Ways to find innovative ideas

 “When the world zigs, zag.” — Levi’s campaign by  BBH

“When the world zigs, zag.” — Levi’s campaign by BBH

“Whenever you find yourself on the side of the majority, it is time to reform (or pause and reflect).” — Mark Twain

Most innovations sounded like bad ideas in the beginning.

Typical idea generation methods neglect this point and encourage safe, familiar ideas. They fail to produce anything that could help build lasting value for a business. Let’s take a look why.

An idea that initially looks like a good idea appears to be good because it’s plausible. The idea is immediately understandable to those observing. A plausible idea is also easily conceivable. If an idea is easily conceivable then it’s something which other businesses will also be capable of conceiving, and also capable of doing. If other business can pursue the same idea then it’s likely some will pursue it; which means there’ll be competition. If there’s competition then businesses will have to fiercely differentiate on features and specs to battle for market share. Thus diluting the value that each business can successfully capture in the long term.

So working backwards, if businesses need to avoid competition to innovate successfully, then it would be logical to pursue ideas which other businesses either can’t do or won’t do. To find these ideas requires closer inspection of the bad-looking ideas. Whilst the good ideas look like bad ideas initially; the difficulty is that bad ideas also look like bad ideas too. The skill is in detecting the right ones.

This is, understandably, one of the most counterintuitive concepts businesses struggle with in practise.

Conventional new product development processes are constructed in a logical way and aim to minimise the risk of implementing a new idea. The trouble is, this logic, when applied to early stage ideas, filters out everything but the plausible looking ideas. For example, internal stakeholder reviews in a stage-gate process invites easy-to-dish-out criticism regardless of an ideas maturity. Bad-looking ideas can be killed on the spot. Ideas are ‘put on trial’ like a culprit rather than nurtured like a new born. At this stage, surface appearance of an idea may mislead and it’s deeper intention will be easily missed.

Equally, asking potential customers for feedback on early ideas produces a similar outcome. This is a hugely misunderstood mechanism for learning about ideas. Asking customers — people who only have a sense of their own context today — to speculate on the possibilities of the future is a reliable method for converging on familiar ideas. Whilst customer interaction is invaluable for understanding their problems, it can return terribly misleading for advice on how to solve them.

Such is the challenge with risk mitigating development processes. The understand-refine-build-launch approach may de-risk new ventures but it prevents critical in-market learning with the first handful of customers. Startups, on the other hand, adopt the inverse approach because they have to: launch-build-refine-understand. Staying lean and nimble fosters rapid learning in-market to quickly find product-market fit. Proceeding with uncertainty rather than risk is essential for learning about an idea.

So despite many possible wrong turns one could make, there is a way to navigate these early stage moments.

Look for secrets; not ideas.

Secrets, as brilliantly articulated by Peter Thiel, are insights so obscured that it’s not immediately obvious they are an insight at all. Secrets are beneath the surface and hidden from the obvious places where everyone else is looking. They are secrets because others haven’t been able to spot them. Secrets are the finder’s reward for deep investigation into an important problem space. An investigation that usually leads to someone realising there’s a much better or cheaper way to do things. Secrets can also be discovered by building genuine and empathic connections with customers. Connections which reveal the true nature of what customers value when it comes to getting a job done.

To paraphrase Thiel, secrets hold the potential for a great business which nobody is building. They are the starting point for innovation.

“Live in the future. Then build what’s missing” — Paul Graham

Secrets require tremendous foresight to translate them into good ideas. Amazon is without doubt a phenomenally successful business, yet it took Jeff Bezos many years of courage to act on his secret and pursue the idea that people would actually shop for anything and everything online. Purchasing behaviour which is second nature for us all now, yet most resigned the idea to failure back in 1994.

Mark Zuckerberg discovered a secret during Facebook’s early days. It used to be wise advice to adopt anonymity on the internet through use of pseudonyms (see: eBay, MySpace). This would protect our personal lives from all those strange people on the internet. Contrary to this, Facebook encouraged us to establish our real identity online. Zuckerbergs’s view was that we’d be able to foster much stronger relationships online if we were our true selves. He was right. In addition to all the selfies and baby photos, Facebook now facilitates far greater online activity than we could have done before; even outside of Facebook. (Imagine Airbnb without real identities.)

Even the launch of the first iPhone in 2007 was met with great scepticism by the likes of Microsoft, RIM and Verizon.

These examples illustrate how secrets are contrarian in nature at their time. They disregard conventional knowledge because innovation is born from an opposing perspective. Secrets are insights so unusual that others would dismiss them as non-sense. The secret holder is on their own. Building an idea around their secret would certainly escape any competition in the short term. But the idea, if executed correctly, is likely to produce an innovative and defensible business in the long term.

Rejecting the trends and being contrarian sounds easy enough, yet secrets are hard. They involve years of persistence in pursuit of an idea which still has a high probability of not working; possibly for many other reasons even if the secret is true.

Secrets look obvious in hindsight. So it would be worthwhile looking to the new breed of companies doing interesting and contrarian things to understand more about secrets.

One company I believe who hold a secret today — a big secret — is Stripe.

