This article appeared in TechCrunch Jan 19, 2013. Here's the link
-----------------------------------------------------------------------------A friend of mine told me recently that he closed a $240,000 account. A competitor (let’s call it BigCo) was bidding for the business. I doubt that BigCo even considered my friend’s company (let’s call it SmallCo) a direct competitor. BigCo is a major player in their space and it raised a lot of money from good VCs and has a strong customer base.
SmallCo’s product doesn’t have a tenth of BigCo’s features. And yet in spite of that, SmallCo won the account. Actually, it was because of that.
As products mature, companies continue to compete in heated battles with their competitors by adding more features and more functionality. Investors and shareholders want to see steady revenue growth, so prices creep up. Yet, the truth of the matter is that a lot of customers need only a fraction of a product’s capabilities. In fact, many of them would prefer fewer features because extra features tend to make products clunky and difficult to use. Still, companies become feature-producing machines.
As a result, what often happens is some small company comes out with a product that’s just good enough and just cheap enough
for the lowest tier of customers and BigCos start losing business. BigCos console themselves by saying the customers weren’t all that profitable and that it’s too expensive to serve them. And they walk away and focus upstream. SmallCos gets a foothold and releases a new set of features. And the process repeats.
There are hundreds of examples. PCs disrupted mainframes exactly this way. Japanese cars and electronics disrupted American ones, only to be disrupted later by Korean companies and now Chinese companies. Merrill Lynch was disrupted by Schwab and then E-Trade. Phone companies by Skype. Visa and Mastercard by Square. Cisco was disrupted by WebEx, then acquired it
, then screwed it up, then got disrupted by Citrix and LogMeIn. Smartphone cameras disrupted Nikon and Kodak.
The process of Low End Disruption is beautifully described in Clayton Christensen’s series of books:The Innovator’s Dilemma
, The Innovator’s Solution
and The Innovator’s DNA
. If you haven’t read them, you should. What’s amazing about these books is not only how important their conclusions are but how well researched they are. These are academic works of the highest quality (I should know. I studied under Jeff Dyer, who co-authored “The Innovator’s DNA”).
So why is this relevant to the deal that I mentioned above? Because I believe the process starts much sooner now. Companies that are barely out of the gate are getting disrupted. The rapid pace of innovation we are experiencing, plus the low costs of starting a company and the reasonable availability of venture capital, add up to a large number of startups fighting for survival in very close quarters. I found the following perceptual map of photo sharing services a couple of years ago.
There are a lot of companies. But just think how many more aren’t on the map: iPhoto, 500px, Tumblecloud, Skitch and ACD. And never mind Facebook, Twitter and Instagram. All of them are differentiated – all of them have something unique – and yet I doubt that too many customers use more than one or two. And that’s when the trade-off happens. In each segment, customers tend to pick the one service that addresses their most salient need the best and other needs just well enough. Those who want to manage albums get Picasa. Share with friends? Facebook. Mobile? Instagram etc., etc., etc. And now we have come full circle. In my view, companies of all sizes need to think about “good enough” competitors.
So what can be done about this?
- Identify the function that most customers of your segment find most important – this requires a lot of customer discovery – and make it the focus of your value proposition. Be AMAZING at it. Photobucket is good at mobile, but Instagram is great. For example, RingCentral provides VoIP as a part of some of its services. But we never positioned ourselves as a VoIP company because that’s not our most important thing. Cloud business phone system is.
- Think about your space not only in terms of who competes with you directly but who is capable of addressing the same customer needs you do. When talking to prospects, don’t just ask them which competitors they are looking at but ask them about ALL the needs they hope to address with your product. By asking this question a few weeks ago, we identified the opportunity we won today.
- If you are a larger company, defend your lowest tiers fiercely. Better yet, disrupt yourself. Launch a stripped down, low-cost version of your product. This doesn’t happen much. I discussed the difficulties of this on my blog earlier this year. One example I gave is Charles Schwab’s launch of eSchwab. Do you have others?
There’s one other thing you should do as part of your go-to-market strategy. You need to very clearly identify an underserved (or over-served) market segment and make it your own. If you can’t find one that fits, INVENT one! At Influitive for example, we define our focus as “advocate mobilization.” And if that sounds strange, just remember that only a handful of years ago when Eloqua was founded, “marketing automation” sounded strange. Yet today, it is a whole industry with such great companies as Eloqua, Marketo, and ActOn leading the charge. Perhaps there’s an industry segment with your company name on it.
