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Different Paths to Success for Tech vs Hardtech Startups

Having been lucky enough to invest in both tech (cloud, mobile, software) and “hardtech” (materials, cleantech, energy, life science) startups (and having also ran product at a mobile app startup), it has been striking to see how fundamentally different the paradigms that drive success in each are.

Whether knowingly or not, most successful tech startups over the last decade have followed a basic playbook:

  1. Take advantage of rising smartphone penetration and improvements in cloud technology to build digital products that solve challenges in big markets pertaining to access (e.g., to suppliers, to customers, to friends, to content, to information, etc.)
  2. Build a solid team of engineers, designers, growth, sales, marketing, and product people to execute on lean software development and growth methodologies
  3. Hire the right executives to carry out the right mix of tried-and-true as well as “out of the box” channel and business development strategies to scale bigger and faster

This playbook appears deceptively simple but is very difficult to execute well. It works because for markets where “software is eating the world”:

  • There is relatively little technology risk: With the exception of some of the most challenging AI, infrastructure, and security challenges, most tech startups are primarily dealing with engineering and product execution challenges — what is the right thing to build and how do I build it on time, under budget? — rather than fundamental technology discovery and feasibility challenges
  • Skills & knowledge are broadly transferable: Modern software development and growth methodologies work across a wide range of tech products and markets. This means that effective engineers, salespeople, marketers, product people, designers, etc. at one company will generally be effective at another. As a result, its a lot easier for investors/executives to both gauge the caliber of a team (by looking at their experience) and augment a team when problems arise (by recruiting the right people with the right backgrounds).
  • Distribution is cheap and fast: Cloud/mobile technology means that a new product/update is a server upgrade/browser refresh/app store download away. This has three important effects:
    1. The first is that startups can launch with incomplete or buggy solutions because they can readily provide hotfixes and upgrades.
    2. The second is that startups can quickly release new product features and designs to respond to new information and changing market conditions.
    3. The third is that adoption is relatively straightforward. While there may be some integration and qualification challenges, in general, the product is accessible via a quick download/browser refresh, and the core challenge is in getting enough people to use a product in the right way.

In contrast, if you look at hardtech companies, a very different set of rules apply:

  • Technology risk/uncertainty is inherent: One of the defining hallmarks of a hardtech company is dealing with uncertainty from constraints imposed by reality (i.e. the laws of physics, the underlying biology, the limits of current technology, etc.). As a result, hardtech startups regularly face feasibility challenges — what is even possible to build? — and uncertainty around the R&D cycles to get to a good outcome — how long will it take / how much will it cost to figure this all out?
  • Skills & knowledge are not easily transferable: Because the technical and business talent needed in hardtech is usually specific to the field, talent and skills are not necessarily transferable from sector to sector or even company to company. The result is that it is much harder for investors/executives to evaluate team caliber (whether on technical merits or judging past experience) or to simply put the right people into place if there are problems that come up.
  • Product iteration is slow and costly: The tech startup ethos of “move fast and break things” is just harder to do with hardtech.
    1. At the most basic level, it just costs a lot more and takes a lot more time to iterate on a physical product than a software one. It’s not just that physical products require physical materials and processing, but the availability of low cost technology platforms like Amazon Web Services and open source software dramatically lower the amount of time / cash needed to make something testable in tech than in hardtech.
    2. Furthermore, because hardtech innovations tend to have real-world physical impacts (to health, to safety, to a supply chain/manufacturing line, etc.), hardtech companies generally face far more regulatory and commercial scrutiny. These groups are generally less forgiving of incomplete/buggy offerings and their assessments can lengthen development cycles. Hardtech companies generally can’t take the “ask for forgiveness later” approaches that some tech companies (i.e. Uber and AirBnb) have been able to get away with (exhibit 1: Theranos).

