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What Will Really Disrupt The Disruptors?

The world is changing fast… The Tech World even faster.

And every day it seems like a new technology incubator/accelerator pops up.  Universities, venture capital firms, big companies, and governments are jumping on the Incubator/Accelerator bandwagon like never before…

Everyone involved with these business startup factories hope the next crop of disruptors is just a few weeks away.  But they just might be wrong. Very wrong.

Why?

People who have been around for a while probably know that when everyone seems to be jumping on the bandwagon it usually means a bubble is forming. And there are a few other signs that flash warnings  about the strong possibility we may be seeing the peak of this startup accelerator trend.  Going forward in this article I will use the term accelerator to refer to Incubator/Accelerators.

First of all, lets nail down the basic accelerator’s goals…

Accelerator operators like TechStars, Y-Combinator, Capital Innovators, and countless others want to attract and nurture great teams who can work with a target customer group to build products/services that will disrupt some business sector and build a billion-dollar business. And… Preferably they should do this overnight. Ten weeks at most.

Think Uber, ETrade, Travelocity, AirBNB, Amazon, Google, and other startups that have caused great upheaval in some marketplaces. Who uses a travel agent, full service stock broker, the Yellow Pages, or a Sears store anymore?

But now with most major markets disrupted there are only two places where the next batch of startups can really thrive and deliver exponential growth with their innovations. (1) Smaller, more narrow niche, markets where it will be difficult to build a big enough business to attract the large sums of capital needed, and/or (2) Disrupt the disruptors.

Smaller niches are always a crap shoot while disrupting the disruptors is an interesting proposition…

Don’t think it is not going to happen. As we have seen many times, market leaders can only retain their dominance until the next big thing comes along. In a world where all it takes is one click to try something new the current market leaders could be living on borrowed time.

What new unexpected company will take Amazon’s ecommerce market away? What upstart financial innovator will out maneuver Etrade? What company that just locked in a pocket full of Seed money and a spot in a hot accelerator will take travel to the next level?

Well… It may not be one of the well-known brand-name accelerators who will shepherds along the next billion-dollar unicorn destined to disrupt a disruptor. The process, procedures, contact networks, and mentors these established accelerators used in the past were great at producing last decade’ s disruptors…   But they might not work going forward.  Whole new processes, procedures, contact networks, and mentors will need to be built from scratch…

Why is this true?

How about some real-world evidence?

The number of true accelerator graduates (companies that have achieved traction and grown exponentially) has collapsed. I will use two data points to illustrate this:

  1. TechStars, the largest accelerator, is now expanding on the backs of corporations and governments looking for innovation. New TechStars accelerators are being funded by the likes of Target, Disney, Sprint, and more… Why would TechStars give high-growth company equity away (or waste valuable resources) to these corporations and governments? Easy answer… Because the companies in these new accelerators will probably not be true Unicorn disruptors. In fact, they may collapse as soon as their corporate or government benefactors stop funding losses.
  2. Investors are having a hard time finding startups with promise. These recent articles document this enlightening trend… “Once-Flush Startups Struggle to Stay Alive as Investors Get Pickier” and “Startup Investors Hit the Brakes” and “Seed funding slows in Silicon Valley .

Smart investors will usually wait on the sidelines while others take the substantial and painful risks to identify and exploit the next big trend. Why take more than an acceptable risk their money? They let someone else take the big risks and shoulder the losers. Smart investors will be there to cherry-pick the most promising new companies.

Where will the next batch of unicorn level disruptors come from?

There may be a few that just pop out of some garage, basement or big city co-working space but look for them to appear out of accelerators with a different nurturing and growth model…

Like what?

Not just churning through startup teams… These new accelerators with have a different playbook all together. The only way to produce tomorrow’s disruptors is to disrupt the entire concept of startup accelerators.

How? More on this in my next article…

Where Will The Next Uber, DropBox or AirBnB Come From? What four things could be missing in startup accelerators?

bdOver the last decade or so startup accelerators have been a great source of inspiration, education, connections and capital for new companies. Y-Combinator, the granddaddy of them all started on March 11, 2005. Since then, just this one accelerator has churned out over a thousand new companies

Unicorns like Uber, DropBox, and AirBnB got their start in accelerators and now they have valuations rivaling high-profile companies that have been operating for generations.

Today, most anywhere in the world, you can throw a stone and hit a startup business accelerator. They come in a variety of flavors from government sponsored to organizations with a very specific industry focus. Even companies like Target, Coca-Cola, and Intel have started their own accelerators to focus on company ideas high on their priority lists.