Have you ever seen the startup competitions and investment panels, such as those run by the VC TaskForce
These events are designed for early stage startup founders to sharpen the pitch and practice speaking about their companies to a rather critical investor audience. The format allows a brief presentation (often without slides) followed by several minutes of Q&A. It is designed this way in order to impose a Twitter-like design constraint on the presenter. The purpose is to force the entrepreneur to get to the very core of their idea. Having been on the other side of the table many times, we are very empathetic to the problem of getting lost in the minutia and not being able to explain the core value in a concise and powerful way. And we value the clarity of thought that is required to use this format effectively.
Besides the market need, team composition etc, most other questions tend to focus on four somewhat related topics:
§ How will you scale customer acquisition to acquire a large number of customers?
§ How do you get a lot of high-quality revenue? “High-quality” money, in our minds, means recurring revenue coming from strategic activities. We frequently see companies that generate revenue from professional services or other forms of customization. This is tactical revenue and it tends to defocus the company.
§ How do you not only enter the market effectively but also shut the door behind you? How do you make your product inherently sticky?
§ If you actually win, is it a game worth winning? Is the business something that can capture substantial protectable value and change the ecosystem if you actually make it happen?
What we aim to do in this paper, is dispel the idea that a “small” startup has little chance of success over large established players. Instead by following key concepts, many proven through the investment forums mentioned above, startups can play big and succeed.
Here’s how we think about it: 1.
One of the keys to scaling customer acquisition is “trial-ability”. Trial-ability goes far beyond a free trial or money-back guarantee or the freemium model. Trial-ability is a quality of the product stemming from deliberate and systematic elimination of all obstacles a user faces when trying your product for the first time. Every extra step customers need to take before being able to use your product, every decision they need to make, every question they need to answer, every bit of software they need to download and install, every bit of information they need to type in is an obstacle. It is essential to think about what is the unavoidable and necessary minimum. 2.
Two key components of high quality revenue is combination of high margin and high value vs the Next Best Alternative (NBA). The trick here is to be mindful of what is the NBA. Often, entrepreneurs compare their solution only to direct competitors. They often say “my product is great because no one else is doing exactly what I’m doing”. This is a wrong way to think about the business. Good questions to ask are: What would my customers do if our service didn’t exist; Can customers address their need in another way; Can a similar solution be “jury-rigged” using existing services; Can they get value without a big upfront time investment? This has to not only consider the monetary cost but the cost of effort and time. 3.
One of the best ways to prevent customers from leaving is to deliberately design products with very high switching costs (the cost for a customer to cancel your service). These costs can be expressed in dollars – like contract termination fees for wireless carriers – but this way isn’t the best because it actually reduces trial-ability (see 1). A much better way is to measure switching costs in units of satisfaction (or inconvenience). Think about leaving Dropbox
after you’ve shared your documents with a bunch of people. If someone offered you a similar service for a couple of bucks less, would it be worth the hassle? 4.
One way of thinking about the impact of your business on the ecosystem is by using game theory. Game theory offers methods for evaluating how ecosystem participants are likely to react to your strategic “moves”. Another idea is by focusing on network effects. This term is often used and almost as often misused. A network effect is impact that one user of a services has on the value that another user derives from this service. Social networks are an obvious example. But there are many more examples: Wireless carriers offer discounts on calls made “on network” because they have a lower cost. In the payment industry, wholesale rates depend heavily on volume of transactions so payment processing companies with larger volume are able to offer deeper discounts to their customers.
Personal examples: Our companies MerchantCircle, and Influitive offer some examples of how these approaches were implemented in practice.
Influitive, which just raised its seed round from 11 investors, is designed to be sticky. Advocates engage with companies they are passionate about (such as ActOn, Dell Kace and Eloqua) through Influitive’s Advocate Hub platform. As the key interface to companies’ most valuable constituency and through deep integration with other players in the ecosystem, such as CRM, Marketing Automation and Demand Gen vendors, Influitive becomes an integral part of these companies’ go-to-market strategy.
At MerchantCircle, the key focus was on two fundamental problems in the local business, both of which came down to distribution. We knew we could provide value to local merchants and consumer once we had a critical mass network, so we spent every day working experiments to build a network of merchants through organic and eventually business development efforts.
