True Innovation Needs A Viable Business Model


The news that caught my attention the most this lazy long weekend was that Better Place was liquidating . http://news.cnet.com/8301-11386_3-57586236-76/electric-car-startup-better-place-liquidating-after-$850-million-investment/ . Of course there was the SAP announcement of organizational changes – but my thoughts as an employee ( that too just 5 months as employee) might not be of much interest to anyone else.

Although alternate sources of energy is a top concern of our generation, that was not the reason I remembered this company called Better Place . I remembered it because of my sense of awe on how quickly Shai Agassi raised multiple rounds of funding – each in 100s of millions of dollars – to turbocharge the progress of his company . I have always been a fan of Shai’s ability to explain his vision in a compelling way to his audience . So it was no surprise that he could garner support like he did . This vision was further backed by investment bankers who concluded that the days of gasoline engine were numbered.

On Social media, the mood I saw was along the lines of “This was bound to happen given the idea was ahead of its time, but admirable that someone chased a dream despite many obstacles”. I beg to disagree – There is nothing admirable in reckless spending of investor money and running a company to bankruptcy in my opinion . If anything , that just is a terribly costly way to show how not to innovate . Innovation without a viable business model is just wishful thinking at best and an unmitigated disaster at worst .

I do hope that Shai dusts off quickly, and becomes successful at this venture itself or something else. And I hope and pray that alternate energy problems we face do get solved one day soon .

The other topic that I got to discuss with my friends this weekend was whether “disk is dead” – In the context of software innovations. I think the electric car company’s unfortunate demise has some lessons that IT industry should pay attention to . For most of the last decade , I have spent most of my time supporting clients in semiconductor industry. Every time I hear “disk is dead” – I am reminded of the economics of that industry that I have watched over the years. When we try to innovate without keeping the economics in mind, what suffers the most will be adoption .

I might be off in exact numbers – but roughly, I think there is 10 to 12 times the capacity to create disks today compared to flash . No doubt flash will increase market share many fold going forward, but not at a clip that disk will become extinct any time soon. Why ? Because it is not easy or cheap or fast to set up a new fab to manufacture flash . All semi companies of the world together might not have the resources (probably in hundreds of billions of dollars) to convert the world from disk to flash any time soon . And if they did so on leverage, most of us would not have the purchasing power to afford our fancy mobiles and tablets anymore 🙂 . What about DRAM then ? A similar logic exists – compared to SSD , DRAM is dearer by 3X or so.

Then there is the cost of disruption – customers have heavy investments in existing technology. For sure there are enough cases where price-performance plays in favor of the more expensive DRAM and SSD solutions . However, the “right time” for all business problems is not “real time” ( Yet ). So for innovation to be viable – at least till hardware manufacturing economics catches up – solutions working on DRAM and SSD need to be able to work closely and efficiently with those that make good use of Disk . And if you listen closely to industry observers you will already hear a lot about “RAM is slow” ! So in a few years, we will need yet another version of hybrid solutions .

Smart vendors realize this and build solutions that make good use of existing technologies, while enabling rapid and useful change with disruptive technologies . Their not-so-smart competitors stick to old or new technology exclusively and either die of obsolescence ( innovators dilemma types ) or of running short of resources and demand ( like better place example) .

Easier said than done – even a genius like Shai couldn’t get technology and business model right at the same time . But cheers to the leaders who get it right ! And I do hope Shai gets it right in his next try as well .

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10 thoughts on “True Innovation Needs A Viable Business Model

  1. Since when has risk of failure prevented enterprenuers / inventors to seek out the joy of adventure?

    Innovation is management speak, invention is the original idea of enterprenuers. Entrepreneurship by its nature is ‘being reckless’ to a casual observer particularly managers.

    Most venture funds know it and seek 40x returns and so 4 failures to 1 success is yet profitable mathematically.

    Investing on the horse and not so much on business model, Vijay. Read somewhere that Shabeer Bhatia got his money for a business model on back of paper napkin.

    To think like an inventor/enterprenuer I think one has to come out of modern management bubble.

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  2. Creation is messy. I see this simply as a long shot, that didn’t pay off. Investors knew it was a long shot and if it worked, they’d be the next Getty’s and Rockefeller’s of the world (if they aren’t already). I don’t think any of the investors will forego a meal or sleep with this loss. It is just big stakes poker.

    Change occurs in 2 models – evolution and revolution. If you look biological evolution – you will find it is really made up of a series of smaller revolutions. Lots of attempts with a few successes and mostly failures. I guess, I simply admire those with the vision, energy, and courage to take the leap.

    Much of what we call innovation in business is incremental. Recombining of old with drop of new. It does move our business forward. It does make a big difference, but it doesn’t conceive a new industry. I envy those who do make these leaps, and do successfully. I also agree, I hope he gets it right next time.

