Emergent Business Strategy

An important part of a disruptive business model is the concept of an "emergent" strategy. In short, startups never start out with the right strategy, part of the entrepreneurial effort is figuring out the right strategy as you go - thus the right strategy "emerges".

As Clayton Christensen points out in "The Innovators Solution" (see link in previous post), a limited or "right" amount of funding can go a long way towards prompting the management team to focus on emergent strategy - they simply have no choice if they want the company to survive. In our Netfreight experience (see post below) we didn't focus on changing our strategy as quickly as we should have because we had the luxury of being patient because of our venture capital funding. When the funding dried up, we didn't have time to create a new strategy.

Contrast that with Coreflix, which was/is a bootstrapped company, so we were constantly focused on changing/emerging our strategy in response to customer feedback (and getting customers right away was in itself an emergent strategy!). We learned what worked and what didn't work much more rapidly and also connected with the customer much more rapidly, at far less cost.

Emergent strategy is key, and has also been pointed out using other terms, by Guy Kawasaki (who's garage.com - now garage technology ventures - also funded NetFreight.com). One of Guy's mottos was "Don't Worry Be Crappy" - which meant, "get your product to market and get some customer feedback." Then you could change your product and strategy based on the feedback. This weeks article by Robert X. Cringley also includes some interesting references to the emergent strategy concept. Instead of focusing on an individual company though, Bob points to VC investment models, and the generally known principle that only through taking chances on a lot of companies can VC's hope that one will be a big hit (Bob also points out that how much of a hit the winner needs to be has also developed into a problem for the VC business).

Referring to Christensen, the emergent strategy as applied to VC investing consists of hoping that one of your portfolio companies gets their own emergent strategy right! If VC's were to additionally impose some of the funding discipline espoused by Christensen on their portfolio companies (say through staged investment, etc.) rather than giving a thumbs up (you get $3M at once) or thumbs down (not well developed enough, not a big enough market, etc. - you get nothing). Maybe their batting averages would be higher overall, and maybe some of the investment "overhang" we read so much about would start to dissipate, and a whole new crop of startups would be created (which could be nothing but great in light of the current job growth/offshoring/outsourcing controversy).

This type of investing model is even more important today because most angel funding and corporate funding has basically disappeared. VCs no longer have the luxury of having these seed stage investors nurture companies to the first round institutional stage that the VCs are known for. However, given the incredibly cheap resources (including offshore development) available to today's entrepreneur, the bright side is that most startups can test their concept/business model/product relatively cheaply, in fact this can generally be done for $200,000 to $500,000 max. With the billions of dollars in VC funding available, it makes sense for VC's to devote $10M to $20M per year to these types of investments. Funding 50-100 companies a year with these small amounts would provide the VC investors with their next "institutional round" candidates, and would also spur innovation, employment and create the next generation of entrepreneurial risk takers. More on the details of managing a program like this in the next post.