I gave the Alumni Day talk at U.C. Santa Cruz and had a few things to say about innovation.
Even though I live just up the coast, I’ve never had the opportunity to start a talk by saying “Go Banana Slugs.”
I’m honored for the opportunity to speak here today.
We’re standing 15 air miles away from the epicenter of technology innovation. The home of some of the most valuable and fastest growing companies in the world.
I’ve spent my life in innovation, eight startups in 21 years, and the last 15 years in academia teaching it.
I lived through the time when working in my first job in Ann Arbor Michigan we had to get out a map to find out that San Jose was not only in Puerto Rico but there was a city with that same name in California. And that’s where my plane ticket ought to take me to install some computer equipment.
39 years ago I got on that plane and never went back.
I’ve seen the Valley grow from Sunnyvale to Santa Clara to today where it stretches from San Jose to South of Market in San Francisco. I’ve watched the Valley go from Microwave Valley – to Defense Valley – to Silicon Valley to Internet Valley. And to today, when its major product is simply innovation. And I’ve been lucky enough to watch innovation happen not only in hardware and software but in Life Sciences – in Therapeutics, Medical Devices, Diagnostics and now Digital Health.
I’ve been asked to talk today about the future of Innovation – typically that involves giving you a list of hot technologies to pay attention to – technologies like machine learning. The applications that will pour of this just one technology will transform every industry – from autonomous vehicles to automated radiology/oncology diagnostics.
Equally transformative on the life science side, CRISPR and CAS enable rapid editing of the genome, and that will change life sciences as radically as machine intelligence.
But today’s talk about the future of innovation is not about these technologies, or the applications or the new industries they will spawn.
In fact, it’s not about any specific new technologies.
The future of innovation is really about seven changes that have made innovation itself possible in a way that never existed before.
We’ve created a world where innovation is not just each hot new technology, but a perpetual motion machine.
So how did this happen? Where is it going?
Silicon Valley emerged by the serendipitous intersection of:
- Cold War research in microwaves and electronics at Stanford University,
- a Stanford Dean of Engineering who encouraged startup culture over pure academic research,
- Cold War military and intelligence funding driving microwave and military products for the defense industry in the 1950’s,
- a single Bell Labs researcher deciding to start his semiconductor company next to Stanford in the 1950’s which led to
- the wave of semiconductor startups in the 1960’s/70’s,
- the emergence of Venture Capital as a professional industry,
- the personal computer revolution in 1980’s,
- the rise of the Internet in the 1990’s and finally
- the wave of internet commerce applications in the first decade of the 21st century.
- The flood of risk capital into startups at a size and scale that was not only unimaginable at its start, but in the middle of the 20th century would have seemed laughable.
Up until the beginning of this century, the pattern for the Valley seemed to be clear. Each new wave of innovation – microwaves, defense, silicon, disk drives, PCs, Internet, therapeutics, – was like punctuated equilibrium – just when you thought the wave had run its course into stasis, there emerged a sudden shift and radical change into a new family of technology.
But in the 20th Century there were barriers to Entrepreneurship
In the last century, while startups continued to innovate in each new wave of technology, the rate of innovation was constrained by limitations we only now can understand. Startups in the past were constrained by:
- customers were initially the government and large companies and they adopted technology slowly,
- long technology development cycles (how long it takes to get from idea to product),
- disposable founders,
- the high cost of getting to first customers (how many dollars to build the product),
- the structure of the Venture Capital industry (there were a limited number of VC firms each needing to invest millions per startups),
- the failure rate of new ventures (startups had no formal rules and acted like smaller versions of large companies),
- the information and expertise about how to build startups (information was clustered in specific regions like Silicon Valley, Boston, New York, etc.), and there were no books, blogs or YouTube videos about entrepreneurship.
What we’re now seeing is The Democratization of Entrepreneurship
What’s happening today is something more profound than a change in technology. What’s happening is that these seven limits to startups and innovation have been removed.
The first thing that’s changed is that Consumer Internet and Genomics are Driving Innovation at scale
In the 1950’s and ‘60’s U.S. Defense and Intelligence organizations drove the pace of innovation in Silicon Valley by providing research and development dollars to universities, and defense companies built weapons systems that used the Valley’s first microwave devices and semiconductor components.
In the 1970’s, 80’s and 90’s, momentum shifted to the enterprise as large businesses supported innovation in PCs, communications hardware and enterprise software. Government and the enterprise are now followers rather than leaders.
Today, for hardware and software it’s consumers – specifically consumer Internet companies – that are the drivers of innovation. When the product and channel are bits, adoption by 10’s and 100’s of millions and even billions of users can happen in years versus decades.
For life sciences it was the Genentech IPO in 1980 that proved to investors that life science startups could make them a ton of money.
