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.

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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.

 

Why startups aren’t cool

Many people think startups are cool. This post will tell you they are not. It will tell you that being a startup is something to be avoided. In the process you will learn about nuclear research, the birth of the world wide web and meet the first cool tech founder. In the end, founders will know what to focus on. Focus is everything. Do it.

The bombing of Hiroshima and Nagasaki started a war. A war that is still being fought today.

The instant cremation of thousands of people from only 64 kg of uranium highlighted the power of science and technology.

Europe was quick to respond. In 1954, twelve European states met and formed “Conseil Européen pour la Recherche Nucléaire”. Or more commonly known as CERN.

CERN was created to make Europe leading in nuclear research. To win the war of science and technology. But fate had another plan for CERN. It would make tech startups cool.

The first of the cool

Ten years before startups became cool, a CERN employee made history. Tim Berners-Lee invented the world wide web.

Tim was proud of his invention. He described it in detail, but only few people took notice. Among the few was a young American. His name: Marc Andreessen.

Marc was a geek. The opposite of cool. But that was about to change. Because Marc would do something no one had done before.

Marc took Tim’s invention and created the world’s fist popular web browser. Mosaic. But equally important, he became the first young tech startup billionaire. In 1996, Time Magazine had him on the cover. Marc Andreessen was 25 years old.

And so it happened. Tech startups became cool thanks to CERN and Mark Andreessen. Today, Silicon Valley is a hit series on HBO, Snapchat founder Evan Spiegel is dating Hollywood star Miranda Kerr and fashion model Tyra Banks invests in startups. But startups were never supposed to be cool. In fact, they are as uncool as can be.

Startups are Marky Mark

Steve Blank has the following definition of startups: A startup is a temporary organization used to search for a repeatable and scalable business model.

The key word here is temporary. A startup is temporary because it doesn’t generate enough revenue to sustain itself. This situation only has two end-games. 1) the startup closes down 2) the startup begins to make money.

Either outcome is actually good. If the startup cannot find product market fit, the best thing is to close down as quickly as possible. If the startup finds product market fit and make money, it morphs into a business.

The startup phase should be as short as possible. But the recent hype around startups creates the opposite incentive. To embrace the startup identity.

The startup identity lures founders into a dangerous reality. A world where it’s okay not to have revenue. Where failure is accepted. Where burning cash is natural. But where press, cool conferences and C-level titles are abundant.

The startup reality is deceptive. Like teenage life. No responsibilities and many parties. It feels cool, but adult people know it’s not. Its a phase that you need to go through. Mark Wahlberg (in the picture) would agree.

Instead of embracing the startup identity, excellent founders do the opposite. They shun PR, conferences and fancy titles. They know it’s a dangerous waste of time.

Excellent founders do the uncool. They do cold calls, suffer tons of rejections, sacrifice friends and family, assemble Ikea furniture in the middle of the night. They forget about saving for pension and delay buying a house. They hustle and barter. But most of all they worry.

They worry about being startup. They want to grow up. Like Marky Mark.

Conclusions made:

  • The startup identity has become cool.
  • The startup reality lures founders into embracing the startup identity.
  • Excellent founders focus on becoming a business.

Check out Accelerace. We invest in tech startups.

Why central banks hate startups

This is a useless blog post. It won’t help you succeed with a startup. Neither will it help you invest in startups. Instead it will make a connection most people haven’t seen. It will expose who really rules the world and how startups are changing everything we know about economics. In the end, you might see the world differently.

Nine years ago the world changed. We got a new ruler.

Regime changes happen when existing power structures break down. Like the French revolution and Arab Spring.

In 2008, the financial sector broke down. In the chaos following, the new ruler came to power. The central banks. And their leaders became household names. Today, most people know of Janet Yellen and Mario Draghi.

Like any new regime, the new rulers portrait themselves as saviors. And they were.

The world was headed for a 1930s like depression. Banks would freeze our accounts. Pensions would evaporate. Governments would have broken down.

Central banks emerged from obscurity. They stepped onto the world stage to shield us from chaos and anarchy. To restore order and confidence.

People embraced the new ruler. In return, central banks quickly and decisively saved banks, companies and governments. They did so by printing money at an unprecedented scale.

So far the ECB and the FED has printed more than $4 trillion in new money. Yes, that’s a lot.

Money printing is not bad in itself. It did save us. The problem is knowing when to stop. And if history has taught us anything, it’s that regimes never step back down. Central banks are no different.

The power of central banks

Central banks have stayed in power since 2008. They have declared state of emergency and taken control of our economy. The free market has been suspended. Prices of stocks and bonds are now under central bank control.

The price of stocks and houses are at historic highs. Not because the economy is better than ever. But because Janet Yellen and Mario Draghi keep printing money.

The reason why they keep printing so much money is because their instrument tells them so.

The instrument is a thermometer. It sits in every central bank. And it measures the temperature of the economy. Or so it’s believed.

The thermometer looks like this: high inflation – moderate inflation – deflation. High inflation is bad. Moderate inflation is good. Deflation is the really bad.

The thermometer tells central banks to aim for moderate inflation (around 2%). If the thermometer falls below their target, they print money.

And money printing always works. Except for the past eight years, it hasn’t.

