Growing a Resilient Business Outside of Silicon Valley
As a venture capitalist with over a decade of experience working at the intersection of investment, innovation, and economic development, Alex Lazarow knows that entrepreneurship is more nuanced than the Silicon Valley model. From Delhi to Detroit, great innovators are building sustainable and resilient businesses—and they’re doing so with a totally different playbook. Yet, when it came to the story of innovation, their experiences were largely missing. He wanted to change that.
Alex works with Cathay Innovation, a global investment firm with over $3.0 billion in assets and offices across the world. He also teaches entrepreneurship at the Middlebury Institute. In this episode of the Creative Confidence Podcast, Alex talks about his new book, Out-Innovate, and the alternative approaches to entrepreneurship he has seen outside of Silicon Valley.
What’s the Frontier?
Silicon Valley has long been regarded as the epicenter of innovation, but with advances in technology such as mobile phone proliferation, software that supports remote collaboration, and a digitally-connected customer base, innovation can now take root anywhere.
For Alex, today’s best entrepreneurs are solving problems largely overlooked by Silicon Valley and are operating under more constrained and challenging conditions. He calls this frontier innovation. The frontier is defined by three qualities:
- A nascent start-up ecosystem
- An economic landscape with less resources to support new businesses
- Environments that often have larger macroeconomic shocks (e.g. political issues or infrastructure gaps)
The frontier is nuanced. There’s Bangalore, which is an emerging market but with a developed startup ecosystem. Then there’s places with developed markets but a nascent start-up ecosystem like Alex’s hometown of Winnipeg, Canada. These complex ecosystems force innovators to get scrappy and creative to establish their companies and thrive regardless of the conditions. The Silicon Valley playbook doesn’t work at the frontier. Forget about “move fast and break things” and “scale at all costs.” Think resiliency and balanced growth instead.
Three Mindsets of Resilient Entrepreneurs
To succeed at the frontier means departing from the rules defined by Silicon Valley entrepreneurship. In this episode, Alex shares three mindset shifts that differentiate frontier innovation: from disruption to creation, from seeking abundance to embracing constraint, and from rapid growth to building a resilience business.
1. From Disruption to Creation
The entrepreneurial version of a David and Goliath story, disruption aims at an incumbent, inefficient industry or player and unseats it. Because it has worked extraordinarily well for some, disruption has permeated the narrative of what it means to be an innovator.
“In the Valley, we’re obsessed with the notion of disruption. Everyone is either disrupting or being disrupted.”
Disruption has also influenced the problems entrepreneurs are solving by rooting new business ideas in the context of existing industries or products that need replacing. This is the case in Silicon Valley, but the frontier is letting go of this mindset and replacing disruptors with creators.
Creators offer a product or service that was not previously available and that is tied to the mass market. A good example of this is Zola Electric, an energy solutions company. Worldwide there are around 1.2 billion people who can’t access a formal electrical grid. Many households still rely on kerosene, which brings with it a number of risks and downsides. Solar power would be a much better alternative, but you can imagine that households that need to burn kerosene also can’t afford a solar panel system. Zola created a solar solution paired with a pay-as-you-go business model that matches customers’ cash flows with a payment plan that they can afford. Through business model and technological innovation, Zola Electric is now the leading energy solution in the markets they serve.
As we see with Zola, frontier innovators focused on creation rather than disruption approach problems through a human-centered lens, meeting the needs of their customers and empathizing with their context. According to Alex, this is an important distinction between the frontier and the Valley. If you look at the more successful start-ups in the Valley, fewer are focused on industries like healthcare, financial services, agriculture, and education compared to the frontier. In his analysis, the human-centricity of frontier entrepreneurs is more than a reaction to the contexts they operate within—it’s a mindset.
2. From Seeking Abundance to Embracing Constraint
It’s no accident that entrepreneurs and innovators flock to Silicon Valley, a place defined by a concentration of funding, a deep talent pool, and a strong economy. Startups born in the Valley emerge in a resource-rich landscape. On the other hand, frontier entrepreneurs are locating their businesses wherever innovation is needed the most, which means they don’t enjoy those same benefits and instead face challenges with talent availability, market size, and funding access. To succeed, frontier innovators must learn to embrace these constraints.