The second thing that’s changed is that we’re now Compressing the Product Development Cycle
In the 20th century startups I was part of, the time to build a first product release was measured in years as we turned out the founder’s vision of what customers wanted. This meant building every possible feature the founding team envisioned into a monolithic “release” of the product.
Yet time after time, after the product shipped, startups would find that customers didn’t use or want most of the features. The founders were simply wrong about their assumptions about customer needs. It turns out the term “visionary founder” was usually a synonym for someone who was hallucinating. The effort that went into making all those unused features was wasted.
Today startups build products differently. Instead of building the maximum number of features, founders treat their vision as a series of untested hypotheses, then get out of the building and test a minimum feature set in the shortest period of time. This lets them deliver a series of minimal viable products to customers in a fraction of the time.
For products that are simply “bits” delivered over the web, a first product can be shipped in weeks rather than years.
Founders Need to Run the Company Longer
Today, we take for granted new mobile apps and consumer devices appearing seemingly overnight, reaching tens of millions of users – and just as quickly falling out of favor. But in the 20th century, dominated by hardware, software, and life sciences, technology swings inside an existing market happened slowly — taking years, not months. And while new markets were created (i.e. the desktop PC market), they were relatively infrequent.
This meant that disposing of the founder, and the startup culture responsible for the initial innovation, didn’t hurt a company’s short-term or even mid-term prospects. So, almost like clockwork 20th century startups fired the innovators/founders when they scaled. A company could go public on its initial wave of innovation, then coast on its current technology for years. In this business environment, hiring a new CEO who had experience growing a company around a single technical innovation was a rational decision for venture investors.
That’s no longer the case.
The pace of technology change in the second decade of the 21st century is relentless. It’s hard to think of a hardware/software or life science technology that dominates its space for years. That means new companies face continuous disruption before their investors can cash out.
To stay in business in the 21st century, startups must do three things their 20th century counterparts didn’t:
- A company is no longer built on a single innovation. It needs to be continuously innovating – and who best to do that? The founders.
- To continually innovate, companies need to operate at startup speed and cycle time much longer their 20th century counterparts did. This requires retaining a startup culture for years – and who best to do that? The founders.
- Continuous innovation requires the imagination and courage to challenge the initial hypotheses of your current business model (channel, cost, customers, products, supply chain, etc.) This might mean competing with and if necessary killing your own products. (Think of the relentless cycle of iPod then iPhone innovation.) Professional CEOs who excel at growing existing businesses find this extremely hard. Who best to do that? The founders.
The fourth thing that’s changed is that you can start a company on your laptop For Thousands Rather than Millions of Dollars
Startups traditionally required millions of dollars of funding just to get their first product to customers. A company developing software would have to buy computers and license software from other companies and hire the staff to run and maintain it. A hardware startup had to spend money building prototypes and equipping a factory to manufacture the product.
Today open source software has slashed the cost of software development from millions of dollars to thousands. My students think of computing power as a utility like I think of electricity. They can get to more computing power via their laptop through Amazon Web Services than existed in the entire world when I started in Silicon Valley.
And for consumer hardware, no startup has to build their own factory as the costs are absorbed by offshore manufacturers. China has simply become the factory.
The cost of getting the first product out the door for an Internet commerce startup has dropped by a factor of a 100 or more in the last decade. Ironically, while the cost of getting the first product out the door has plummeted, it now can take 10’s or 100’s of millions of dollars to scale.
The fifth change is the New Structure of how startups get funded
The plummeting cost of getting a first product to market (particularly for Internet startups) has shaken up the Venture Capital industry.
Venture Capital used to be a tight club clustered around formal firms located in Silicon Valley, Boston, and New York. While those firms are still there (and getting larger), the pool of money that invests risk capital in startups has expanded, and a new class of investors has emerged.
First, Venture Capital and angel investing is no longer a U.S. or Euro-centric phenomenon. Risk capital has emerged in China, India and other countries where risk taking, innovation and liquidity are encouraged, on a scale previously only seen in the U.S.
Second, new groups of VCs, super angels, smaller than the traditional multi-hundred-million-dollar VC fund, can make small investments necessary to get a consumer Internet startup launched. These angels make lots of early bets and double-down when early results appear. (And the results do appear years earlier than in a traditional startup.)
Third, venture capital has now become Founder-friendly.
A 20th century VC was likely to have an MBA or finance background. A few, like John Doerr at Kleiner Perkins and Don Valentine at Sequoia, had operating experience in a large tech company. But out of the dot-com rubble at the turn of the 21st century, new VCs entered the game – this time with startup experience. The watershed moment was in 2009 when the co-founder of Netscape, Marc Andreessen, formed a venture firm and started to invest in founders with the goal to teach them how to be CEOs for the long term. Andreessen realized that the game had changed. Continuous innovation was here to stay and only founders – not hired execs – could play and win. Founder-friendly became a competitive advantage for his firm Andreessen Horowitz. In a seller’s market, other VCs adopted this “invest in the founder” strategy.