It seems like everyone is getting into the startup accelerator game lately… But why haven’t there been more than a handful of success stories? With thousands of companies going through these programs several times a year, you would expect a new batch of innovative, fast growing, money-making companies to pop up every day. And all of them changing the world in interesting and compelling ways.
But that hasn’t happened…

And here’s why…

To better illustrate the problem, pull out your smartphone and push whatever magic button needed to get it to light up. Consider for a moment all the Apps and features on your phone and how your life has changed for the better because of the modern marvel you hold in your hand.

en3Now consider how much use you would get out of your smartphone if there were no GPS, music, video, or valuable services like EverNote, Open Table, and Fandango? What if only people with your same smartphone model could text or email you? What if all those financial services like credits cards, banks and brokers were not available on your smartphone?

Then your smartphone would be about as useful as that original cell phone you could have bought back in the 1980’s. They referred to those 1980’s era phones as bricks. They were far from the marvelous devices we use today. Basically all they did was make and take voice calls.

The big difference today is the smartphone ecosystem…

It’s the smartphone ecosystem that is really the power and convenience of these devices and why there are over two billion smartphones in use today with a projected three billion by the end of the decade.
Without the ecosystem your smartphone would be nearly useless and nowhere near the essential tool it is today. A real brick might be more useful in some situations.

The same goes for Startup Accelerators…

To get more companies to real success, startups need to be developed in a solid entrepreneurial ecosystem with all the features, benefits, and support only a complete ecosystem can provide. Without it, startups wither and disappear. Their chances of success are about as likely as excitement over a new smartphone that only makes and takes voice calls. Give me the real brick instead. The monthly service plan for a brick cost less and there is no battery recharging required.

Many, if not most, startup accelerators act and smell like the real thing at first look but when you dig around they usually do not have a real functioning entrepreneurial ecosystem. Startups jump into the accelerator then in a few months nothing happens when the program is over and the next batch of founders are waiting at the door. True success is just out of reach unless they are lucky. And luck is not the basis of a good business plan.

EES1Before you google “entrepreneurial ecosystem” and get intimidated by huge graphics that look like something NASA would use to plan a mission to Mars slow down… All it really takes is four things to build a functioning Entrepreneurial Ecosystem.

And… flashy crowded office space in a city center or on a university campus is not on the list. If the accelerator you are considering does not have all four of these elements locked in place, then walk away. Run if you can.

If you are an investor looking for the next big thing. Look elsewhere because without these four elements the best business idea and team in the world will evaporate when the money dries up. And it will dry up because there is a very low probability that a company can get to positive cash flow without these four essential elements.

What are the four essential items for an Entrepreneurial Ecosystem?

1) Motivated Entrepreneurs – This seems pretty basic but if the people who have to make the startup company really work are not totally committed there is no chance of success. If the company founders do not have a burning desire to change the world with their product or service, then when dark nights come those entrepreneurs might just slip out into the shadows.

Sure this is about work ethic but a great way to determine startup founder motivation level is to ask questions like, “Why this company now?”. If the answer is sort of vague and weak then what will hold this company together when (not if) a crisis arises? Look for answers that involve logical idea origin stories that show the founders deep commitment to the what’s at the core of the company.

Most of the time the startup’s first idea will collapse under the pressure of market forces, technology realities, and target user demand level. Faced with this situation motivated entrepreneurs roll up their sleeves, double down their efforts and pivot their idea until it works. Failure is not an option for motivated entrepreneurs. They find a way.

2) A Solid Network – This entrepreneurial network is far reaching and includes fellow founders along with quick reliable access to all the people, equipment, services, and resources needed to reliably start and run companies. Access to other founders is at the core of this network. Talking with someone who has traveled the startup path and survived is essential.

Quick access to everything a founder needs today and in the future can quickly build a bridge over any business roadblock. These resources can be things like patent attorneys, tax accountants, contract manufacturers, public relations experts, computer equipment suppliers, real estate agents, business development specialists and more. Whatever might be needed has to be available and ready to use at the click of a button. There is little time to completely determine who might be right for the project. The resources in this network are sensitive to startups and know how to quickly get things done right at the lowest possible costs with the most impact.

3) Mentors – This is actually where the entrepreneurial ecosystem can be made or broken… The initial Mentors who help founders establish and build their companies are essential. No founding team knows everything. In fact, it’s what the founders don’t know that will derail their company. Or worse the founders will make age old mistakes and waste precious time and money going down paths that seasoned business professionals could help them avoid. Why spend months trying to get to an important potential customer when it turns out the person is your Mentor’s twenty-year golfing buddy? Why waste money on a marketing campaign that your Mentor tried a year ago and fell flat? Why go it alone when someone who has been down this path and solved these problems many times in the past can be there to advise and guide you?

