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About the Author

Ofer is CTO at Carmel Ventures. He is involved in the technological evaluation aspects of the due diligence process and works with CTOs and R&D managers of portfolio companies post-investment.
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Why startups should ride the Innovation Wave (or risk being overtaken by it)

By February 13, 2017

The global industrial revolution, which began in Great Britain in the late 18th century, led to a huge wave of innovations, like the steam engine and increased productivity in multiple domains like mining, iron production, textile manufacturing, transportation, and more. Other countries followed, but Britain’s dominance was clear and overwhelming, helping it to grow stronger both economically and militarily and to become the global superpower of the 19th century. But this initial wave of innovation was eventually disrupted, and I have been thinking lately about the parallels between the Industrial Revolution of yesteryear and the high-tech revolution of our own era.

The second Industrial Revolution which started in the latter half of the 19th century was no longer led by Great Britain alone. Other countries – like Germany, the United States and a few others – were dominant players as well. In this period of rapid industrialization, Europe’s share was greater than the rest of the world combined, but the United States was about to surpass Great Britain.

Ironically, one of the factors that made the competition harder for Great Britain in this period was its first mover advantage in the first Industrial Revolution:

“Because it industrialized first, Britain’s comparative advantage lay in the old industries while her rivals’ comparative advantage lay in newer industries… The concentration of British export in a few industries was therefore the legacy of the lead that Britain achieved in the industrial revolution… The legacy of early leadership shaped British trade into the twentieth century and may have imposed costs of ‘overcommitment’ and late adoption of new technology.”
The Cambridge Economic History of Modern Britain, Volume 2, “Trade, 1870-1939: from globalization to fragmentation”, pp. 174-175

How Disruptors can quickly become Disrupted

This does not surprise me. In the world of startups and VCs, we are constantly in the business of disruption, always on the lookout for disruptors who can undermine the dominance of the incumbents through technological, operational and business model innovations. We understand that the over-commitment of the market leaders to their technological and operational legacy, as well as their commercial commitments to their existing customers, is usually holding them back from being the innovators in their fields.

But with the increasing pace of innovation, the disruptors themselves might not be moving fast enough. When the second or third wave of innovation come shortly after a first wave in some industry, they overtake the emerging leaders of the first wave before these manage to conquer the territory of the old dinosaurs. What happened to the British over several decades during the Second Industrial Revolution might happen in today’s high-tech industries within a few years.

Sun Microsystems and Unix were major disruptors of mainframes in the 1980s and 1990s, but were disrupted themselves in the 2000s by hardware commoditization and Linux. After suffering weakening steep losses due to the dot-com bubble burst of 2000, and failing to recover its market position, its share price fell from its record high of $253 in 2000 to slightly over $3 in 2008.

Nokia’s fall was even more swift, although the 150-year-old company still survived due to its diversified business. Nokia was the largest vendor of mobile phones in the world, and its Symbian operating system had 67% of the global smartphone market share in 2006. But following the launch of the first iPhone in 2007, Symbian became quickly outdated, and in 2012 the company almost became bankrupt.

Who (or what) might disrupt YOUR startup?

For us, as innovators seeking to disrupt industry giants, the major challenges are typically to find the weaknesses of the incumbents and the innovation that will allow us infiltrate their customer base. We try to lead the innovation wave and ride it, knowing the gorillas of the market will usually be too slow to respond in time to avoid being disrupted.

But with new waves of innovation just around the corner, emerging and developing ever more quickly, we should also be careful not to be overtaken by younger disruptors.

While we are busy building our products and perfecting them to control the market, someone else might grab the market with an even better technology or product. Innovative startups are not immune to being undermined by innovation.

An important technology to watch carefully is Deep Learning, which is lately outperforming competing approaches in many domains – computer vision, speech and audio processing, natural language processing, predictive analytics, and more. While it’s true that not all problems lend themselves to Deep Learning, and Deep Learning is not necessarily a solution for all analytic challenges, it is a big threat hanging above many industries. A startup providing state-of-the-art analytics built on a unique innovative technology invented in-house, based on deep domain expertise and superb algorithmic development, might find that someone else, even someone with less knowledge and experience in the field, is bringing even better results by using common Deep Learning platforms. In such cases, the innovation of yesterday can quickly become the legacy of today and a “digital burden” that weighs us down tomorrow.

The threats posed by other technologies – like Virtual Reality and Augmented Reality, the proliferation of sensors, or the increased usage of messaging as a preferred communication method – might be less prevalent, but no less powerful where relevant. Once a tsunami starts, it’s almost impossible to sail in other directions.

So what will disrupt your startup? Sometimes it’s not so easy to predict, but there are cases where you can see it coming by keeping an open eye and trying to pre-empt what you would do if you weren’t already committed to your current technology. If you detect a good alternative that is emerging, it’s time to recalculate your path. It does not mean, of course, abandoning all your investments and changing course every year, but neglecting the next wave altogether might not be the best approach either.

 

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