Not everything we did worked, and there are 20 things we would do better the next time, but we knew that the product focus was building a network of merchants on a scalable basis. We did this with a free platform, if there is a network effect and a zero marginal cost of delivery, the answer is always focus on distribution and free is a big part of the answer. People are always asking about how we did it, the short answer is we got out of bed in the middle of night thinking about how to grow merchants. If you have a smart team who is willing to experiment and they focus on a key metric like distribution or RPU or content depth, it will happen. The key thing is picking a metric that matters for the product and that once you have won on it, will matter.
For a long time, the mantra has been – address customer’s needs. And it seems like we are there. Almost every pitch we hear does a good job of solving customer’s problems. But that isn’t enough anymore because your competitors are thinking the same way, too. And there are always many ways to solve each problem. So how do you pick the right one? Well, you can use some of the tools we suggested above, but most importantly don’t just focus on designing a great product – design a great company.About Authors
is the VP of Business Development at Influitive. Influitive is a platform for mobilizing brand advocates. He’s also an angel investor and startup advisor. Prior to his role at Influitive
, he was the head of strategic alliances at RingCentral
. His blog is vbelfor.weebly.com
and his twitter handle is @vbelfor
Ben T. Smith IV
is CEO of ShopCo, a startup focused on reinventing online discovery shopping by delivering the most engaging social shopping experience for consumers, wherever they happen to be. He is also a Venture Partner at Accelerator Ventures and co-founder of MerchantCircle.com
. Ben blogs
at btsiv.com, and you can follow him on Twitter at @bentsmithfour
This article was published by PEHub on May 14, 2012
A few months ago, a budding entrepreneur pitched Ben and me on the patio of the Rosewood hotel. The pitch was tight and the young man had nearly every academic degree know to mankind (MSEE, MBA etc) from top schools. But when I turned to Ben after the pitch, he said "Nice guy, but too normal and overly educated." That one comment lead us to collaborate on this article
I recently invested in two companies whose founders either had little interest in school as students or who dropped out of grad school: MixRank and Influitive. Both management teams are driven, hard working and well prepared for the difficult road of creating a business from scratch.
It got my co-author Ben T. Smith IV and I thinking. We all know that Steve Jobs, Bill Gates and Mark Zuckerberg famously never finished college. But getting to know the founders of MixRank and Influitive suggested that there must be many more with a passing interest in school and perhaps for good reason. There must be a pattern.
With a bit of research, we found over 50 CEOs and founders of successful Silicon Valley companies and many times that running companies elsewhere. Carly Fiorina, for example, didn’t finish her J.D. Sergey Brin and Larry Page got their master’s, but dropped out of the Ph.D. program. Michael Dell dropped out of pre-med. Larry Ellison attended University of Illinois at Urbana-Champlain and University of Chicago, but didn’t graduate from either. Kevin Rose dropped out of University of Nevada Las Vegas, and the list goes on and on.
In 2001, Michael Spence received a Noble Prize in Economics for his work on information flows and market development. One of his most famous works was the Job Market Signaling Model, where he observed that employees signal their respective skills to employers by acquiring educational degrees. Employers pay higher wages to more educated employees because they know these employees have greater abilities and conclude it will cost less to teach them new skills than employees with lower abilities.
In other words, the education itself may or may not have value to the employer. What’s important to employers and what they are paying for is the signal that the students are sending about their intelligence and willingness to work hard.
What these employers look for in employees is the ability to succeed in a competitive and challenging environment. These are great qualities and we as investors are fans of graduates of good schools. But let’s take this one step further.
What many employers don’t look for in young professionals many investors demand of their CEOs: the ability to focus on what is really important, a predisposition for risk-taking and a healthy dose of irrationality. Can you imagine a bunch of somewhat irrational, laser-focused risk-takers in a corporate environment? You probably can’t.
For that reason, most entrepreneurs do not make good employees. In fact, when we look at our investments over the last 10 years, we find in our limited data set that investing in people who were great employees – especially ones with more than 5 years in corporate positions – frequently brings lower returns.
Here’s how entrepreneurs themselves think about it:
When we I asked MixRank co-founder Ilya Lichtenstein about his time in college, Ilya replied, “Yeah, I graduated from University of Wisconsin-Madison in 2010. I didn’t go to class much though, was too busy making money with affiliate marketing.” Fellow co-founder Scott Milliken says: “I didn’t spend any time in classes either. In my last semester at Berkeley, I was working 40 hours outside of school and taking 21 units. (I) attended 2 out of 5 of my classes. School wasn’t nearly as important to me as making money and getting professional experience.”