There are three key components to effective mentoring and all three are required:

(1) Appropriate Mentors tailored for the startups – These are seasoned professionals perfectly matched to the exact needs of the startups. Don’t expect a Mentor with twenty-year’s of senior management experience in Corporate IT/Security Systems to be an appropriate Mentor for a founding team developing the next big meal replacement snack food for overscheduled teenagers. Not a match. Just a waste of time. Either find the right Mentor or the startup company should not be included in the accelerator program. No matter how great the team and product concept appear. Get the right Mentors.

(2) An organized rigorous Mentoring system – Mentoring is not just a few casual meeting over pizza, a Power Point assisted lecture, or a weekly phone call when convenient. And it is definitely not a frantic eleventh hour panicked phone call when things are going south fast. Mentors and Mentees must be kept to regular meetings with stated goals and objectives for each meeting followed by a clear list of tasks and responsibilities. Without the structure and accountability component it just will not work. There are many online cloud-based systems that can be used to manage Mentor/Mentee interactions. But a cheap spiral bound blank notebook can do the same job. Just so both Mentor and Mentee know what is expected, who is responsible, the deadlines, and the date/time for the next meeting.

(3) A receptive respecting Mentee – The Mentee/Mentor relationship is probably the most significant element determining the success or failure of the startup. Assuming the correct Mentor/Mentee match has been made the founder must manage the Mentee/Mentor relationship. No one knows the business better than the founder. Don’t think you have all the answers. In reality founders barely have any answers. In fact, it will be a struggle to just come up with the questions. You can always spot a company that has failed to use their Mentor. The startup company wastes time and resources dealing with the wrong business elements. Their startups appear flawed and ragged around the edges. Usually the right Mentor can help the startup cut through time-wasting unimportant items and polish the company so it is ready to get to the next level.

4) Investors/Money – The oxygen for any startup is investment capital. The money to fund the early days when risk is high, the cash to expand from the founding team once the concept is proven out, then the money needed to scale quickly… All essential. All provided by investors who know the risks and are excited about funding startup companies. No money. No ecosystem.

The best investors to fund startups are former startup company founders who have made some money either from company profits or a sale of their company. This is the sustaining part of the ecosystem. As long as profitable successful companies are being created there will be former founders waiting in line to fund the next round of bright shiny startups. Without this reflow of startup capital new companies will wither and dry up. If former founders will not invest in new companies then why should other outside investors, angels, venture capital Funds, or banks?

It just worksSomewhere in the entrepreneurial community former founders and other risk hungry individuals must be identified and cultivated. Bring them into the ecosystem early. Maybe even when the Accelerator teams are being evaluated for inclusion in the program. The earlier these investors are brought in the better. Once the startup companies have grown to a point where additional funding is needed an array of investors already acquainted with the company should be the first ones contacted. Without this essential reflow of capital from the entrepreneurial community the ecosystem will not be sustaining. Eventually it will collapse when the initial narrow sources of capital run out.

I have never seen a thriving Entrepreneurial Ecosystem or startup accelerator without these four components. The only way we will see the next Uber, DropBox or AirBnB is if more solid entrepreneurial ecosystems are established. More shared office space, and army of smart well-intentioned university professors, government programs, and large corporations hunting for the next things will not be enough with these four essential elements.

What Can Startups and Investors Learn about “Pain Points” From Jet.com, Amazon, and Uber?

amazon_headquartersTwo online retail sales forces are colliding this week…  Jet.com a potential Amazon rival went live and Amazon is announcing earnings.

Jet.com has a great story ( link here)…   The former online retail guru who sold his suite of companies including Diapers.com and Soap.com to Amazon for $545 Million is now back in the online retailing game and gunning for Amazon.com’s customers.

His non-compete agreement must have just expired but is this really the best use of his time and his investors’ money? Why try to go up against Amazon when this online retail leader  can’t even seem to make money in this online retail business?

That’s the other thing that hit this week. Amazons earnings report!

Amazingly Amazon reported a profit of $92 Million on revenue of $23.19 Billion for the quarter ended June 30. This is the first profit in a while and compares to a $126 Million loss on $19.34 Billion in revenue a year earlier.  When you do the math Amazon makes less than 0.4 cents on every dollar it takes in. That’s less than half a cent. Not so good. Lots of activity not a lot of profit.

jet3So if Amazon is having a difficult time creating profits out of our intense need for stuff delivered right to our door within two days, then why does Jet.com think they can make any money at this?

