Why Milestones Kill Startups and how the Roman Empire points to a better way

Most startups founders are faced with provisions by their investors. The investors do it because they think it helps them steer the startup in the right direction. And because they think it gives guidance for deciding on further funding. The headline reveals it is a mistake. This article will explain why milestones kill startups and suggest how to actually measure progress. 

When Octavian was 19 years old, his ruthless uncle was brutally assassinated by a group of political opponents. The young man resolved to achieve what his uncle had not. Founding the world’s largest and longest lasting empire.

And so, Octavian began materializing his vision. He called it Pax Romana. We know it as the Roman Empire.

To people of his time, Octavian wasn’t a celebrity. He did not display the same early sweeping conquests as his assassinated uncle, Julius Caesar. Nor the bravado and charisma.

Instead, Octavian was a founder. His ambition went beyond military success, fame, and power. He wanted to create something lasting.

Gauging the career of Octavian, one notices the wide range of things he accomplished. Surely, he enlarged the empire through military campaigns. But more importantly, he created structural development. Like tax reforms. Setting up a firefighting brigade, and a professional police force. And obviously erected many buildings, temples, and monuments.

The result was peace. The reward was a natural death at an old age. Something rarely bestowed rulers of his time. And as you will see, the story of Octavian holds an important lesson for startup founders and their investors.

Lasting companies and lasting empires are similar

Small projects can be planned, managed and tracked. In contrast, Large projects, like building an empire cannot. The complexity, timescale, and unknowns will not allow it.

Instead, large projects require a founder (or founder team) with a deep resolve to materialize a vision that is larger than himself/herself. Just like Octavian. But more importantly, the founder must focus on a wide range of issues. Also, just like Octavian.

The large range of elements that goes into building a lasting empire requires something quite different from a plan. It requires awareness and courage. Awareness of coming issues and the courage to do something about them. It was true for founders of lasting empires. It is equally true for founders of lasting companies.

The elements that go into building something lasting are entangled and interdependent. In other words, a lot of things depends on other things. Revenue requires sales channels, that requires partnerships, that requires multilevel value propositions, that requires customer insights, that requires nurtured relationships and so on. When one thing changes, most other things changes. Octavian knew this. So do most startup founders. But for some reason, many investors seem to have missed this.

Milestones are flawed and destructive if not done right

Many investors place ‘milestones’ in their investment agreements. And these milestones tend to be flawed, if not downright destructive. The problem is that the milestones often have little connection to the actual job of building the company.

Instead, the milestones seem to reflect the faulty idea that the progress of large projects can be measured on a single dimension. Like the number of users. Downloads or revenue. But that would be like evaluating the progress of an empire by area or population. The first could easily be achieved by annexing uninhabited desert. The second by paying people to become citizens. Octavian did none of those things. Why? First of all, he wasn’t stupid. Secondly, he didn’t have investors who were.

Octavian focused on whatever made sense. He shifted his focus to what was needed to advance his project to the next stage and ensure its long term viability. So do the best startup founders. At one point they recruit. Then they release the next version. Then they build partnerships. Then they fundraise.

Founders successively focus on specific dimensions of their company. And when they do, the company progresses. But not in a linear function. It happens in steps. That means each dimension is stagnant for a period until the founders find it relevant to focus on it.

When investors make founders focus on a single dimension by enforcing simplistic milestones, they do one of two things. Either the investor presumes that he/she knows better than the founders what dimension needs focus. Or the investor is ignorant of the mechanics of large complex projects. Both should be colossal red flags to a founder considering an investor.

In cases where milestones are put in practice, the result is that the founders start doing stupid things. Why? Because humans follow the reward. And the easiest way to hit the milestone and claim the reward is rarely to do the right thing. Those who experienced the Great Leap Forward in China between 1958 to 1962 would agree.

That said, milestones make sense. Both for the founder and the investor. Understanding if a project progresses is important to avoid what economists call the sunk cost fallacy. In other words, keep doing something you should stop doing.

However, milestones only make sense if they actually capture the progress that is natural to the development of the company. What is natural, changes almost daily. And only the founders have the information to make this judgment.

Still, it is possible to define the potential areas of progress. An early-stage startup can grow in four dimensions. Those are: human capital, technology capital, customer capital, cash capital. E.g. if a startup recruits a rock star, it is progress. If a technology breakthrough happens, it is progress. If customer loyalty increases, it is progress. If the free cash flow increases, it is progress.

