L11. Beyond Silicon Valley - Coggle Diagram
L11. Beyond Silicon Valley
High-growth tech start-ups are the business miracle of recent decades.
Most seem to follow the same playbook: Begin with a plan to “disrupt” an existing industry, use injections of capital to grow as rapidly as possible, and tolerate high risk in a rush for market domination.
But that is not the only way to launch a thriving start-up.
Start-ups operating amid conditions of relative scarcity, where capital and talent are hard to come by and economic shocks are more likely to occur, face unique pressures.
Yet many have become superstars in their own right. Their formula :
Investing In Global Talent
Silicon Valley has one of the richest talent pools in the world.
But an unintended consequence is that Silicon Valley and other innovation clusters now have high employee turnover built into the business model.
Companies operate under the assumption that employees are replaceable highly skilled labor is as abundant as workers’ opportunities and thus high churn is an accepted by-product.
Away from innovation clusters, however, recruitment is a universal pain point.
In a study of 628 entrepreneurs in emerging markets, 75% of those whose firms were rapidly growing identified lack of available talent as the biggest barrier to their business.
One way frontier innovators overcome shortages is to build distributed workforces that tap the best talent everywhere.
Zapier, a website automation venture founded in Missouri, was an early pioneer. Its staff of 250 is scattered across 25 states and 17 countries. Wade Foster, Zapier’s cofounder and CEO, says that the strategy has a serious advantage:
“You have access to a worldwide talent pool. If you restrict yourself to 30 miles from your headquarters, you’re going to have a hard time hiring.”
In the first year since instituting a “delocation” package, Zapier’s job application rates have increased 50%, and employee retention is up as well.
In emerging markets, a distributed workforce is often a forced choice.
The founders of Zola, which provides solar power to off-the-grid homes in Africa, initially struggled to find the right place to start their business.
1 more item...
Another response to a lack of readily available talent has been for companies to build and train their own pipelines.
Shopify, an e-commerce enabler based in Ottawa, launched a “dev degree” in partnership with nearby Carlton University.
1 more item...
Branch, which makes microloans to customers in emerging markets, is headquartered in Silicon Valley but offers employees the option to work from any of its many global offices and pays for flights between locations.
1 more item...
Stock options, Silicon Valley’s de facto financial retention tool, are challenging to replicate on the frontier—in part because exits (in the form of either IPOs or acquisitions by larger firms) take longer and are less proven.
As a result, many founders are experimenting with new models of employee ownership that are better aligned with the frontier context.
It is too early to tell what the best emerging practices for employee ownership will ultimately look like, and models are bound to evolve further.
It is clear, however, that the entrepreneurs of the frontier will continue to experiment with perks and compensation designed to retain employees over longer term horizons.
But while it is acceptable in Silicon Valley to burn through capital, innovators on the frontier are less likely to tolerate losing money on each customer.
It’s not that they aren’t trying to scale many of these businesses benefit from the same network effects that make Silicon Valley titans so wildly successful.
But they tend to avoid the high-risk grow-or-die approach: They focus on both growth and profitability, build resiliency into their models, charge for the value they create from the get-go, and take a long-term outlook.
It takes time and resiliency to build an industry from scratch, and this too makes a growth-at-all-costs approach untenable.
In the mythologized view of Silicon Valley, start-ups rush to develop a minimum viable product, raise capital, and lay waste to entrenched inefficiencies in the process.
In Silicon Valley, the quest for growth all too often trumps sustainable unit economics and profitability.
It is not unusual for start-ups to burn through millions of VC dollars a month as they chase ambitious growth targets, often subsidizing user costs to drive acquisition numbers.
The hope is that in highly competitive winner-take-all markets, a firm’s revenue will increase exponentially as it dominates its market, and profitability will eventually sneak past zero and then grow rapidly.
This strategy works well for start-ups that success fully make it through to the other side: If the number of users takes off, start-ups can indeed become very large, very fast.
Of course, some firms don’t have the luxury of choosing a balanced approach to growth and instead are forced to keep an eye on the top and the bottom lines.
For example, entrepreneurs far from innovation clusters lack access to large amounts of venture capital, nor is there an investment class that will put up with growth without profitability for long periods.
But evidence is beginning to show that balance holds own advantages.
Venture capital can be a powerful tool that helps start-ups accelerate at critical moments. But too much of a good thing can distort the market.
Solving Real Problems
A disproportionate number of the frontier start-ups I have worked with focus on providing services that meet universal human needs.
That’s especially true for emerging market companies.
By offering basic services, companies have the opportunity to become necessary to untapped customers.
Within existing industries, entrepreneurs often set up operations in new ways that improve people’s lives.
Too often, Silicon Valley start-ups are force-fed capital only to collapse under the weight of hypergrowth.
The country also suffers from an acute shortage of drivers, because of inefficiency in the system.
For example, a driver might travel several days to a delivery location and upon arrival find that return shipments are unavailable.
Typically, companies that create truly new offerings have a long, arduous path to growth that may include educating customers about how to use the product or service.
But there are advantages to addressing basic needs in a new way. The market—and thus the payoff—can be enormous:
And first movers often find that once they gain people’s trust, their consumers welcome the addition of high-margin services to the platform.