Their marketing pitch is full of stuff to hopefully make us believe they can serve up goods a prices lower than anybody else on the internet. “Club price savings on pretty much anything you buy.”  A quick search of the stuff I buy on Amazon shows Jet’s prices are exactly the same but I pay a shipping fee on Jet. Since I am a Prime Member I pay no shipping fee when I order from Amazon.

The same price for the goods but I pay extra for shipping…. What was Jet thinking?

I’m sure Jet offers some items at a lower price than Amazon but unfortunately nothing I buy. If you test Jet with your items and come up with a significant savings let me know.

Usually before smart people start a new business or invest in one they identify a series of consumer perceived “pain points”. So let’s list what we hate about Amazon to identify potential “pain points” that could give a competitor an edge:

  • Amazon reliably ships me what I order on time or earlier.
  • Amazon has a simple return system so with a few clicks I can return stuff when I need to.
  • Amazon has my order information so ordering is just a few simple clicks.
  • Amazon prices are usually the lowest you will find.
  • Amazon provides me all kinds of free stuff like movies and electronic books with my Prime membership.
  • Amazon pays me a $1 per order credit if I elect to get my stuff in less than two days.
  • If I ever need help I can always get someone from Amazon on the phone.
  • When I am in a bricks and mortar store and I see something I want I can use my phone to scan the barcode and find out what Amazon charges then order the product.
  • Amazon has been doing this for over 20 years.

Sorry… I couldn’t ideAmazon1ntify any “pain points”. So where is the opportunity for Jet.com?

I just don’t see any reason Jet.com to exist. And even if they are successful at poaching Amazon customers with their lower price pitch those buyers will be the more price sensitive customers that were actually costing Amazon money.  Ultimately Jet.com will be helping Amazon make more profits. They should expect a nice Thank You note from Jeff Bezos.

To sum things up… Jet.com has entered a low margin (probably a losing) business category with a single strong entrenched competitor who appears to be doing everything right to keep customers happy.  It’s not like Amazon is leaving us out in the rain to compete with a ninety-year-old lady for a lone yellow taxi.

So as a comparison let’s consider Uber…

UBER RUBIOThis leading ride sharing business who appeared to come out of nowhere and rocket to a reported $50 Billion valuation entered a fragmented market with no clear leader where it took many steps to hail an inconsistent ride. And before Uber when your ride showed up you probably paid more to get to your destination in a smelly vehicle with a gruff distracted driver. Then there is Uber’s App where you can see those little cars circling. With a few clicks you see your ride on its way.  At the end of the ride no money changes hands. It’s all automatic.  No scrambling for cash, waiting for a receipt, or agonizing over how much to tip.

When you are looking for a company concept for a startup or to invest in think about Jet.com and Uber. Identify the pain points and be sure people care enough about those pain points to use your product/service and pay enough for it so you can make a reasonable profit.

[DISCLOSURE: I do not directly own any shares of Amazon.com]

A Six-Point Company Idea Checklist To Help You Spot The Next NetFlix, Uber or Pinterest.

NetflixBuilding4There are basically three types of ideas when it comes to Startups. Small Ideas, Big Ideas, and DOA (Dead On Arrival) Ideas. Unfortunately most of the ideas I see fall into the first and last categories. Far too few even come close to The Next Big Idea.

A Small Idea is not really a bad thing. The problem is that there is a low probability that a Small Idea will develop into something that can support the large organization required for execution and an outside investment level to make the company grow at an acceptable pace. There is nothing wrong with a small idea. I have seen many small ideas that can support a tight staff of five to ten people where everyone goes home at the end of the month with a nice paycheck and benefits package. Nothing wrong with that. The problem occurs when a startup team mistakes a Small Idea for a Big Idea. They try to build the Small Idea company along with all its related expenses with the illusion that it is a Big Idea company. Pretty quickly expenses balloon with staff, advertising, programming, office space, travel, etc… while revenues can’t keep pace. Then the bills mount up and things collapse. If you are working on a Small Idea company don’t grow and run it like a Big Idea company until you are absolutely sure the company can support your intended expense ramp up.

UBER RUBIOAnd… I will say it one more time… There is nothing wrong with a Small Idea company just be sure to keep your expenses in line with actual revenues.

