Business Model Innovation
Sam Hinkie has said when the Rockets were in the early days of revolutionizing basketball with data, whenever they got a surprising result with the data they asked: What do the Spurs do? As a first order for thinking, the Spurs were a good approximation of what is right (h/t Sam on Patrick O'Shaughnessy’s podcast.)
Fred Wilson has a few posts about the power of business model innovation (first in 2006 here) and revisited in July 2019 here. He makes the argument that business model innovation can be more disruptive than technical innovation.
What stands out to me about business model innovation is how companies can develop and evolve in public, building a unique set of capabilities that later serve as a defensible moat while all along operating in full view of the competition.
We know and can see it in realtime - the way internet business models proved disruptive against traditional incumbents in the form of Amazon vs Barnes and Noble, or Netflix vs Blockbuster. Neither of those companies were ‘stealth.’ They were just playing a different game. They were a slow moving, at first, very public freight train coming down the tracks with a wildly different business model which replaced industry incumbents.
What I love about revisiting Fred’s 2006 post is that he uses a real company to explain what a new business model innovation could look like for the fashion industry. I don’t know how it worked out as an investment (the company does still exist today) but the description sounds very similar to Rent the Runway, a company started three years later that is rumored to be going public later this year.
My favorite way to think about business model innovation is to consider what constraint can you now relax that couldn’t be done before. It isn’t that the founders of Barnes and Noble or Blockbuster were less intelligent than the leaders of new companies. They just were built pre-internet, and thus had cost structures, executive talent and compensation schemes that were not aligned with a move to a better business model when the internet was created.
When framed as eliminating constraints, a new model for competition becomes apparent, without having to rely on some preternatural insight from a single person. For example, if you noticed the internet coming as a ubiquitous presence at a time when most shopping involved humans physically moving locations to stores rather than goods moving to humans, then a model for online retail ‘just makes sense.’
This isn’t to take away from the foresight and incredible accomplishment of building companies like Amazon and Netflix, but rather as a pointer for thinking about new business opportunities.
Distilling the insight: What is a multi-decade trend that I have high conviction will continue whose implication creates/requires a profoundly new way to provide a good or service?