A lot of commentary around innovation and disruption takes it as a given that startups own the future. Compared to corporate giants, startups are nimble and agile. Such a “startup culture” is necessary for the creation of breakthrough products and services. Recent history seems to bears this out. We have seen several large companies such as Blockbuster getting replaced by upstarts like Netflix. Indeed, the rise of companies like Dropbox, Airbnb and Uber has been phenomenal. But is it really inevitable that startups own the future of business?
History Begs To Differ
Since the arc of history is long, it might be useful to have a look a little further back in the past than the last two decades. Most of the major technologies we use today were developed in the R&D labs of large corporations such as Xerox’s PARC and AT&T’s Bell Labs. This trend continues today, with over 90% of the top 20 global R&D spending happening in large companies such as Amazon, Intel, Ford, Johnson & Johnson, Cisco and Roche.
Of course, this R&D still needs to be combined with viable business models in order to achieve commercial success. But this is not a one-way street. R&D is still a key ingredient in the innovation formula. Without breakthrough technologies, well-designed business models cannot by themselves succeed.
What most startups have tended to do over the last two decades is leverage existing technologies developed by large companies and apply great business models to them (e.g. Uber, Airbnb, Pinterest). This was largely because companies like Xerox fumbled the opportunity to benefit from their own technologies. Startups also need to work in this way because they don’t have the financial muscle needed to build a great R&D function. In contrast, large companies usually have the resources they need to do great R&D.
The Third Wave
This capacity to invest in R&D puts large companies at an advantage. We are now entering, a new age of technology and the internet. In his latest book The Third Wave, Steve Case identifies three waves of internet technologies:
• Wave I (1985–1999): Companies like Cisco, IBM, AOL and others were building the necessary underlying technologies for the internet. Their work mostly involved laying the foundations of the online world that we have today.
• Wave II (2000–2015): The app economy and mobile revolution took hold. Companies like Amazon, Google, Facebook, Twitter and others were able to leverage the foundations built in the first wave to create great products and services.
• Wave III (2016-): The internet will be fully integrated into everything we do and every product we use. Economic sectors that were hitherto only marginally affected by the technology revolution, such as healthcare, education, transportation and food production, will be impacted by the ubiquitous connectivity that innovators will be able to leverage.
A key factor to notice is that the first wave needed a lot of financial investment in R&D and infrastructure building. There was also a need for a lot of these companies to be involved in discussions with governments in order to get key policy changes made. This type of innovation required deep pockets and vast resources. This is why large companies and venture capital dominated this era. In contrast, second wave companies were taking advantage of systems that were mostly in already place and leveraging them to build companies. As such, the cost of company creation was relatively low. This is why accelerators making small investments in a lot of ideas was a great way to test the market and pick winners (i.e. moneyball for startups).
According to Case, the second wave is now peaking and coming to a close. We are now moving into a third wave that is strikingly similar it is to the first wave. This is because it mostly involves products and services that are much more costly to create and distribute (e.g. transportation and food production). The industry sectors are also highly regulated by governments and have powerful well established companies that are gatekeepers to the market (e.g. healthcare and education). To succeed in the third wave, companies will have to make large financial investments, form partnerships with other companies and influence government policy.
These requirements play well into the inbuilt advantages of large companies. As we have already noted, they have the resources to invest in the R&D required to create third wave products. Large companies also have the muscle, knowledge and networks to form partnerships with other companies and influence policy decision making. All these factors place startups at a slight disadvantage going into the third wave. Indeed, a lot of FinTech startups are finding out that life is easier if you partner with a larger institution that already has a banking licence. Of-course, success for large companies is not guaranteed. Even with their resources, they can still lose to startups if they do not have a well designed internal innovation ecosystem.
The First Rule About Fight Club
According Alex Rampell Andreessen Horowitz, ‘the battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation’. During the third wave, it will get increasingly difficult for startups to get distribution. All the while, large companies all over the world are working really hard to get innovation.
The first rule about fight club is that you don’t talk about fight club. And yet, most conference keynote speeches on innovation that I have ever watched begin with the speaker lampooning some large company that just got disrupted. In the last decade, startup folks have gotten real cocky and started talking about disruption and how their new agile-lean methods of innovation were helping them move faster and create better products than large companies. But if you are going to punch a bully in the face, it might be wise to not keep reminding them of that fact every two seconds!
What the lean startup movement has done is reveal to the business world how successful startups work. We now know the difference between searching and executing. Slowly but surely, large companies are figuring out how to take this best practice and apply it to the contexts of their businesses. In other words, the incumbents are getting innovation while they still have a lock on distribution, and a lot of financial resources.
As we move into the third wave, large companies will have the advantages of resources and political muscle. When this is combined with the knowledge of how to do innovation well, these companies will just get harder to beat. Of-course, there will be those companies that can’t help but get in their own way. Just as in the first wave, some incumbents will still be swept away by the winds of change. But if there is commitment and a leadership that gets it, then large corporates will, in the end, be the greatest beneficiaries of the lean startup movement.
This article was first published on Forbes where Tendayi Viki is a regular contributor. Tendayi Viki is the author of The Corporate Startup, a book on how large companies can build their internal ecosystems to innovate like startups.