Reversing the Decline in Transformational Ideas

This is post 2 of the Transformational Entrepreneurship series (original on HBR). Post 1 defines Transformational Entrepreneurship and the matrix of socioeconomic value creation used in this post. Post 1 can be found here.

Many venture capitalists are up in the arms because their returns are down, their funds are drying up, and there appear to be a declining number of entrepreneurs pursuing big ideas.

They’ve turned to blaming angel investors for encouraging “an entire generation of entrepreneurs [to build] dipshit companies and hoping that they sell to Google for $25 million”. They say, “this ‘think small’ attitude is driving entrepreneurs who may otherwise build the next Google or Microsoft to create something much less interesting instead.” And this has implications for the whole ecosystem because, “then everyone loses. No IPO. No 20,000 tech jobs. No new buyer out there for the startups that don’t quite make it.”

Unfortunately Venture Capitalists have mixed up their causality. Angel Investors are not the reason more entrepreneurs are thinking small. More entrepreneurs are thinking small, because the costs to starting a company have fallen so dramatically that there is now a whole new class of entrepreneurs creating companies. The founders starting “dipshit companies” are not the same types of founders who would be starting the next billion dollar companies. These founders don’t want to change to world. They just want to make enough money to provide for their family, buy a car, or earn their freedom. These people are the information economy’s Mom & Pop business owners, just more technologically leveraged and profitable than their brick & mortar predecessors. Instead of starting restaurants and hairdressers they build coupon apps that are used by thousands of restaurants and hairdressers.

This is not a bad thing for the startup ecosystem or the economy. Quite the contrary. It means instead of only having companies at the fat head, there are tens of thousands of smaller companies fulfilling demand for the millions of “X for Y” niches along the long tail.  And sometimes they may even find the niche was much bigger than they thought. Ever thought air mattresses in living rooms would grow into a billion dollar company that would take on the vacation rental market and the hotel industry? I know many smart investors didn’t.

The only negative effect this rise of the long tail should have on Venture Capitalists, is that they need to get better at filtering the increased noise in the system. At present, the startup ecosystem’s inability to differentiate Mom & Pop tech entrepreneurs from High Growth Entrepreneurs ready to build the next Billion Dollar Company, wastes a lot of people’s time and energy.

Who Is To Blame For The Lack of Big Ideas?

While the VCs are wrong to blame the Angel Investors for fewer big ideas, and while falling startup costs have enabled many more small thinkers to become entrepreneurs, I don’t think VCs are off the mark in their perception that there is a smaller absolute number of entrepreneurs with big ideas. But I think the cause is a far subtler point. I believe the decrease in big ideas for software companies is the result of homogeneous founding teams in the Valley.

Billion dollar companies do not happen if the founding team is not extremely well suited to the market (now called “Founder Market Fit”). In the past, the magic formula was two engineers or an engineer and a businessman. Most of the big successes followed this pattern. Hewlett and Packard, Jobs and Wozniak, Gates and Allen, Ellison and Miner, Larry and Sergey, Thiel and Levchin, the list goes on.

The innovations that made these companies worth billions of dollar could be classified as computer hardware and software infrastructure. They made calculators, personal computers, databases, search engines and payment processors. The formula worked. Combine a lone technical genius with a mesmerizing sales guy and you had the DNA for a billion dollar technology company.

But times change. These cutting edge applications became today’s infrastructure, and enabled a new wave of billion dollar companies. In the last 7 years it became clear that a technical genius and a mesmerizing sales guy weren’t enough. A new competency started to appear in the DNA of this generations successful founding teams: Design. Design is everywhere. Design thinking. Design Conferences. Designer Funds. Design Celebrities. It’s all there. And if you need a few successful companies who consider design a key competitive differentiator you don’t have to look hard: Mint, Square, Quora, Asana and Path, just to name a few. Design at its best is more than just a beautiful interface, it synthesizes complex technology with a deep understanding of end users’ motivations and abilities into a unified, intuitive product experience.

Why has the era of the designer only arrived now?

The Internet and Technology more broadly, progress very developmentally. Infrastructure is built on top infrastructure, which opens up new possibilities that weren’t possible before. For designers to be appreciated, they needed a web that was fast and robust enough to handle pretty AJAX magic shows. They also needed billions of consumers to get online who would happily through down money for a beautiful, intuitive user interface. No longer were technology companies main customers old, white executive managers who got their jollies off on the largest feature set at the cheapest price.

But now I believe the designer led team is on the verge of irrelevancy, too. The Internet has the necessary infrastructure and achieved the global ubiquity to be able to reimagine and disrupt nearly every industry in the world. But Silicon Valley seems to think that all that is required for disruption are a few “Rockstar Engineers” and “Superstar Designers”. This team type used to be able to lock themselves in a room, come up with a big idea and start executing on it. Now, if you throw 2 engineers and a designer together and tell them to come up with a new startup idea, you’ve got better than 50% odds they will come up with another mobile local social photo sharing app. This team competency was exactly what the doctor ordered when the next evolutionary step of the digital world was just creating software that was actually intuitive to ordinary consumers. But now these teams seem to continually run into a creative roadblock.

What gives? Have all the innovative ideas already been done?

