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Innovation Lately… Not Likely

Innovation? Not Likely. Not Lately. Not Where It Use to Be

We use to count on Software Startups to drive the innovation engine. Yet real Light bulb ideas,  that kind of big thinking that created Light Bulbs. Steam Engines, Internal Combustion Engines, Telephone, Radio, Television, Micro-wave Popcorn, are currently overshadowed by evolutionators dressed in innovators clothing. There use to be a steady pace of real innovation coming from startups and inventors. Now we have things like….

Peanut Butters, a startup that helps companies hire and retain millennials by helping them pay off their college loans.  According to a Peanut Butter white paper:

85°/o of Respondents would accept a job offer when student loan repayment is included.

No Shit Sherlock… you know what else data says? Data shows that Millennials and real people tend to stay in jobs longer when employers do all kinds of nice crap for employees versus when employers crap on them. That’s why my new highly innovative startup Crap Fan Deflector is going to be the next big thing. We deflect crap from hitting employees when the shit hits the fan. And I didn’t have to commission some bogus study to figure that millennials and real people don’t like to be crapped on.

(Authors Note: (Which is a thing I do when I want to think of myself as an author instead of a Cranky Old Man) I know I used the S word…. but guess what? According to this study… that just means I’m smart)

Now I’m not just picking on Peanut Butter… I’m trying to evenly spread the blame across the startup slice of bread like a nice Peanut Butter and Jelly sandwich.

If you’re looking for innovation in the app or SaaS world, you’re looking at the masters of Me-too and not the inventors of What’s-New. How can  a Trustify, the Uber of Private Detectives be innovative when it’s not only derivative but it only satisfies a pain few people rarely experience? In other words, no one needs a Trustify. As soon as a company describes itself as the google of poodles they reveals their derivativeness.

The Innovation Lower Bar

The bar for being a startup founder in the software world use to be so high that only real innovative genius ideas got the funding required to get out of the gate.  In good old days the cost of startup admission was high. It required purchasing expensive computer equipment for your team because you couldn’t just fire up the old AWS.  There was no AWS.

Startups were forced to build software from the ground up because there wasn’t any open source. Every component had to be built from scratch and any pre-built components required an expensive license purchase. You couldn’t just use a open-source MySql, you had to buy a database software license from Oracle. You couldn’t just incur a monthly cost until you went bankrupt. There was no  Cloud Computing and therefore there was no SaaS.

If you wanted to run on computers sold by IBM, Unisys, Digital Equipment, Data General, and Wang, you had to own a lot of equipment because hardware from one vendor was incompatible with software running on hardware from another vendor. Software companies needed access to multiple computers  to port (develop a new version) to each computer brand supported. If you were using a data base like Oracle they had to purchase a license for every computer they planned on supporting.

In 1990 it took 2 years and $6 million 1990 dollars ($11.4 million in today’s dollars) to build a software company. Today because of Cloud Computing, Open Source, Portable Programming Languages that allow one software version to run on multiple platforms.  Today it takes $200K in 2017 dollars ($200K in today’s dollars) and 8 months to produce a product. So everybody with a bad idea and a rich daddy can try and build a crappy company… and unfortunately they are trying.

The Lack Of Risk Capital for Innovation

VC’s have practically abandoned putting money to work in the big idea, the innovative ideas that takes huge piles of capital to get past significant technology risk. If there’s technology risk, let Friends and Family or Fools, otherwise known as Angel Investors take that risk. Today VC’s wait for the technology risk and most of the market risk to be baked out of the cake before they take their huge slice…eat that cake… and through participating preferred have their cake too.

NEA’s late Venture Partner Harry Weller once called angel-funded seed companies as petri  dish lab experiments. Saying that VCs wait and watch to see if anything grows before investing. I was part of the 2 NEA portfolio companies pre 2001 dot com bubble, Progress Software in 1986 and Call Technologies in 1997. NEA made seed investment of over $2 Million in both, alongside other investors. These were early investments in companies that would not have existed or achieved huge exits without the money from VCs. These are companies that wouldn’t get funded today.

Few if any VCs today have an appetite for a true seed investment. Even when they do, they’re more likely to be betting on a team that had a previous exit or success like ZoomData or Revmetrics. So young innovators with risky big ideas go unfunded and their companies unfounded.

There are a few exceptions to the rule. A great company like Hurdlr can be self-funded and gain tens of thousands of users.

