Startups 101

Opportunities Building Upon the Future

April 2008

By Jon M. Garon*

This column is part of a series of book excerpts from Own It: The Law and Business Guide(tm) to Launching a New Business Through Innovation, Exclusivity and Relevance.

Entrepreneurial opportunity lies with identifying the stressors caused by new innovation. Every change brings with it another set of problems. The Internet has increased the speed of communication, brought library resources into every home and put the individual into the center of content selection — and even creation. On the other hand, the Internet has changed the role of public and academic libraries, it has created a need to authenticate and select written authorities from an overwhelming amount of information and it has created such a demand that consumers find home access to be insufficient, requiring the Internet to be available on devices carried in their pockets.

When the Internet was first popularized, AOL, Yahoo.com, Go.com and others focused on providing library-like organizational hierarchies to the Internet known as portals. With words rather than numbers, Yahoo led the way in creating a Dewey Decimal System-like syntax to the Internet. Traditional media companies attempted to build portals to deliver their content and control what other content was available to the public on the Internet in the same manner that they programmed television and radio schedules before. Unlike the television and radio, the Internet was not limited to a single channel or to programming time constraints. Search engines like Alta Vista and Ask Jeeves provided an alternative to the traditional structures that were not anticipated by traditional media companies.

But there were problems. The portal system was failing because traditional media companies failed to change content access from a delivery model to a consumer driven, on-demand model, and the way in which the first search engines organized Internet content was a bit raw. These stressors created the opportunity for Google to dominate the search landscape by addressing the first generation problems and solving the stressors created by the search engines. Google's innovation in search was made to answer the inherent limitation of the portal approach to accessing Internet content.

The search engines were born of the desire to funnel from the vast body of information on the Internet that which a searcher is seeking — the truly relevant information. The first generation search engines based their interpretation of relevance solely on the relationship between the search words and the frequency of matching content on the target sites. Therefore, by simply dumping search terms into a website's content, website owners could drastically improve their rankings. This was roughly analogous to basing search priority on the size of the ads in the Yellow Pages. Despite their shortcomings in terms of actual relevance, these search engines created the basic infrastructure that has allowed Google to lead the market in changing this structure, thereby undermining the portals and becoming a much more useful, and an overwhelmingly popular, search engine with an expanded array of web-based tools.

Search engines like Google currently use complex search algorithms when they crawl web pages looking for the websites that will best connect searchers with the most relevant content. The specifics of an algorithm change frequently, both to fine tune the ability to deliver relevant returns and to try to stay a step ahead of the website owners and consultants who try to "trick" the engines into ranking their sites artificially high. One factor in the way Google and other search engines rank sites is link popularity — how many incoming resource links a site has. Google looks at the volume of links to page as well as the quality of the page that provides the link. Links from pages that themselves have many relevant incoming links help to make the pages to which they link more likely to rank higher. If a website wants better Google rankings, it must make its content more valuable to more users and eliminate barriers to linking to that content. By aligning its criteria to the criteria of the consumers, Google solved the stressors caused by the new innovation of search engines and dominated the market for relevance.

This process suggests, in turn, that the next generation of search engines will more carefully incorporate user data to prioritize within each search. By tracking the use made on a particular machine or user, an algorithm can incorporate the behavior pattern of the user as well as the relevance of the information based on its content or its web popularity. A user who typically shops online will find shopping sites more highly ranked than someone who regularly links only to academic websites. Already versions of this selectivity are being built into search parameters that a user can select, but the need to make searches highly relevant to the user will inevitably lead to greater personal differentiation for each search.

Google's success stems, in large part, from its founder's drive to innovate to the horizon — a Japanese phrase for far-reaching development goals. The innovation model of entrepreneurship assumes that the enterprise's goal is to solve preexisting problems of process or output. An even greater opportunity exists, however, to focus on long-term, systemic problems and system failures. By developing plans to overcome those challenges, the entrepreneur innovates to the horizon and increases the distance between his company and that of the competitors.

Most market innovations focus on the stressors that are immediate impediments to process or customer satisfaction. For established companies, a great deal of attention is required to make incremental improvements to products that will create both improved quality and a consumer perception of product freshness. Start-ups have no legacy in the marketplace, so their products and services are typically compared to the established companies, but within a few months or years, they also have their own history and incremental comparisons.

