Improvement V/S Innovation - DNA for investing

We often hear about the need to invest in revolutionary projects, disruptive ideas and breakthrough models against established models.

Dreaming disruption

We often hear about the need to invest in revolutionary projects, disruptive ideas and breakthrough models against established models. However, as the S-curve shows, disruptors often take years and multiple attempts to validate the idea, build the right business model - Attract à Convert à Retain customer and make a sustainable, profitable business.

Investors are not always ready to wait a decade or longer for results. Investors have LP to answer to and targets to show in order to raise new funds. As a result, expectations and reality often diverge, and interesting investment opportunities are missed.

At first there are few projects, but a lot of hype around them. 

• Innovators
• The first 2.5 percent of the most daring innovation lovers are first to try a new product.
• This group usually does not contribute to the revenues and in certain cases is paid/rewarded to try the product and give feedback.
• This is the beta stage of the product.
• This stage typically lasts anywhere upto 18 months.
• Early Adopters
• With the feedback received in the Innovator stage, majority of the companies improvise the customer experience and move on to general release phase.
• This phase is marked by 13.5% of the market. ( Refer the S-curve model)
• During this phase, the company is generally faced with high uncertainty as it incurs high marketing & customer acquisition cost along with no to low revenues.
• This stage typically lasts anywhere upto 12 months
• Early Majority & late majority
• This segment typically comprises of 68% of the market.
• Venture capitalists interest spark at the beginning of this stage and is followed across the lifecycle. ( depending on the growth curve)
• This is the stage where competition increases. New businesses with improvement, fight for the market share, thereby, creating opportunities for investors to – enter -> create value - > exit.
• Mergers, Acquisitions and Consolidations are the often used sources of value creation for the investors and founders.
• At this stage, the marketing and CAC starts to reduce, and revenues start flowing in.
• Attaining this market of everyday users catching up, can often take 5, 7, or even 10 years, which provides ample time for new competition, customer acquisition, product development and value creation.
• Laggards
• This segment comprises of 16% of the market.
• Consists of  users who do not use the product frequently.
• Their presence adds to the user number  but do not add value in terms of revenues or brand propagation.

The S-curve more often than not reflects, there are usually few small companies with small audience in young markets while there are many companies with a valuation of several hundred million dollars, which is related to the larger no. of users willing to include new products and services in their lives.

Conclusion

There is an inherent thinking that there is too much competition in the later stages but from an investors perspective it is important to note that at later stages:

• There is an existing market.
• Known customer behavior.
• Need gap analysis that can drive improvements in the product offerings.
• Competition often  drives efficiencies.

Google disrupted terrible search engines of the time, while Facebook and Tesla certainly weren’t first in their fields, but they focused on improvement and were in the right place at the right time.

While innovation is great, improvement is a  must have.