yale in close proximity. It is undoubtedly the densest concentration of raw business, technical, and creative talent in the world, and I am certain we will see a continuing explosion of incredible upper right companies sprouting from this base.
At the MIT Media Lab, where I did my graduate work in computer music, the fundamental tenet is being multi-disciplinary: if it were possible for a professor to pursue his or her research at a different institution, then ipso facto, the Media Lab is probably not a good fit. Instead they look for researchers for whom the lab is the ONLY place where they can find the unique combinations of talents and skills to innovate. As the lower hanging fruit in the lower left and right quadrants run out, this type of multi-disciplinary, experience-rich approach will be a tremendous strategic advantage to pursuing the next generation of high-value company building as we contemplate the fruit that’s too high to simply pluck.