As a result, while there is no single playbook that works across all hardtech categories, the most successful hardtech startups tend to embody a few basic principles:

  1. Go after markets where there is a very clear, unmet need: The best hardtech entrepreneurs tend to take very few chances with market risk and only pursue challenges where a very well-defined unmet need (i.e., there are no treatments for Alzheimer’s, this industry needs a battery that can last at least 1000 cycles, etc) blocks a significant market opportunity. This reduces the risk that a (likely long and costly) development effort achieves technical/scientific success without also achieving business success. This is in contrast with tech where creating or iterating on poorly defined markets (i.e., Uber and Airbnb) is oftentimes at the heart of what makes a company successful.
  2. Focus on “one miracle” problems: Its tempting to fantasize about what could happen if you could completely re-write every aspect of an industry or problem but the best hardtech startups focus on innovating where they won’t need the rest of the world to change dramatically in order to have an impact (e.g., compatible with existing channels, business models, standard interfaces, manufacturing equipment, etc). Its challenging enough to advance the state of the art of technology — why make it even harder?
  3. Pursue technologies that can significantly over-deliver on what the market needs: Because of the risks involved with developing advanced technologies, the best hardtech entrepreneurs work in technologies where even a partial success can clear the bar for what is needed to go to market. At the minimum, this reduces the risk of failure. But, hopefully, it gives the company the chance to fundamentally transform the market it plays in by being 10x better than the alternatives. This is in contrast to many tech markets where market success often comes less from technical performance and more from identifying the right growth channels and product features to serve market needs (i.e., Facebook, Twitter, and Snapchat vs. MySpace, Orkut, and Friendster; Amazon vs. brick & mortar bookstores and electronics stores)

All of this isn’t to say that there aren’t similarities between successful startups in both categories — strong vision, thoughtful leadership, and success-oriented cultures are just some examples of common traits in both. Nor is it to denigrate one versus the other. But, practically speaking, investing or operating successfully in both requires very different guiding principles and speaks to the heart of why its relatively rare to see individuals and organizations who can cross over to do both.

Special thanks to Sophia Wang, Ryan Gilliam, and Kevin Lin Lee for reading an earlier draft and making this better!

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Reading the Tea Leaves on PlayStation 4 Announcement

Sony’s announcement of the PlayStation 4 today has gotten a wide array of responses from the internet (including, amusingly, dismay at the fact that Sony never actually showed the console itself). What was interesting to me was less the console itself but what is revealed about the tech industry in the pretty big changes Sony made over the PlayStation’s previous incarnations. They give a sign of things to come as we await the “XBox 720” (or whatever they call it), Valve’s “Steambox” console, and (what I ultimately think will prevail) the next generation of mobile platform-based consoles like Green Throttle.

  • Sony switched to a more standard PC technology architecture over its old custom supercomputer-like Cell architecture. This is probably due to the increasingly ridiculous costs of putting together custom chips as well as the difficulties for developers in writing software for exotic hardware: Verge link
  • New controller that includes new interface modalities which capture some of the new types of user experiences that users have grown accustomed to from the mobile world (touch, motion) and from Microsoft’s wildly successful Kinect product via their “Eye Camera” (2 1280×800 f/2.0 cameras with 4 channel microphone array): Verge link
  • Strong emphasis during the announcement on streaming cloud gameplay: It looks like Sony is trying to make the most of its $380M acquisition of Gaikai to
    • demo service letting users try the full versions of the games immediately as opposed to after downloading a large, not always available demo
    • drive instant play for downloaded games (because you can stream the game from the cloud while it downloads in the background)
    • provide support for games for the PS3/2/1 without dedicated hardware (and maybe even non-PlayStation games on the platform?)

    Verge link

  • Focus on more social interactions via saving/streaming/uploading video of gameplay: the success of sites like Machinima hint at the types of social engagement that console gamers enjoy. So given the push in the mobile/web gaming world to “social”, it makes perfect sense for Sony to embrace this (so much so that apparently Sony will have dedicated hardware to support video compression/recording/uploading in the background) even if it means support for third party services like UStream (Verge link)
  • Second screen interactivity: The idea of the console as the be-all-end-all site of experience is now thoroughly dead. According to the announcement, the PlayStation 4 includes the ability to “stream” gameplay to handheld PlayStation Vitas (Verge link) as well as the ability to deliver special content/functionality that goes alongside content to iOS/Android phones and tablets (Verge link). A lot of parallels to Microsoft’s XBox Smart Glass announcement last year and the numerous guys trying to put together a second screen experience for TVs and set-top boxes

Regardless of if the PS4 succeeds, these are interesting changes from Sony’s usual extremely locked-down, heavily customized MO and while there are still plenty of details to be described, I think it shows just how much the rise of horizontal platforms, the boom in mobile, the maturation of the cloud as a content delivery platform, and the importance of social engagement have pervaded every element of the tech industry.