Influitive founder Mark Organ, who dropped out of a Ph.D. program, says, “quitting a Ph.D. program to go build a startup is a touch of madness. Trust me, I know. It was risky. But a founders’ sense of probabilities is different. He over weights the value of the big win, no matter how slim the odds are of achieving it. And it’s not about the money either, at least to me. We are only here on this earth a short time. We might as well take every opportunity to build something truly consequential before we turn to dust. It’s a way of achieving immortality.”
Running a startup is about making big decisions every day. There’s always a shortage of resources with too many opportunities to pursue and too many masters to serve, including customers, partners, investors, employees. Running a startup is all about making difficult trade-offs and being laser focused. But it also requires all-consuming passion to get through the tough times. It requires a slightly irrational power of conviction.
So what signals to an investor that a 20-something kid asking for a million dollars has what it takes? Perhaps it is dropping out of a really good school to pursue her passion and ambition. What struck us after we compiled the list was that successful dropouts came out of many schools, but three colleges dominated the list. They weren’t just good schools, they were great schools: Harvard, Stanford and MIT. Not only do they offer fantastic academics, but also have a deep culture of entrepreneurship and thought leadership.
So next time a Harvard dropout pitches you a social network de jour, take her seriously. Getting into Harvard is difficult. She dreamed about going there for a long time and worked hard to do it. The decision to drop out was agonizing. And yet, here she is. And we wouldn’t want to bet against her. Oh yeah, we both graduated, but don’t hold that against us.
(Victor Belfor (pictured top) is an entrepreneur and investor and currently runs strategic alliances at RingCentral, He graduated with an engineering degree from Kiev Polytechnic Institute and is pursuing his MBA at Wharton.. He can be found on Twitter @vbelfor. Ben T. Smith IV (pictured above) is CEO of ShopCo, a venture partner at Accelerator Ventures, and a serial entrepreneur and investor and the co-founder of MerchantCircle and Spoke. He is available on Twitter @bentsmithfour) He graduated from U.C. Davis in Engineering and Carnegie Mellon’s Tepper School with an MSIA.)
This article was co-written with Ben Smith and came out on PEHub March 5th, 20012.Here's the link http://www.pehub.com/138876/victor-belfor-ben-smith-we%E2%80%99ll-trade-100-employees-for-one-a-player/
As I re-read it, I wonder whether 2 key points we were trying to make really came through: 1. For a Start Up, NOT getting A players (regardless of position) is very dangerous. We need not only A executives but A doers in every capacity.
2. Obviously, it is important to look for competent, experienced and intellectually curious employees. But what sets A Players apart from the rest is Will and Humility. When hiring, we rarely explicitly focus on these two qualities. In fact, we often think that bragging etc is a positive trait. We tell people not to be shy about tooting their own horn. For certain positions (e.g. sales and marketing), humility is often considered a handicap! Also, Will is more than just passion. Will is specifically self-motivation / drive and track record of overcoming adversity. So when Interviewing / talking to references, we should to deliberately look for evidence of these qualities in addition to professional competence and cultural fit.
Below is the full text of the article:Victor Belfor, Ben Smith: We’ll Trade 100 Employees For One A-Player
Posted on: March 05, 2012
Mark Zuckerberg famously commented that a great engineer is worth a 100 average engineers (something every developer knows deep in her heart). He was talking about A-players, and in our opinion the worst thing any startup can do is accept less than the best and brightest.
Think of Jony Ive at Apple (Sir Jonathan as of December). Compare his impact to that of an average designer.
Supporting rapid growth at a company requires the rapid growth of human capital. New engineers and product managers come on board to build out a company’s product. Service and support staffs expand the customer base. Settling for B-players is the same as inviting mediocrity.
Entrepreneur turned Dallas Mavericks’ owner Mark Cuban once said a company should hire A-players in only core positions and pay market rates for anything non-core. We disagree. This may be true for a fully scaled company. But at the early stage, a company may not even realize what its true core is.
One good example of this is Groupon. Groupon started to focus on the daily-deal market, but when the company experienced early success, the space became very competitive. New competitor LivingSocial, even eBay and Amazon, offered daily deals. What separates Groupon from the pack and what has become its core competency is its powerful sales machine. This wasn’t anticipated at first. There should be no room in a company’s early development for B-players.
What is an A-Player?
In his book Good to Great, Jim Collins said the highest expression of leadership is the combination of humility and will. These are traits A-players possess. Their strength of will assures motivation. They never point fingers. The ball stops with them. A-players don’t need to be micro-managed or proactively motivated. They only need to be pointed in the right direction.
