In Silicon Valley, the usual rules of business do not apply. This was one of the key learnings on the first day of Leading Digital Transformation (LDT), our five-day program for executives on innovation. Andrey Kunov, the CEO at SVIC, explained how in the Valley, profit is subordinate to growth. This philosophy is baked into the DNA of Silicon Valley tech companies, which seek to expand quickly and take advantage of the network effect, whereby each additional user of a product renders that product more useful to future and current users.
In the session with Andrey, we saw that Facebook is a great example of this phenomenon. After all, when everyone is using one social network, why would you go anywhere else? The history of Facebook shows us that it grew fast, expanding its user base by hundreds of millions each year and in the process obliterating the competition (do you know anyone that still uses Myspace?). Profit eventually came five years after the social network was founded when the user count was 300 million, a little more than a tenth of what it is today.
In pursuit of hypergrowth
That same model of innovation is still with us. We grasped this with Waze, the driving application now part of Google. As we heard from the platform’s business development manager, in the past half-decade the number of people using Waze has grown exponentially, meaning Google is now turning its focus to the question of monetization.
Part of Waze’s strategy to generate cash flow are features such as carpooling when one user pays another to ride in their car, with Waze generating commission on each transaction. But at the same time, we can safely assume that Google will also continue efforts to grow the number of non-paying users in the hope that a business model capable of turning mass membership into profit will eventually materialize, as it did in the case of Facebook. The answer may simply be more advertising, as has largely been the case with Mark Zuckerberg’s social network.
If further evidence were needed that this ‘hypergrowth’ approach to innovation retains currency in Silicon Valley, we need only look at Uber. Undoubtedly one of the most disruptive companies in the world today, the ride-hailing service is still not profitable more than a decade after it was founded.
Self-disrupt ≠ self-destruct
Yet in Silicon Valley, a lack of positive cash flow is not grounds to abandon a project such as Uber or Waze. Instead, so the thinking goes, what those two companies show is that in order to innovate successfully, we must put conventional business theories and practices to one side. This point was driven home to us through the story of Netflix, a company that was used by many speakers during LDT as an example of an organization willing to disrupt itself.
Who of us would be ready to dismantle a successful, profitable company in order to completely change the business model and make a big bet on new technology? That was exactly what Netflix CEO Reed Hastings did, almost overnight. When the company divested itself of its physical assets in favor of streaming, its stock price fell dramatically. But in the end, Hastings was proven right, as Netflix became a world leader in video-on-demand and its chief competitor, Blockbuster, faded away. Today, as more and more companies enter the streaming marketplace Netflix is once again trying to remake itself by becoming a content studio.
How did Netflix do it? Indeed, how does any innovation come into being? While moonshots such as Reed’s may occasionally pay off, the truth of innovation is much more banal. As a session with the Berkeley Innovation Group on design thinking showed us, the creation of novel solutions is a step-by-step process whereby ideas are generated, evaluated and then executed upon in order to gauge results. Generate, evaluate, execute, then repeat ad infinitum until you strike gold: that’s the law of the land on planet Silicon Valley.
Leading Digital Transformation Day 1 Key Concepts and Takeaways
- In Silicon Valley, the conventional wisdom does not apply, hence the quest for growth before profit
- Pursue the network effect. How could your company change the way it works so that your product or business model becomes stronger and more desirable with each additional user or customer?
- Is there a case for self-disruption? It may cannibalize your core business, but if you do not make that switch, chances are, a competitor will.
- How do you ‘do’ innovation? It is not a eureka moment, it’s a process you can learn.
Startup = Growth – Seminal essay by Silicon Valley luminary Paul Graham on the ‘hypergrowth’ philosophy.
What is Design Thinking? – Short explainer video from Harvard Business Review.
Lean Startup – A major contribution to the literature on how to create new products. Penned by Eric Ries and published in 2011.
The Design Sprint – An alternative innovation framework to design thinking from Google Ventures.
In this article, we review the first day of the January 2020 edition of the SVIC Leading Digital Transformation (LDT) program. Taking the form of meetings and workshops with top Silicon Valley companies, the program is a journey of inspiration and learning. Apart from providing participants with personal connections to standout figures in the field of innovation, it teaches them how to achieve business growth in times of disruptive technological change.
Click here to see forthcoming program dates.