Starting on a new journey [via Nikhil] seems to be the theme among a lot of people these days. While the downpour of entrepreneurial attempts is to be expected, there is also a subtle shift that is happening in the innovation landscape towards a newer breed of companies that help bootstrap and run new properties than to focus on building up one product as a segment leader and then defend that positioning for the rest of the product's life.

The trend for now is weak, but it is substantial enough to be perceived as a trend. Every conversation that I've had with people in the innovation space these days seems to veer dramatically towards the role of an enabler of a lot more, than being restricted to standalone properties. Everyone has the gut feeling that something more needs to be done (not only from the perspective of evening out the risk spread), but there is not much of an idea in terms of what exactly needs to be done. I will tackle that point, but later in the post.

Traditionally, bootstrapping is a space that has been occupied by incubators, seed and angel investors. Venture Capitalists generally steer clear of this of this segment because the bite-sized piece of the pie is considerably smaller than their average investment foray and they also tend to work with products that have progressed beyond the proof-of-concept stage. Even then, players on both sides of the divide tend to not get into bed with the companies they are bootstrapping/investing into other than the regularly scheduled meetings or so-called 'adult supervision' in the case of VCs.

This is something that is bound to change. Rather, it has to change as soon as possible for the investors (angel/seed/VC) to be relevant in the coming years. Some of the reasons for this are as follows:

Elephants don't dance and boulders don't waltz: Before the turn of the century, 10 years was a timeframe that did not mean much. It was a timeframe in which a company could be bootstrapped and grown to be a proper set up. But it certainly was not a timeframe in which you could bootstrap a company from scratch and build it out to be the market leader or a significant player. Contrast this with the present and companies like Yahoo, Google and Research in Motion. They are all companies that have been around for less than 15 years and already market leaders at least in one thing they do.

What is even more interesting is that in the areas each company has excelled, the expected usual big boy suspects did not do much and in that fact is hidden a point I am trying to make -- that innovation is not always about inventing new things; is more about adapting to changes and inventing and constantly re-inventing yourself than repeatedly going to the drawing boards trying to create yet another wheel. And, even more importantly, the soil and environment needed to grow this important grape of innovation is becoming increasingly harder to find in larger companies.

Big companies have a major advantage over the smaller players -- of scale and resources. They can afford to plonk down in marketing costs on a single product money that could currently bootstrap ten start ups in a year. What they don't have is, though, nimbleness. Decision making, development and adaptation is slow and cumbersome in them. It is the classic case of checks-and-balances becoming a choking point. Process before product is a philosophy that is only useful if the process brings about significant value-addition to the product. In most big companies processes are energy-sapping mental masturbation sessions spent on the parallel bars and trapezes of ego and insecurity.

This is the reason why you will see the bigger larger players doing the already-done-to-death things for the n-th time with a fresh coat of paint on an already much-peed-on wall and expect you to not recognize the familiar smell underneath that the branding/advertising can't cover well enough. Thus we have the phenomenon of the 50,000th social network, 9000th email service and 350th digg.com clone. Contrast this with any of the newer products that have captured your imagination in India: the Cleartrips, Bazees and MapmyIndias out there did not come from an established set up.

This also brings about a serious problem for the established players. It is costly for them to start a new product in-house. Being an established set up you'll need to pay people standard or better compensation and back it up with an extensive marketing campaign for it to get any traction. The end result is often that you have incurred enough cost into a single product launch that it will take you at least a couple of years to recover that base cost alone. And that is when you are not taking into account operating costs which comes in after the product goes online. You have more or less shacked your new product with your size and resources even before you've started.

What the digital space has enabled is the rewarding of nimbleness. Set ups that can improve, adapt and correct mistakes at a fast clip can often outpace bigger and larger players, even if they have 1/100th of their operating budgets. Elephants and boulders, by nature, are not nimble beings. They often curse their products with their best strengths turned into weaknesses. This eventually leads to the situation where M&A becomes the only viable option to bring in innovation into the system. That too, happens at a cost much higher than what it would have cost the start up to build and push out the product. It is a fair and just compensation for taking the risks associated with entrepreneurship, but it also highlights the fact that there is little chance to do the right next big thing in an established set up.

First mover disadvantage: This has already been debated at length over at Shashi's place. So, I won't rehash the points all over again here. A simple example of how this works out can be this: even as recently as five years ago, it would have been impossible to build a scaleable web-crawling/indexing infrastructure at anything less than a massive cost. Currently, with Nutch, Hadoop and a handful of other open source technologies, you can easily build and deploy a fully functional (limited, maybe) product that would enable anyone with the required chops to prove/disprove a concept.

The trouble for first movers, especially large players, again is one of cost. Once a product is out there, clones often turn up in no time, built at 1/10th of the cost and 10x the first mover's learning under their belt. Moreover, since the newbie's product is more recent, it also sports a code base that is legacy-free and also amenable to quick changes more than the larger players, who will go into yet another round of deliberations over the latest minor change. This is often a case also of people mistaking web development with technology engineering, but that is another vast topic in itself. Will save that for later.

Essentially, what this allows the non-First Mover is to either succeed or fail at a cheaper cost than the established set up. In either case, it allows for the enabling of better bang for the buck for smaller players. They can, with reduced costs, afford to spread out the risks over a wider portfolio and still do quite well, even with an average success rate.

