How do startups navigate a world that is in a state of flux? What do we build and who do we build it for? To understand innovation in a technology or startup context, we must look at the cycle of transformation. By transformation we mean the evolution of domains and industries over a period of time, each phase normally lasting a decade (that is why the duration of a VC fund nears a decade.) If you are a founder, understanding how transformation happens, will help identify the stage of maturity in your particular domain and thus allow you to position yourself accordingly.
As a disclaimer, we’d like to add that these are our thoughts and that views on the transformation cycle may differ among academics and practitioners.
Phase 1 – The beginning: horizontal service providers
In this phase, a new way of doing things is introduced and this happens at a very broad level. So for example, the eBay eCommerce store was introduced to shift buying and selling of products to an online model.
At the beginning of this stage, customers are still trying to understand the process and adoption is slow. In order to improve adoption, companies have to focus on selling their product in a straightforward manner, whereas design is focused on improving the ease of understanding. Here, companies grow slowly and eventually adoption takes place; this is one-third of the transformation cycle.
Phase 2 – The acceleration: verticalization of the major horizontal service provider
As customers become used to the domain and develop relatability with it and when adoption has happened, the second phase begins. At this point, customers start talking about their specific problems as they now see room for better solutions, more tailored to them. In this manner, verticalization begins to happen. In the eBay marketplaces case, small scale eCommerce stores specifically focused on certain kinds of products began popping up.
In this scenario, customers demand enriched offerings and expect customized products and services. Startups can offer products in a verticalized manner by focusing on one specific niche in their overall domain. We’d like to point out that within the global transformation age, we’re currently at the early stages of verticalization.
66% of the transformation cycle has been covered at this stage. Verticalized service providers make up the growing, dominant chunk of the economy; while old economy players have become the rust-belt area.
Phase 3: Service providers to serve vertical players, full circle
In the final phase, vertical players have amassed size and so service providers that serve these large vertical players begin to emerge. Tech startups making time tracking tools for bigger enterprise products like Slack, or e-commerce personalization tools for vertical-specific e-commerce stores are some examples.
At this point, the domain is already beginning to get saturated with technology solutions. This is when the transformation cycle has come full circle.
Before we conclude, it is pertinent to add that the above is the transformational cycle explained in a functional context for the economy/country, which kick-started the cycle. There is a geographical parallel also, commonly known as cloning models. In this model, entrepreneurs of another economy/country clone/copy the business model with a lag of a few years, as the original pioneer is busy in the local economy and cannot achieve a global scale that fast.
The US economy has been at the forefront of numerous transformation cycles, especially in the new economy’s digital context. We at ScaleX believe that China is the new leader in business models for consumer tech, while the US still remains the deep-tech leader. Emerging startup founders may learn and leverage from these trends also.
How does this help startups?
Founders and startups need to be cognizant of where their domain is within the transformation cycle. This will tell them whether they are ahead of their time. Do they face the risk of running out of cash? Are they at a stage where their domain has become commoditized and there is no longer space for much margins? The transformation cycle will help them identify what sweet spot they should be targeting and most importantly, answer questions of what to build and who to build for.