Consequently, the only sensible way to craft milestones for early stage startups is to include any and all type of relevant progress, and simply trust that the founders know where to allocate their attention. If investors do not trust founders on this, it is not the milestone that is wrong.

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The Startup Adoption Lifecycle

This article tells the story of how farmers in Iowa shaped the way startup founders think. Furthermore, it argues that we need a new way for startups to identify their early customer segments. In the end, founders will know how to obtain product-market fit, and why the article features a picture of an airline crew on heavy cases.

In 1927, scientists developed a new hybrid seed-corn. They knew their invention would give farmers 20% more yield. What they didn’t know was that the seed-corn would define how we came to understand innovation.

The new corn was offered to farmers in Iowa. Oddly, not everyone adopted it. The situation caught the attention of two sociologists at Iowa State University.

In 1941, the two researchers Bryce Ryan and Neal Gross went to interview the Iowa farmers. What they learned was puzzling.

Even though the new hybrid corn was objectively better, some farmers simply resisted using it. In fact, it would take about 10 years for all of the farmers to adopt the new corn. And that was just Iowa. It then took another decade before it was fully adopted throughout the US.

Bryce Ryan and Neal Gross concluded that some people are just prone to try new things before others. Today, we know their theory as the Technology adoption lifecycle. For close to a century, the theory has defined how we understand the adoption of innovation.

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Why the Technology adoption lifecycle is important and useless

The Technology adoption lifecycle basically explains that in the beginning, only a small group of people adopt a new technology. Later, the majority follow suit. Finally, the last little group of resisting people gives in.

As trivial as it sounds, it was an immensely important realization. Because it provides a frame for innovators view the world. I know this first-hand.

When I started my first startup in 2006, I was fresh of business school. And like any graduate, I knew the Technology adoption lifecycle. It helped me formulate our go to market strategy. First, we would go for the innovators and early adopters. Sounds right on paper.

But most startup founders learn that understanding who those innovators and early adopters are is much harder. In fact, the framework does not provide any guidance for this problem. At all.

The thing is that the Technology adoption lifecycle was never meant to help tech entrepreneurs. It was a retrospective view of a category innovation over its entire lifecycle. That means it spans decades and each block of adopters represent years of slow gradual adoption. Although important, it is pretty much useless as a practical startup tool.

In reality, most startups face less than 12 months of quickly evaporating runway. And the next months are the only period of any importance because it’s all the time a startup is sure to have.

Unfortunately, the Technology adoption lifecycle is of little help. The model just says: innovators and early adopters. Whoever adopts the technology first, are the innovators and early adopters. That’s called circular logic.

600 startups later a pattern emerges

Today, I am a partner at two accelerator-funds. And for the past seven years, I have met about a hundred startups per year, helping them obtain product-market fit. Or at least tried.

One consequence of specialization is that one obtains a very granular understanding of a narrow field. In my case, I suspect my expertise has become the early phases of the Technology adoption lifecycle.

Having observed so many startups go from zero to their first hundred business customers (or first million users), I have witnessed a clear pattern.

The startup adoption lifecycle

All the successful startups I have worked with have experienced adoption through the same sequence of micro-segments within the very first part of the Technology adoption lifecycle. Let’s shrink into the micro-cosmos of the very first adopters. What I call the Startup Adoption Lifecycle. Here we go:

The first adopters are always friends, family, and colleagues. They sign up to support the founder(s) and cheer on. They rarely have a deep need for the product. This group will constitute the first 10 to 50 customers.

The second adopter group is always the “crazy” people. They don’t know the founder(s) personally, but for some reason, they are obsessed about the area the startup operates in. And I mean abnormally obsessed. This group often send something that looks like fan mail to the info@ or support@. This group varies in size but is probably the next 5 – 30 customers.

The third adopter group is by far the most important. This group is often called the Beach Head. This group is also abnormal, but for a different reason. They are not “crazy”. Instead, they live under unique circumstances that impose extreme or unusual needs. Because this group is small, no one has really cared to serve their special needs. Consequently, they are somewhat “desperate” which makes them actively look for new solutions.

Examples were the first hardcore gamers on a live streaming website called Justin.tv. The founders realized the potential of this little Beach Head and renamed Justin.tv to Twitch.

Another would be airline cabin crew. Few people fly every day, so why bother making wheeled suitcases for cabin crew who do. In 1987 someone finally did. Of course, cabin crew was the first adopters. Today we all have trolleys. (The crew members in the featured picture clearly needed them).

