Lessons from the true frontiers of innovation

 Alex Lazarow: Silicon Valley needs a reset

Book Review:  Out-Innovate – how Global Entrepreneurs – from Delhi to Detroit – are rewriting the rules of Silicon Valley, by Alex Lazarow. Harvard Business Review Press.

Entrepreneurs around the world overcome numerous obstacles in their innovation efforts and have much to teach us. Maybe it’s time then to stop slavishly following Silicon Valley’s playbook of what a start-up looks like. That’s the premise of author Alex Lazarow in ‘Out Innovate’ which contrasts the success of these resourceful entrepreneurs from Delhi to Detroit with the venture capital-fuelled ones of the Valley.

Silicon Valley’s traditional hold on the global innovation agenda is increasingly being challenged by so-called frontier innovation, where entrepreneurs in more challenged environments are taking a different and arguably better approach argues venture capitalist, academic and author Lazarow.

Entrepreneurs in Dublin, Detroit and Bangalore have more in common with the best entrepreneurs in Sao Paulo than they have with the best entrepreneurs in Silicon Valley, he says, adding that the Valley needs a refresh.

Lazarow’s charts the success of start-ups outside the Valley who cope with issues such as political and economic instability and the lack of ready resources such as finance and innovation ecosystems, yet who overcome such challenges to grow successful global businesses.

Despite this, he says our knowledge of the way start-ups are built is based on a narrow playbook, centred around the Silicon Valley software business, which is celebrated uncritically in books, podcasts and blogs.  “Silicon Valley has codified what a start-up should look like, dictated how it should be built and defined what its culture should be,” he maintains.

Lazarow doesn’t have beef with the Valley per se, it’s just that its model is not appropriate for others in many cases. Would-be innovators from around the world look to Silicon Valley for guidance on how to drive their own innovation yet despite the hype, recent innovation in the Valley is incremental rather than transformative, he says. He cites investor and entrepreneur Peter Thiel’s quip, “we wanted flying cars, but we got 140 characters”, in support of his argument.

Disruptive innovation has become a mantra in Silicon Valley, he adds, but what if you exist in a part of the world where there is nothing to disrupt?

Frontier innovators, he notes, need to be creators instead as often there are no established industries to disrupt. Often, they need to build entirely new sectors offering products and services taken for granted in other parts of the world in sectors such as education, healthcare, communications, energy and financial services.

In a neat metaphor, Lazarow’s contrasts Silicon Valley’s desire to create unicorns (start-ups that reach the magical $1 billion valuation level) with frontier innovators’ creation of camels, robust beasts that can survive droughts.

In contrast to the Valley where businesses are asset-light and highly niche-focussed, frontier innovators often have no choice but to build the ‘full stack’ including the enabling infrastructure that their products and services require.

In a neat metaphor, Lazarow’s contrasts Silicon Valley’s desire to create unicorns (start-ups that reach the magical $1 billion valuation level) with frontier innovators’ creation of camels, robust beasts that can survive droughts.

The way start-ups are funded in such contrasting models is an obvious difference. Silicon Valley funding rounds are fast, and growth is paramount for the model to succeed. Growth trumps the need for profitability. Even ten years into operation, in the first quarter after its IPO, Uber lost $1 billion, he notes.

Venture capital can be addictive, he says, adding that if companies get used to running on jet fuel, it becomes harder to switch to diesel.

As part of this journey, such firms also need to negotiate the so-called Valley of Death where operating costs exceed revenues. Silicon Valley has an entire system to create and support unicorns, but the focus is always on hyper-growth.

He notes how global consultancy McKinsey & Co, after examining the life cycle of 3,000 Silicon Valley-style software companies commented: “If a healthcare company grew at 20 per cent annually, its managers and investors would be happy. If a start-up grows at that rate, it has a 92 per cent chance of ceasing to exist within a few years.”

Silicon Valley’s oft-celebrated fast winners are matched by an ever-greater number of fast losers. Nonetheless, the Valley has safety nets. Lazarow notes the pattern of ‘acquihires’ where companies are acquired only for their team, giving founders a face-saving exit and stock options in the acquiring entity.

At the Frontier, things could not be more different. Funding is more measured and safety nets are often non-existent. Failure results in job losses and bankruptcy, with a black stain on the founders that can follow them for life.

“Frontier innovators manage costs, charge for the value they create from the get-go, ingest capital on their terms, understand the levers for action, diversify the business plan and take a long-term view,” he says.

They manage the cost curve to better sync with the growth curve. New hires need to be justified by increases in revenue and operations. Investments need to be scaled at an appropriate pace and spending levels are modulated so that the business doesn’t go too far down the cost curve hole.

You don’t hear enough about managing costs in Silicon Valley, he notes.

Lazarow cautions against start-ups offering a free lunch. Entrepreneurs working in tougher, less developed markets don’t share Silicon Valley’s obsession with offering free or subsidised products and service to fuel growth.

Constraints

Using constraints as an advantage is a key theme of the book. Unlike start-ups in Silicon Valley, where resources are plentiful and markets provide abundant domestic opportunity, Frontier innovators have small local markets with limited financial and human capital. This forces them to think globally from the ‘get go’ and to build products and services that can compete in multiple markets.

Lazarow, who has worked at the intersection of investing, consulting and economic development across the public, private and social entrepreneurship fields, notes there are currently more than 1.3 million technology start-ups globally and more than 480 hubs worldwide, from Detroit to Bangalore, to Nairobi and Puerto Rico.

Around 10 per cent of all unicorns are located outside Silicon Valley and the major European and Asian hubs, he says. PayPal founded in 1998 has 267 million users worldwide while Paytm, founded 10 years later in India, trumps it volume-wise with over 300 million users. Uber’s success in the taxi market is now being replicated in emerging markets by firms such as Grab, Gojek, 99 and Cabify in Latin America and South East Asia.

Lazarow notes that the Valley should learn the lessons of Detroit, once the hub of global innovation and excellence in auto industry, which in time was subverted by others in centres such as Germany, Italy and Japan. Today, however, Detroit is succeeding once more, but in new ways.

Sea change

As he concludes, “A sea change is on the horizon as all of these outside-the-Valley entrepreneurs step up to the fore of innovation. To succeed, they repeatedly subvert and reimagine Silicon Valley’s rules, out innovating everyone else as they write a new playbook for a new game. To keep up and remain a home for world changing innovation, we should all consider taking a leaf from their book.”

Drawing on numerous lessons of successful entrepreneurship from different corners of the globe, Out-Innovate is a ground-breaking book with an engaging narrative that encourages us to look beyond the narrow playbook of Silicon Valley to more sustainable and diverse forms of innovation.