The Startup Innovation Gap (Observations from “Circle One”) (*)

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Dear Friends,

We live in an era where starting a company is a common choice in young peoples’ lives. This option is no longer reserved for the few exceptionally bold and risk-taking entrepreneurs. In most societies around the world, young people still choose between two main options – either study in a college/university to earn a degree, or join an existing enterprise/family-owned business. In developed economies, athird option is becoming even more popular – start your own company. It is becoming a “startup world”, or a world of startups.

In emerging and developed economies, technology advancement is reshaping industries and challenging traditional businesses to reinvent themselves in order to compete with new players who ride on waves of innovation. As a result, job security and stability are declining. It is almost impossible to find a stable workplace that can offer a 30-year career path, such as that which blue chip companies once offered the “working class”. Employees can no longer rely on such safe workplaces. Instead, they need to adjust to such changes, and become more “entrepreneurial” if they wish to build a long-term career. They have to stay ahead of the curve by learning and adapting to constant change.

As job security declines, the “startup way” is becoming comparatively less risky than before. And as the global middle-class buying power grows, the startup path looks more compelling than ever before. These higher-risk-higher-reward trends result in a global phenomenon of “startup inflation”.

In Israel alone, there are 5,000 startup companies today, with an additional 600 startups founded each year. Venture Capital funds around the world cannot invest in such a large and growing number of startup companies at the seed stages and so other funding alternatives are emerging – Incubators, Accelerators, Professional/Serial Angel Investors, Micro Venture Funds, and Crowd-funding.

Startup companies consume a lot of capital from seed stage to maturity or even to an exit event. In the classic technology business, companies rely on VC funding in the initial R&D phase, before they introduce products to the marketplace. Only then do they start funding their business from customers, and as revenues grow and risks decline, they can raise money from the public by issuing securities in the capital markets.

The typical new entrepreneurs of today organize themselves into a 2-4 people core team with a product concept in mind. Some start looking for an idea after the team is in place. In most cases, they know which area they plan to focus on, and the Internet would be the natural choice for many. Initial funding is modest and is used for proof of concept, which calls for fast product development, and revenue generation as soon as possible. They raise money from angels, and sometimes use platforms such as KickStarter, which allow companies to offer their products to customers online, ahead of development, using proceeds to develop these products…

In many cases, the limited funding, the core team considerations, and the need to quickly enter the market result in an “Innovation Potential Gap”. We sometimes see great entrepreneurs with outstanding personal skillsets and capabilities to develop meaningful products and technologies, who are instead focusing on developing applications that are less significant and sometimes even unimportant due to startup considerations and constraints. The total aggregate sum of talent results in a lesser amount of innovation that could have been generated – for the sake of speed, limited R&D funding, and fast time-to-market.

Whether we like it or not, we need to accept it as a fact of life. At the same time, it is important to understand the tradeoff. At the end of the day, in the Israeli model, we want to do more with less, and in a small country that has limited human capital resources, every talent counts. As the startup route becomes a way of life, we shall see innovation being sacrificed for the success of the startup. I believe it is important that we understand the trend and are able to differentiate between the startups that are deeply driven by innovation, and the ones that are simply the common choice of young people. I am sure that out of the many startup companies that exist today, we will still see amazing companies emerge as global category leaders – and quite possibly more than ever before.

As always, your comments and thoughts are welcome

(*) This Blog’s Hebrew version can be found both on my Facebook Page chemi.peres, and on the Israeli newspaper Calcalist website (http://www.calcalist.co.il/local/articles/0,7340,L-3609750,00.html)

 

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