Believe in the Brick

I love LEGO!

Growing up, there was nothing I enjoyed more than building with them. I would shake every birthday or Christmas present I ever got hoping to hear the sounds of LEGO bricks shaking within.

My interest in the small plastic bricks has been rekindled recently due to my reading the book Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry. It has been a fascinating view of one of the world’s most iconic brands. Born within a small carpenter’s shop in a tiny village in Denmark, the book tells the story of LEGO’s rise to the most recognizable toy on the planet, it’s eventual decline, and its subsequent return to glory. If you loved LEGOs growing up, I recommend you give it a read. If you are interested in how businesses innovate and reinvent themselves to stay relevant, I recommend you give it a read. If you are a human being with a heart and a soul, I recommend you give it a read.

Below are some of the lessons that stuck out to me especially stronger.

Actions to Thoughts

In the early 2000s, LEGO nearly went bankrupt. The company’s low point was in 2003, and in its desperation it turned to a newly hired former consultant, Jørgen Vig Knudstorp, to help right the ship. Over the course of the next few years, Knudstorp led a fundamental transformation of the company to help it compete in the 21st century. In hindsight, his actions look like those of a visionary, but Knudstorp himself would tell you that there was no master plan when he took over. It was clear that the company was in dire straights, but it took him almost a year to properly understand the issues the company was facing. Without a master plan, Knudstorp focused the company on blocking and tackling. His underlying theory was that the culture of LEGO needed to be fundamentally reorganized, but he believed this could only be done through action. Too often people start with thoughts and expect action to follow, but Knudstorp was convinced that if he was able to get the company doing the little things right again, that the positive culture change he was after would follow. I love this idea of the power of action to impact our thoughts. Too often in our personal and professional lives, we try to will ourselves to make a change. Sometimes it is easy to change you or your company’s actions and to have patience knowing that the thoughts will follow.

Creativity within Constraints

One of the big reasons why LEGO began to struggle was that it spread itself too thin in the name of trying to be innovative. It spread its attention out across a massive influx of new product lines trying to find winners. And it did! Unfortunately, for every winner, there were many more attempts that did not come to fruition. The company wasn’t doing a great job of tracking the success of different new efforts and at one point it was estimated that over 3/4 of the products the company sold were unprofitable on a per-unit basis. In an attempt to drive innovation, LEGO had removed all the parameters for its designs that ensured consistency and proper unit-economics. One of the key things LEGO did to turn itself around was put those guard rails back in place. Before the innovation explosion in the late 90s/early 2000s, LEGO had been strict about maintaining their catalog of brick designs at around 6,000 (each with varying colors). By 2003, this number had jumped to 14,000. Many of these new brick designs were custom pieces that might only be used in a handful of sets. As part of the company’s turn around, a strict review of brick designs was launched with the number of designs once again slashed to ~7,000. Designers suddenly had to do more with less. Their designs were constrained by a smaller universe of potential bricks, but something interesting happened. Design teams started churning out MORE creative designs, not less. By putting into place some constraints within which to operate, designers were forced to get more creative. Often this meant using bricks from existing sets in unique and interesting ways. This led to better, more profitable designs as the company had to produce far fewer one-off pieces. This is a great example of the positive power constraints can have on creativity. It helps to have guardrails sometimes. They can be a powerful impetus for unique thinking and help to get creative expression going.

Crowd Control

One of the favorite innovation strategies out there is to leverage the “Wisdom of the Crowds”. Get a large number of people working on something and they will often come up with better answers than even the most capable individual within their ranks would be able to generate alone. But crowdsourcing is not a silver bullet. Not all companies are right for this type of input from the masses. While LEGO did spend some time dabbling with user-generated designs, it really found its highest leverage point in “clique-sourcing” as opposed to drawing from a massive crowd. Taking designs submitted by anyone and everyone made it difficult to ensure consistency of brand and to maintain profitability on sets. Instead, LEGO turned to a small number of highly-vetted individuals that could bring a differentiated skill set to what LEGO had in-house. When LEGO was exploring how to re-launch a version 2.0 of its smash-hit Mindstorm set, the company wanted to make sure it got input from the consumer group that made the kit such a success, the adult fan segment. LEGO recruited a small set of a few super fans with differentiated skill sets to provide input as part of the design team for the new set. Each person brought something different to the table in terms of expertise, but they were all passionate LEGO enthusiasts and excited to participate simply for the sake of getting to help steer the direction of one of their favorite products. LEGO didn’t give them absolute free-reign. Internal teams already had major design decisions locked-in by the time they brought in the user experts. This ensured that the underlying fundamentals of the set would be aligned with LEGO’s vision and brand, with the details and features most important to fans still being represented in the final product. LEGO knew that there was power in tapping into the wisdom of the crowds, but it also knew that they needed to exercise some effective crowd-control if they were going to be able to deliver a truly impactful product.