(Update: as per Pat Miller’s comments, I’ve corrected some of the previous statements I made about the PlayStation 4’s use of Gaikai technology)

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Why Comparing Google Drive to Dropbox is Missing the Point

Last week, Google unveiled its long-rumored Google Drive product with great fanfare. While the gaggle of tech journalists/bloggers issued predictable comparisons of Google’s new service with online storage/syncing services like Dropbox, I couldn’t help but think that most of the coverage missed the point on why Google Drive was interesting. Yes, its another consumer-facing cloud storage service – but the really interesting aspect of it is not whether or not it’ll “kill Dropbox/Box.net/iCloud/[insert your favorite consumer cloud service here]”, but the fact that this could be the beginning of a true web “file system”.

I’ve blogged before about the strengths of the web as a software development platform and the extent to which web apps are now practically the same thing as the apps that we run on our computers and phones. But, frankly, one of the biggest things holding back the vision of the web as a full-fledged “operating system” is the lack of a web-centric “file system”. I use the quotes because I’m not referring to the underlying NTFS/ExtX/HFS/etc technology that most people think of when they hear “file system”: I’m referring to basic functionalities that we expect in our operating systems and file systems:

  • a place to reliably create, read, and edit data
  • the ability to search through stored information based on metadata
  • a way to associate data with specific applications and services that can operate on them (i.e. opening Photoshop files in Adobe Photoshop, MP3s in iTunes, etc)
  • a way to let any application with the right permissions and capabilities to act on that data

Now, a skeptic might point out that the HTML5 specification actually has a lot of local storage/file handling capabilities and that services like Dropbox already provide some of this functionality in the form of APIs that third party apps and services can use – but in both cases, the emphasis is first and foremost on local storage – putting stuff onto or syncing with the storage on your physical machine. As long as that’s true, the web won’t be a fully functioning operating system. Web services will routinely have to rely on local storage (which, by the way, reduces the portability of these apps between different machines), and applications will have to be more silo’d as they each need to manage their own storage (whether its stored on their servers or stored locally on a physical device).

What a vision of the web as operating system needs is a cloud-first storage service (where files are meant to reside on the cloud and where local storage is secondary) which is searchable, editable, and supports file type associations and allows web apps and services to have direct access to that data without having to go through a local client device like a computer or a phone/tablet. And, I think we are beginning to see that with Google Drive.

  • The local interface is pretty kludgy: the folder is really just a bunch of bookmark links, emphasizing that this is a web-centric product first and foremost
  • It offers many useful operating system-like functionality (like search and revision history) directly on the web where the files are resident
  • Google Drive greatly emphasizes how files stored on it have associated viewers and can be accessed by a wide range of apps, including some by Google (i.e. attachments on Gmail, opening/editing on Google Docs, and sharing with Google+) and some by third parties like HelloFax, WeVideo, and LucidChart

Whether or not Google succeeds longer-term at turning Google Drive into a true cloud “file system” will depend greatly on their ability to continue to develop the product and manage the potential conflicts involved with providing storage to web application competitors, but suffice to say, I think we’re at what could be the dawn of the transition from web as a software platform to web as an operating system. This is why I feel the companies that should pay more close attention to this development aren’t necessarily the storage/sync providers like Dropbox and Box.net – at least not for now – but companies like Microsoft and Apple which have a very different vision of how the future of computing should look (much more local software/hardware-centric) and who might not be in as good a position if the web-centric view that Google embodies takes off (as I think and hope it will).

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