Promising Deltas

I've always wondered if it is possible to tell with reasonable accuracy a given technology startup's fate, i.e., whether it will cease to be a startup someday and join the ranks of big companies. This question seems very much like telling the future and its definitely so if not any more difficult. In fact it's so difficult that even the smartest people in the trade, namely entrepreneurs and venture capitalists often get it wrong. So is it worth spending time trying to answer this question ? I don't know, but in this article I'll try to present one way of attacking 1/10th part of the problem - namely the strength of the idea.

Firstly, to set the expectations right, let me point out that even though the idea provides the foundation for a company, it's not the most important thing. At the end of the day it is the execution of the idea that matters most. I won't go into the details of this argument but there are plenty of entrepreneurship books around which seem to talk about this and only this. However, I'd like to point out that it's easier to predict how well an idea will be executed than to predict the strength of the idea itself. For example, one trick is to always bet on the rider and not on the horse. If the management is good and have a track record of success, if the founders are reliable and experienced people, most likely they won't screw up.

Evaluating ideas is more difficult because in general there success depends on too many variables. For example, is it possible that the competition can produce the same product or service for cheaper, or whether customers will accept the product or service, or whether another product or service could be used as a cheaper substitute, etc. Answers to all these questions depend on future events that are yet unknown, thereby making prediction of an idea's fate seem extremely difficult. Still, unless we answer these questions one cannot truly evaluate an idea. This article discusses one approach for looking into the future to gauge an idea's potential.

Let's start with some trends in information technology (IT). IT is growing at an enormous rate. This can be attributed to the number of people working in this field which is generating a very rapid pace of innovation. Whenever an industry grows at such a rapid pace, pockets of inefficiency appear in the system. Since this whole process is so dynamic, these pockets or "deltas" in efficiency may grow to be bigger gaps, or may disappear with the next change in the industry. These deltas are the future Googles, Yahoos, and VMware. The best thing a startup can do is to align itself with a delta that is only going to grow. Of course, identifying the promising delta is like telling the future and thats not easy at all. However, if one can identify inefficiencies in the right areas, it can make a very good business proposition.

Several areas in IT are doubling in size every year. This is common knowledge, but we often fail to see the long term impact which is the whopping 1000X increase this amounts to in just a decade. What looks like an unworthy opportunity today could be tomorrow's billion dollar company. Opportunities arise all the time as tiny deltas but can grow to become huge gaps in a few years time. You cannot hope to fill the gap when it becomes large enough cause then several people will come in for cashing on it. Your best bet is to start working on a tiny but promising delta today so that when it is big, you are ready for it. Ideas that are aligned to widening gaps in the industry grow and others perish. The trick is to be able to see these gaps, to be able to calculate which of them will grow, and align yourself and your startup with them.

Let’s look at some recent examples of successful startups that became major corporations and how they aligned themselves to the right deltas. VMware for those who don’t know is the market leader by leaps and bounds in virtualization. VMware was described by Sun’s CEO Jonathan Schwartz as "an apology from the software industry to the hardware industry as we (software industry) were allowing servers to run with very low utilization". When VMware was founded in 1998, the problem of under-utilization was not as serious as it would be today without virtualization. But hardware manufacturers were making ever faster servers while software vendors failed to utilize them fully as they were trying to solve a totally different problem (stability, gui, security, etc.). Over time, this small delta in utilization grew into a huge delta within a decade resulting in the billion dollar company VMware. There are two observations to be made here. First, the software and hardware industries diverged in utilization not by accident but by nature. Computer programmers don't write programmers so as to use all the CPU available in a system, but CPU makers try to put in more and more horse power into their CPUs. So the delta always existed and given the rate at which these two industries grew in the last ten years, the delta also grew proportionately. Secondly, a promising delta doesn't say anything about what would be the right technology to fix it. People took several different approaches towards solving the utilization problem and not all of them worked. But it does tell us that if a company aligns itself well with a burgeoning delta, it has a better chance of survival.

Yahoo was the market leader in the search industry in the late 90s when Google was founded. Yahoo search did a pretty good job for Internet search in those days but as the Internet continued to host more and more data, a delta appeared for better ways for searching this vast information space. Google grabbed this delta and grew along with it. But today, there is a new trend that is spawning yet another delta in Internet search. As more and more people are getting hooked to the Internet, there is a huge reservoir of new web content in the form of user generated content. There is a significant delta between Internet search and the vast pool of user generated contents. This delta is all set to grow with time and will result in dozens of companies being founded. We are already seeing major corporations being founded on this delta, e.g., YouTube, Wikipedia all try to reconcile Internet search with user generated content.

In summary, as small trends get amplified over time due to the incredible growth rate of IT industry, new opportunities are being created all the time. It is difficult to miss promising deltas which are the ones at the crossroads of rapidly growing domains.