The Myths of Innovation

+8* ABL Column ThoughtsPublished September 8, 2009 at 4:02 pm No Comments

This article discusses the myth of the lone inventor using high-profile examples from Asian social networks. It is a guest column written monthly for the Chinese business magazine “China Electronic Business” (invested by Jack Ma of Alibaba) and IT news site Interfax.

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My column last month described how innovation can spur from the “5Cs”: Copy, Competition, Combination, Constraints and in the case of China, a special “China” factor. This month we will explore the validity of long-standing ideas around innovation.

In fact, the writing of this column was a surprise in itself. As I was gathering my thoughts and doing additional research (including on possible predecessors to Thomas Edison in inventing the first incandescent lamp), I found that there was a whole book written on this very topic, published in 2007! Believe it or not, even the title of the book was the same as my column’s draft.

Though I have not read his book yet, I hope its author, Scott Berkun, won’t mind me using the title as it happened it was mine too!

Ideas, inventors and entrepreneurs

As with most delicate subjects, it is important to define terms precisely. I will use the following definition:

• An idea is a thought that is new to the person finding it;
• An inventor is a person turning an idea into a prototype;
• An entrepreneur is a person turning an idea or prototype into a business.

Note that an entrepreneur can also be an inventor and have ideas. In turn, ideas can possibly never be prototyped nor turned into businesses (in which case the idea can be art, a dream or at best a concept). This approach will help clarify many misconceptions while respecting sensitivities as much as possible.

Perception bias

More often than not, we are in love with our ideas, that we think are so original (apparently even this idea is not – see the introduction). When considering successful inventions, there are two key biases that help maintain this illusion of originality.

The first one is called the winner’s bias: we mostly hear about successful cases, or dramatic failures, but not the silent failure of ideas that never get done, projects that die after a few attempts or companies that fade into oblivion before shipping their first product. There are side benefits to this situation: it inspires people to try (and might not try if they knew the reality of the odds).

The second could be called the DNA bias: between its beginning and later success, a company might have changed almost every aspect of its initial idea and business. It could use a different concept, business model as well as have a different owner and management.

In short, what we generally see is a still photograph of the finish line, with very little idea of what happened during the race, including possible changes of horses or riders on the way.

Beyond appearances

The Web industry is full of interesting examples. As an illustration, what we discovered about the creators of leading social networks in Asia along the years contains quite a few good lessons.

First, just like I found out with the title of my column, it’s almost impossible to claim having an original idea. I recall in 2003 when a friend of mine was presenting a pretty original concept of a location-based mobile social network to an investor in Japan. This topic getting hot in Silicon Valley today but remember that at the time almost no one even used the term “social network”. My friend was told by the investor that himself submitted a similar idea at a business plan competition during his MBA. The difference was: he had an idea and did nothing; my friend had an idea – possibly similar – and built it.

One company in the United States called Y Combinator (YC) is an incubator and investor in early stage projects. Recently, they found that there were some needs in the market that no startup was covering well and launched a “RFS” (Request for Startups) for entrepreneurs interested in developing a business around the ideas YC put forward. Even in that case, the share they would take of the company for their support would be equal of barely superior to what they usually take as, according to its founder Paul Graham “Execution matters so much more than the idea that even if we supplied the entire idea we wouldn’t be entitled to more than 10 percent of the company.”

Second, the inventors are not necessarily the ones running the show. Cyworld, Korea’s largest social network, was acquired before it became the success story it is. Xiaonei in China was sold by its founder about a year after launch due to lack of funds, while its buyers managed to raise hundreds of millions of dollars barely a year later. Another case is Mixi, Japan’s largest social network, which was suggested and prototyped in a few months by an Indonesian IT intern based on the idea of Friendster, a U.S.-originated service popular in South-East Asia as well.

Third, the founders do not necessarily have a clear idea about the business at start. It was true for Google, it is the case for many social networks too! The chief operations officer (COO) of “Mobile Game Town,” the largest mobile social networking site (SNS) in Japan and worth over a billion dollars on the stock market, mentioned that when they launched their social network with free Flash games, their intuition was that since millions of users were already paying for games, they should be able to attract large numbers with free games. Then they would find a way to generate revenues. Eventually, even the business model evolved: from pay-per-view advertising it transitioned to affiliate links to having the majority of its revenue coming from direct virtual goods sales. All of this in the span of two or three years.

Fourth, not only the business model but also the service core might require dramatic changes. A great example is the second-largest mobile SNS in Japan named GREE. It started as a PC-based “serious” social network relying on advertising and is now almost 100 percent mobile and monetizing games and avatars with virtual goods. You could almost say that the investors who bet on that team actually invested in a totally company totally different from the one which IPO in December 2008. However, one thing they picked correctly is the team and its ability to make the company evolve.

Fifth, having too many ideas can be a distraction. In China, many entrepreneurs have some kind of “Business ADD” (Attention-Deficit Disorder): they see so many opportunities passing by that they cannot focus long enough on any of them. I read once in an interview of Ma Huateng, founder of Tencent (China’s largest Internet company which made 1 billion USD in revenue with 40% net profit in 2008 and on which we wrote a fantastic report), that he had competitors but they moved on to do other things as could not make money with Instant Messaging. Ma Huateng did not have other ideas than Tencent’s QQ messaging service, which is why he stuck to it and tried hard until he found a suitable revenue model.

Sixth, an innovative idea is not necessarily suitable for its environment. It might be too expensive, require more advanced infrastructure, be too difficult to understand by the targeted population. Being too innovative does not help. Back to our mobile SNS in 2003, if the infrastructure was enough to run the service, the price of data in Japan was not. It took about four years for unlimited data plans to become mainstream. By that time, the service had been sold to another company and competitors took the lead.

Embracing change

As you can figure from the various examples given, the inside story is often quite different from what the general perception is, and the elusive “lone inventor” figure is far from being commonplace. Actors change and success has as much to do with timing, finance, infrastructure as it has with adaptability. Being innovative bears significant risks, like climbing a tall mountain, and picking the team, the equipment and adapting to the environment are surely as much critical to success as the idea believed to be original.

Your comments are welcome to benjamin@plus8star.com. Our presentation “Lessons Learned From Asia” is available on www.slideshare.net/plus8star.

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+8* | Plus Eight Star looks at China, Japan and Korea because with more Internet and mobile users than the US and Europe combined, they must be up to something.