The Disruptive Innovator

Discussions concerning Innovation Strategy, how to design and market innovative new high technology products and services, the difference between technologies and products, Disruptive Innovations,the Technology Adoption LifeCycle, the SWIFT New Product Innovation method, Silicon Valley startups and more.

Saturday, September 16, 2006

What the Chasm means for Venture Funded Start-ups and other New Entrants

Why the Chasm exists

Because Visionaries and Technology enthusiasts want to use a product before anyone else, no existing references are needed to sell to them. In fact, references might be counter productive, suggesting that the opportunity to be ahead of their competitors has already passed. Pragmatists on the other hand, according to Moore and Brown, are pack animals and look for safety in numbers. They want to know that there are already other purchasers like them to feel safe.

Pragmatists don't accept references from Visionaries and Technology Enthusiasts, because Pragmatists see Visionaries and Technology Enthusiasts as far more risk tolerant. Pragmatists fear that the earlier adopters' successes may not be repeatable without the substantial effort and customization of the product that Visionaries insist on. A pragmatist doesn't know how they would customize such a product, and they don't want to spend the time or expend the effort to become educated. For Pragmatists the product must be ready to solve their problem as is, or they will wait until there is such a product.

Moore argues that these differences between Early Adopters and Pragmatists cause a "chasm" to develop. Companies that are successful with the Early Adopters are rarely able to successfully ignite sales to the Pragmatists. Today's "mainstream" market leaders and are supplanted by new entrants. I will say more about this when we cover Disruptive Innovation, but suffice it to say for now that in accordance with Moore's model selling to Pragmatists requires different sales skills, and different product attributes than selling to Early Adopters.

A side effect of the Chasm is that if we are successful at pioneering an Early Pragmatist market we may have little to fear from the incumbent market leaders who gained their success selling to Early Adopters. The traits that made them successful to date will inhibit their success in crossing the chasm and competing effectively with our new market entrant.

According to Moore, a company can be successful even if it never moves beyond the Early Adopters, as long as it creates a constant stream of such innovations that it can sell to these customers. And the size and other characteristics of the company have to match what is possible in that market place. Because the percentage of Early Market adopters is smaller than the rest of the life cycle, such companies will be more limited in growth compared to companies on the other side of the chasm.

An alternative destination that we will speak of later is merger or acquisition of a company that is successful in the Bowling Alley.

Why the Bowling Alley Phase is Ideal for Venture Funded Start-ups and other New Entrants

In contrast, the SWIFT method is designed to help Venture Capital funded companies enter the market during the Bowling Alley phase (or to kick it off if it has not already started) and then achieve market dominance during the Tornado phase. These phases are those which are best suited to the ease of entry, leadership potential, growth, and liquidity/exit requirements of Venture Capital.

Here is why:

Because of the Chasm, no entrant in the Bowling Alley has sufficient brand awareness and clout among the Pragmatists to dominate the nascent market. There are no barriers to entry yet which will prevent success for a late comer. (Indeed, keeping in mind the earlier two phases, late comers are the most likely to become new leaders).Who will become the market leader is anyone's guess, and leadership changes are fluid. The market is still small, but growth is rapid. Leadership Fluidity, is important for new entrants, making the Bowling Alley an ideal place to start.

As sufficient numbers of "Early Pragmatists" demonstrate success with the new technologies, their success stories motivate "Late Pragmatists" to join the stampede like herd animals.

Market growth in the Tornado can become exponential, and soon the markets are sizable. This rapid growth is necessary to meet the expectations of Venture Capital investors, who may be seeking returns on their investment of upwards of 40% per annum.

As the markets become large enough, market share and brand awareness come to matter more and more, so that the market leadership become stable, often freezing in a dominant market leader ("the Gorilla"), two or three alternative suppliers with significant share ("the Chimps") and the remainder of the market is limited to many extremely small competitors ("the Monkeys").

While there is still some fluidity in leadership but also some separation among larger and smaller players, a large marketing war chest can be valuable. The emerging Gorilla and Chimp candidates may become excellent candidates for a public stock offering (IPO) to fund their continued growth and to improve their competitive position during this phase.
Also this is the time for merger's and acquisitions. By merging the #2 and #3 market share competitors the previous market leader might be effectively challenged. Acquiring a number of "Monkeys" can also boost any company's market share.

Acquisition is also a common strategy among the former market leaders of the "Rainbow" Phase, who were unable to cross the chasm before, but who now see their market shrinking rapidly. Indeed, this can be an effective and repeatable strategy for a company who achieved great brand awareness and controls a large distribution channel. Effectively, the company lets venture capital pay for the R&D, and lets the market select the winners. They then meet their own growth targets by acquisition of the market approved technology which they can help grow even faster using their own channels. This kind of acquisition strategy has been seen in many of the biggest names in high technology, including Microsoft, Oracle, IBM, Hewlett-Packard, Cisco and AOL, and is now helping generate growth for Google and Yahoo as well.

Both IPOs and acquisitions provides the "exit strategy" wherein the Venture Capital Investors can achieve liquidity and thereby cash out their investment and return the expected substantial returns to their fund.

In the next post we will explore in more depth the characteristics of the remaining market phases and the traits that define the typical stakeholder driving purchasing decisions at that phase.


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