A third example would be victims of the Japanese tsunami in 2011 that starting using a chat app to communicate because the cell phone towers were gone. Today, that chat app has an estimated 500 million users and is known by the name Line.

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In truth, all successful startups eventually must find their Beach Head. It is the most important adopter group because they are the first people who adopt because of a true need. Their need might be unique, but that makes them willing to test a new product from an unknown startup.

Who is the Beach Head for any particular startup? It’s the group that most founders overlook because it is far too small to fit the story of the billion-dollar market. It’s the group that has an unusual job. Or live an unusual place. Or have an unusual interest. Or have been affected by an unusual event. Or perhaps a combination.

The Beach Head group varies in size, but it is rarely bigger than 100 – 500 customers to begin with. Luckily, that is often the perfect size for a startup with an evaporating runway.

If startups can navigate the Startup Adoption Lifecycle they will be well on their way. Because on the other side of the Beach Head is product-market fit. And with that, the beginning of twenty years of movement through the Technology adoption lifecycle . May your journey be smooth.

Tip: If you are a startup founder and want to get help finding your Beach Head, a qualify acceleration program might the right thing for you. At Accelerace and Overkill Ventures, we see this as our main job. Some other accelerators might do as well. At least check out my blog.

Why many startup investors are missing the point of acceleration programs, and should seriously start investing in them.

Many investors think acceleration programs are cute. Playgrounds where inexperienced and hopeful founders go to learn basic stuff. And where real successful people generously share stories to “pay it forward”. Like charity for young people. Those investors are mistaken. Not always. But the ignorant consensus can cause some investors to overlook what can be the most effective and best performing vehicle for startup investing. This post will explain why insider trading is illegal and how that makes quality Accelerators a must for investors. In the end, you will know how to evaluate Accelerators, and management teams will gain inspiration.

In 1934 the rules of the game changed. In the ensuing years, hundreds of people would be jailed. Among them a beloved housewife and self-made celebrity named Martha Stewart.

The US Congress witnessed how certain investors benefited immensely from possessing unique information about publicly traded companies. Because these investors knew something others didn’t, they could make timely and informed decisions. Economists call it asymmetric information. The public called it unfair.

In response, the US Congress passed the Securities Exchange Act in 1934 making it illegal to trade securities on asymmetric information. Today, we know it as “insider trading”.

In 2001, Martha Stewart learned the value of asymmetric information. The celebrity housewife owned stocks in a company called ImClone Systems but her stockbroker knew something other people didn’t. He knew that ImClone Systems would receive a rejection of their new cancer drug. He urged Martha to sell immediately. She did and avoided a loss of about 200,000 dollars. To her horror, it would also cost her five months in prison.

Asymmetric information in startup investing

The rules surrounding publicly traded securities do not apply to startups. And because asymmetric information is generally the most valuable element in investing, startup investors are furiously seeking to obtain it. To this end, most Venture Capitalists require startups to sign ‘exclusive term sheets’, meaning that only they get to due diligence the company for a period of time. The VC wants to know something other investors don’t.

The problem with asymmetric information is that it’s hard to obtain. That is because it’s sticky. The information resides within a few key individuals and is often non-codified. If it wasn’t, the information would diffuse and thus become symmetric. In other words, everyone would know it.

Sticky information must be extracted and the process of extraction takes time and effort. The individuals holding the information must trust the entity that wants to extract it. Simply put, the startup founders must trust the investor before they share what they know.

Furthermore, sticky information tends to be unstructured. Maybe a startup founder recently got the impression that most of the customers will upgrade their subscription next year because of a new feature. This information is not just important but is also unstructured. To obtain this information the investor must spend time with the founder asking random questions until the topic might come up. Needless to say, this is expensive at scale.

How great Accelerators extract asymmetric information at scale

Interestingly, an acceleration program can be regarded as an institutionalized and methodical system for extracting information. And a well-run accelerator does this at scale.

Quality programs have lengthy and deep relations with hundreds of startups per year. During the program, the startups and the Accelerator enter into a mutually beneficial exchange. The Accelerator provides value in form of content, help, and resources. In exchange, the Startup provides information, such as in the application forms, office hours and workshops etc. Much of this information is asymmetric and can be called ‘Insight’.

Great Accelerators understand the value of Insight. And they design their program to obtain it. Less sophisticated programs will not.

