Want to Launch the Next Billion-Dollar Startup? Here is How Elon Musk Did It
Three stages of innovation launched Tesla, Netflix, and McDonald’s billion-dollar brands, and can help your business boom too.
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Tesla launched its Roadster in 2008. While a radical entry into the electric car market, it was largely ignored. Over time a truly unique business model emerged, including the shift to online ordering. The release of Model 3 is Elon Musk's true end-game: a production car the masses can afford.
I have had the honor to work with pretty eccentric inventors and tinkerers. I am often mesmerized by their splashes of creativity and innovative new products. But as proven by Tesla and many others, the type of innovation that is relevant in a market has everything to do with life cycle. Whether you are a startup or mature company, it's critical to be aware of which industry phase you are innovating in:
When a new entrant creates a market in a white space, it has the largest upside for exponential growth. This is the time a company can command high margins and market share, as in the case of Square. This window of opportunity closes quickly, and the innovator has a finite amount of time to realize the first mover advantage. After adoption, the number of brands will proliferate quickly.
I work with a startup launching a beauty line. Whenever they launch a new concept, their own customers try to copy them. In this struggle to gain relevancy, few startups graduate from this stage to the next. In this phase, ensure you have robust intellectual property protection, gain a foothold in a few strong customers, create success stories, and manage your cash very, very carefully.
Up Market Disruption
When a market is nearing maturity but is not yet saturated, entrants may attempt to provide new features or benefits that improve the utility of its products or services. A classic example is the shift to on-demand content. Famously, Netflix founder Reed Hastings approached Blockbuster CEO John Antioco in 2000 and offered to sell him the company for $50 million, but Antioco dismissed Netflix as a "small niche business."
The rest is history. According to Statista, online movie subscription services, including Netflix, had a 59 percent share of U.S. movie revenue by 2016.
What's interesting about the rise of Netflix and streaming video is that the core product didn't change- the delivery system did. But business model innovation would not have been as relevant if movies hadn't already been adopted. Renting a movie at Blockbuster was an alternative to the theater; then Netflix became an alternative to Blockbuster.
In this phase, be very aware of the value chain, so you can find new ways to innovate your business model as opposed to developing new products. For example, one of our clients recently offered a monetization method new to their industry. They allowed customers to lease their equipment instead of buying it, adding a new profit center in the form of financing.
To conduct a value chain analysis, plot all the major activities involved in your customers' procurement of your category. Then assign a value to each activity (as a proportion of the total price) and consider if you can provide more relative value to other parts of the chain. Those are the segments in which you might consider adding services.
Low End Disruption
The term "disruptive technology" was first introduced by Clayton Christensen in his revolutionary book, The Innovator's Dilemma. Since the book's release in 1997, many have misused the term "disruptive innovation", which is often used to describe any radically transformative business model. But that is not the proper application of Christensen's theory.
Disruptive technology describes technologies that scale existing product categories, generally at lower costs. In this phase innovations may include products or services that do not offer a leap in terms of new utility. In the case of electric mobility, Model 3 does not offer new technology, it offers it at a lower cost.
When McDonald's, to combat Starbucks, began offering its McCaf coffee line, it did not offer new varieties of coffees. The expansion of its menu merely supported the status quo, because McDonald's enjoys such massive scale that a duel with Starbucks based on sameness played to its strengths.
In this phase, embrace the path to a billion-dollar brand. This may be the time when the established company needs more funding. Focus on scale, cost reduction and efficiency. Ensure you have the operations people who can take your business to the next level.
So be thoughtful about how you innovate. Maybe you will launch your next invention into orbit someday, as Musk did.