    As to disks, I don’t think secondary or tertiary storage is going away. IBM just announced $1B in solid-state disk technology investment. I’m sure we did our homework. I’d say that spinning disks may go away, but external storage. http://zd.net/YfjptL. New memory technology called Phase change memory that looks very promising (http://ibm.co/r2yT5E and http://bit.ly/7hnAuz).

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  3. Hi Vijay,

    “There is nothing admirable in reckless spending of investor money and running a company to bankruptcy in my opinion.” I don’t know how they spent investors’ money but if it was spent recklessly, sure there’s nothing admirable. Fail fast is a relative thing. In some cases, failing in one day may be considered slow;in other cases, failing after 10+ years (plus millions of dollars) may be considered fast.
    The most important thing is: Did human kind learn lessons from their failures? What can/should be changed to address the top concern of our generation namely, as you pointed out,alternate sources of energy. As a result of that failure, would next project on finding alternate sources of energy spend less? Sure, this doesn’t address the issues of the creditors/investors/customers. I hope they understood the risks involved before they decided to invest in new unproven technologies.

    Bala

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  4. I think there are several points to be considered. I think that Shai comes from a very strong entrepreneurial background but his background was IT. That is a very different industry than the car industry which also obeys to very different rules. The thing that made Shai / Better Place fail was the mere fact that they invested a lot of money without counting on the main part of the business the Car Industry. For the Car industry to agree on common standards is very difficult. In the case of the batteries it was even worse since all would have needed to adapt their design to Better Place… why should they do it ????
    Further the evolution of super fast charging batteries have made battery changing stations obsolete.
    Vijay you made a very interesting analogy with Flash and DRAM. With the adoption of Flash being very fast and the prices going down significantly… why continue to bet on DRAM ??? The futher advantage of really using Flash inside a server vs DRAM are multiple.
    1. Persistent already
    2. Just as fast
    3. Can be much bigger than today DRAM configurations by design
    The market and the market forces are the ones who will tell us all who is right or who is wrong. I am sure that we will still see quite interesting changes ahead of us

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  5. I strongly believe that a viable business model is the one that differentiates the successful products from the not so successful ones and not the product per se. Identifying the right one is the tricky part as many a times one needs to think away form the beaten path be bold and make some bets.. What i do not see is the decision to cut losses when the model becomes nonviable. Firms press on throwing good money after bad.
    In the case of Better Place, i assume they failed to switch track early enough. 850M and 6 years is along time to learn a lesson. At the same time, I believe that Shai will bounce back soon with a better option.

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  6. I don’t know Vijay. Don’t you think failure is an integral part of innovation? There are often some expensive failures along the road of innovation and certainly financial failure is not what we should be emulating, but dismissing something as “how not to innovate” for the simple reason that it failed financially seems wrong to me as well.

    It seems to me that innovation can take a slow-and-steady approach or a big-and-fast approach. There are advantages and disadvantages to both. In the slow-and-steady approach, where investment is minimal until financial success is demonstrated, failure is less expensive but innovation also takes longer to come to fruition. In the big-and-fast approach, everything is accelerated by massive investment dollars, so both successes and failures tend to be huge. The question, I guess, is whether the acceleration is worth it.

    In the case of Better Place, I don’t think the idea was ahead of its time at all. In retrospect it was just the wrong idea. Battery technology (and therefore range) is getting better faster than it is possible to build out a network of switching stations. With a car like the Tesla Model S, the need for switching stations in a country the size of Israel or Denmark is minimal. You can drive pretty much anywhere in the country on a single charge. Better Place’s technology was just the wrong bet. But if it had been the right bet, we’d be 5+ years ahead on implementing that technology right now.

    Meanwhile, Tesla has raised around $1 billion and, if stories are to be believed, was (along with Elon Musk) within a hairsbreadth of bankruptcy at one point in it’s 10-year life. But it looks like they eked past and actually made the right bet with regards to battery technology. Good for them, and I’m glad they started their mission in 2003 and not 2013.

    But in 2007 (when Better Place was founded) I don’t think we could have predicted which bet would succeed. Does that mean neither effort should have been made? I don’t think so. Does it mean that the efforts should have been allowed to stay small until validated by market success. Not sure that would have worked either. If that had been the approach, it might be another 5 years until we figured out which approach we should really invest in.

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    • I do see your point, Ethan

      Failure surely is a part of innovation – assuming you fail fast . Multiple rounds of 100M funding later , I find it hard to agree that failure is an option – that is why I think it was reckless . Was it impossible for them to see the feasibility was not there for the idea till 850M was spent ?

      Not just the investors and creditors – What about customers who already bought the cars ?

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  7. Strange observation: “There is nothing admirable in reckless spending of investor money and running a company to bankruptcy in my opinion . If anything , that just is a terribly costly way to show how not to innovate . Innovation without a viable business model is just wishful thinking at best and an unmitigated disaster at worst.”

    What would you have said if they could have raised another round and move on? Genius?

    There is often a fine line between success and failure and I am sure the investors, including some of the best brands in the business, will see this differently.

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