The Third Wave: An Entrepreneur's Vision of the Future (9 page)

For anyone who has worked outside of tech, this advice may sound easy and obvious. For anyone who has worked in the business, you know how hard it can be. There is an attitude and a culture among some people in the tech world, where money equals merit, and where people are celebrated for brashness.

During the Second Wave, this swashbuckling attitude often worked to the benefit of companies, but mostly because they didn’t need to build partnerships. In the Third Wave, this same attitude could be devastating to a company’s prospects. In the Third Wave, disruption cannot be a mantra; it has to be a strategy. And while your product has to be great, your partnership skills may end up determining your success or failure.

We saw this with the rise of MOOCs, or massive open online courses. The original idea was that these companies were going to offer a platform for learning, where anybody could be a professor and anybody could be a student. But it didn’t take long before the folks behind these companies realized that they had to pivot to an enterprise model, selling the platform
to companies rather than consumers. And to be credible, they realized, they had to partner with Harvard and MIT and other top schools, bringing in credible brands to give their corporate customers comfort about the quality of the learning.

The problem was, even though companies could get to market with the core MOOC technology relatively quickly, they made a lot of noise doing so. They were unwisely public in their criticism, calling universities irrelevant and pledging to drive them out of business. Then one day they realized they needed to pivot, and the very universities they had said would soon be irrelevant became important partners. One of the leading MOOC companies, Coursera, even hired the former president of Yale to become CEO. The credibility and relationships he brought were viewed as critical to the future of Coursera.

Third Wave industries are some of the most regulated in the country—and usually for good reason. We don’t want businesses selling drugs that haven’t been approved by the FDA, or companies selling unsafe food to our children. We don’t want a startup to unleash self-driving cars onto our highways or self-flying drones into our skies unless we’re sure they’re safe. And whether you want to build a wind farm or a solar farm, companies can’t build things in the real world with the same freedom they might in the virtual world.

It doesn’t matter whether you think that’s a good thing
or a bad thing. It is not going to change. There are battles over unnecessary regulations—and there should be—but the changes sought, even when meaningful, are always going to be marginal in comparison to the size of the regulatory regime.

Government will always play a role in Third Wave industries, and that means Third Wave entrepreneurs must have a fluent grasp on the policy issues they will encounter. New lending platforms require Securities and Exchange Commission (SEC) clearance. Personalized genetic testing requires approval from the Food and Drug Administration (FDA). Delivery devices can’t be flown without clearance from the Federal Aviation Administration (FAA). And the list goes on and on.

Third Wave entrepreneurs will need to engage with governments. The challenge, of course, is that few founders are policy wonks, and even fewer have the time (or desire) to become regulatory experts. They’ll have to hire them—or at least rely on them—from the beginning. A lot of companies won’t be able to get venture funding without demonstrating a credible go-to-market strategy, including how to manage regulatory issues. No matter how good an idea, a Third Wave company that lacks a clear strategy for policy is a dangerous gamble for investors. It’s not that success is impossible; but the odds make it a difficult bet.

We’ve watched the risk factors change as each wave evolved. In the First Wave, technology risk was the great concern—can you build it? In the Second Wave, market risk was paramount—if you build it, will the masses adopt it? In the Third
Wave, policy risk will become more important—will you be able to navigate the rules and successfully bring your product or service to market?

Perseverance is part of the story of
every
successful company. But Third Wave entrepreneurship will require a special kind. A great Third Wave idea will have dozens of obstacles to viability, not just with hardware and software but with logistics and supply chains, with partnerships and policy. And it is all too easy to see any one of those obstacles as fatal. A partnership fails. A regulator objects. The company is adrift. But during the Third Wave, things can change quickly. In 2014, when genetics-testing company 23andMe was prohibited by the FDA from selling its products, many observers believed the company was dead. But less than a year later, the company was able to get a special exemption from the FDA and restart its sales. Had they not persevered, they wouldn’t have been around to relish the victory.

AOL was a decade-in-the-making “overnight success,” and we had many near-death experiences before we succeeded. The same will be true of many Third Wave companies. There will be the occasional come-out-of-nowhere phenomenon, but the next generation of entrepreneurs is going to need to be prepared for a long slog. And the Third Wave will require a high degree of adaptability. Your initial product may
not survive its first contact with the marketplace. Or with regulators. Or, perhaps partners you seek to align with will demand some adjustments. You’ll have to keep adjusting, tweaking, pivoting.

The winners of the Third Wave will be those who chase big-impact ideas with a sense of urgency—but also methodically and diplomatically. Third Wave companies will have to find a perfect balance between two competing ideas. On the one hand, disruptive success depends in some ways on ignorance. It requires a fresh perspective and the ability to look at new paradigms without being burdened by legacy dogma. The founders of PayPal like to say that if any of them had actually worked in the credit card industry, they would have been too fearful to give their new business a try. In this sense, thinking like an incumbent is a disadvantage. Yet on the other hand, understanding the dynamics at play in the industry and having a clear view of potential partnerships and policy issues will increasingly be prerequisites for success—or at least for avoiding major roadblocks. Third Wave entrepreneurs must find a way, then, to bring both viewpoints to bear—the nuanced perspective of the defending incumbent and the relentlessly disruptive mind-set of an entrepreneur on the attack.

A
S THE
Third Wave approaches, many long-established, stable, profitable corporations will be in jeopardy. A 2015 report from Reuters noted that “the top executive of many a corporate giant must feel like the fictional character Gulliver, waking up to find themselves under attack from modern-day Lilliputians, small start-up companies which overwhelm their established rivals with new technologies.” Many of these industries were somewhat immune to technological changes in the first two waves of the Internet and may, as a result, face this next wave with complacency. They do so at their own peril.

