Reckless Cloners or Innovation Adopters?

By Andrej Rusakov

The criticism of technology start-up “cloners”, who take innovative but proven business ideas from the U.S. and copy them in Europe, Latin America, and China is raging. Silicon Valley entrepreneurs claim that “me too” companies discourage innovation as they limit initial innovator’s upside and thus prevent true entrepreneurs from launching new ventures. Venture Capitalists, however, do not seem to mind, and continue to pour increasingly large funds into copy-cats (e.g. Samwer brothers recently raising $700 million), viewing them as lower risk compared to “new-idea” start-ups as the product/market fit has already been validated in “me too” companies. Who is right here? Do “me too” businesses add value to the society? Can their founders be called entrepreneurs or are they simply executors?

Innovation Adopters?

From a societal point of view, copy-cats do add value. They foster competition and bring innovative products to new markets fast. Why should a billion people in India wait years for paypal.com to eventually enter the market if they can get the same service from someone else today? Moreover, many (but not all) “me too” companies improve the original business concept and adopt it to the localities of the market – something many incumbents lack the abilities, knowledge or resources to do.

Some choose to clone products and concepts in their entireties, however, and not bother with any localization or concept improvement. Such companies may hardly be called innovation adopters. However, they do promote competition. Examples are ample:

Pinterest.com (original)	Pinspire.com (copy)
Fab.com (original)	Bamarang.co.uk (copy)

Entrepreneurs or Executors?

Because copy-cats often do not need to spend much time or money discovering the product/market fit, and the go-to-market approach is already tested by the incumbent, “me too” businesses tend to be “start-ups on steroids” growing fast and offering very lucrative risk adjusted returns to their founders. Indeed, the rumor has it that 90% of the Samwer brothers cloning machine’s start-ups become profitable after 1 year from launch!

But can we call these guys entrepreneurs? Is an MBA launching a “me too” venture anything more than an executor of somebody else’s ideas? I would argue that despite him using other people’s idea, he is still building something from scratch, and thus he is an entrepreneur. Getting the right people together, incentivizing them, securing funding, adopting the product to the local market – what is it if not entrepreneurship? We still call a restaurant owner in London who “borrowed” an interesting concept from New York an entrepreneur. Why tech industry should be any different? Ideas are worth a nickel a bucket; execution is what makes all the difference. In this sense, even Samwer brothers are entrepreneurs – many of the companies they have replicated are more successful than the original once.

Conclusion.

It is a very personal choice between taking on more risk, but having a moral satisfaction of having invented something entirely new, and taking a potentially less risky path of replicating an existing business in a new geography. If you lean towards “true innovation”, strong network effects and high barriers to entry may deter bold replicators to copy your “brain child”. However, there is no guaranty – facebook has been successfully copied in (and adopted to) local markets such as Russia, where it is still having hard time fighting with copy-cats. Something worth keeping in mind when choosing a business to start.

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Can large corporations be “Lean”?

by Anonymous

I have constantly found myself thinking through the new lean startup concepts throughout this class and wondering how they could be successfully applied to large organizations.

The definition of a startup and a large corporation are completely different in every critical way: access to capital, human resources, brand awareness etc. And yet, large corporations are constantly trying to find ways to “incubate”, develop, promote and support lean startup methodologies. Over the past few years, I have seen how two large companies have tried to create a “lean” environment within their companies. The common trade-offs are:

Uncertainty vs. Scaling: Startups ideally try to reduce the amount of uncertainty through minimum viable products (MVPs), while corporations require accountable business plans and projections that force premature scaling and disincentives pivoting. Effectively there are rarely corporate structures or environments that even permit anything beyond setting a vision in the Hypothesis Driven Entrepreneurship Process. 

Testing vs. Brand: Does testing hurt a brand? As companies grow, so does their customer base, as does the size of their funnel, and ultimately their brand presence. This tension can be seen in multiple ways:

• Smoke tests are a wonderful inexpensive way to gauge customer demand for a new product, although large companies are hesitant to endorse false advertisement. 
• Constrained functionality can tarnish a brand and corporations are often unwilling to engage customers with a half baked product. 
• Frequent pivoting after a product idea has been launched at a large corporation often indicates weakness to the public and investors. In short, corporations feel they can’t afford to “fail”. 

Large companies have constantly failed at creating lean environments. As a result, they have resorted to purchasing companies for a huge premium after ideas or concepts have already proven a “product-market fit” and fail to continue encouraging lean methodology. That’s when you start seeing write-offs for early stage acquisitions that failed to grow, pivot or adapt after acquisition. Does that mean corporations can’t be lean? I would still like to believe there is hope. Corporations would need to constantly test unbranded products and cut off their reliance on branding to drive hype and validation. Most importantly, corporations must create an environment that allows and encourages failure.

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Using Lean Startup Practices for New Business Development in Big Corporations*

by Qingxi Wang

The core of lean startup practices is hypothesis testing process, a systematic approach for validating a new business’ proposed business model. With appropriate adaption, this systematic approach could and should be used for new business development in big corporations. Meanwhile, there is likely to be significant extra challenges during the process.