Believing in the Brick

At the end of the day, LEGO’s biggest pitfall was that it strayed from what made it great. The LEGO brick was the innovation that built a toy empire, and LEGO’s attempts to appeal to fans who didn’t enjoy creative building almost shipwrecked the company. By foregoing the brick or lessening its importance in products, LEGO removed what made it special. it tried to appeal to everyone and in doing so it stopped appealing to anyone. LEGO was only able to recover by doubling down on the brick. They did so in a unique and interesting way. Yes, they cut toy-lines that had no actual LEGO bricks in it, but more than that, they focused on what the brick represented. A LEGO brick is a promise. A promise of consistency and effectiveness. A promise that no matter what set you bought it in, that brick will work with bricks from any other set. It is a canvas upon which a near-infinite world of possibilities can be built. LEGO recaptured success by focusing on what made it great in the first place, but that meant thinking beyond the physical brick and thinking about what the brick represented. One of the most successful product lines that helped turn the ship around (and one of my personal favorite toys growing up) was Bionicle. Bionicle wasn’t made from traditional LEGO bricks, but it maintained the same design principles that the original LEGO brick was built on. Sets were consistent, combinable, and infinitely buildable with each other. LEGO learned an important lesson that is every bit as applicable for people as it is for large enterprises. You won’t ever be able to be good at everything. You won’t ever be able to satisfy everyone. What you should instead focus on are the skills and strengths that are uniquely yours.

Grow.

Learn new things.

Develop new products.

But never neglect what got you to where you are in the first place.

We all have something unique inside us.

Sometimes we just need to remember to Believe in the Brick.

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The Pillars of Innovation

What is innovation?

It’s a word that gets bandied about a lot, especially in the world of venture capital, but what does it actually mean?

The dictionary defines “Innovation” as a new method, idea, product, etc. (snarky side comment: What the heck does “etc.” mean in this context. I am dying to know)

Here’s the way I see it.

There are two broad categories of innovations.

1. You can improve on something else that exists (Sustaining Innovations)

2. You can create something new (Disruptive Innovations)

That’s it.

Every new method, idea, product or etc. fits into one of those two buckets. Is one better than the other? What are the differences?

Better Mousetraps

Innovations on something that already exists are sometimes derided by tech thought leaders. They are thought of as inferior to disruptive innovations. Somehow less pure.

In the words of Peter Theil, “We wanted flying cars, instead, we got 140 characters.” (You could argue in some ways Twitter is more of a new innovation than flying cars, but the message is pretty clear here).

I definitely appreciate Theil’s perspective, but the reality is, that the vast majority of companies are building better mousetraps. There is a LOT of value to be unlocked by simply making things work better.

Less friction.

Quicker.

Slicker interface.

People pay big money for these things. And why not? At the end of the day, an increase in efficiency is really an increase in available time, the one resource we can’t get any more of.

Innovations improving on something else should not be derided. They create massive value in both venture capital and within the economy at large.

Superhuman. Zoom. Evernote. The list goes on.

There are plenty of fantastic companies that have been built by making people’s life easier. The downside is that when user experience is your selling point, you are setting the bar you need to meet extremely high.

You can’t just be a bit better than incumbents, you need to blow them out of the water.

My favorite opportunities for improvement innovations are in large, slow-moving incumbent industries that have been slow to adopt new technologies. It is absolutely unreal the amount of our economy that still runs on faxes/paper/on-site databases/etc. If you can get people to change their ways (not a trivial task), these types of markets provide the opportunity to unlock tremendous value since the status quo is so poor.

New and Shiny

Disruptive innovations are the creation of something out of nothing. These are the Zero to One type of products or services that provide you with a new experience that you have never had before. These are the products that make Mr. Theil happy as a clam (where the heck does that phrase come from? A quick Google search for those of you curious).

They are the truly great innovations that create massive step-function improvements over the ways things used to be done.

At their core, disruptive innovations provide someone with an experience they weren’t able to have before. The name of the game is access. Increasing access to a good or service that a user has never had before.

One of my favorite examples is Venmo.

Venmo isn’t a simple improvement on a cash-based society, it is an enabling force function on people’s ability to forgo cash on a daily basis. It provided access to something (P2P payments) that people hadn’t had before.

