“Solipsistic Startups” and the Downside of User-Centric Innovation

“Build What You Know” was the major lesson of the first session of the London Entrepreneur’s Challenge, a workshop programme and business plan competition open to a number of London schools that aims to show participants how to start a business. The lecturer, a former entrepreneur and venture capitalist who led the session, asked us to think of areas we consider ourselves experts in and talk about them with the people sitting around us.  The man sitting next to me told me he was an expert skier, and I informed him that I had sung opera since high school.  When we reconvened as a group, the lecturer told the 200 some-odd people in the audience that by virtue of our pedigree, we were some of the smartest people in the whole world.  This Challenge included Biochemistry PHDs and LSE MBAs, and if we home in on what we know, we can build amazing companies.

The lessons from that session mirrors what Eric Von Hippel termed the rise of “User Innovation”. As opposed to manufacturer-centric innovation, which originates from an individual or firm looking to sell a product, now the ones who serve to benefit from the product or service are the ones dictating the directing of innovation.  Collaborating users have done everything from inventing the World Wide Web to building the original mountain bike  because the existing solutions did not fit their needs.  Eric von Hippel and his colleagues discovered that “6.1% of consumers in the U.K. over the age of 18 had created or modified a product for their own use within the last three years,” and that rate is even higher among those with bachelor’s, master’s, or Ph.D. degrees in technical fields

While Eric Von Hippel neglects to talk about the demographics of the “user innovators” in his sample, it is clear that those who are able to turn their products into high-growth businesses have a certain profile. According to the University of New Hampshire’s Center for Venture Research,”minority entrepreneurs in the United States made up just 8.5% of the people pitching their businesses to angel investors in the first half of 2013″.  These entrepreneurs were also far less likely to receive funding, with only”15% of minority-owned firms successfully translating a pitch into dollar bills, compared to 22% of all businesses.” According to the latest CB Insights Venture Capital Human Capital Report, 81% of all funded founders are between the ages of 18 and 44 and 92% of these founders are male.  Less than 2% of venture-backed founders lack a college degree.

The result of this founder profile is an ecosystem of “solipsistic startups” built by entrepreneurs following the advice of “build what you know”.  C.Z. Nnamaeka published an article about this phenomenon titled “The Unexotic Underclass”, where she argues that entrepreneurs have not only failed to adequately address Big Problems like clean energy and climate change, but also big problems (little b little p) faced by people we ignore: single parents nearing poverty, military veterans waiting for medical benefits, and the unemployed who lack relevant skills for a modern economy.  While many entrepreneurs focus on how metropolitan twenty-something year olds choose restaurants and share status updates with friends, fewer focus in on problems faced by people they look nothing like or share little in common with.

What to do from here? 

For starters, we need to encourage entrepreneurship across a greater number of demographics.  If Eric Von Hippel and my entrepreneurship lecturer are correct, and “building what you know” and innovating on products you use generate the best outcomes, then the best kind of innovation in impoverished communities will require their members to lead the charge. One of the best models for encouraging innovation is the Israeli Yozma initiative, a government investment vehicle that combined attractive tax incentives with the promise to double any investment with funds from the government.  As a result of this program, “Israel’s annual venture-capital outlays rose nearly 60-fold, from $58 million to $3.3 billion program between 1991 and 2000,” and today Israel lists more companies on the NASDAQ than any other country outside of China and the United States despite having a national population just over 8 million. Perhaps governments could apply a similar public/private hybrid model to spur venture capital firms (whose returns as an industry are being beaten by the Nasdaq and S&P) to structure funds around underrepresented demographics (say, returning military veterans or minorities from low income areas).

In the meantime, I would reconsider the logic of “build what you know.”  Perhaps you love gaming and want to develop a new mobile game; unfortunately, nearly 60 percent of iOS app developers fail to break even with the apps that they create and market. About three out of four venture-backed startups fail: is that simply the natural rate of failure, or is the rate this high because similar entrepreneurs “building what they know” face a lot of competition (how many ways to book hotels do we need)?

In this blog post, Roberto Verganti argues that user-centered innovation has contributed in creating an unsustainable world. Verganti proposes a new solution, Design-Driven Innovation, which argues that innovation that originates from markets struggles to create new markets.  User-centric innovation tends to be iterative; design-driven innovation is transformative.  In order to truly create a breakthrough service, Verganti argues we should push beyond customers and users to find “interpreters,” visionaries who “deeply understand and shape the markets they work in.” Verganti gives the examples of Nintendo’s Wii and Apple’s iPod as innovation arising from this framework. Perhaps the best way to generate global utility is not to tell entrepreneurs to “build what you know,” but instead to ask them to build the future.