Commoditization of technology: Done right, these days, technology is a minimal cost component in starting up a company. Companies like Meebo and Smugmug have been self financed or bootstrapped on the credit cards of the founders. You can also scale now at a reasonable cost (not to be mistaken with no-cost at all), using the various cloud computing infrastructure out there these days. There is no longer an advantage in being able to order seriously expensive hardware without batting an eyelid.

Technology has become so commoditized that having a lot of it to throw around is no longer of any value unless you have the products (with valid use cases) that can use it. Technology is only an enabler, while it is often mistaken for being a product by itself.

While this is something that works equally well for the established players, it also opens up a million new fronts on which they have to battle many bit players, any of who can easily scale out at nominal costs and be a winner. Add to this the constant pressure of having to out innovate a hundred tiny talented shops that can release ten improvements in the timeframe that takes you to go from thought to execution in terms of changing the shape of a basic button in an established company.

Which takes us straight to our next point.

You are like water (big co) to my oil (talent): In other words, outstanding talent and big companies are finding it harder to mix these days. There is simply no reason for a lot of talented individuals to spend a year speccing out a product, while they can go from concept to execution in less than half the time if they are on their own. Aiding this are the earlier points regarding technology, elephants and boulders. The number of people working outside the bigCo ecosystem is absolutely stunning these days.

At any industry event you will see a large number of young and talented people who are tooled to the tooth with the right attitude/aptitude/processes to be enablers of any fundamentally right product. It is another story that the product innovation environment in India has to improve by leaps and bounds before we see an end of the clone-of-a-clone-of-a-clone line of thinking come to an end. But it is something that will only improve than degrade from here on.

We don't need none of yo' stinking money: As demonstrated in the case of Meebo earlier, it is just no longer a must-have to take in seed funding or venture capital to start off on your entrepreneurial journey. Between your beer buddies, credit cards and family it is very much possible to start off companies that can easily knock out any of the larger players.

Recently, while trying to ascertain the costs involved in seeding a new concept, I was shocked to see the final figure, which was of such peanut-ian proportions that I had to go over it again and again just to check if I was missing something very obvious. It was so low that between a couple of loans from a few well-to-do friends and some savings at your end, you can easily build out a reasonably well-to-do company that is still not diluted in terms of equity to near nothingness.

But, interestingly, there is another breed of entrepreneurs who are financed from an entirely and unexpected quarter. As a result of the recent economic boom, there is now a whole army of middle-level executives who have a nice chunk of cash to spare in terms of savings accrued from various bonuses. What most of these people bring to the table is experience in having seen and run operations up close and personal and also the capital to get something running and generating cash using money only from their own pockets.

I recently met one such entrepreneur recently who was already in the black, with zero equity dilution and an increasing positive cash flow margin, thus enabling him to expand his operations and still have a tidy sum saved in his pocket without taking on any additional funding. And there is another friend who has his head down building out a product purely out of his savings. What is essentially happening is that there is lesser and lesser reasons for such innovators to bring in the existing innovation ecosystem into the picture.

There is an amazingly wide margin of difference in the tone, tenor and terms of a discussion that is backed by a non-critical need for capital from external sources and one that is not backed by such luxuries. More importantly, the capital that is funding such forays is coming directly out of the coffers of the larger players. Effectively, the larger players cannot out-innovate and they are also feeding the thousand hands which are also busy scripting concepts and products that are going to take them on in the coming years.

This is also eating into the opportunities available for investors since the innovation-crunch in the larger players would mean that more of the entrepreneurs are likely to go straight into a situation of exiting through a sale to an existing player and use that money to fund yet another start up than to recapitalize via the usual investment route.

Concept arbitrage: Once again, I will have to lean on some stellar prior art to elucidate the point than to go over it all over by myself again. Concept arbitrage extends rather nicely into a snug fit with the above points. There are a million niches (mostly, not very obvious ones), in which there are possibilities ranging from the margin play to outright domination, provided the execution is right, smart and cost-effective. With the traditional industries still waiting it out at the gates, the exit possibilities for products that fall under this domain are tremendous. All of this again possible under cost structures similar to what has been discussed above.

Conclusion

Coming back to the main point of changes in the innovation landscape, the one common thread that runs in all the above points is that nobody is seeing the exit as an end, but as a means to an end. There is no longer the single-play and defend concept in terms of products. More innovators are now looking to partner and build together a wider portfolio, which looks to leverage existing cost, knowledge and infrastructure equations than to repeat the invention of the wheel.

This by itself is a change that will shatter a lot of existing thinking and concepts, primarily because it takes out the VC and the investor out of the picture from the word go. I have been fascinated and impressed by the openness that is already out there in trying to combine forces than to compete against each other. The attitude too is refreshing since it is something that aims to marry the best-of-breed talent with established knowledge and infrastructure.

This is essentially the role of the enabler and catalyst that is mentioned in the title of this post. People who are in that role are looking outwards to bring in the best talent and domain expertise to give a product the best chance to succeed at a vastly reduced cost.

Considering that technology and infrastructure is no longer a differentiating factor, domain expertise is increasingly becoming the critical differentiating factor for any product segment these days. There is nothing that really stops big companies from doing the same, other than their own stubbornness and lack of foresight. Eventually, the bigCos will need to adopt strategies that enable and foster innovation from the myopic confines of its internal systems to survive in this altered reality.

Whether they have the stomach or the vision to do something like that is something that time alone will tell.

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