Business model innovation vs Product innovation (better brake pads)

JULY 24TH, 2019

The Thumbtack founder shared a great post (8 lessons) on scaling/growing a startup to $1B. Read it all. Lesson #4 stood out to me 'the best companies win on product innovation AND business model innovation'

“We talk a lot about product innovation, for good reason. But business model innovation is sometimes even more important to your company’s success. Why? Very few companies grow virally, so most startups succeed or fail based on their ability to acquire customers. Growth hacks are effective at subscale but to reach meaningful scale most startups need to unlock paid acquisition. Paid acquisition is effectively a business model competition: the company who can pay the most for an impression, click or call wins. This is true whether you acquire customers programmatically (Google/Facebook) or via sales. That is why business model innovation is so crucial. If you can invent a new business model that monetizes better than your competitors, you will win.

Takeaways: 1) Acquisition is a business model competition 2) Early-stage founders should spend more time thinking about business model innovation and acquisition strategy.”

I’ve shared my views on this before, and I continue to believe that while both are necessary, business model innovation is more disruptive than technical innovation.

Business model innovation matters for several reasons. First, it represents an often under-utilized source of future value. Second, competitors might find it more difficult to imitate or replicate an entire novel activity system than a single novel product or process- i.e. it's relatively easy to knock off an iPhone, but Apple's decision to tether the iPhone to its proprietary app store makes the package significantly harder to knock off. In this manner, since it is often relatively easier to undermine and erode the returns of product or process innovation, innovation at the level of the business model can sometimes translate into a sustainable performance advantage. Third, because business model innovation can be such a potentially powerful competitive tool, entrepreneurs must be attuned to the possibility of competitors’ efforts in this area. Competitive threats often come from outside their traditional industry boundaries- i.e. the hotel industry did not see AirBnB coming, nor did the Taxi industry see Uber coming.

Looking forward, I am excited about the move to decentralized crypto based business models for this very reason. I think it opens up the possibility that some very large new companies will be created that innovate largely on entirely new business models.

An area that is particularly ripe for this kind of innovation is user generated content or, more broadly, user generated products and services. If you think about something like Instagram, the software is great but could fairly easily be replicated. But the network of users and the content they create is difficult to replicate. Instagram's value lies largely in its strong network effects. While that's a difficult competitive advantage to overcome, humans are incredibly motivated by financial rewards. A crypto Instagram model would compensate users for creating the content, rewarding the most popular content, gamifying the financial reward system. Instead of profits accruing to the centralized platform, profits would accrue to users.

This is precisely the business model innovation that decentralized applications built on open data protocols represent, and the compensation of the user is what a token incentive model would offer in terms of a new business model.

So why have we not seen this emerge yet? I believe the primary inhibitor to this business model innovation is that it requires users to own crypto-assets and store them in a wallet somewhere and be comfortable using them to access decentralized apps. That has not gone mainstream and we need a killer app to make that happen. That is why I'm excited about Facebook's Libra. I think it has the potential to be an important and necessary piece of the crypto infrastructure.

If not Libra, I am confident it will be something that gets billions of users holding and using tokens on our phones. And when that happens, a wave of business model innovation will be upon us. I’m super excited for that.