Humility is often overlooked and equally important. Humble people do not seek personal credit and gladly give it to those who deserve it. They don’t engage in politics. The simply have no interest. When they voice an opinion, whatever you may think of it, you can always be sure that it is what they believe. They have no ulterior personal motives. Humility assures that a company is not overrun with attention-seeking prima donnas.
Some of the best A-players you will hire have had a failure or two, but accomplished a lot and took risks as part of that failure. A-players aren’t always great leaders. But that doesn’t matter. You want humble people with the will to succeed not only as executives, but as your “doers.” Startups need not just A-level strategy and A-level vision, but A-level execution.
MerchantCircle found an A -player in an unlikely spot: working on his struggling startup and a political campaign in northwest Florida. He was not from Harvard. He was from the University of West Florida. He did not come in as a strategist; he was a support person. He was even told by someone he should go to a big company to learn how to be an A-player, whatever that means. He executed, he listened, he read, he analyzed, and most importantly he learned. Five years later he had risen to head of product for MerchantCircle and drove some of the company’s biggest innovations and in doing so helped set strategy. Ryan Osilla has now helped created Peixe Urbano, one of the fastest growing Internet companies in Brazil.
In Silicon Valley, the job market is very competitive and companies such as Facebook, Google and Zynga pay top dollar. So startups, such as MixRank, have to be clever to keep up. That means using company culture – bright, driven people working together on big things – to set themselves apart.
Last year after graduating from Y Combinator, MixRank co-founders Ilya Lichtenstein and Scott Milliken raised an angel round and set out to expand their team. At first they were unimpressed with the vast majority of the resumes. So they began to reach out into the community using Twitter, Hacker News, technical forums and open-source mailing lists to engage talented, passionate engineers. They wanted independent thinkers with a healthy disrespect for rigid rules and authority. What attracted the “right” candidates wasn’t the money, even though they offered market-based salaries and equity, but rather the vision and culture.
Good engineers like to work on difficult problems that keep them interested and engage their creativity, said Ilya. They are excited about the big data problems that MixRank is tackling and the opportunity to have a significant impact on the technical direction of the company.
Keeping A-Players Happy
In the 1980s, Benjamin Schneider developed the “attraction – selection – attrition” framework and the notion that organizations tend to become homogenous over time because they attract and select people who fit in. Those who don’t fit in tend to leave. The implication is that as long as a company has a somewhat homogenous group of A-players, it will remain a largely A-class organization.
But this is only part of the story. A-players need a pat on the back now and again. What’s interesting is that they only value pats on the back from other A-players. They don’t value the approval unless they respect and admire the person giving it. So developing a critical mass of A-players has an added benefit: the company tends to repel B-players and attract other A-players, reinforcing what it has built. Zappos employed this theory when it famously offered its employees $2,000 to quit under the assumption that A-players aren’t motivated by money and only B-players would take the deal.
The bottom line is this: B-players tend to be more vain and less secure. They want to be admired, regardless by whom, to make themselves feel superior. So B-players often attract other B-players and more commonly C-Players, who look up to them. In other words, A-players beget even more thoroughly A-companies and B-players eventually beget C companies.
A few things to consider:
§ A-players are not just from big name companies. They come from failed startups as well.
§ A-players don’t only come from the top schools. But they can learn just as quickly.
§ A-players are motivated by winning and being around other A-players.
§ A-players are not always the smartest, but they want to win and know that learning and execution are two of the key factors to making that happen.
§ A-players leave, but generally don’t want to. Find ways to keep them if they are aligned with your direction. If they are not aligned with the direction, they can kill you.
§ A-players are not always motivated by recognition and financial rewards, but give them both. Then other A-players will come.
By now, we’re sure you get the point. Don’t let down your hiring standards and your company will be better off for it.
(Victor Belfor (pictured top) is an entrepreneur and investor and currently runs strategic alliances at RingCentral. He can be found on Twitter @vbelfor. Ben T. Smith IV (pictured above) is a serial entrepreneur and investor and the co-founder of MerchantCircle and Spoke. He is available on Twitter @bentsmithfour)
In an article published last month by PEHub and co-authored with Ben Smith
, we argued that startups have an advantage in qualitative leaps, while BigCo's are better at incremental / proceduralized innovation.
