Innovators Solution - Chapter 9 - Getting the right Investment
This chapter talks about what is the correct investment and what is a wrong investment. As per professor Christensen, the investment in new ventures must be small and the expectation must be that it become profitable fast which is in line with emergent strategy. On the other hand, investing a large amount and expecting huge growth in revenue but being patient about profitability would be a wrong investment. This is because it can lead to money being invested in a wrong idea. Even the right idea may take the wrong path if huge growth expectation comes in and focus is on their biggest customers instead of focusing on customers who are not being served today or have lower willingness to pay. Also if growth of main business stalls, the small business will be expected to take on the burden of growth. All this may set it up for failure. That is the reason it is better for emerging businesses not to attract big money and become profitable in a small scale as fast as it can. The same is true whether it be corporate funds or venture capital funds. Venture funds in their initial stages invest small amounts and monitor for profitability with growth expectations proportional to the investments. However when they become big and have more capital, they invest bigger amounts in early stage untested start ups and expect big growth which sets them up for failure.
One example that comes to my mind for this theory is Facebook's investment in Metaverse and rebranding to metaverse. This would be a wrong investment as per this theory. Without having tested the market for and path to profitability of immersive experiences, huge money was invested and the entire future of mega corporation like Facebook was tethered to it through the rebranding. This is something that was expected to fail and it did. Not only did it fail, but led many other companies along the same doomed path.
Now thinking of the reason Facebook followed this path could be the path of the original Facebook, which probably defied this theory of how emergent businesses can grow. In case of platform businesses like Uber, Amazon, Facebook, the value comes more from the number of people on the platform. In these kind of platform businesses, the value comes from connecting maximum number of people to each other or maximum number of service providers to maximum number of customers. They key performance measure is number of customers and businesses. And it is a winner take all kind of market because neither merchants nor people want lot of platforms. Customers want to reach maximum number of businesses through a single platform while businesses want to reach maximum number of customers through a single platform. So the one platform that grows fastest will capture the entire market and rest will be left with nothing - an all or nothing kind of game which is very different from the kind of businesses professor Christensen is talking about wherein the value comes from solution characteristics. So platform businesses can be safely left out of the theory - they are an aberration leading to monopoly or oligopoly till they get disrupted by decentralized models. Now the metaverse is all together a different game. At the outset, it does look like a platform play. But the underlying infrastructure was not yet ready unlike the time of Facebook when people had their computers and internet connection and all Facebook had to do was to create the platform to grab the customers. Unlike then now most people don't have low latency internet, high speed internet connections and virtual reality devices. So Facebook couldn't make it a platform play. They did try to do their bit by subsidizing the headsets. Despite the subsidy, the headsets are still expensive and their usage cumbersome and something customer don't use already in their day to day.
So overall bottom line is get small investment, spend wisely, demonstrate value in limited settings and once value is proven beyond doubt, put the money in and scale rapidly.