Innovation Or Improvement? The Most Important Philosophical Distinction In Business
Among the many ways to classify a new business, perhaps the most subtle is drawing a distinction between businesses that truly innovate and those that simply improve upon something that already exists. It might sound like a philosophical question, but the answer has very practical applications for both venture investors and startup founders.
Consider the current AI boom. Generative neural models dominate headlines, and every second company now claims that AI powers their product or service. It all sounds very innovative. But if I, as a seasoned investor, look under the hood, I find that 90% of these companies aren’t really innovating at all. They’re simply tacking more convenient user interfaces onto existing neural networks. They aren’t innovating; they’re improving—which is perfectly fine—but investors should be clear on the difference.
This phenomenon is as old as invention itself. True innovators have always blazed the way, followed by “improvers” who ride on their technological coattails. Today’s global industry of artificial lighting still builds upon the innovations first made in Thomas Edison’s lab almost 150 years ago.
As a business model, improving on an existing product is no better or worse than innovating. Both approaches can achieve impressive results. But it is important to understand how they differ in nature—the different challenges they pose and the benefits they offer. An innovation is something fundamentally new. Better car tires are an improvement; a flying automobile is an innovation.
It is very important that innovators understand at which point in the product cycle they should stop and focus on making improvements. Innovative companies have much more difficulty than others do in assembling a team, establishing partnerships, stoking consumer demand and establishing a market for their product. And, of course, in the race to market, they must stay several steps ahead of competitors with similar products. But if they succeed, they have an undeniable advantage: the opportunity to achieve a genuine breakthrough and earn fabulous profits.
By contrast, companies that improve upon existing products or services can observe what is already happening in the market and attempt to earn a profit by introducing greater efficiencies. Consider, for example, the online ticket booking service. Let’s say the purchasing process takes 15 minutes and is full of hassles. Your company, however, makes it possible to accomplish the same thing in only a minute and with just three clicks. In this case, you’ve made a qualitative improvement and users now bring their money to you instead.
It is very important for a startup founder to be honest with himself: Is he innovating or just improving on something? The answer will affect how he formulates his strategy for market implementation, builds his unit economy, manages his team and, of course, raises capital to develop the business.
I can’t speak for all investors, but I much prefer backing innovators. First, they are much more interesting. This might be because I make early-stage investments. Like the startup founders we back, I like taking risks on the chance of winning a major payoff later. Early-stage investors and innovators understand each other better.
Of course, neither approach guarantees success. Innovative companies don’t always become unicorns and generate astronomical returns for investors. In fact, most innovators fail to “summit.” Conversely, a startup that simply improves on an existing product might generate consistent dividends—hardly a boring result. Many of the starring companies in my portfolio began by simply improving on something, but to have reached “star status,” they first had to make an innovative breakthrough in at least one small but crucial business process.
The line between innovators and improvers can be incredibly thin, and sometimes quantity turns into quality. One of my best investments is a great example.
When I invested in this startup, it was only one of several similar companies entering the market at the time. This startup only became a superstar when it found an innovative approach to a particular problem that had been plaguing its competitors—a solution that made their product not just slightly better than its rivals, but 10,000 times better. The improvement was so great that it could safely be defined as an innovation. And even when imitators attempted to catch up, the company’s innovative team again outpaced them. Copycats abound, but development and innovation are the foundation of real success.
Despite my interest in innovators, I have sometimes invested in improvers. Maybe I unconsciously wanted to reduce risk. Whatever the reason, I have made good money on improvers. But I earned much more from investing in innovators, which comprise almost all the unicorns in my portfolio.
Therefore, if you invest in high-tech companies, you should also ask yourself whether you invest in innovators or improvers. An honest answer will help you manage risk and, at some point, find the proper balance between your expectations and interests.
Published on Forbes
Consider the current AI boom. Generative neural models dominate headlines, and every second company now claims that AI powers their product or service. It all sounds very innovative. But if I, as a seasoned investor, look under the hood, I find that 90% of these companies aren’t really innovating at all. They’re simply tacking more convenient user interfaces onto existing neural networks. They aren’t innovating; they’re improving—which is perfectly fine—but investors should be clear on the difference.
This phenomenon is as old as invention itself. True innovators have always blazed the way, followed by “improvers” who ride on their technological coattails. Today’s global industry of artificial lighting still builds upon the innovations first made in Thomas Edison’s lab almost 150 years ago.
As a business model, improving on an existing product is no better or worse than innovating. Both approaches can achieve impressive results. But it is important to understand how they differ in nature—the different challenges they pose and the benefits they offer. An innovation is something fundamentally new. Better car tires are an improvement; a flying automobile is an innovation.
It is very important that innovators understand at which point in the product cycle they should stop and focus on making improvements. Innovative companies have much more difficulty than others do in assembling a team, establishing partnerships, stoking consumer demand and establishing a market for their product. And, of course, in the race to market, they must stay several steps ahead of competitors with similar products. But if they succeed, they have an undeniable advantage: the opportunity to achieve a genuine breakthrough and earn fabulous profits.
By contrast, companies that improve upon existing products or services can observe what is already happening in the market and attempt to earn a profit by introducing greater efficiencies. Consider, for example, the online ticket booking service. Let’s say the purchasing process takes 15 minutes and is full of hassles. Your company, however, makes it possible to accomplish the same thing in only a minute and with just three clicks. In this case, you’ve made a qualitative improvement and users now bring their money to you instead.
It is very important for a startup founder to be honest with himself: Is he innovating or just improving on something? The answer will affect how he formulates his strategy for market implementation, builds his unit economy, manages his team and, of course, raises capital to develop the business.
I can’t speak for all investors, but I much prefer backing innovators. First, they are much more interesting. This might be because I make early-stage investments. Like the startup founders we back, I like taking risks on the chance of winning a major payoff later. Early-stage investors and innovators understand each other better.
Of course, neither approach guarantees success. Innovative companies don’t always become unicorns and generate astronomical returns for investors. In fact, most innovators fail to “summit.” Conversely, a startup that simply improves on an existing product might generate consistent dividends—hardly a boring result. Many of the starring companies in my portfolio began by simply improving on something, but to have reached “star status,” they first had to make an innovative breakthrough in at least one small but crucial business process.
The line between innovators and improvers can be incredibly thin, and sometimes quantity turns into quality. One of my best investments is a great example.
When I invested in this startup, it was only one of several similar companies entering the market at the time. This startup only became a superstar when it found an innovative approach to a particular problem that had been plaguing its competitors—a solution that made their product not just slightly better than its rivals, but 10,000 times better. The improvement was so great that it could safely be defined as an innovation. And even when imitators attempted to catch up, the company’s innovative team again outpaced them. Copycats abound, but development and innovation are the foundation of real success.
Despite my interest in innovators, I have sometimes invested in improvers. Maybe I unconsciously wanted to reduce risk. Whatever the reason, I have made good money on improvers. But I earned much more from investing in innovators, which comprise almost all the unicorns in my portfolio.
Therefore, if you invest in high-tech companies, you should also ask yourself whether you invest in innovators or improvers. An honest answer will help you manage risk and, at some point, find the proper balance between your expectations and interests.
Published on Forbes