To obtain Insight, the Accelerator must do two things. First, establish trust between the founders and the Accelerator. Second, provide content, help, and resources of high perceived value. If the founders trust the Accelerator AND believe the program will be valuable to them, the founders will be willing to provide Insight in exchange for benefiting from the Value of the program.

How Accelerators develop trust

Trust is an outcome of earlier beneficial interactions between the parties. If two people have engaged in numerous trades in the past and both parties feel they benefited from those exchanges, they most likely trust each other.

The speed at which trust develops seems to be a function of multiple factors. Such as the number of interactions, the depth of the interactions, and the environment the interactions take place in. This equation of Trust is depicted in the table below:

Fig 1: The equation of Trust. (Completely non-science based)

trust

According to the equation above, Trust develops quickly if the parties have many rich interactions in unfamiliar environments. And that is exactly what marks great Accelerators. Many programs start with an intense kick off period. The founders fly in and spend long days in workshops, mentor sessions, and social activities. The result is trust, at scale.

How great Accelerators obtain insight

Data is the ingredient of Insight. Not all data is Insight, but all Insight is data. Because data and Insight can be hard to distinguish, the way to obtain Insight is simply to obtain large amounts of data. Consequently, the best Accelerators collect data at every possible instance.

In order to obtain data, the Accelerator must solve the biggest problem with data collection. The problem is that data collection often incurs significant costs on the side of the startup. This is because the data is rarely readily available.

Often, the founders must spend time and energy to clean and codify the data before it can be provided. An example would be a lengthy survey. Not only must the founders spend time and opportunity costs answering the questions, but must also look through documents, search for old e-mails, and make calculations to answer the questions. The cost of a lengthy survey can easily seem insurmountable to a startup founder.

That is why the best Accelerators are solving this problem in two ways.

One, they provide Value of such a high quality that it offsets the costs of the “intrusive” data collection. This enables the Accelerator to obtain insight through conversation, surveys, and participation in customer meetings etc.

Two, they implement systems that collect data non-intrusively. Like tracking the attendance rate of the founders, their KPI reporting, and development in team composition, etc.

The collection of data at scale is making great Accelerators the most knowledgeable entities for startup Insight. Period. No other entities have had deep trust-based interaction with thousands of startups over extended periods of time. While collecting valuable data.

If done right, an acceleration program is simply the most efficient system for obtaining Insight into a large number of startups. And for investors, the best programs represent a golden opportunity to benefit from true asymmetric information. Wall Street would be envious.

Written by David Ventzel. Partner at Accelerace, a Copenhagen based accelerator and seed fund. Also General Partner at Overkill Ventures, a Riga based accelerator and seed fund.

What porn and ridesharing can teach corporates, investors and startups

Most investors and corporates estimate the potential of a new technology. It’s a mistake. Real disruption comes from the convergence of different technologies. This post will explain how technology convergence creates parallel industries and Startup Tsunamis. Most importantly, it will tell the story of a young stripteasing college student that took down a billion-dollar empire.

In 1953, a 27-year-old entrepreneur raised angel investment from 45 investors. With the money, he pioneered one of the world’s biggest industries and built a true empire. Today, his product is an iconic piece of western culture.

The name of the entrepreneur was Hugh Marston Hefner. His product was a new type of magazine. He called it Playboy.

The world was changing its view on sexuality, and pornography was taking off. It became a billion-dollar industry with companies raking in huge profits.

The pornography studios appropriated most of the profit because they controlled the means of production. Print machines, studio light, cameras and retail distribution were expensive.

At the height of its glory, the industry launched its own award show rivaling the Oscars in glamour. And then one day, in late 1990’s, it was all over.

A young college student had set up a camera in her dorm room. She connected the camera to her computer and created a website she called JenniCam. She started broadcasting for the world to follow. She quickly learned that viewers increased when she did stripteases.

A few years later, Playboy delisted from the stock market. Its stock was plummeting.

JenniCam started a webcam revolution. Today, there are thousands of cam models. They connect directly with viewers thanks to cheap cameras, fast internet connection, chat and digital payment.

The webcam revolution is one of the clearest examples of disruption caused by the convergence of technological innovations. The old companies were built on an infrastructure of professional grade equipment, film studios, and physical distribution.

In contrast, the webcam industry is built on the availability of cheap consumer grade equipment, online distribution, and new communication and payment protocols.

