How High Should You Aim?
Last year, Matt Perez invited me to go along to a Future of Money workshop with him during one of my visits to Silicon Valley. It was a fascinating day. One thing that struck me about it is that the people describing their projects had wildly varying levels of ambition.
At one end of the spectrum was the bank that told us how they developed the world’s first “social credit card”. What makes it social? You can “Like” it on Facebook.
At the other end was the startup that wants to replace the global banking system with one based on tweets.
One idea makes the smallest of incremental change, while the other one aims to turn the world on its head. There are some interesting ideas for innovation in this.
Innovation Lessons from the Bank With Tweets Guys
- If you’re big, you need to try ideas all along this spectrum. If you’re a larger organisation, you need to be trying all kinds of innovation. The ones at the safe end keep you competitive – these are the things that improve your current offerings. But you also need to work on ideas that extend your current strengths into new markets – this is how you grow. Finally, you need to invest in some of the ideas that are nuts – the ones that will turn your industry on your head. This allows you to help shape the future a bit, and it also helps you adapt if the Bank With Tweets guys really do make their idea work. This is an important part of the portfolio approach to innovation management.
- If you’re a startup, you need to choose how high to aim. The double bar on the spectrum in the picture is important – this is where the potential returns to your idea start to grow exponentially. To the left of this break, if you start an organisation, both the risk and the return are fairly limited. Paul Graham writes about how being a startup means aiming for high growth. In his phrasing, a barbershop is not a startup. There is some risk (you could be a bad barber, you could start the shop in a neighborhood of hippies that don’t need haircuts, fashion can change, etc.), but not lots of it. And if you are reasonably competent, you can make a good return by starting this kind of business. On the other hand, firms with ideas to right of the break are aiming to be high growth. Here is what Graham says (the whole post is essential reading, so check it out):
The constraints that limit ordinary companies also protect them. That’s the tradeoff. If you start a barbershop, you only have to compete with other local barbers. If you start a search engine you have to compete with the whole world.
The most important thing that the constraints on a normal business protect it from is not competition, however, but the difficulty of coming up with new ideas. If you open a bar in a particular neighborhood, as well as limiting your potential and protecting you from competitors, that geographic constraint also helps define your company. Bar + neighborhood is a sufficient idea for a small business. Similarly for companies constrained in (a). Your niche both protects and defines you.
Whereas if you want to start a startup, you’re probably going to have to think of something fairly novel. A startup has to make something it can deliver to a large market, and ideas of that type are so valuable that all the obvious ones are already taken.
If you’re starting out, you need to understand that these are two very different types of business. There are different ways to make them work, they require different skills and resources to manage, and the potential outcomes are very different. So you need to decide how high you’re going to aim.
- If you’re a region, you need lots of firms that are aiming high. The Bank With Tweets idea probably won’t work. On the other hand, there are probably 1000 startups in Silicon Valley trying out ideas that might seem just as crazy right now, and eventually one of them will work, and it will change the way we bank. I was talking with my PhD student Andrew Barnes today, and we agreed that on average, Australian startups aren’t aiming high enough. There are lots of startups that are aiming more at the barber shop end of the spectrum. Collectively, we have to figure out how to address this.
- Solve a real problem. Let’s go back to Graham again – he says “For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people.” There isn’t much demand for a credit card that you can “Like” on Facebook, so our bank fails on (a). I’m not sure that the Bank With Tweets guys can actually make something that will solve their problem, even if lots of people would like better banking. So they fail on (a) too. The thing that struck me about the day is that there was only one firm there looking at the place where mobile banking is working right now Africa. As The Economist points out, Kenya leads the world in mobile banking. Why? Because there are few banks, but lots of mobile phones, cash is dangerous to carry and use, and without mobile banking it is nearly impossible to safely transfer money from one person to another. These are all real needs, and firms like M-PESA solve these problems. The high growth startup in the future of money is highly likely to come from Africa.
There is always risk in innovating, even if your idea is down towards the Safe end of the spectrum. But some ideas are definitely riskier than others. If you’re a startup, you have to decide how high you’re aiming.
Often, we’re not aiming high enough. If we try to solve real problems that lots of people have, that is one good way to reduce the risk of the ideas that seem a bit nuttier. And since all of the low-hanging fruit has been harvested, if you want to have an impact, it will have to be with an idea that seems nutty.