Fourth, in the last decade, corporate investors and hedge funds have jumped into later stage investing with a passion. Their need to get into high-profile deals has driven late-stage valuations into unicorn territory. A unicorn is a startup with a market capitalization north of a billion dollars.
What this means is that the emergence of incubators and super angels have dramatically expanded the sources of seed capital. VCs have now ceded more control to founders. Corporate investors and hedge funds have dramatically expanded the amount of money available. And the globalization of entrepreneurship means the worldwide pool of potential startups has increased at least 100-fold since the turn of this century. And today there are over 200 startups worth over a billion dollars.
Change Number 6 is that Starting a Company means you no longer Act Like A Big Company
Since the turn of the century, there’s been a radical shift in how startups thought of themselves. Until then investors and entrepreneurs acted like startups were simply smaller versions of large companies. Everything a large company did, a startup should do – write a business plan; hire sales, marketing, engineering; spec all the product features on day one and build everything for a big first customer ship.
We now understand that’s wrong. Not kind of wrong but going out of business wrong.
What used to happen is you’d build the product, have a great launch event, everyone high-five the VP of Marketing for great press and then at the first board meeting ask the VP of Sales how he was doing versus the sales plan. The response was inevitably “great pipeline.” (Great pipeline means no real sales.)
This would continue for months, as customers weren’t behaving as per the business plan. Meanwhile every other department in the company would be making their plan – meaning the company was burning cash without bringing in revenue. Finally the board would fire the VP of sales. This cycle would continue then you’d fire the VP of Marketing, then the CEO.
What we’ve learned is that while companies execute business models, startups search for a business model. It means that unlike in big companies startups are guessing about who their customers are, what features they want, where and how they want to buy the product, how much they want to pay. We now understand that startups are just temporary organizations designed to search for a scalable and repeatable business models.
We now have specific management tools to grow startups. Entrepreneurs first map their assumptions and then test these hypotheses with customers out in the field (customer development) and use an iterative and incremental development methodology (agile development) to build the product. When founders discover their assumptions are wrong, as they inevitably will, the result isn’t a crisis, it’s a learning event called a pivot — and an opportunity to change the business model.
The result, startups now have tools that speed up the search for customers, reduce time to market and slash the cost of development. I’m glad to have been part of the team inventing the Lean Startup methodology.
Change number 7 – the last one – is perhaps the most profound and one students graduating today don’t even recognize. And it’s that Information is everywhere
In the 20th century learning the best practices of a startup CEO was limited by your coffee bandwidth. That is, you learned best practices from your board and by having coffee with other, more experienced CEOs. Today, every founder can read all there is to know about running a startup online. Incubators and accelerators like Y-Combinator have institutionalized experiential training in best practices (product/market fit, pivots, agile development, etc.); provide experienced and hands-on mentorship; and offer a growing network of founding CEOs.
The result is that today’s CEOs have exponentially more information than their predecessors. This is ironically part of the problem. Reading about, hearing about and learning about how to build a successful company is not the same as having done it. As we’ll see, information does not mean experience, maturity or wisdom.
The Entrepreneurial Singularity
The barriers to entrepreneurship are not just being removed. In each case, they’re being replaced by innovations that are speeding up each step, some by a factor of ten.
And while innovation is moving at Internet speed, it’s not limited to just Internet commerce startups. It has spread to the enterprise and ultimately every other business segment. We’re seeing the effect of Amazon on retailers. Malls are shutting down. Most students graduating today have no idea what a Blockbuster record/video store was. Many have never gotten their news from a physical newspaper.
If we are at the cusp of a revolution as important as the scientific and industrial revolutions what does it mean? Revolutions are not obvious when they happen. When James Watt started the industrial revolution with the steam engine in 1775 no one said, “This is the day everything changes.” When Karl Benz drove around Mannheim in 1885, no one said, “There will be 500 million of these driving around in a century.” And certainly in 1958 when Noyce and Kilby invented the integrated circuit, the idea of a quintillion (10 to the 18th) transistors being produced each year seemed ludicrous.
It’s possible that we’ll look back to this decade as the beginning of our own revolution. We may remember this as the time when scientific discoveries and technological breakthroughs were integrated into the fabric of society faster than they had ever been before. When the speed of how businesses operated changed forever.
As the time when we reinvented the American economy and our Gross Domestic Product began to take off and the U.S. and the world reached a level of wealth never seen before. It may be the dawn of a new era for a new American economy built on entrepreneurship and innovation.
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