There are two ways an entrepreneur can fail: one, launch a product that nobody desires; two, launch a product that people desire but it has no significant advantage over established competitors (hence, you give no strong reason for a customer to switch away).
These two failure modes have their analogous success modes: one, a culture-led startup success, where a new desire is discovered and fulfilled; a technology-led startup success, where new technology is used to fulfil an existing desire.
Startups are, at the very core, an arbitrage of insight. What are you, dear entrepreneur, betting on that others are not fully realising?
Are you betting on culture, expecting a nascent demand to become mainstream? Or, are you betting on technology, expecting it to become massively cheaper, faster, better in the near term?
Sometimes an entrepreneur is able to observe a pattern of new derivative desires that didn’t exist before. This is Elon Musk betting on electric vehicles before all major car makers. Spotting such trends is tricky because, initially, they can be mistaken either as fads or insignificant.
However, an entrepreneur who has good observation skills is able to connect the dots from diverse sources to grow her conviction about a cultural shift just when the market is ripe for it. This is why keeping an eye on early signs of growth in VC-funding activity, new-product launches, new regulations and new careers/jobs is a great way to get a sense of which cultural trends are imminent.
New cultural and socio-economic trends create new markets by creating new desires in people. The simplest example of this is banking or finance startups in developing nations. Founders of such startups understand that as an economy grows, the population tends to consume more and, therefore, the desire for consumer finance products will naturally emerge. Notice that this is a bet on the future desires of consumers, but it is an informed bet because that’s how the story has played in other nations. There’s solid data that demand for banking grows as GDP does. The need for consumer finance always grows as an economy develops. This happened in the US and other western countries, and now it is happening in India and China, and soon it’ll happen in Africa.
Another example of culture-led startups is the ever-growing number of startups around the idea of sharing and renting economy because the success of Uber and Airbnb has softened consumers into trusting strangers. This cultural change led to hundreds of other successful startups that are enabling, among many other services, sharing dog-walking (Rover, Petbnb) and car-parking (JustPark, ParkAmigo). Such companies are not using new technology. Rather, they’re using the existing technology and shifts in culture to offer a cheaper and more convenient solution to age-old desires of dogwalking and parking.
Before Airbnb and Uber, trusting strangers was tough. Now, culture has evolved for us to take that for granted.
Established competitors are usually focused on their existing market, which often is built to serve well-established desires. Hence, a culture-led startup often has a wide blue ocean of newly emerging derivative desires to fulfil. And they can often do it cheaply because such startups typically don’t need to innovate on technology as they can assemble a solution using pre-existing technology New innovations can substantially improve upon solutions offered by existing players. Think how GPS in smartphones enabled the disruption of traditional maps. The reason technology-led startups succeed is because new technology can help make a new product that’s substantially cheaper, better or faster than existing products. And customers love making progress on those dimensions. Tech is a big lever in creating Delta 4 in efficiencies.
Clayton Christensen called this process disruption and suggested that the reason entrenched competitors ignore startups with innovative technology is that initially, technology-led startups do not have a fully built solution for the entire market. New technology often looks like a gimmick in the early days and by the time established players realise the full potential, it’s already too late and a startup has gotten the escape velocity it needs. Think how everyone ignores GPT-2 as a toy, until GPT-3 and then ChatGPT took over in a big way.
A classic example of a technology-led startup is Google. Their key innovation was PageRank, using which they offered demonstrably better search results and beat other established players, such as Yahoo and AltaVista, at that time. Another successful technology-led product was the iPhone, which launched in 2007 with an amazing touchscreen, thus providing for a much more natural way of interacting with the phone, and paved the way for phones replacing desktops as our primary computing devices.
In reality, no successful startup is either only culture-led or only technology-led. Usually, there’s a mix of both elements in successful startups. For example, Uber realised that people increasingly have internet and GPS-enabled phones and have developed a comfort with transacting online (a cultural trend). So, they combined this insight with technology innovations to produce a significantly better way to fulfil the two pre-existing desires: faster taxi access to consumers and faster customer access to taxi drivers.
Excerpted with permission from The Book of Clarity: Building Your Dream Startup Using First Principles Thinking, Paras Chopra, illustrations by Aakanksha Gaur, HarperCollins India.
