Technology Isn't Enough

Technology is table stakes. Founders need to innovate in other realms in order to build big companies

Technological innovation is the lifeblood of modern society. From Gutenberg’s printing press, to Whitney’s cotton gin, Ford’s automobile and Bell Lab’s transistor, mechanical and technical innovations have ushered in industrial revolutions and improved the standard of living for billions of people around the world (albeit not in an equitable fashion).

It’s no surprise then, that startups are most often associated with technological advancements. A novel algorithm. A proprietary machine learning model. A unique chip design. These are common punch lines to pitches I hear on a weekly basis.

Israel in particular is recognized globally as a technological exemplar. Indeed the combination of sophisticated technical military units, the active and willing investments of capital by the government in R&D and several decades of successes in the semiconductor and cyber security sectors have fostered a thriving culture of technical enthusiasm locally.

But I often find myself frustrated when I speak to founders whose entire presentation relies on the development of superior technology. Technology isn’t enough. The fact of the matter is that nowadays, superior technology is table stakes. My starting assumption when meeting companies is that the team has the technical chops to accomplish what they set their minds too. The issue, is that I have the same basic assumption regarding their competitors.

Technology as a Means

This isn’t to say that technology isn’t important. It’s of utmost importance. It can’t however, be the only thing a company has going for it. Technology is the means through which you can accomplish a given end, not the end itself. As such, it shouldn’t be the sole catalyst for starting a company.

As you’re reading this, you may be coming up with a list of companies in your head that did indeed start as with purely a technological innovation. And of course, there are many. But in response to your mental list, I have two responses:

1) The biggest startups of the last decade were not founded based on technological innovation alone

Companies like Stripe, Shopify, Airbnb, Zoom, Doordash and Slack, weren’t founded on the premise of an incremental improvement in technology. Of course, they are thought of as “technology companies” because they are software driven and employ hundreds of talented engineers, but technology alone isn’t what led to their success or scale. Rather, they relied on innovation in other areas that, when combined with superior technology, lead to success.

2) While technological innovation companies can be successful, their upsides are capped

There have always been, and will always be, companies that get acquired for their technology. Israel has historically mastered this type of exit. A $100m-$500m deal in some combination of cash and stock. There are shockingly few examples though, of technology driven acquisitions that surpass the oh so desired $1bn benchmark.

The Innovation Framework

When I meet startups, there are three innovation prisms through which I evaluate them.

1) Technological Innovation - the topic of this post thus far. Innovation based on the promise of a technological improvement or breakthrough.

Examples include:

• Deepmind - novel machine learning methodologies and models

• Innoviz - superior lidar tech

2) Business Model Innovation - Innovation based on the application of a novel business model to a traditional industry, or a completely new model for generating revenue

Examples include:

• Fiverr - monetization platform for micro tasks (supply side), pay for specific tasks on demand (demand side)

• Robinhood - free trading (enabled by payment for order flow…oops)

3) Product Innovation - Innovation based on the creation of a superior user experience for consumers, or the modernization/digitization of traditional workflows

Examples include:

• Chime - modern banking experience

• TripActions - consumer-feel business travel booking platform

(It’s important to note that all successful companies end up innovation on multiple fronts [hence technology not being enough]. As such, any example I used is merely to demonstrate what I believe to be that company’s key area of innovation.)

While each innovation category is a world unto itself, it’s interesting to note that there are common and less common pairings. My favorite example of this is the business model + product innovation combination, as from my experience technology is the easiest layer to add on after the fact. Uber and Airbnb are prime examples of this, as both companies began with the premise of innovating on both the product and business model side, but have since come to be known as engineering powerhouses. They certainly would not have achieved the level of success that they have so far were it not for the sophisticated technology embedded in their core. I would argue though, that founding the company based on product and business model insights and executing upon them, is what put them in the position to hire such strong engineering talent in the first place.

What About Distribution?

Distribution is a key driver of success for any company. It could be argued that a fourth innovation category should be dedicated for distribution oriented innovation. An example of this could be Elastic, which leverages open source to sell bottom-up through developers as opposed to top-down.

I myself struggle with how to classify distribution within this framework. My reasoning for excluding it is that distribution can only occur once there is a product/technology to distribute. One of the most popular distribution strategies at the moment, product led growth, necessitates exactly that. Thus, I don’t believe companies are founded based on a specific distribution insight/innovation, rather it’s an added layer further down the road. Of course, distribution serves as perhaps the most sustainable long term moat, but that’s a topic for another post. All that said, I’m still unsure about my classification of distribution and can be easily convinced otherwise.

True Unicorns

The term “unicorn” has become too common, thus contradicting what it was meant to represent - something truly rare. It seems that another company gets minted a unicorn on a daily basis. I believe that true unicorns are companies that manage to incorporate all three innovation categories into their missions. I mentioned earlier that I meet too many companies that only check the technological innovation box, but far more often I meet companies who fail to tick any of the innovation boxes. Of course, as an early stage investor, 99.9% of the companies I meet have not yet proven that they can truly innovate in any of the aforementioned categories. But what I desire most is for entrepreneurs to paint a picture of a future in which their company has successfully innovated across the board. Israeli founders are getting better at this than they were seven years ago when I started my venture capital career, but there are still far too many who settle on the assumption that technological improvements are enough of an advantage. To them I say: Think bigger, think greater. Technology isn’t enough.