A recent study in the Journal of Marketing provides empirical data suggesting that market focus actually reduces market innovation, particularly transformative innovation.1 The implications of this study reinforce the need for the entrepreneurs, as well as all other business leaders, to look beyond the short-term innovation when developing corporate strategies. The ability to take this long-view approach is necessarily difficult, but Drucker's list of stressors can readily be applied to the twenty-year horizon as well as the five-year strategic plan.

It is quite uncommon for start-ups to have a twenty-year scenario developed for their company. The level of speculation for the new enterprise hardly makes the exercise worthwhile. A snapshot of the marketplace developed for a five, ten and twenty year analysis, however, may provide some valuable insights regarding the paths to follow and the paths to avoid. Such a snapshot should take the following into account:

  • Changes to the particular product, service and industry. The starting point for the long-view analysis should be focused on the history and trajectory of the enterprise's own products and services. But a twenty-year growth plan should be based on a twenty or thirty year historical analysis rather than a snapshot of last year's competitors or even a five year comparison. This retrospective analysis can then be used as a benchmark to track and compare the other factors listed below.
  • The demographic trends of population size, movement and ethnic mix. Expanded immigration (both legal and illegal) are changing markets and culture throughout the U.S.
  • The international changes in world stability and trade changes. While the past twenty years have seen the fall of the Berlin wall and China's entry into the WTO, historical trend lines suggest both increased international trade and an inevitable balancing of world superpower domination by a single county. Presently, the East-West world dichotomy is being replaced with one of two possible new models: the Muslim-Christian dichotomy or the American-European-Asian balance. Both scenarios share some common business implications, but vary greatly in many regards.
  • Technological trends continue to impact all sectors. Gordon Moore's law regarding the doubling of computer chip transistors every two years has held since 1965 despite many scientific articles describing the physical limitations of this continued innovation.2 Regardless of the sustainability of this particular aspect of innovation, the broader trend of technological progress is likely to continue.
  • Economic cycles. The U.S. economy runs through recessions and financial cycles that overlap the twenty-year approach. Universities must plan for downturns in enrollment, and companies must plan for downturns in the economy. If they fail to include these changes in their planning, they will lack the flexibility required to respond to the inevitable changes.
  • Changes in relevance. Products and services come and go. Fashions change. The inevitable life cycle of products, services and social phenomena should be taken into account. The broader view that includes addressing the underlying consumer need, rather than its current mode of satisfaction, will be valuable here.
  • Government philosophy and regulatory environment. The regulatory environment for products, services, antitrust enforcement and funding also follow a rough cycle based on the electorate, which inevitably decides when the leadership by one party or philosophy has run its course. Barring assassination or criminal activity, this cycle appears to run longer than economic cycles, so the precise timing has a longer arc. Good planning should take into account the potential for the regulatory environment to change, even if predictions regarding the timing of this change will be highly speculative.

While such a detailed analysis will be difficult, it should provide invaluable information as well as a paradigm for future growth. An outgrowth of twenty-year planning process will be a set of particularized assumptions that can serve to inform the philosophy of the company. By developing the philosophy out of the twenty-year strategy, the true core assumptions can be articulated. These, in turn, will guide the five-year strategic plan and the annual assessment measures for the growth of the company. By using this approach, the enterprise can innovate both at and beyond the minor changes essential to next year's product line, anticipating the short-term needs as incremental steps to the longer-term goals.

This is part of a series of book excerpts from Own It: The Law and Business Guide(tm) to Launching a New Business Through Innovation, Exclusivity and Relevance, which provides a step-by-step guide to developing successful start-up companies using concepts of intellectual property in all aspects of business planning and financing.

* Jon M. Garon is admitted in New Hampshire and California.

 


Footnotes.

1. Kevin Zheng Zhou, Chi Kin (Bennett) Yim & David K. Tse, The Effects of Strategic Orientations on Technology- and Market-Based Breakthrough Innovations, J. MKTG., Spring 2005, at 42.

2. Intel, Moore's Law, http://www.intel.com/technology/mooreslaw/index.htm.


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