Instead of inflation, we see clear signs of deflation. And Mario Draghi and Janet Yellen don’t know why. So they keep printing even more money. Sadly, it’s a futile act.

But to understand why, I will take you back in time to see when the misconception started.

Classic entrepreneurs made new products

In the late 1890s, there was a farmer named Henry. The thing about Henry was that he hated farm work. So he started dreaming about building a machine that could do his job.

Henry started to materialize his dream. After a long day of farm work, he would go to his small shed to work on his machine.

Then one day it was ready. He turned it on, and it worked. Henry had built a vehicle running on a gasoline engine. It marked the beginning of his later company. The Ford Motor Company.

But Henry Ford was just one of many entrepreneurs inventing new consumer products. In fact, the following decades would see a flood of new products. Like sewing machines, washing machines, personal computers and smartphones.

The new products provided vastly better solutions to our problems than the existing products did. Cars outperformed horses. Sewing machines outperformed handheld needle and thread. And the personal computer outperformed typewriters and calculators. The inventions created entirely new product categories that consumers were willing to pay premium prices for.

A car was more expensive than a horse. A sewing machine more expensive than needle and threat. And a personal computer was more expensive than a typewriter and calculator combined. But that didn’t matter, because new categories have no existing price anchors. The inventor is free to set a high price.

In the age of product innovation, rising prices became synonymous with economic health. A healthy economic environment had rising prices. In large part due to the many new and better products being introduced on the market. In other words, the age of product innovation was a world of inflation.

New entrepreneurs disrupt industries

The evolution of entrepreneurship can roughly be summed up like this: The first generation of entrepreneurs created new products. The second generation created digital tools. But the third and current generation does something no generation of entrepreneurs have attempted before. They redefine established industries. And the change of focus matters greatly.

The highest valuated startups are currently Uber (2009) and Airbnb (2008). Both were founded in the aftermath of the great recession. And they have inspired and defined the new age of entrepreneurship.

These startups showed aspiring founders that startups can do more than just make tools. They can disrupt and redefine the very pillars of our society. Such as: transportation, housing, banking, legal processing, energy and even space exploration. These industries are so important that their institutions have (almost) become political establishments. Disrupting them is the most daunting task ever taking on by startup founders. And it’s also the most important.

But disrupting industries has a very different economic impact than creating new product categories and creating digital tools. New categories are inflationary. Digital tools increase productivity. But redefining existing industries have a very different effect. One that Janet Yellen and Mario Draghi fear the most. Deflation.

The age of deflation

When startups disrupt and redefine existing industries they are not inventing new product categories. They are reinventing the way existing product and services are being produced.

Uber fundamentally delivers the same service as taxi companies. But they have redefined the underlying infrastructure behind the service. They have applied technology and utilized excess car capacity. The result is transportation that costs half of a taxi.

Airbnb fundamentally delivers the same service as hotels. But they have also applied technology and utilized excess capacity. The result is overnight stays that costs half of hotels.

But these companies are merely the front runners of a seismic wave of startups attacking the very pillars of our economy. Startups like Impossible Foods is redefining the way we produce meat. The result will be high quality meat at a fraction of the current price. Robinhood is attacking the financial service industry and eliminating fees for trading stocks. All of these startups have one thing in common. They lower the price on things we already spend money on. And that has a name. It’s called deflation.

It’s the thing central banks fear the most. And they will fight it with everything they got. But what they fail to understand is that not all deflation is created equal.

Why deflation from disruption is different

Economic theory stipulates that deflation leads to deferred spending. If apples are cheaper tomorrow, we will wait buying them. That’s obviously bad for economic activity. But this theory builds on a critical assumption. The assumption is this: we can anticipate the price decline.

If we know that apples will be cheaper tomorrow, we will surely wait buying them. But deflation from disruption is fundamentally unpredictable.

No one saw Uber or Airbnb coming before they were actually here. No consumer thought: I will wait booking my vacation until some startup emerges that will utilize spare bedrooms to offer cheap stays.

This means that deflation from innovation won’t lead to deferred spending. And this also means that Janet Yellen and Mario Draghi are looking at an obsolete thermometer. In other words, they are dead wrong.

Disruptive startups will define our future

Central banks have pledged to keep printing money till they reach their inflation targets. But they are fighting the force of human innovation. A force consisting of entrepreneurs from across the globe hell-bent on disrupting the establishment. Janet Yellen and Mario Draghi have brought a knife to a gun fight. And they will lose.

What central banks will get instead is something worse than deflation. They will get bubbles. All the money flows into stocks and cheap housing loans. Prices on stocks and houses will detach from the true state of the economy. They will bubble up to levels so high, that central banks will have no choice but to keep them high.

Janet Yellen and Mario Draghi will find themselves in situation they cannot get out of. All of it because they don’t understand that the world has changed. That they actually aren’t in control. But that disruptive startups will define the future economy. And it will be deflationary.

Conclusion made:

  • Central banks rule the current economy by intervening with printed money
  • Central banks want inflation because inflation used to show economic health
  • The new generation of startups creates deflation
  • Deflation created by disrupting startups doesn’t lead to deferred spending
  • Money printing will only lead to bubbles
  • Startups will succeed disrupting industries and thus create deflation

 

Check out Accelerace. We invest in tech startups.