On Startups Attacking Small vs. Big Problems
I often see entrepreneur pitches that want to attack a big problem from the get-go. Whether it’s via a pitch deck or a white paper (if coming from the blockchain industry side), the main intention is to disrupt an entire industry or supply chain, and take over something that is “not working well”.
So, they start with a grandiose strategy to conquer the world, and assume that they will get there by going head-on with the incumbents. Just because they described the problem well doesn’t give them credibility nor does it give their investors assurances that they will succeed. What makes sense on paper and in theory is often very far from the reality of execution.
The history of startups that became big companies is paved with stories of gradual growth, starting with small successes that later became bigger ones. Startups excel when they “flank” the competition (or incumbents) by landing in uncontested areas, then they grow from these areas into the next adjacent segments, and it goes from there.
Amazon didn’t set to take over the retail industry from day 1. They didn’t say “retail is broken”, and we’re going to fix it by taking a $200 Billion chunck of it per year online (2018 figure). Rather, they started by being an online book marketplace (a segment of retail), then got into household products via the Drugstore.com acquisition, and it went from there. They kept adding and increasing their footprint gradually, one segment at a time.
Facebook didn’t start by saying they were going to re-define social networking and become the social network of choice for the world. They started as a photo sharing application for university students, and then grew from there gradually.
During the early Internet years, there was a phenomenon called “B2B electronic marketplaces” that wanted to attack every single industry or sub-industry. By 1999, there were close to 200 such industry consortias or B2B marketplaces that wanted to re-define how business to business relationships were conducted. On paper, it made a lot of sense because the Internet was that efficient medium of exchange between organizations. By the middle of 2001, when it was clear that the Internet was hitting a wall, only 2 of these marketplaces remained standing. All others closed down for a variety of reasons: failure to raise funds, failure to launch, lost interest from concerned partners, lack of support from key stakeholders, etc. And many of them were actually started by the bricks-and-mortar incumbents that were trying to jump on the e-commerce bandwagon.
Fast forward to where we are today, to the world of ICOs and their flagship white papers that are paved with grandiose ideas to change the world, and asking for funding from the fools that are to believe them. These ICOs want Series D/E type funding when they are really a seed-stage company, and sometimes without even a product. Funding ideas instead of working products is not something that typically ends well.
That said, there are exceptions. In that category, we have the case of Libra and its grandiose strategy. They didn’t overtly say it, but the following words are implied from their strategy: “banking is broken”, “international remittances are broken”, “central banking is broken”. Can they succeed by executing on a direct attack on incumbents? Not every startup is like Facebook, and not every company can put together an A team to tackle a big problem. Despite all of that, they still have several headwinds, not the least being from the regulatory side. What’s interesting about the Libra project is that it takes a two-prong approach to market infiltration: 1/ it is exclusive to Facebook Apps (Messenger and WhatsApp initially), so they have a captive market that will have no choice but to try it out, 2/ introducing “Move”, a general purpose programmable money language that developers will latch-on to, to extend money transfers in and out of platforms via the Libra system, for a variety of use cases. For those and more reasons, Facebook’s chances of success are much better than most other startups or projects with a similar range of ambition. Maybe they could have started with a less ambitious strategy, and remained under the radar for a while longer, but their current dominant status in social networking gives them a huge advantage in luring users to their currency.
When you hear or read words like “disrupt industry”, “re-invent supply chains”, “xyz (a multi-billion dollar market) is broken and we’re going to fix it”, run away if you’re being asked to fund them with big bucks to do that. The reality of startups (and any projects) is that nothing happens according to the original plans, and failure will be the dominant end-point. If you are an investor and you take a portfolio approach to your investment decisions, then it might be OK to fund a few shots to the moon, as long as you also invest in realistic projects as well.
Startups and entrepreneurs can be ambitious (and they should be), but they also need to be realistic about the fact that everything big thing starts small. There is no escaping the progressive nature of success even if you were able to raise substantial sums of money from the beginning.