 Stripe founders: Patrick and John Collison (Source:  Business Insider )

Stripe founders: Patrick and John Collison (Source: Business Insider)

Founded in 2010, the internet payments start-up made it simple for developers to integrate payments APIs to websites. Serving the needs of the developer was a marketing and distribution model that drove their initial success. Again, obvious in hindsight, yet, at the time, conventional knowledge asserted internet payments infrastructure was hard and the target customer was the website owners, not developers. That’s just how it was. And it was destined to stay that way until someone thought otherwise and did something about it.

Whilst they’ve certainly been successful in the ‘internet payments market’; I believe Stripe have greater ambitions. I believe they hold a much bigger secret which we are getting a glimpse of just now.

Several weeks ago, Stripe launched a new service called Atlas. Atlas (currently in Beta) will allow anyone, regardless of where they are located, to incorporate a US company. By removing the complexity associated with setting up a company; Stripe are making it easy and simple for entrepreneurs across the globe to get their business up and running. More importantly, they’ll help them start accepting payments — also using Stripe.

Opening up this service to people in countries with governments infamous for bureaucracy, or even corruption, is likely to be very appealing to those country’s entrepreneurial communities. It will create opportunities for individuals who might not have previously had chance to start their enterprise at all.

Most businesses would shy away from an opportunity like this. The complex tax implications and even cross-country geo-political issues it might raise would make it an unappealing business venture. Not for Stripe.

Atlas is more than just a smart move to grow their own demand for their original payments product. There’s something much larger in sight for the company. Especially given their decision to, reportedly, turn down acquisition offers from both PayPal and Facebook. It all hints at the secret Stripe may hold.

The secret about the future of work.

It is predicted that in the future, a large majority of the world’s population won’t have traditional jobs, instead they’ll have multiple income streams. In this scenario, we’re going to need suitable solutions to help manage how we transact and handle our personal income. Solutions which will need to be substantially different to the ones we have today.

The idea that lots of people won’t have traditional jobs for their main source of income in the future sounds suspicious. Any business idea built upon this theory sounds like a bad idea. Or is it just too early to judge?

It might seem like a distant future but we’re already witnessing this transition. Marketplace businesses have, only in recent times, truly unlocked the ability to scale at unprecedented rates. Uber, Airbnb, Etsy, Taobao, Upwork. Just a handful of many businesses which provide a connection service between buyer and seller. The growth of smartphones (approx 2bn in the world today) has provided the necessary infrastructure that makes these global marketplaces large enough to be viable. Some people are not only supplementing their income by participating in these marketplaces; they’re replacing their main income all together.

What’s fascinating with this transition is how it is having a dramatic effect upon the number of employees needed within a traditional company. The platforms described above have achieved a significant scale yet with dramatically fewer internal employees. The participants — outside of the company — create the majority of the value despite having no formal employment or contract of work with these platforms. Pre-internet businesses wouldn’t have been able to create this kind of value in this way; or at this scale before.

Back in 1937, economist, Ronald Coase wrote an essay on “The Nature of the Firm”. Coase argued that “firms exist because they reduce transaction costs, such as search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs.” As a consequence, the theory stated that firms would benefit from being larger in size; but only large enough to keep their costs low. Beyond a certain point, firms become inefficient because of bureaucracy and managerial overhead. At this point, outsourcing — transacting through markets — would begin to make more economic sense. However, the common architecture of the firm for the past several decades has tended towards being larger in size; and not transact via marketplaces.

Whilst the driver of firms remains the same, the opposite effects are now happening because of the Internet. Firms are shrinking, not growing. The very transaction costs highlighted by Coase are now becoming more economically appealing to conduct outside of the firm. The near zero marginal cost of adding additional participants to these networked businesses facilitates radically lower costs. And companies like Uber and Airbnb — which invite participants to bring their own assets — are capitalising on this paradigm shift. The platforms and marketplaces have the greatest power unlock the lowest transaction costs by utilising their peer network to bring scale.

With firms shrinking in size, those outside of the firm adopt roles of independent contractors, Contractors who are highly coordinated via software and internet connectivity. Contractors who have no formal employment with any of the platforms they work for, and no reporting lines to management.

One of the most articulate voices on this shift is the brilliant, Esko Kilpi. Kilpi recognises that not only do most organisational structures still carry the inefficient siloed and hierarchical design from the industrial era, but also the concept of ‘management as peopleis going to be made obsolete in large pockets. Platforms that are driven algorithmically will provide income opportunities directly for individuals; in context, in real-time and with substantially greater efficiency. This will negate the need for ‘an employer’ or intermediary manager for a large number of workforces.

Such a dramatic shift in the world of work will require new solutions for people as they begin to manage their own economic activity directly; and in an immediately global context. We’re going to see a massive change in how institutions get formed; and how people outside of institutions generate their personal income.

Stripe’s move to provide a company formation service — independent of an individual’s country of residence — is a step in this direction. There’s likely much greater nuance to the actual secret Stripe hold. Atlas is perhaps a helpful stepping stone towards this new world of work. A world in which there’ll be need for tools and services that we don’t have an urgency for today, but will seem indispensable when we get there.

Neil Smith

Neil Smith Design LTD, 1 Davenham Ct, Liverpool, L15 8GD, United Kingdom