Soon after the article came out, a reader sent me this article
from the Economist. In spite of it's provocative subtitle (Why large firms are often more inventive than small ones), the author actually echoes our conclusion. Here's a passage for the Economist:However, there are two objections to Mr Mandel’s argument. The first is that, although big companies often excel at incremental innovation (ie, adding more bells and whistles to existing products), they are less comfortable with disruptive innovation—the kind that changes the rules of the game. The big companies that the original Schumpeter celebrated often buried new ideas that threatened established business lines, as AT&T did with automatic dialling. Mr Mandel says it will take big companies to solve America’s most pressing problems in health care and education. But sometimes the best ideas start small, spread widely and then transform entire systems. Facebook began as a way for students at a single university to keep in touch. Now it has 800m users. Our article is below:
With all their resources and talent, why do big companies have trouble innovating? How can a Blekko exist when there is a Google? Or a Tapulous when there is an Electronic Arts?
Even more puzzling, why couldn’t Yahoo create Facebook with Yahoo 360 instead of losing out to a 20-year-old kid from Harvard? A lot of innovation comes from tiny teams with only $100,000 in the bank, or often a lot less. The reason is they don’t fear breaking the rules.
In reality, there’s a lot of innovation happening at big companies. But most of it is incremental. The focus is usually on process optimization and efficiency improvement. In order to support the rigid, crystalline structure of a large enterprise, lots of rules and procedures are implemented and enforced. These rules are “The Box.” The goal of most enterprise innovation is to get close to the edge of “The Box” without touching the lines – like a child drawing in a coloring book.
A startup innovator doesn’t care about rules. He doesn’t care about “The Box.” His motivation is to achieve something that has never been done. Most innovators we meet have an explicit goal of changing the world.
Another key reason why big companies aren’t good at qualitative innovation is a combination of legacy and Wall Street pressure. Most large companies do not grow very fast. Their current customer base is large, and, by comparison, the inflow of new customers is small. This imbalance creates a disincentive to introduce change and innovate. Customers often react negatively to change over the short term, and Wall Street punishes companies for taking risks.
Startups, on the other hand, are unencumbered. There’s no aversion to risk. There’s nothing to protect.
Victor (pictured above) has seen this at RingCentral. For years, the RingCentral team has pushed the envelope with cloud telephony in an old-fashioned, highly competitive telecom industry dominated by huge incumbents. It would have been easy for RingCentral to start looking over its shoulder, and then stumble and fall. But the company kept swimming upstream, winning one innovation award after another (including the prestigious World Economic Forum’s Technology Pioneer Award) and adding more loyal customers. Now, the company is enjoying industry-wide acceptance and many of the industry’s largest names have become valued partners and strategic investors.
Ben (pictured left) saw this same dynamic as he offered advice to the Tapulous and Mesmo teams competing against the major game studios. Tapulous, for example, built out a massive network of freemium users in the same gaming market that created billion dollar businesses with Harmonix Music Systems’ Rock Band and Activision’s Guitar Hero. Neither franchise was able to embrace the iPhone as the new gaming platform, or freemium as the new business model, the way Tapulous did.
Only a few big company executives and boards have the guts to resist the pressures from shareholders and Wall Street. One example of a company that did is Charles Schwab under then CEO David Pottruck. Pottruck’s big bet was to see the Internet as the future. In the late ‘90s, Schwab offered a discount brokerage service at $80 per trade and an e.Schwab platform with reduced service levels at $64 per trade. E*Trade wasn’t yet a strong competitor. That changed.
Pottruck’s bold decision was to face rising Internet competition head-on and offer all customers, online and off line, the same service levels and the same reduced price - $29.95 per trade. This bold innovation cost the company about $100 million in profit the first year, and Wall Street punished the decision. Shares dropped by about 40%. But Pottruck and Schwab were right and within nine months the stock recovered and reached new highs on massive customer growth. Some of its competitors’ product strategies were a year behind. Stories like this are few and far between.
The startup environment is different on a fundamental economic level, not just because founders are more motivated and focused, but because anytime a startup does something big, the upside is uncapped and the downside is pretty small. If a company fails, an investor loses a few million dollars. The team goes on to get new jobs.
Big companies can look at the same project with the same economics and lose a billion dollars in market cap. Netflix is an example. The risk paradigm is reversed. For any qualitative innovation, a big company has an uncapped downside and a finite upside.
That’s why startups do what they do. They have nothing to lose, only upside. It is why they are willing to change the world.
(Victor Belfor is an entrepreneur and investor and currently runs strategic alliances at RingCentral. He can be found on Twitter @vbelfor. Ben T. Smith IV is a serial entrepreneur and investor and the co-founder of MerchantCircle and Spoke. He is available on Twitter @bentsmithfour)