Disruptive innovations are often the platforms that sustaining innovations are built on top of.

Ok, disruptive innovations sound great right? Easier said than done, unfortunately.

Disruptive innovations by definition are harder to build. There is no frame of reference by which they can be compared. No well-worn path that they can walk. They need to be generated a priori.

And then somehow transformed from an idea into a tangible product.

This is no easy feat. Even for the biggest and most well-resourced companies in the world.

Recent innovations in the smartphone market are largely predicated on increased camera capabilities. Amazon hasn’t developed anything truly game-changing since AWS.

Disruptive innovations are, in a sense, purer. They are the creation of something from nothing. Order from chaos.

But boy, are they tough acts to follow. It is nearly impossible to successfully build and deploy one disruptive innovation, much less a string of them.

One Innovation, Two Innovation. Red Innovation, Blue Innovation.

Ok so sustaining innovations improve an existing experience and disruptive innovations provide access to something totally new.

The reason this framework is important to understand is that it defines how you look at every company or opportunity.

Sustaining innovations are, at their core, user experience plays. When evaluating a sustaining innovation business, you will want to really dig in to understand exactly how the product or service works to understand if it is a meaningful enough improvement in performance to motivate a buying decision or investment of time from a customer.

Disruptive innovations are centered around access. What access to a good or experience do they provide that people never would have been able to experience previously? I like thinking of questions of access through the Jobs to be done framework. What job does the product or service provide users? How did they achieve that job before? If the innovation isn’t an improvement on an existing good or service, what product (or products) is it replacing? Understanding the system within which the innovative product is connected will help you to determine whether it is worthwhile or not.

Ok.

I have a confession to make. This post is somewhat of a false dichotomy. I made it sound like you either had to be one innovation or the other. Sustaining or disruptive. Improving on something new or creating something from nothing.

The truth is not nearly so black or white.

The truth is that the best innovations, the most impressive, most valuable, most world-changing technologies…

They have a little bit of both pillars of innovation within them.

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Tech's Manifest Destiny

In the 19th century, American pioneers expanded across the reaches of the American continent. The driving force behind this unstoppable conquest was the belief in America’s Manifest Destiny. Today, as we witness a new technological Manifest Destiny, we must be careful not to repeat the sins of the past.

The Call of Destiny

Manifest Destiny was the belief that America’s unique virtue not only allowed, but obligated, its citizens to expand and tame the American continent. It was followed with an almost zealous fervor by pioneers and settlers pushing the bounds of the United States’ frontier ever further. Manifest Destiny, perhaps more than any other cultural belief, has created the country we know today. It brought immeasurable wealth, resources, and power to what eventually would become the world’s preeminent superpower. This treasure trove of riches was not won without sacrifice. The secondary effects of Manifest Destiny were the displacement of native peoples, the extinction or endangerment of many natural species, and the fundamental altering of America’s environmental landscape. It’s hard to argue that the benefits of Manifest Destiny, at least from America’s perspective, outweighed the cost, but we are fooling ourselves if we ignore that there was a cost. I will leave the debate of whether Manifest Destiny on a whole was positive or negative to history’s scholars, but what is undeniable is that the phenomenon was more complex and nuanced in its ramifications than anyone considered at the time. Manifest Destiny’s effects, good and ill, have reverberated through time and are still felt today. The modern-day Manifest Destiny will have an equally far reach, but will it be for our benefit or our detriment?

Technology’s Manifest Destiny

The modern equivalent of America’s Manifest Destiny is the seemingly unassailable march forward of technology and innovation. Innovation grows at an exponential scale as new discoveries and technologies open up the door for additional breakthroughs. It has become a cliche critique, but I do think there is truth in the idea that we spend so much time asking if something can be done, that we rarely take the time to ask whether it should be done. As we reach new technological frontiers in mobility, automation, and artificial intelligence, we need to start grappling with the very real questions of not only what should be done, but how should it be done.

Don’t mistake me. I am not out to get technology or break up big tech or regulate innovation away. If anything I am the opposite. I genuinely believe that technology and innovation is the driving force behind a tide that raises all boats. I believe that we live in the single greatest period of time in human history and that tomorrow will be better than yesterday.

I write this post not because I distrust technology, but because I believe in it so strongly. Just as the pioneers of 200 years ago did, I have at times found myself a zealot blindly preaching the benefits of the forward progress of technology with little heed towards its potential side effects. This entrenched bias and lack of nuanced view scares me when I see it in myself and it scares me when I see it at large in our community. I love disruption as much as the next guy, but we shouldn’t worship at its altar. Disruption hasn’t always had the positive connotations that it enjoys today (just ask my grade school teachers…). We mustn’t give in to the temptation to simply assume that what we do is “good” and what others do is “bad”. We can’t kid ourselves that just because technology has created unprecedented prosperity that, left to its own devices, it is destined to continue to do so.

