Innovation: process vs product

Innovative products and people who build them make my work in venture capital enjoyable .  In my mind, VC investing means feeling innovation’s pulse.  Over the years, I have started to classify creative ideas into two broad categories: :  process innovations and product innovations.  You need some combination of the two or no deal.  Here’s how I classify innovation.

Process Innovation:

If you came up with a novel way to do something unchanged for years, but have not created a new technology enabling that improvement, you are a process innovator.  Process innovators focus on changing how something is done,  and not on what is done. There is absolutely nothing wrong with that.  Some examples of fantastic companies that changed existing processes:

  • Groupon has taken two simple desires:  the consumer’s want of a good deal and the vendor’s need to get new customers, joined them in a clever way, and became a big business commanding a huge valuation. Most people look for bargains and Groupon’s  value proposition makes  sense.  There are arguments on whether Groupon’s innovation will turn out to be sustainable, but one can not argue that Groupon has pioneered and scaled the “offer space” like few others.  Because of Groupon,  how merchants attract business and how people buy has changed.
  • Redfin changed the way people buy and sell houses by mixing internet technologies with a novel way of running a real estate agency.  Redfin’s CEO happens is one of my best friends (and former co-founder) Glenn Kelman.  When Glenn originally described the company he was joining, I  remember shaking my head and asking “so, what’s new about that?”  I was thinking as a software engineer.  But, as I saw and read more about Redfin, I understood that the company is not about creating new software but rather about creating new approach to an old marketplace, about changing how real estate is sold.  The technology enables the new process.  Redfin is a process innovator in my book.
  • FreshDirect simplified the way I shop for groceries in Manhattan.  Since FreshDirect first appeared on my radar in 2003, I have shopped at traditional Manhattan supermarkets only about a dozen times.  I can not imagine my life without this service.  Shopping for food is not a new idea, nor is delivery.  But FreshDirect, combining technology, supply chain management, and service has changed how I stock my refrigerator.

Note the similarities:  take a process that could use improvement (clearing out old inventory, dealing with obscure real estate listing services and questionably motivated realtors, or hauling grocery bags), use  technology, change the routine, and you have a new company.  All companies I mentioned are useful, profitable, and growing.  Competitive barriers these companies create appear due to the size to which their operations have grown.  Sure, I can start a company that lets you order groceries on-line (as others have tried), but, to match FreshDirect, I will have to build a warehouse, stock it with perishable food, buy a fleet of trucks, and hire an army of delivery people…  hard to do, expensive, and time-consuming.  Groupon clones are the rage these days, but, what most don’t understand, is that to compete with Groupon they will need a sales staff to match (4,000 of Groupon’s 8,000 employees work in sales).

Indicators of process innovators’ potential:  traction.  That’s about it.  The market should be big, obvious, and already exist (bricks and mortar retailers, real-estate agencies, grocery stores) and waiting for disruption.  Companies needs to have some semblance  of a product built, the product should be in the public’s hands, and the adoption curve should start showing exponential growth.  Their products’ adoption often is “viral.”  I don’t think it makes sense to place a bet on a process innovation without real evidence of this exponential adoption.  Investments in process innovators are expensive because the goal is to grow the customer base faster than the competition — to outgrow them, usually by outspending them.

Product Innovation:

My technologist’s heart tends to favor this group.  Product innovators make you exclaim “wow, that’s really a clever idea!”  The company still needs the right market and a great team (see earlier post), but I tend to want to invest more time in these companies and, instinctively, like to invest in them.  Real product innovations are few.  Real product innovators in a market that’s right are even more rare.

Some examples of product innovations:

  • Nintendo Wii has integrated an innovative controller technology into a prevalent gaming platform and changed the way we enjoy console games at home.  There have been hardware extensions to video games (GuitarHero guitars, racing wheels, and Twister boards), but the idea that we will make a hand-held device that translates kinetics into visual screen feedback, and  its simple implementation are new.  The original “Pong” was a tennis match.  Tennis on the Wii is radically different from any video game I have ever played.  The Wii had changed what we mean by playing a video game.
  • Square.  I stood in a taxi line at JFK sometime in 2009 next to a young man also waiting for a cab.  He asked me what I did.  I told him I was a software entrepreneur.  “Me too,” the young man said and pulled from his pocket a little white square that he plugged into his iPhone.  That young man turned out to be Jack Dorsey.  He showed me what the product did in about 2 minutes.  “Whoa,” I said, “this is really cool.”  I thought using the audio port was clever, that the form factor of the little square was great,  and that capturing my signature on-screen was nifty.  I thought this product will go far.  It did, and I couldn’t be happier for Square and its founder.  Mobility + simplicity + plastic economy = a product innovation that will keep on growing.  I am sure that Jack has something figured out for the NFC wave coming next.  Square changes what accepting credit card payments means.
  • NodeJS. In early 2010, Rafael Corrales from LearnBoost told me that they were building their online gradebook using a server-side JavaScript technology platform called NodeJS.  Having written both client-side and server-side code myself, I thought it was an intriguing platform choice.  Here was a server that used all the well-known features of JavaScript, but, by its design forced the developer into a even-driven programming model underpinned by JavaScript’s known ability to “do closures”.  NodeJS, as I learned from my reading and after doing some coding with the platform, is ideal for today’s heavy-trafficked, responsive, real-time web sites.  And, since then, listening to Ryan Dahl (Node’s creator) I keep repeating “Wow, this is awesome.”  What a terrific product innovation that changes what we will be expecting from real-time web programming and design.