Big Corporate Innovation Factories

Amazon, Google and Facebook…. how do you compete with that. In the old Days when the world’s best companies were industrial giants… true innovation was expensive. It was a big job. Chrysler moving from rear-wheel drive to front-wheel drive was considered “innovation.” In 1999 Honda released the first commercially available mass produced hybrid.. the incite. It took another 10 or more years for the Hybrid to find itself as an option offered by most automobile manufacturers. Without a federal fleet gas mileage requirement mandate would this innovation have happened at all? Would there be a Tesla?

But today, because it is inexpensive to bring software products to market the big corporate software giants can invest a small portion of their mass profits, put there best people to work developing new products and then leverage their market dominant positions to release these products offered at seemingly no cost to the consumer while the consumer pays in other unknowing ways.

Netscape the first commercially viable web browser, the very product that popularized the world wide web was crushed when Microsoft quickly released an inferior yet seemingly free browser as part of their operating system.

If you’re not paying for it you’re the product and not the customer.

The innovators dilemma does not apply in to software giants like Google, Amazon and Facebook. Look how Facebook easily turned the company that was Foursquare into features of a more ubiquitous Facebook.

The innovators Dilemma is the theory that entrenched companies can’t afford to dedicate top resources to small markets that someday become huge markets until it’s too late. Hence (which is a word I use when I want to appear smart… is it working?) Xerox, Polaroid, Blockbuster, Borders, and Circuit City were disrupted by new innovative technologies.

In Software the big three, Amazon, Google and Facebook can afford to put the limited resources and give away little products like gmail, that one day become very big. In industry this isn’t true. That’s why Tesla can disrupt Ford and GM. That’s why SpaceX can disrupt Boeing and Lockheed.

The Innovators Dilemma is alive and well in heavy industry.

Big Corporate Innovation Blocking

There’s a bias of large entrenched competitors  who hinder, delay and block the innovation that leads to disruption.  The oil companies through lobbying, military policy and by fighting air quality and mileage mandates artificially keep the price of gasoline low. In the UK and in Germany gasoline costs twice as much as it does in the US. Germany… an economy widely recognized to be stronger than the US economy gets over 34% of it’s energy from green renewable sources.  In the US in comparison it’s less than 13%. That leads to green renewable energy innovation in Germany while the US lags at a cost to our economy, jobs and investment in innovation (see a case for Renewable Green energy).

In 1980, companies like Convergent Technologies and Fortune Systems were offering 16 bit processor-based, muti-tasking, multi-user systems of equivalent functionality and performance as significantly lower prices than IBM mini-computers. What did IBM do to compete? Did they invent a better mousetrap? No they “invented” a worse mousetrap and then used their market dominance to crush their innovative competitors.. While Convergent was based on the more innovative 16 bit, multi-tasking 80186, IBM released a single-tasking, less capable, Intel 8088. IBM hired a crappy little software company in Seattle Washington, Microsoft to create a\n defeatured, barely functional, single-threaded, single-user operating system.

The move worked. Consumers and Business execs went IBM because:

Nobody ever got fired for buying IBM

Today, Convergent Technologies and Fortune, the real innovators are barely a footnote in computing history. Hell, Fortune doesn’t even have a Wikipedia page. Ironically,  in the late 1990s Microsoft turned the tables on IBM replacing them as the most valuable company in the world by using their Windows software release to kill the IBM PC.

Large companies continue to put up barriers for small companies to innovate through lobbying, exercising their market positions. and access to cheap capital to squash disruptive innovation.

Where Innovation Will Happen

Through all of this Innovation continues. Although we are witness to more derivations and less innovation from software startups. Real innovation from a startup requires more funding than available in the seed market. Instead of innovation we are presented with hohum web sites claiming to be the less than visionary products like the Uber of Journalistic Photographers, cont3nt.com.

Where will innovation happen? Innovation will take place where the technical specialized knowledge and capital bars are set high and where risk capital is available. Things like:

  • Unmanned Aerial Vehicles (UAVs or Drones) – On the highest end this is happening in military grade UAVs on the low end we see the multi-rotor hobbyist drones. While we won’t be seeing Drones delivering our Pizza’s, Tacos or Amazon.com orders in the near future, we will see more innovation in mid-range UAVs used for surveying infrastructure, agriculture, disaster areas. Drones for serving some fire and rescue functions and as this market develops there will be new uses for UAVs that we can’t imagine today… just as we could never have imagined a Nest Thermostat when the web first gained popularity in the early 1990s.
  • Green & Renewable Energy – Innovation in form factor allowing solar and other forms to be integrated into normal building materials, clothing and integrated into everyday products. Prices will come down and performance will increase as they did with computing power (see Moore’s Law).
  • Internet of Things (IoT) – Everything from automobiles to shoes to medication will be internet enabled. Product packaging will be IoT-based. Look at the Amazon Brita Filter.