We are better than that.

Innovation is a force and just like any other, it is indifferent in its application. The fire does not hate the wood it burns.

Responsibility ultimately lies with those who wield it.

Us.

The lack of acknowledging that responsibility is one of the things that scares me most in the world of technology today. There seem to be two camps. On one hand, there are people who believe that tech can do no wrong. That it is not just ultimately a force for good, but unequivocally so. On the other hand, there are those who believe that we are powerless to change the course of innovation for better or worse. That innovation is an unstoppable tide that we must be content to merely keep our heads above water as we are swept away.

I reject both of those arguments.

We should not fall into the same trap that the pioneers of yore did by simply believing that because we can do something that it is good. I will be the first to tell you that I believe that technological progress is on its net, overwhelmingly positive, but to outright ignore its downfalls is a path to disaster.

We are not bystanders who lack sovereignty over our circumstances either. We are creators that can exert our will upon our creation. To argue otherwise is an attempt to dissociate responsibility.

Now look, I don’t have the answers.

But I do know that we need to continue the discourse. We need to have the tough conversations about not just what can be done, but what should be done.

We as a community cannot hide behind platitudes of technology’s greatness. We need to be honest with ourselves about innovation’s heights and depths. About its greatness and its shortcomings. Its light and its darkness.

Because if we don’t.

Who will?

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The Globalization of Venture Capital: Is United States Innovation Falling Behind?

Photo by NASA on Unsplash

There was a story doing the rounds this week about a new Center for American Entrepreneurship study about the globalization of Venture Capital. CAE’s study showed that the United States’ share of global venture capital investment had fallen 20% in the last five years and 50% in the last 25 years. These statistics were framed with alarming rhetoric from both the tech media and the Center for American Entrepreneurship.

VentureBeat stated that this report should give Americans “cause for concern.”

Richard Florida, one of the leaders of the study, stated that “[he] thinks for the first time, the U.S. is truly in trouble.”

Much of the discussion around this report has represented similarly disheartening views of the outlook for innovation in the United States. Media sites and commentators have worried over America’s loss of “edge,” and forewarned of dark days ahead.

My response:

Are we really so insecure that our place in the global order is threatened by the United States only receiving HALF of the globe’s capital invested into innovation?

The United States represents approximately 4% of the world’s population. By any objective viewpoint we are significantly punching above our weight to receive over 12x our share of the world’s risk capital.

But Erik, what about the relative decrease in our portion of venture capital investments? Shouldn’t we be worried about investment into our country decreasing by 20% in 5 years?

Short answer: No.

Long Answer: This is why Intro to Statistics is required coursework. Venture capital investing into the United States has not decreased by 20%, the share of global venture capital received by US-based companies has decreased by 20%. The difference is incredibly important.

Via NVCA. As of June 30, 2018.

2018 is, in fact, poised to be the largest year for venture capital investment into US startups since the Dotcom crash. At the halfway point of 2018, about 3/4 of 2017’s total investment value has been deployed. This means that we are on pace for a potentially record breaking year (for discussion of whether this should even be something to be celebrated or not, check out last week’s post.) Yes, our piece of the overall venture capital pie is shrinking, but the overall size of the pie is magnitudes greater than it used to be. That is what matters most. Innovation is not a zero sum game, our ability to innovate is not hampered by China’s or India’s. In fact, it is the reverse. Increasing levels of global innovation create network effects which the United States can take advantage of to propel us even further.

It is short sighted and, frankly, close-minded to believe that the United States has some sort of divine right to be the innovation capital of the world. Innovation, by its very nature, is meritocratic. The United States’ shrinking share of venture capital dollars should be met with fanfare, not rumors of our impending demise. The rest of the world is catching up, and that can only be a good thing. More innovation means more impactful technologies that can improve people’s lives for the better. Where that innovation occurs is far less important than the fact that it is occurring, and if we are being honest with ourselves, there are many parts of the world that need ground-breaking innovation a lot more than the United States needs a new social media app.

We are not facing an innovation crisis in the United States. We are the pioneer of modern technological innovation and the rest of the world is starting to build up their own capabilities on the back of 80 years of the United States writing the playbook.

This is a good thing.

For everyone.

To suggest otherwise is both alarmist and misguided.

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