In my opening post to this blog, I observed that there are two commonly-held, alternate views of seed-stage businesses. One is that all startups are part of a single, indivisible class of enterprise, and seed-stage ones aren’t meaningfully different from their later-stage, revenue-generating counterparts. The other is they’re not real businesses at all and should be ignored until they’ve done “something”. I disagree with both of these perspectives, and in this post I lay out why I think seed-stage businesses as a group are both very distinct and very relevant.
It is widely appreciated that the core value added by most startups is their ability to innovate, and especially to innovate disruptively. The thinking on how and why new entrants overcome their established rivals—ranging from Joseph Schumpeter’s mid-20th century writings on gales of creative destruction to Clay Christensen’s modern-day theories on disruptive innovation—is well-trodden ground. The basic idea is that while large, established firms often handle incremental innovation, such as constructing progressively smaller microprocessors or adding wheels to suitcases, very well, they are poorly-suited to developing paradigm-shifting products and models. There are two reasons for this. First, the hierarchical, conservative and bureaucratic nature of many of these organisations makes it very difficult for “outside the box” ideas to gain sufficiently wide internal acceptance that they actually get implemented. And second, these businesses need to devote their resources to satisfying current customer needs: diverting personnel and money to projects that will, at best, produce speculative, non-specified benefits that accrue at some point in the future is not only difficult but often downright irrational. Startups, by contrast, are constrained by neither of these factors, and their small organisations and relative lack of present obligations makes them ideally suited to think about how to change the world.
That’s the part that most informed people acknowledge. The corollary to it, which is far less often expressed, is that many of the same considerations apply within the startup world, and that seed-stage businesses are much more capable of disruptive innovation than even their somewhat later-stage counterparts. Once a startup has taken a few steps forward—built its minimum viable product, begun interacting with customers etc.—it may still be a lean and agile operation as compared to a FTSE 100 company, but it’s already beginning to get tied down by legacy. The business is now focused on implementing whatever innovation it came up with when it was at seed-stage, and while there may be plenty of room to tweak, it’s difficult to do a full-on pivot even when changes to the ecosystem mean that that would be the best move. Persuading shareholders to support a change in model, telling prospective customers that you’re actually going to provide a very different product and abandoning months of work on the technology are all very difficult things to do. Some startups manage it, but the strong pressure is to keep on course with the original idea. As a result, startups at this stage are no longer really about innovating so much as implementing innovations from an earlier stage in their life cycle.
Seed-stage businesses face no such legacies. At their core they are a few people sitting around in a room (or pub) thinking about ways to address a need or create a market, and while they may have constructed a few spreadsheets or the beginnings of a codebase, taking a radically different approach requires little more than getting agreement among the team and heading back to the drawing board. So when a new competitor appears, or a new technology looks like it’s gaining acceptance, the seed-stage startup can acknowledge that its original approach is no longer innovative or viable, scrap it and innovate all over again. If the business was a bit further down the track, it wouldn’t be so easy.
What we have, then, is a situation where the ability to innovate correlates inversely with the stage of a business’s life cycle almost from day 1. Startups are better able to innovate than well-established businesses, but in turn seed-stage startups are better innovators than those that have already made progress.
That is why seed-stage businesses are both so interesting and so different from other startups. They are the type of business that is most capable of imagining a whole new way of doing things—of “dreaming of things that never were and asking, why not?”—and of setting out a course to turn that imagination into a reality. They are beset by plenty of limitations as compared to established businesses and even later-stage startups—lack of capital and resources, no track record, uncertainty that the technology or model is even viable and much else—and I will talk about a lot of these limitations (and how to address them) in future posts. But fundamentally, the innovations that will create value for investors, customers and society tomorrow are being developed by the seed-stage businesses of today. And it’s only by fostering and encouraging these businesses that we can ensure that at least some of these innovations actually happen and some of this value is actually realised.