What the pornography studios experienced is the phenomena of parallel industries. Few people understand it. You are about to become one of them.

The difference between competition and parallel industries

The runaway success of Playboy attracted many competitors. Among the biggest was Penthouse. The magazines competed on celebrity pictures and naughtiness. With the emergence of DVDs, the studios competed on distribution and licensing agreements.

But when JenniCam launched, few took notice. To the established players JenniCam wasn’t a competition, let alone a threat. Its young founder didn’t try to muscle them out of licensing deals. She didn’t invest in new studios or steal their models. In fact, she was utterly invisible to them.

The thing is that when certain technologic innovations converge, it creates entirely new industrial platforms. The startups that emerge on the new platform are not competing with the incumbents. Instead, they are building a parallel industry.

A parallel industry is an industry that has been rebuilt from the ground up on a new industrial platform. The new platform provides an infrastructure that is magnitudes faster, cheaper and more effective than the traditional industrial platform.

The new platform enables entrepreneurs to reimagine all components of their business model and apply new technology in every layer of its business. As a result, the startups that emerge are so different from the incumbents, that they go unnoticed by the old industry.

The next thing that happens is that the parallel industry matures. It develops its own suppliers, consultants, and networks. Suddenly, JenniCam had sparked an entire industry of innovative producers of webcam technology, video compression providers, and digital payment solutions.

At this point, the incumbents take notice. But it’s too late.

How parallel industries cause Startup Tsunamis

Parallel industries are supported by underlying technologies that serve as the infrastructure of the industry. Like: production technology, distribution technology, communication technology and financial technology.

When innovations in the different underlying technologies converge, a new industrial platform is born. That happened during the industrial revolution when factories (production), railroads (distribution), the telegraph (communication) and Wall Street (finance) converged and gave us a tsunami of new products.

Startup Tsunamis describe the phenomena of very large number of startups launched within a concentrated timespan, attempting similar business models. One of the latest examples of this is ride sharing.

Much like the pornography studios, taxi companies had enjoyed decades of steady business. But around 2010, a new industrial platform was emerging.

The smartphone converged with advances in payment infrastructure. At the same time, venture capital was reemerging as a source of capital for startups after being decimated by the global financial crisis.

The result was a true Startup Tsunami. Here are just some of the few startups that built their business on the new industrial platform: Uber (2009), Ola (2010), Wingz (2011), Sidecar (2011), Hailo (2011), Grab (2011), Lyft (2012), Didi Chuxing (2012), Careem (2012).

Today, few people doubt that ridesharing will change personal urban transportation for good. When electrified self-driving cars join the convergence to enhance the new industrial platform, taxi companies are history. But the story doesn’t end here.

Blockchains are creating new financial infrastructure. IoT is creating new communication infrastructure. 3D printing is creating new production infrastructure. Individually they might seem like toys. But so did webcams until they converged with high-speed internet, chat and digital payment. The cocktail enabled a young college student to initiate the fall of an empire.

At Accelerace we help both startups and corporates. Check us out at Accelerace.io.

Thank you to Jeremy Rifkin and his great book, The Third Industrial Revolution, to inspire me to write this post. I can recommend his book.

Why corporates are terrible at assessing startups and how to do right

Many corporates are billion dollar entities in stagnation or decline. So they run startup programs to look for the next big thing. But big corporates need big ideas to move the needle. That is why most corporate selection committees focus on market size. They think big market is a prerequisite for big opportunity. They are mistaken. This post will explain why market size is irrelevant and how corporates should be evaluating startups.

Today most corporates have some kind of startup engagement activity. Like outplaced innovation teams, hackathons, innovation garages, and accelerators. And they should. Startups create much of the innovation today and corporates would be foolish not to attempt to leverage it.

The problem is that it’s not working. The initiatives do bring the sense of innovative spirit and fun for the employees involved, but the billion-dollar success stories keep eluding them.

The problem is that many corporates are terrible at assessing startups. And this problem is magnified because the consultants and service providers helping the corporates design and manage these programs are too focused on getting the contract to question anything. Sucking up rarely produce truth.

The fallacy of big markets

Corporates need billion-dollar ideas and this fact makes them focus on startups with big (adjacent) markets. And it makes sense. Big markets are the prerequisite for big business. Unfortunately, this logic is flawed.

The thing is that startups aren’t really businesses. Instead, they are problem-solving entities. And this fact is immensely important when assessing the potential of startups.