Plenty of companies will sit on the sidelines, assuming all will continue to be fine. They follow a long line of businesses, once heralded, that failed to adapt and then failed to survive. Perhaps that’s why business leaders said, in a 2015 survey by
the Global Center for Digital Business Transformation, that nearly half of the top-ranked companies in their industries will be gone by 2020. But the Third Wave is not just a fait accompli that corporations must defend against; the best leadership teams will recognize it’s something they can take advantage of. As Peter Diamandis, founder of the XPRIZE nonprofit, put it, “It isn’t that entrepreneurs are smarter than companies, it’s that they are trying more crazy ideas, taking more shots on goal.” There will be some corporate leaders who will develop a strategy to take more shots on goal—to get in front of these opportunities rather than chasing them from behind.

The conventional wisdom may be that startups are the future, while established corporations are all relics of another world. But many of the world’s biggest companies are teeming with talent and resources, creating new and innovative products all the time. In 2014, for example, Johnson & Johnson spent more than Google on research and development. And though the most rapid growth in R&D is happening in the software and Internet industry, as of 2014, less than 10 percent of total corporate R&D came from tech companies. Most of the world’s biggest ideas are still hatching elsewhere.

Consider the self-driving car, a technology that has captured the imaginations of executives at Google and Uber, who are competing to develop a street-legal vehicle that will help us redefine our commutes. But the idea of a self-driving vehicle was not first born in the tech sector; it was born in the
agricultural sector. Plenty of farmers were operating self-driving tractor technology before Google ever entered the space. Illinois-based John Deere was developing GPS navigation systems for its tractors more than twenty years ago—before Google was even founded.

John Deere executives may not have appreciated what they had, and they were likely not in a position to build a commercial self-driving car division from scratch. But what if they had created a spin-off company to commercialize their self-driving technology, or licensed the technology to a partner? Perhaps John Deere, a nearly two-hundred-year-old company, could have become one of the leaders in Third Wave transportation.

In some industries, the most successful Third Wave companies may also end up being the most established. They’ll be the companies that took the Third Wave seriously enough to get ahead of it. But what does that entail, exactly?

It starts with developing a point of view—a hypothesis that the world is changing. Just the simple act of a CEO embracing and articulating such a world view is critical. It’s a way of delegating a mix of paranoia and curiosity, making people a little nervous and getting them out of their comfort zones. It’s also a way of expressing optimism, rather than dread, about the future—which naturally gets employees to pay more regular, focused attention to what is happening around the edges of
your industry, with an eye toward what may happen next. It’s about lifting up the people in your company who are seeing around corners, and giving them the support—both emotional and financial—to innovate.

Incumbents often fail because they underestimate the speed at which the future is approaching. People at startups think about the future every day. Venture-scale investors are seeking companies with the potential to reach at least $100 million in revenue and go public. In the startup world, staggering sums of money are chasing some of the world’s biggest ideas. It’s only a matter of time before the right entrepreneur with the right idea connects with the right venture firm. The corporate mind-set is often to avoid mistakes, but in a world that changes rapidly, doing nothing can be the biggest mistake. Sometimes waiting for all of the facts can be riskier than taking a leap of faith.

Incumbents also fail because of the size of their organizations themselves. Frequently, large companies have a decision-making process where many people have the power to stop an idea, but very few have the authority to green-light one. This creates an environment where there is a strong bias toward “no.”

Objects in the mirror are closer—far closer—than they appear. One of the biggest mistakes companies make is overlooking the impact of nascent technology. Too often corporate executives are too shortsighted to understand how technology that is disrupting a different industry might be adapted to do the same to their own. Uber might be disrupting taxi services
today, for example, but as they move into the delivery business, will Uber disrupt FedEx or UPS tomorrow?

Second, corporate recruiters need to be working overtime hiring and retaining and celebrating and protecting the innovators within their walls. There is a mythology in the tech world that the best talent gravitates toward startups. But many of the smartest, most creative people in the world can be found working at some of its biggest, oldest companies. Siemens employs 90,000 research scientists. Monsanto employs some of the sharpest agriculture technology minds on the planet. GE’s research labs are filled with brilliant PhDs. The raw talent is there; the question is how it is organized and whether it can be mobilized to innovate. It’s not enough to employ these kinds of thinkers. They need to have a voice, along with the resources and protections that will enable them to commercialize their ideas. They need a level playing field to stay in front of their startup competitors.

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The challenge for Fortune 500 CEOs is to leverage scale advantages, while injecting a tempo of speed and a culture of risk. At Facebook, engineers are encouraged to “move fast and break things,” not because Mark Zuckerberg is reckless, but because he understands that innovators need the space in which to take risks. At most large companies, innovators are often discouraged from even sharing their ideas. That’s self-destructive—and self-reinforcing—behavior.

What these transitions will ultimately require is companies willing to self-disrupt. As Steve Jobs once put it, “If you don’t cannibalize yourself, someone else will.” Yet the challenges of doing so are substantial for entrenched companies, and have been made famous by Harvard professor Clay Christensen in his book
The Innovator’s Dilemma
. As he writes, the greatest challenge for successful companies is focusing on customers’ current preferences while preparing for their future preferences. In a CBS interview, Jeff Bezos said it plainly: “Amazon will be disrupted one day. I don’t worry because I know it’s inevitable.”

Some companies have proven successful at self-disruption. Apple’s unprecedented growth has required the destruction of some of its most profitable products. The iPhone hurt iPod sales. The iPad cannibalized the MacBook. Amazon, too, has moved swiftly in this way. Having built its reputation and revenue on selling printed books, Amazon recognized that the ebook industry would rule the future. So they built it themselves—the hardware and software—and now they own the past and the future.