Last week I had a mind-bending chat with an entrepreneur and investor who does real-time traffic arbitrage. He and his team monitor the price of paid search terms. If there is a price difference between Google and Yahoo, he will buy from one and sell to the other, exploiting the “spread.” The technology to monitor search terms in real-time is interesting, if not revolutionary. However, the real disruption is what they do with the data they collect.
Over time he’s able to predict with high accuracy what businesses are good acquisition targets. Advertisers spend money where there is consumer demand. The more advertisers spend, the larger the market for chopsticks, organic vegetables or in-home senior care, for-instance. Using the advertising data he collects, he buys companies in the markets where advertising growth is strongest. Banks, hedge funds and investment houses would kill for such valuable data. Traditional mergers and acquisitions decisions are made on the basis of historical, self-reported data that is nowhere near as accurate. Wall Street would kill for what he knows.
The conversation got me thinking about the difference between disruption and creativity. We appoint ourselves the former, when it’s really the latter. Startups often make the claim that they are disruptive. What they really are is inventive. You can build something the world has never seen, which is great. But this is a far cry from success. Market traction will declare you a true disruptor. Facebook made its jaw-dropping purchase of Whatsapp yesterday because the chat app is truly disruptive at acquiring users, users Facebook covets.
Why disruption is about business model not technology
Startups often mistake their technology for the disruption. Code stacks do stuff, but they aren’t a business. Founders love talking about features, and neglect to mention what investors want to know most; is your technology cool and will it be profitable? Great technologies don’t take themselves to market. This is why your business model is the disruption. The more costly it is to bring new solutions to market, the lower the chances of success. As Steve Blank says, startups fail when don’t attract customers, and not because they built something people didn’t like. Acquire new customers faster than you burn cash. Win.
Technology startups are tantalizing for investors, because the cost of delivering a product over the Internet decreases with time. Hundreds of millions of users with credit cards have access to what you are selling. This is the essence of growth hacking, and why it’s such an important topic in startup marketing.
Facebook and the late majority
Facebook only became truly valuable when it successfully left college campuses and attracted students’ parents, aunts and uncles to their platform. College students have tight budgets. Your parents have a mortgage, buy insurance and go on regular vacations. All these big-ticket purchases can be influenced by the right advertising messaging.While college students created the buzz that grew Facebook, it was the late majority that gives it value. Facebook bought Whatsapp for a staggering $19 billion this week because the chat app is mainstream in the world’s fastest-growing markets.
Early adopters are essential for validating a new technology. Your early adopters are those looking for an any advantage they can exploit to gain an edge over their rivals. This is especially true of upstart companies in the same growth stages as you. Early adopters will help you by beating up on your technology, exposing bugs and proving the soundness of your infrastructure. As companies age they become risk averse, bureaucratic and unimaginative. It’s easy to do when you own a market and have your customers locked in. Why ruin a good thing? The ability of a startup to deliver its solution to those in need is the true measure of disruption. A product will never survive when the cost of delivery is prohibitively expensive. A product that decreases the cost of delivery as its market share increases is a true disruptor.