Businesses have markets. Startups have niche products that target niche customers with a problem no one has cared to solve before. Per definition, most startups have tiny or even non-existing markets. Like a young startup called Unity in 2005 that made it easy to create games for Apple devices. There was no market because none played games on an Apple device. That was until Apple launched the iPhone. Today Unity Technologies is a unicorn.

Or Trustpilot (an Accelerace alumni company from 2008), that made it easy to review webshops. Their market was non-existing because they had no customers. Only free users. Today Trustpilot has thousands of business customers and raised $150 million in funding.

The thing is that market size is not relevant because the product evolves and the market sentiment changes.

Still, in most selection committees I’m in, the corporate representatives will regard the current product pitched as a fixed value proposition and estimate the potential from that snapshot. It’s a mistake.

How markets emerge over time

The truth is that most startups radically change their product. It happens because startups are founder driven, and founders can enact radical changes at will. To a corporate, sudden and radical product changes is unthinkable. Thus, corporates tend to gravely underestimate the plasticity of startups products and business models.

When the product change, the potential market changes as well. Like when the high-end limousine ordering app Uber added non-luxury cars to their app and became a taxi killer. The limousine market is small. The taxi market is not.

Just like the product can change, so can the market sentiment. It happens if the product has network effects or product consumption is highly observable.

When products have network effects, the product becomes more valuable over time. In the beginning, the product is only valuable to a small group of people. Like the first computers or an early version of the crowdfunding platform Kickstarter. But as more and more people use the products the relevant market increases. And Metcalf law teaches us it can happen very quickly.

In other cases, the market sentiment changes because of trends. If the product is highly observable, it can initiate a change of perception among potential customers that suddenly redefine the market.  Like electric vehicles, café latte and CrossFit.

For reasons above, market size is a terrible proxy for potential. And corporates need to unlearn the importance of it.

How to do it right

Instead, corporates must learn to construct a thesis about the future of their industry. The thesis must regard how technologies and trends will influence, reshape or even replace their industry. Once in place, corporate must target ideas and startups within the thesis.

They must learn to resist the temptation of attempting to foresee the potential of the individual startup but instead focus on executing their thesis. In all practicality, this means betting on a lot of teams doing similar things but from different angles.

The selection committee must still regard the potential, but the potential is already built into the thesis. So instead of questioning the market size, the committee members should question how closely the startup fits the thesis.

If telcos had done this in 2011, they might have caught either Line, Snapchat, Viper or WeChat. They all launched their chat apps that year, but telcos were missing a valid thesis on the future of communication. This should be a lesson for all.

Conclusion

  • Most corporates look for billion dollar ideas.
  • When assessing startups, corporates question market size.
  • Market size is a bad proxy for potential.
  • Corporates need to create a valid thesis about the future of their industry and start targeting a large number of startups within this thesis.

 

My startup investment outlook for 2018

One year ago I felt uncertain about the future. I know because I wrote about it here.

The era of mobile internet was ending. The decade gave us causal gaming, on-demand services and chat. The successful strategy had been to bet on apps with network effects. But the next wave wasn’t obvious.

Going into 2018, my uncertainty is fading, and I start sensing the contour of the next decade. And it is cute kittens.

In October, the first version of the game Cryptokitties was released. People breeding and trading digital cats. It became an instant success. Its demise will be equally swift. But something important will linger.

Cryptokitties paves the way for something truly groundbreaking. The assignment and trading of unique digital assets.

Bitcoin had long proved blockchain’s ability to assign and trade ownership over digital assets. But until October this year, the digital assets were fungible. Meaning my coin is no different from your coin. This property makes Bitcoin suitable as money. The thing is we already got money.

In contrast, we never really had unique digital assets. But we do now. And that matters because value stems from two properties. The first property is scarcity. The second property is uniqueness.IMG_6309

Bitcoin solved the scarcity problem. But the coins had no meaningful differentiation. Like oil, gold, and energy.

But the underlying blockchain to Cryptokitties added uniqueness as a property. Like art, companies, contracts, and land.

Uniqueness is immensely important because people are different. We like and need different things at different times. A rental contract might be favorable for one person but useless for someone else. A remix of a song might be enjoyed by one person, but disliked by another.

Furthermore, we are creative beings and we like to personalize our world. We develop recipes, produce art, write software and record tutorials.

The smartphone made it easy to create. In 2018, the innovations in blockchain technology will make it easy to own and sell whatever you create.