“Constraints make things really challenging, but the best entrepreneurs are overcoming those challenges to create more successful businesses.”
To overcome the constraint of smaller local markets, frontier entrepreneurs adopt a mindset of “born global,” meaning that they focus on a product or service that has the ability to scale to many different regions from the get-go.
Zola Electric is a good example of this mindset as well. By building solar kits in China, coordinating across different markets from an operations center in Amsterdam, and utilizing top engineering talent out of an R & D unit in San Francisco, they managed to create a global network to achieve the end-to-end delivery of their service.
Constraints with talent are tricky because they get harder over time as the business scales. To overcome, frontier innovators, like Zola, build distributed teams in different regions or by going fully remote. This approach allows them to tap the best talent regardless of location, create teams with increased diversity, operate the business in different ecosystems, and increase their capacity to work across different cultures.
At the frontier, where challenges and constraints abound, innovators have to think more creatively about how they approach entrepreneurship. Ultimately, they craft more resilient businesses that enable them to better serve their customers and their employees.
3. From Rapid Growth to Resilient Businesses
In Silicon Valley it’s been all about chasing unicorns, the magical creature that represents a company valued over $1 billion. Much more than a number, it’s also a mindset. With the unicorn mentality, start-ups aim to scale at all costs. Rapid growth and an early exit after a couple of years are the markers of success. The pursuit of unicorn status brings with it high reward but also high risk. Alex sees frontier innovators taking a more balanced approach, embodied by a different mascot that represents and inspires resilience.
Enter the camel. Able to live without food and water for extended periods and capable of rehydrating faster than any other animal when water returns, the camel has adapted to survive the harshest environments. Unicorn or camel, the objective is still to build world-changing companies but to do so from a position of weaving sustainability and resilience into the business model at the onset.
Rather than scaling as fast as possible, frontier entrepreneurs take a balanced approach by scaling relative to their financial growth. They manage burn rate, understand the value they provide to their customers and charge for that value from the beginning, bring in capital appropriately, and take a long-term approach. It’s not about avoiding growth, it’s about scaling while also de-risking outcomes.
Alex points to the story of GrubHub, which only raised $84 million in funding (modest numbers compared to competitors that raised billions), focused each round on specific projects, and took eight years to reach their IPO. They could have done so faster, but that would have brought much more risk into the equation. They are now a billion dollar company.
The Road Ahead for Entrepreneurs
Months into the coronavirus outbreak, uncertainty in the air, a recession looming, you may wonder if now is the time to think about starting a business. While there’s been incredible disruption to our lives and business, we’re also starting to see new behaviors and adaptations emerging. Despite how scary things may seem on the surface for entrepreneurs, Alex has an optimistic outlook: “This crisis is laying bare some really big problems that we have, that in many cases are really big opportunities.” He envisions a new generation of companies led by world-changing entrepreneurs who are just beginning to understand these problems and will react as a result.
When it comes to investing during this time, he advocates for a lens that looks long on the horizon. Right now, we’re currently still in the eye of the storm, but you also have to consider the medium term after the eye passes and the long term as well. When it comes to the long-term, Alex is bullish. “Technology has demonstrated the ability to build incredibly enduring businesses, and the force of entrepreneurship is the biggest source of job creation in the U.S. and around the world,” he says. The medium term is all about businesses that can execute on a balanced growth approach.
According to Alex, it’s not only businesses that need to adapt: “We have to be entrepreneurs too, as VCs, and figure out business models that better serve our customers.” He predicts adaptations in the way entrepreneurs are supported—new business models and funding structures that work better for start-ups with an incremental, rather than exponential, growth trajectory.
While some of you may be building software companies in the Valley, many of you probably have your sights set elsewhere. The approach of frontier entrepreneurship isn’t the only model, but neither is the paradigm set by Silicon Valley. Considering that the future is certainly uncertain, as it always is, which approach will help you build a business that can endure the ups and downs that inevitably lie ahead? Will you go the route of the unicorn or forge ahead like a camel?
To take your learning further, check out our Business Innovation Certificate program where you’ll learn an accessible and actionable process to do the work of innovation, no matter your role or industry.
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