There are generally three main stages in developing a new business in a big corporation – concept stage, design stage and launching stage. During the concept stage, a new idea is proposed and basic technical and economic analysis is done. In the design stage, a business plan is drawn, which includes the team structure, operational process and solutions, sales model and detailed economic analysis. After winning some buy-in of the business plan, the new business might be launched. During the launching stage, hypothesis for the new business model need to be tested. A systematic approach for validating and revising assumptions in order to find a viable business model, the lean startup practices, would shorten the time to reach break-even and increase the probability of the new business’ success.

So what are the major differences between lean startup and developing new business in big corporations? I will focus on the resource constraints and organizational heritage here.

On the one hand, the key feature of startups is constraint of resources such as capital, talents, production capacity, distribution channels, etc. A big corporation may be well equipped with many of these, if not all, and may be able to ramp up any shortcomings of these in a comparatively short period of time. Unfortunately, these endowments oftentimes disguise a big corporation to waste a lot of investments unnecessarily before finding a viable business model. However, in certain circumstances, big corporations should leverage their rich resources. If there is strong first mover advantage, large benefit of economy of scale, large potential for network effect, or potential incoming competitor, a big corporation may want to invest fast and heavily in a new business, on the condition that there is decent chance of finding a viable business model or the potential long term profit increase for the corporation is large. Admittedly, there is risk for the big corporation to incur losses. However, a big corporation is able to take such risk. Even if the big corporation loses, it would still have another chance to continue to play; if it wins, the gain is big. At a casino, a rich player with more chips can make a bigger bet than a poor player with same cards. Besides, a big corporation can also manage this risk by investing in a portfolio of new businesses and diversify the risk.

On the other hand, because of the existing culture, organizational structures, process, and talent pool, big corporations may encounter many challenges to have new businesses emerge and develop. The established priorities, budgeting process, performance metrics, incentive structures, short term focus, and lack of experiences and skills oftentimes kill new businesses in big corporations. One solution is to have a separate unit, which is free from the existing system, to incubate new businesses. During the incubating process, systematic hypothesis testing approach of lean startup can be used. After a competitive business model is found by this separate unit, the new business may be returned to the corporation system.

*Reference: materials from classes of Launching Technology Ventures, General Management: Processes and Action, and Building and Sustaining Successful Businesses.

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Creating the “Next Big Thing": How to Inspire Innovation

By Brad Bonnett 

How do I apply all my learning’s about lean startups such as finding product market fit with a minimum viable product if I don’t have an initial problem that I am trying to solve?  I know that I want to build something that changes the world but I continue to struggle to find what product or service I want to build.  During our class with Fred Wilson he said that “If you have an idea that you can't get out of your head, do a startup. Otherwise join a startup.”  Although I appreciate the simplicity of this view and the experience that Fred brings to the table I am dismayed to think that unless I stumble upon an idea that really sticks with me I am going to be excluded from starting my own company.  Therefore I tried to put together a process that can help inspire innovation for those of us who are lacking an idea to create that “next big thing!”

I tried to take the best practices that I have learned from my Managing Innovation class at HBS and conversations that I have had with other LTV students and formalized a three pronged approach to innovating:

1. Product – What is the problem a certain product solves? Maybe discover a problem the customer doesn’t even know exists
2. Business Model - Take an existing problem and solve it with a new or different business model
3. Efficiency - Solve an existing problem using the same business model with a more efficient solution

Product Innovation:  Product innovation is all about asking the right question i.e. “Can you have light without fire?” Once you have the right question inventing the light bulb is just an exercise in problem solving.  Continuum, an innovation consulting firm, uses a process focused on the customer and works to understand everything about a certain customer activity.  For example, when working on a project for P&G’s cleaning products division Continuum realized that of the 12 steps that a customer went through to clean their floor, 5 of those steps were cleaning the thing you were cleaning with.  With that knowledge it was much easier for them to design a disposable cleaning product later named “Swiffer.”

Business Model Innovation:  Evan Shore a fellow LTV student used the example of Groupon to explain this to me.  Groupon gives large groups of customer’s access to retailer discounts.  Alternatively Gilt Group innovated on that model and instead gives small groups of customer’s exclusive access to retailers.  Where these two models are both driven by sales teams finding deals a third spin on the same problem would be a customer driven model where customers vote for companies they want to receive coupons from.  Each of these models solves a similar problem but they all approach it from different angles.

Efficiency:  Although this method was the driving force behind many of the dotcom bust I still think it is a viable option.  The basic idea is to utilize technology to eliminate cost from the value stream.  Can you use AWS instead of buying servers, can you use Hadoop instead of paying for SQL, can you outsource you accounting department entirely?  With the myriad of new technologies and companies popping up in the B2B market it has never been easier to start a company and keep your cost low.  In old industries many companies are slow to adopt these new technologies or flat refuse to change with the times.  I would argue industries like that are ripe for technological innovation.  

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