The problem is that creativity works by taking what we know and applying it to something new; and what engineers understand is new enabling technology trends like cloud, mobile, social and big data. This worked great when the problems teams were trying to solve were fundamentally technology problems. But now much of the transformational potential of the “pure information technology” possibility space has been exhausted to the point of terminal differentiation. The new frontier for software is applying our highly developed, easily deployable technology stack to a whole new range of industries, where the problems can’t be properly solved just by firing up a text editor and initializing a LAMP stack. The only way out of this innovation gridlock is an expansion in founding team diversity. I believe the missing piece from the DNA in the founding teams of Transformational Companies is now the Domain Expert, who has deep insight into the industry they are trying to disrupt. Without a domain expert attempts at disruption are unimaginative and incremental at best.

There are so many industries ripe for technology startups to disrupt: Education, Health Care, Business, Art and Government just to name a few. But where are the domain experts ready to be paired with a team of rockstar engineers and superstar designers? Most of them appear to be wandering around attempting to spread their ideas through books, speaking engagements, university lectures and consulting gigs, unaware of the possibility now available to them to integrate their ideas into software applications. An approach that has a dramatically better chance at changing behavior and influencing society.

One of the impetuses for this insight was when I was struggling to come up with a good title for my role on the Startup Genome team. My primary function on the team is to build models and prescriptive frameworks that describe the innovation process and how businesses evolve. What was my title? I realized that part of the reason for the lack of good language was that traditionally the type of work I was doing would be packaged as an academic paper or book. Only recently have the enabling factors arrived to let me build this knowledge into a scalable software product, that can be used by millions of businesses to improve their decision making on a daily basis.

Now I look around and see lost opportunities for collaboration everywhere. The world is full of brilliant domain experts and full of people great at building software, but they rarely speak to each other, much less work together. I see people building personal finance software who have never heard of Ramit Sethi’s extremely effective 6 week personal finance program described in his New York Times best selling book. I see people building weight loss apps who have never heard of BJ Fogg’s Behavior Change Model or his Persuasive Technology Lab at Stanford. I see people who want to build software that supports personal growth and spiritual enrichment but have never heard of Integral Life Practice. I see people building productivity apps who have never heard of GTD, or more importantly Energy Management. Product teams seem to believe that all that’s needed for innovative disruption is to add soup du jour technology features such friending, following and sharing. This implicitly imbues primitive, uninspired theory into the design of products. The world is full of great research and theory, it’s time we transplant these ideas from lifeless parchment and their resident isolated ivory towers and “electrify” this knowledge, integrating it into the software tools that power society.

The number of teams working on transformational ideas in Silicon Valley seems to be declining and homogeneity of founding teams is one of biggest reasons why. We started with the dynamic duo of the businessman and the engineer. Recently we added the designer. Now if want to continue to create products that scale into billion dollar companies, create thousands of jobs and transform society, we need to add Domain Experts to the founding DNA of Technology Companies.

*The ideas discussed here are of course not the only the reasons for a decline in big transformational ideas. There is an important argument to be made that there is a decline in breakthrough science and technology due the risk aversion of the scientific establishment and lack of long term thinking. Two good articles include The Innovation Starvation and In Search of Black Swans.

  • Colin Hayhurst

    Max,

    This one of the best blog posts about entrepreneurship I’ve seen for a long while. You are spot on, IMHO, in many ways.

    I think the point about domain experts is a good one. However, I think the opposite can also be true: An ambitious, determined entrepreneur can disrupt very occasionally precisely because they are naive about an industry. The guys at Airbnb are an example: Unless they knew about Couchsurfing which I’ve never heard them mention. Somebody should ask them!

    But here is the big problem, I think. Too many investors use pattern matching too much. Yes, I understand why they do and I would do the same to some extent. But there is not enough of an eye for the outlier. There is invariably something unusual about the startups that became really big. In some ways these companies have to be different from what came before.

    From evidence I’ve seen incubators are also guilty of too much pattern matching and encouraging of, as you mentioned it, “dipshit” companies.

    Colin

  • ericbweinstein

    Deep domain understanding could thought of as Gladwell’s 10,000 hour rule to master a domain. The only way to get that much experience is to work in a field for years and years.

    What may be sufficient, however, for a solid a business plan, is for an outsider to come in and understand the domain like an Enterprise Architect would. Have conversations and document entities like goals/objectives, sufficiently detailed business processes, identify business services, the key organization and roles involved, products, data – and yes technology (applications, infrastructure etc…). Review the weaknesses in those entities and come up with a business plan. The domain expert is key to identifying the opportunity, defining the requirements, and testing the solution. They are sort of like the end user or customer in an organization.

    A domain/industry expert has a deep, intuitive understanding of the above gained through years of experience. That’s not to say, however, that a solid business plan could not be derived from the key aspects of the entities above from an outsider. In short, the domain expert knowledge can be acquired with a little research.

    Either way, I tend to agree – developer, business (sales/marketing) and designer is not enough. You need someone (you call them a domain expert) who understands the enterprise architecture.

  • Peter

    Great post. However: “Domain experts” ARE the archetypical founders and have been around for hundreds of years. It’s the insurance agent going off starting his own firm, the lab manager who after 15 years starts his own lab, or the marketing expert launching his own consulting firm.

    It’s just that the new breed of tech “founders” started to give a damn about thsese people because they think they don’t need them. Foremost evangelist Graham / Y Combinator who said that business people don’t know how to start tech firms or recruit tech talent, and tech founders should concentrate on building the product and then sometimes later get some of the b-guys.

    Unless VCs and angels demand as a condition for financing that the team inclused at least one b-guy, ideally with 10 years of domain experience, nothing will change.