Indicators or product innovator’s potential: the idea. Here, “why didn’t I think of that?” is the reaction you should expect.  From an investment point of view, the goal is to make sure the market for the idea is correct, make sure the company has a roadmap for what to do when the idea is no longer new, and that it gets enough money to move quickly and confirm the invention’s market applicability.  Money is important because talent acquisition is paramount.  But these usually don’t take as much cash as process companies.

 


 

This is how I look at innovation. And I feel that there are great opportunities to invest in both types of innovators: process and product. However, personally, I am much more of a “product guy” than a “process guy.”  Venture capital firms, or partners in each firm have preferences and comfort zones with one type of innovation or the other. When considering whom to approach with your idea, also consider the personal preferences of the individual listening to the presentation. Will it be building a better mousetrap or figuring out a way to get more mice to run into existing ones?  I welcome the new mousetraps.

Enhanced by Zemanta

About Kirill Sheynkman

I am the Senior Managing Director of RTP Ventures. I am a three-time founder of software startups including Stanford Technology Group, Plumtree Software and Elastra (an acquisition, an IPO, and a failure): spent most of my life building companies and working with VCs. Now a VC myself. Still not 100% sure I like it.

9 comments
JGreene65
JGreene65

Thanks alot. I really enjoyed this read. Gets the ol' braincells ticking!

kevinneary
kevinneary

But what of the time dimension here. If hypothetically speaking, linkedin, facebook, twitter in their current form, were to hit the market today, for the first time: - they may be considered process innovations, as somebody else would already be credited with capturing the product innovation in their respective categories.

In the current landscape, is it feasible to aim for product innovation on the back of process innovation. Is this approach aligned with what investors look for given that the capital structures and funding strategies of product and process companies are different?

kevinneary
kevinneary

But what of the time dimension here. If hypothetically speaking, linkedin, facebook, twitter in their current form, were to hit the market today, for the first time: - they may be considered process innovations, as somebody else would already be credited with capturing the product innovation in their respective categories. From an entrepreneurial strategy perspective, is it feasible to aim for product innovation on the back of process innovation. Is this approach difficult to fund with the capital structures and funding strategies of product and process companies being different from the outset?

zhenchen.wu
zhenchen.wu

Would product innovation inherently create new process? By using a new product, people would change "how" they do certain things (how they play video games, for example). And what about social networking sites like facebook, twitter and linkedin? I would think they are process innovations, as they changed how people share information with others, and traction is key to their success. Did I get this right?

kevinneary
kevinneary

This is so worthwhile! To understand clearly, the preferences and comfort zone of all partners would dramatically improve the process of engaging with VCs.

sheynkman
sheynkman moderator

@kevinneary Look, both types of innovators can be winners. I just like product. And time dimension: Look at Yahoo and Google. Arguably in the same market with the same product (search engine product, advertising dollars as market, traffic as goal). Same investor (Mike Moritz). Yahoo: process innovator. Who would have thought you can give away a product and make money on ads the way the publishing industry has been doing for year on this thing called the internet? Google: who would have thought you could actually build a product that delivered more relevant results, faster, and with more scalability in a search technology space that seemed very tired at the time?

I would have MUCH preferred to be the Google investor... both would have been nice too.

sheynkman
sheynkman moderator

@zhenchen.wu I don't think necessarily a product innovation changes the process. For example, the Pony Express is a process innovation in how mail is delivered. The automobile is a product innovation (and it could also be used to deliver mail). I my software world, product means software.

Every software product or service is a combination of both product and process. However, the article is about what is the innovation.

Facebook: lots of product innovation as well as process (the wall, the like button, an architecture that gave us a lot of code that is now open-sourced (s.a. Cassandra). Twitter (the real-time messaging, hashtags, follows).

Groupon - all innovation is in the process, Craig's list same thing.

sheynkman
sheynkman moderator

@kevinneary Maybe it's because I am new to "the other side of the table." But I prefer to be honest about things that I find interesting vs. pretending to know something about everything. I'd rather say "I don't know" than have an HBS-case backed opinion on topics I shouldn't.