It is a common mistake to attempt entrepreneurial market development using classic business school practices of surveying customers, sizing the market, planning development costs, and figuring out the ROI. It is the primary reason why intrapreneurial programs in big companies fail to come close to the returns achieved by Silicon Valley’s innovation model that links entrepreneurs to venture-capital in start-ups (EVC).
The first mistake is to believe that customers are visionaries. Customers are either too busy trying to solve a problem or get the cheapest price to look to the long term. Their unsolved problems and unmet needs are only the seeds of new markets. It typically starts with a customer wanting something custom. It can also be the case that you observe an unmet need they don’t even know they have.
In both cases, big company business units will typically kill it with a thumbs- down because the opportunity can’t be sized or it’s just too small based upon what you know or can survey. They are looking for grown trees not the seeds of innovation — in other words, fast-follower strategies. There’s nothing wrong with well executed fast-follower tactics. It’s just that they don’t apply to developing markets.
Entrepreneurs succeed where intrapreneurs fail because they are willing and able to address customer needs.
Classic examples of these are telephones, ATMs, Microprocessors and Search Engines. When AT&T was the Google of its day, the communications giant was Western Union. AT&T stands for American Telephone and Telegraph. Market research studies showed people didn’t like to talk on telephones and that because of this the market would be restricted to business. Consumers preferred telegraphs, where Western Union was dominant.
ATMs have a similar history of slow adoption. First patented in 1939 and later successfully implemented in 1967 it took 50 years before ATMs became mainstream. While banks could buy into the idea of the lower cost of an Automated Teller, consumers preferred human tellers.
The microprocessor is a more recent example. Intel developed its 4004 as a result of a request from Nippon Calculating Machine Corporation for what would become the Busicom calculator, which would buy around 100K 4004’s. While a significant success, Intel ignored MPUs in favor of memories, which were a far larger market. Marketing’s analysis showed that with Moore’s Law, MPUs would surpass minicomputers in capability and the market for these was only a few hundred a year, not even a cassette of wafers. Memories filled fabs with demand in the millions. Out of the team of three engineers, Frederico Faggin left Intel to form Zilog in 1974 and develop the Z80. While the Z80 would become the foundation of early PCs, being viable in MPUs in the 70s was a real struggle — even if you owned the entire market.
It wasn’t until the combination of IBM selecting them for the PC and Japan pushing them out of memories that Intel really got serious about microprocessors. The brilliance of Intel was that it never killed it like most companies would have. Any decent turn-around specialist would have killed it. This is the difference between a technologist’s approach to markets and an MBA’s. Intel was willing to let it develop.
Consider that on similar paths, Texas Instruments never really applied itself at all. Its TMS 1000 was actually awarded the patent for the single-chip MPU, and is arguably the first MPU. But their decision to get out of memories was slow and when they did it was too late to recover MPUs. They were also developing chips for a calculator, for which the market would crater in the latter seventies. So in both Intel’s and TI’s cases, the customer’s vision was limited to improving what they made, not inventing a new market.
In the case of Google, they were running on the freeconomics URL business model: Ubiquity first, Revenues Later. They would have no idea how to generate revenues for several years after their start-up, they just knew they had a far better and far more cost-effective search engine than Yahoo, who was #1 at the time.
Imagine trying to get funding from someone with a classic business school approach with this plan: it’s a great solution to a problem for which customers won’t pay anything. What’s the path to profitability? We’ll figure that out. What’s the market size? Zero. What’s the market potential? Zero. What’s it going to cost? 100’s of millions. When can I expect a payback? Never, but the customer is really going to love us.
But 10 years after their founding, they were $24B in size, with COGS of $9B and Gross Margin of 63%. The investors who bet on URL know what you can now learn from the best entrepreneurial business schools, like Stanford: that almost all early business plans fail and that it is adaptability and persistence that win the day. The reason for a business plan is not to stick to it, but to know when the world is changing and that you have to adapt.
Now it is true that Google was founded in the midst of the dot-com boom where click-based dog food and grocery stores could get money on the come. But there is a fundamental difference between the Silicon Valley EVC model and the intrapreneurial model: that’s the level of risk you’re willing to take. The EVC model makes huge returns on the premise that a 70% failure and 30% success rate is a winning combination. No corporate division manager that has to demonstrate growth and profits over the next few quarters will ever take that bet.
The classic approach of identifying and sizing a market, assessing the competition, finding an entry point , developing a plan, and executing to it only works in a situation where the average success rate is 90% and failure is less than 10%. These are markets that already exist, not ones that have to be developed.
If you are really committed to being an intrapreneur, your success will be determined by your ability to get management to commit to EVC risk levels, planning, and persistence out to the 5-10 year range, not 3-4 quarters.
If you question this about semiconductor equipment, look at two executives who won SEMI’s coveted Bob Graham Award. Ed Braun re-engineered Veeco to turnaround in the nineties by addressing adjacent markets. First data storage and then LED, for which he was way ahead of his time. Another executive who did this was Art Zafiropoulo at Ultratech. Today, Ultratech is reaping the rewards of his vision, not the customer’s, that laser anneal would ultimately develop into a viable market with persistent, but metered investments. In Art’s case, there was no business case at the earliest stages. It was pure and sound engineering vision. Also, one can’t forget his forays into data storage and later, advanced packaging.