Digital Transformation Doesn’t Mean Innovation5 June, 2018 / Articles
Everyone in today’s economy – and especially established companies — is required to adapt and transform to a fast-moving digital world.
Seeking transformation is a matter of survival. This has given rise to a “Digital Transformation Industry”, which, while helping many along the way, uses many of the same methods to achieve transformation, following proven best practices.
So while adapting products and services to a digital economy takes talent and experience, and might also keep your business relevant, it is quite unlikely to eventually spark uniqueness and universal disruption. And this is important because a lot of businesspeople confuse the two: digital transformation is not disruption, it’s just keeping up with a market that’s already been disrupted.
Digital is commodity
This is what most digital transformation looks like: A first step is to recognize you have a problem — you have to adapt to a market that’s moving away from you. So you digitize products and processes to align with the realities of the new economy. If you get that right, you move on to the second step: leveraging those shiny digital tools to create new channels of revenue, new products, and growing your businesses horizontally. So far so good: we’re doing digital transformation, and we’re still in the game.
But most of us want more, we want to think bigger, we want to win. We want to disrupt new markets.
This is the realm of the third (and superior) layer of transformation — you could call it “innovation’’ –and very few companies actually operate there. This goes for tech companies –also known as digital native companies– as much as it does for brick and mortar companies undergoing digital transformation. Startups using digital platforms which someone else has invented might be great at execution and product design, but they’re essentially using traditional database tools, apps and features to deliver their experiences.
Given all this, how should we think about innovation, and how can we hope to achieve it?
First, we have to be aware that the venture capital industry in many respects works against potentially innovative companies. Many digital companies who call themselves tech startups are overvalued because they, and their investors, are purposefully distorting the perception of their risk. When you’re an investor, you will likely think that a company that generates revenues sooner will be a better investment than a company that may generate revenue later on, even if that company has the potential to radically disrupt a market years down the line. But the chances that a company which is generating revenues sooner will be truly disruptive are very low. Many investors would opt for a less risky digital company than a riskier, long-term tech play –even if they publicly say the exact opposite.
That’s because in the tech business, there are two primary ways to success:
Entrepreneurs can either envision a gap in the market, and race to be the first and the best executed response to this need. According to Pitchbook, as much as 48% of Silicon Valley startups are B2C, seeking usage disruption models to bring scalability and control in a digital world. Discord (voice communication), AirBNB (hospitality marketplace), Unity (development environment) or Uber (ride sharing) are great examples of companies that re-invented new and better experiences for existing industries.
Entrepreneurs can open new dimensions, invent something new where no other company was ever able to, by innovating a true disruptive technology which gives them an unfair advantage. According to Startup Nation Finder, 73% of Israeli startups are b2b, developing unique underlying technologies that then enable new models to be imagined. Consumer Physics (Molecular sensors), Taboola (Content discovery platform), StoreDot (Battery charging) or SparkBeyond (AI-powered research engine).
Here’s how that last example works out in the real world: French Startups raised $4.1B in venture capital financing in 2017, while Israeli startups raised $5.1B in the same period. However, French exits the same year totaled $1.5B, while Israelis passed the $10B (if you include Mobileye’s sale to Intel that figure would jump to $25B). When French startups provide digital services, that may make them appear on the VC map — but down the road the value they generate is capped because their DNA is to create revenue and usage, and not to truly disrupt. That’s not to say there are no truly amazing technology innovators in France, there are, but they are too often lost in the mass. Let’s not forget that the core business model of a VC is the exit (either IPO or M&A). An ecosystem needs to empower and cheer their exits in order to become VC-friendly. Selling French gems to multinational corporations should never be a shame.
It’s not only VCs working against innovation (yes, let that sink in), governments can also paradoxically work against innovation and disruption in their own tech ecosystems.
Every government’s primary objective is to create new jobs, which appears indeed directly associated with economic growth. This goal by definition distorts their perception of what would enable their ecosystems to stand out globally, and for the longer term. Job creation doesn’t necessarily mean value creation: The digital industry creates a lot of jobs for a lot of people (think delivery and logistics), and the number of digital services companies (startups) is booming. Young people are getting hired, and some are even becoming entrepreneurs, but in a global economy, it is the value created in the long term from truly disruptive innovations that actually feeds the virtuous cycle of access to funding, successful entrepreneurship, and market leadership.
At Start-Up Nation Central, a tech NGO connecting the world to Israeli innovation, we use this definition for technology startup: A business entity that pursues research and development (R&D), and which offers an original, proprietary technology product which it has developed itself. We’re tracking around 6,000 of these companies now in our innovation discovery platform, Start-Up Nation Finder.
This is why multinationals do not see Israel just as a “D”=Development center, like they would see India or the Ukraine, but rather as a powerful “R”=Research center that can eventually execute the “D”. The value of such a business –if and when its R breaks new ground and creates a D=Disruption– is not calculated by the amount of engineers involved, the returns to investors, or the immediate jobs created. The value of that company is measured by the absolute value it brings to the world, and to the industry stakeholders. MobileEye, which can make any car smart, is so strategic, so unique, that Intel purchased the Israeli startup for $15B.
Technology, entrepreneurship, digitalization, new economy, startups… those are words and concepts that do not necessary imply innovation. Ultimately, innovation is not about connecting the dots, but creating entirely new ones.