Startups drive commercialization of high-impact innovations

https://www.nber.org/be/20231/startups-drive-commercialization-high-impact-innovations

by hhs • 3 years ago

95 22 3 years ago

nber.org

fuzzfactor• 3 years ago

Finishups seem to have the advantage of decades more experience & dedication themselves.

kaon123• 3 years ago

This is similar to the point being made in "The Innovators Dilemma" [1].

I experience this currently at the wealth management bank I work. They were reluctant for a long time to invest into a mobile app for trading because it may cannibalise their current portfolio. They built it last year, but pricing was close to our bespoke services. The developers built a great product but when pricing is double whats on the market, then you are going nowhere.

The question "Will it cannibalise our current profits?" is asked to stop every idea. Rightfully so maybe: We make 750k revenue per employee. Money is bursting through the seams. Shame it all goes to shareholders, not employees.

[1] https://en.wikipedia.org/wiki/The_Innovator%27s_Dilemma

madsbuch• 3 years ago

This is really interesting!

My immediate thought is: "If we don't cannibalise their current portfolio, somebody else will" and use that as the argument to carry on on good ideas.

Why do you think that has not been the natural inclination?

rco87862• 3 years ago

Because very few companies want to take that risk. Startups take the risk because they have little/nothing to lose.

ZephyrBlu• 3 years ago

If you care about short-term profits it makes sense to ask that question, if you care about long-term profits it doesn't.

I think it's going to be very rare that over the life of a business every opportunity will be orthogonal to your existing business lines and not cannibalize them in some way.

Companies seem structurally incapable of cannibalizing existing business lines even if it barely impacts revenue because they cannot afford to report reduced growth for even a single quarter.

rco87862• 3 years ago

Yea it’s not about short or long term, it’s just about shareholders and risk management.

And honestly the system actually works pretty well. Incumbents do the thing that got them the incumbent spot, and new challengers try risky stuff to see what could beat them out. Market churn and competition fuel innovation. The cost is that incumbents occasionally get dethroned but that seems like a healthy thing overall.

Aunche• 3 years ago

The difference is that employees at startups get a larger share of the long-term profit. At a megacorp, you mainly win by getting promotions, and the easiest way to do so is to optimize for short-term profits.

TeMPOraL• 3 years ago

The question "Will it cannibalise our current profits?" is asked to stop every idea.

I wonder if this is the real objection, or really just a proxy one? As in, yes, the new thing will compete directly with the old thing, but it will easily bring in way more than it "cannibalizes". So the company will likely come ahead. However, the old thing and new thing are likely developed by distinct teams, in different business units of the company. So I imagine this question is really a proxy for the old thing team asking, "will it cannibalize our currenet jobs?". If the answer is yes, it's not surprising they'll resist.

netjiro• 3 years ago

It is an uncomfortable risk for many, to back a likely long term winner over a sure current cash cow. Even if their own estimates say they should go for it. See it all the time.

And to make it even more short sighted, the idea won't go away, it will just take a little longer and then pop up in competing colours.

NalNezumi• 3 years ago

I assumed it's also an easy trap to fall in to if you start to write down pros/cons in a list when you discuss / strategize where to invest your next effort to increase profit. Effort to optimize current thing, have a lot of pros and few cons, so very low risk. Something that could cannibalise current profit might have few bullet points at the pros list vs the cons, even if that one bullet point might be substantially bigger in the effect.

Sony had the technology(mp3 players, phone, etc) and competence to be the first one to invent the smartphone. But I can't imagine in a risk averse culture, that a boardroom would listen to someone that would come in a suggest something that cannibalise multiple divisions in the company, in the promise that it would generate more profit, vs each divisions proposal of how to optimize their already existing profits.

moneywoes• 3 years ago

Is wealth management open for disruption?

Lerinsmooris23• 3 years ago

Startups are know for their ability to generate innovative ideas and challenge existing norms.

AndrewKemendo3• 3 years ago

Almost by definition right?

My Reinforcement Learning metaphor for equity finance driven startups is that they are the exploration process for capital seeking perfect ROI. After they find a new high margin process they exploit it to maximum financial return and (they hope) create a new paradigm that placed them as a monopolist or at worst oligopolist.

I’d argue this is precisely how major startup financiers view this - thiel explicitly says this.

So given that, and given that technology often is a key differentiator for structural change through new processes, it makes sense that evaluations of regulatory capture processes (including patents) would accrue primarily to new entrants.

Worth noting though that if you further iterate this capital/tech game, other larger monopolies/oligopolies will accrete these companies and technology too until some social tipping point is reached and the whole thing collapses.

I discuss this process as it’s root form in the third proposition of my myth of scarcity paper [1]

[1] https://kemendo.com/Myth.pdf

bumby3• 3 years ago

I like the RL metaphor. Does this imply a corollary that incremental success by exploration is more probable in new spaces but gradually decreases as those spaces get explored?

AndrewKemendo3• 3 years ago

Yes that is a logical extension

If you think of a three dimensional manifold as the unexplored state space of a new market, then the exploring:exploiting process maps areas of the manifold into “known” and “unknown”

It takes effort to explore the manifold in real life and the effort is measured in $/hour. Meaning whomever shows up to a new unexplored manifold with the highest potential work energy will be able to explore/search the space faster unless someone else has a more efficient search/explore or exploit mechanism.

I think this would be where “tragedy of the commons” would be relevant

marcosdumay• 3 years ago

Almost by definition right?

Well, no, it's a behavioral finding.

There is nothing on the market structure stopping consolidating companies to commercialize new tech by themselves. In fact, if you take a naive view of the market, the consolidated companies are the ones with all the structure needed for it, while startups have all kinds of obstacles to get a foot on the door.

This is a well known fact, found again and again by several studies. But it is not obvious in any way.

djoldman• 3 years ago

Putting this another way that makes it less exciting: the more important a patent is to your future survival, the higher the quality.

Or another way: multiplying the average number of forward citations by the total, yielding the absolute number of forward citations, would result in the opposite graph: massive # of forward citations for university, less for incumbent, and least for startups.

It is almost a proxy for patent cost.

Startups drive commercialization of high-impact innovations

Related Stories