DOA (Dead On Arrival) Idea companies are a whole different animal. Sometimes these have the hype, excitement, logos, t-shirts, PowerPoint Presentations, Sharp Teams, plus the overall energy and “feel” of the Next big Idea… But… Once you get past the fog and manufactured excitement of all the company accouterments, the product/service just does not work for a significant number of users, has already been done, or does not have the possibility of attracting more than a few curious early adopter types who probably would not pay anything for the product/service.

A Big Idea company needs to be something that could reasonably create a profitable company with at least $100 million in annual sales. More is good but the $100 million mark is the ideal.

There are many great Big Idea company examples from the past so lets think in general about a few of the past “Big Ideas” and try to categorize them. Things like online Travel booking (Travelocity, Orbitz), online auctions (eBay), service sharing (Uber, AirBnB) and online Classified ads (CraigsList). When you consider these four categories you will have to agree that each probably fit the checklist shown below when they were created. But the key will be to identify new categories going Pinterest-HQforward. More on those potential new categories in a future article.

When I review startup companies I use a six-point Next Big Idea checklist like the one below before I even begin digging in for a deeper look at the team, marketing plan, P/L projections, etc…

The Six-Point Next Big Idea Checklist 

1) The Product/Service is Unique, Special, and Relevant – Are there any products/services that do this now? If so, why your product/service now? What is the target user “pain point” that the product/service will address? Who are the current competitors? How do the target users perform the task now? Does the product/service look like it would have been a great product/service to introduce last year or next year?

The Product or Service may already exist but for some reason your implementation will solve a big problem or in some significant way make things easier, faster, or more efficient. Or just more fun!

2) The Future Looks Good For The Product/Service – Is there is some known significant “game changing” event or trend on the horizon that will make your product/service especially relevant almost overnight?

An example of this would be that your product/service takes advantage of (exploits) some new feature in the next iPad, iPhone, Mac, or version of Windows. Or maybe some new law will require people do something and your product/service makes that much easier for people.

IBM PC In 1984

IBM PC In 1984

3) The Market Size Is Significant And Provable – The potential market is substantial and the target users will pay for the product/service.

The bottom line is that you will need to make money. It’s a fact of business and it will be better for you if your market is significant. Estimate the number of potential users and how much they each would pay. And show your proof on why you think those numbers are correct. The best ideas in the world (even from huge companies with big marketing budgets) will not endure if the market is too small. Examples are Microsoft webtv PLUS, Apple Newton, Sony BetaMAx, and smokeless cigarettes. If you are interested CLICK HERE for a list of the entire top 25 Biggest Product Flops of All Time.

4) The User Experience Delights People – Can the benefits/features be clearly defined and experienced by the target user? Is it confusing or clear? Is there an “aha, I need this!” moment for the target user? Is there a moment of delight and surprise for the target user? How forgettable is the product/service? Is it something people will want to talk about and share?

The Next Big Idea will be something that can be quickly communicated either in words or by demonstration. And when people see it they will immediately

The First Macintosh Computer 1984

The First Macintosh Computer 1984

understand it. They will line up to buy the product/service.

I remember the first time I saw the Apple Macintosh. (Yes, to entice my company to make software for the Mac, Apple sent me a Mac Computer many months before they were released in stores.) As soon as that first screen popped up I knew the new apple computer would be a success. Especially because it was sitting on my desk next to an IBM PC with a DOS operating system that had green glowing characters on a black screen. The Macintosh looked easier and was a delight to use. It still is.

5) A Prototype Can Be Tested Right Now – How fast can a prototype be created for testing and how much will a prototype cost?

0524_chipotle_new_630x420The faster you can get a minimally functioning prototype in front of users the better. You need to see how people really respond to the product/service in a real life setting.

6) There Is A Significant Moat – What is the moat? What will keep others out of your product/service space long enough to build a user base? Can you patent some technology? Is there some type of exclusive arrangement? Is the market too expensive for others to enter? Is there some unique distribution channel? Is there some unique aspect of the product/service that cannot be easily duplicated? Is there some unique customer relationship required to make a sale?… The bigger the moat the better.
There will always be great ideas that will not make it through my Big Idea checklist but still go on to succeed. ushg_shackshake_940_09Companies like Chipotle and Shakshack come to mind. Why would we ever need another place that makes burritos when we have Taco Bell? Why another burger place to compete with 5 Guys and all the rest? But these two companies are on a roll.

If your dream is to start a Big Idea Company the key is to run your potential company ideas through the six-points above or…. just work harder on your burrito and burger recipes.