The combination will complete the economic ecosystem for digital products. The winners will be startups integrating and owning the biggest verticals, and thus benefitting from both economies of scale and network effects.

I would bet on startups with this aim.

Happy new year to everyone.

 

Startup tsunamis and how corporates face them

Most corporates think of startups as small businesses. Everyone knows that small businesses don’t matter. But startups move in waves. Sometimes waves are so big, we call them tsunamis. And tsunamis matter. This post will explain the nature of tsunamis. It will tell the story of a single earthquake that triggered two very different tsunamis. In the end, corporates know how to handle startup innovation. Do it.

In 2011, the most powerful earthquake in Japanese history triggered two devastating tsunamis.

The first tsunami hit the Japanese coast an hour later. A 40m tall mountain of water traveled 10 km inland demolishing everything in its path.

The second tsunami hit the global telco industry five years later. A cohort of chat apps reached maturity and shattered the future of telcos.

What happened was this: After the earthquake people wanted to call their loved ones, but the phone lines failed. Instead, people sought internet access and a group of developers developed a solution. They called it Line.

Line inspired entrepreneurs everywhere to build chat apps. Among these were: WeChat, Viber and Snapchat. All of them launched in 2011. A startup tsunami was in motion.

At this point, the telcos should have reacted. Today, we know they didn’t. The reason is the nature of tsunamis.

The nature of tsunamis

Tsunamis are always proceeded by an earthquake. Earthquakes are easy to read. The ground shakes and our needles move.

In contrast, tsunamis are hard to read. Only a fraction of earthquakes triggers one. When it happens, the tsunami is practically invisible. It travels underwater with the speed of a commercial jet. Just before the coast, it suddenly rises and darkens the horizon. At that point running is pointless.

The same happens in technology. Some big breakthrough occurs. Like an earthquake, the event is easy to read. Academics, research papers, and popular science media cover it in full.

In some cases, the technological breakthrough is practical enough for entrepreneurs to take advantage. In these cases, hordes of ambitious people found startups. The event has triggered a startup tsunami.

Like a normal tsunami, startups tsunamis also travel below eyesight. It moves through garages, co-working spaces, accelerators and obscure online forums. Places that are mostly invisible to corporates. But it moves fast, gain momentum and suddenly rises. At that point, innovation projects are meaningless.

Why corporates are paralyzed in face of startup tsunamis

Startups tsunamis travel for about 7 years before reaching shore. That means we get a rough picture about the future seven years in advance. If telcos had noticed the large cohort of chat apps launched in 2011, they could have saved themselves.

The problem is that most corporates don’t have proper sensors placed to detect these motions. And when they do, they don’t know what to do about the information.

Most corporates have no method to handle startups. Corporates normally have two defenses against competitors. They buy them or compete with them. But none of that works with startups.

Most M&A professionals would never consider buying a startup. It is simply too small. Why go through all the hassle to buy something small, when you can buy something big with the same amount of work.

Competing with startups seem equally silly. They have no market share.

The thing is this: startups are not competitors. In most cases, startups do not compete with the incumbents. Instead, they build a parallel industry that will eventually outperform the old industry.

Corporates have no answer to parallel industries. It’s not part of a standard MBA course. But there is a way.

Corporates must respond to startups by helping them build the parallel industry. Few founders want to disrupt. Most founders want to build. And when asked, an overwhelming majority of startups actually wants to collaborate with corporates.

If corporates help startups to build a new industry, the corporates will be a part of it. Luckily, new tools are available.

How to ride a startup tsunami

Corporates must take part in the startup tsunami. To do this, corporates need a dedicated interface towards startups. The interface can be an accelerator, incubator, VC arm or some other open innovation initiative. The most important thing is that the initiative follows these rules:

  1. It must scout startups globally. Innovation can arise anywhere.
  2. It must engage enough startups. The more exposure to the tsunami, the better you can react.
  3. It must have a value proposition that is attractive to startups. Startups don’t need you, so make them want to collaborate.
  4. It must include and incentivize all the relevant business units. To utilize synergies the startups must get access to operational decision makers.
  5. It must be rebranded. Even though your brand is a hundred years old and worth billions, startups don’t think it’s cool.

And most importantly….

  1. It must be run by people who know how to talk and deal with startup founders. Founders differ from the rest of humanity and disdain people who don’t get them.

Follow the rules above, and certain calamity becomes a possible future.

At Accelerace we help both startups and corporates.