Monday, January 19, 2009

Type I vs Type II companies

I've spent a reasonable amount of time thinking, over the Christmas break, of what types of startup companies succeed, what types raise funding, what types are capital intensive. It's also been interesting to compare cleantech companies to IT companies, because in some ways there are similarities, and in other ways, the two sectors fall in distinct camps.

So, without further ado, here are my two categores:

Type I Companies
- Value based on a technological breakthrough (Technology Push)

ie: "cure for cancer" type companies.

Examples (based on my observations):
NanoH2O
Various Biofuels companies
Sunpower (and other solar companies)
Ballard Power Systems
Viagra
X1
Google

I call these companies "cure for cancer" companies, because the main importance is the technology, not the marketing. If someone shows up with a cure for cancer, investors aren't necessarily going to say, "wait a minute...what's your marketing strategy?". The market is huge and obvious and the marketing plan isn't as important. I have to put a small caveat here - because X1 struggled due to marketing reasons, and Google only became a money machine once they figured out how to monatize search. But the main point is that the technology drives the value and thus the company.


Type II Companies
- Value based on a marketing breakthrough (Market Pull)

Examples (based on my observations):
Facebook
YouTube
Dell
Scripped.com
Most internet companies

Here, the value of the company is not based on discovering a technological breakthrough, but rather it is from developing a clever business plan. Dell didn't really do much more than assemble commodity computer parts, but it does so with very low supply chain costs. Facebook is "nothing more" than a large database with various pointers, but it's genius has been how it has executed brilliant viral growth and user lock-in. YouTube has some technology in its video compression through Flash, but mostly it succeeded through opening up its comments, allowing videos to be posted on blogs, and basically out-marketing, virally, any other video site.

These companies are started by looking at the market and saying "what is the market need here", and then building the software. I recently came across Scripped.com. It's a great idea - take Screenwriting software (which has existed for ages), put in on the web with a SAAS model (a la Google Docs), charge nothing for it, and try to monetize the community. This idea didn't come about because of a technological breakthrough - heck Google Docs and Desktop screenwriting software proved it could be done. This idea came out by seeing a need and building a business to meet it.

So, which is better? Well, back in my days in the auto industry at Visteon, they would have said Type II is better. Visteon was forever inventing technology looking for a home, and was wanting to assess the market need and create products to meet it. True enough...however, technology push companies tend to be easier to get funding for (walk into any VC with a technology proven to produced zero-carbon energy at a lower cost than coal and you will almost certainly get a check). A type II company can be harder to sell the vision for (can you imagine the initial pitches for eBay? - "So...people are going to be selling used Smurf dolls and old socks online and you think that's a business?") Type II companies can be easier, technologically, to start, but can have a harder time getting traction and funding.

In my opinion, neither is better. Facebook is on one list - Viagra is on the other. While Type II might be easier to start; if you are finishing your PhD with a killer area of research, Type I might be an obvious fit. I'm now putting serious effort into seeking out fantastic opportunities, and I noticed that this framework seemed to be an interesting way of categorizing where your business falls.

6 comments:

Ben Kuo said...

Good observations. In my experience both can be successful, and the key factor to success in either of your categories is ability to execute (type I: ability to actually bring their technology to market; type II: ability to out-execute the many, many other competitors).

FiveSprockets said...

Check out FiveSprockets (www.fivesprockets.com) as a competitor to Scripped which adds social-networking features, collaboration, education content, and production features.

Anonymous said...

While a type 1 company can lock up IP and gain decades worth of momentum on the competition your average type 2 database web application start up, due to the lower barriers to entry, can have 20 competitors within year 1.

As you say sometimes type 1 innovations can be a product looking for a market but the same is often true of 'yet another' web start-up targeting increasingly narrow and less valuable niches.

With the current momentum behind EVs how about the potential market for wheel motors?

Check out www.evans-electric.com.au

Mitra said...

That's an interesting way to characterise. There are two things I notice by thinking about companies that way.

1: Type I companies are the ones most likely to answer the question "Competion:?" with "None" - which drives investors nuts. In a sense they are right, noone else does what they do, but on the other hand, they are ignoring the OTHER technologies used to solve the same problem.

2: Type II companies really need splitting into:
a) those with a better business model - that translates into a cost/price advantage over competitors (e.g. Dell)
b) those with an incremental improvement in technology , but then packaged and marketed so that the increase was valued by the market (Google, Facebook, SunPower, YouTube all fit here).
c) those who are indistinguishable or worse than the competition except for the marketing. (Most companies Microsoft bought used to be in that category, i.e. 3rd or worse rank in their space, purchased and made to look better than their competition by association with the Microsoft brand)

Of course - there are many other ways of categorising companies ... but I like thinking here.

- Mitra Ardron ( www.mitra.biz/blog, www.naturalinnovation.org )

gammill said...

Great post – I like the framework of Type I v. II. Having been involved in both types of companies & industries (I think some industries or predisposed to dominant models). A simple framework (simple at the surface level) I adopted while at IBM working on big picture Innovation projects is: Invention + Commercialization = Innovation. I tend to assess opportunity through this lens so I can gauge what is needed and what the focal points are for execution. I look at your Type I through the lens of invention where the technology/science/idea are really what drives initial success. I look at Type II through the lens of commercialization where go to market is the initial issue. To me the art of Type II is deep consumer/customer insight on a truly unmet need. Sometimes that will happen from study, but one of the beauties of today’s web technology, is you can create solutions and experiment to see if the need is big enough. Type I is based on the ability to place bigger bets as the upfront investment tends to be greater and traction more costly to gain. It’d be interesting to see some data comparing the success rates of the two types and comparing investor/entrepreneur returns. At the end of the day they are both fun and can be lucrative for all parties involved – but understanding which one you are ‘in’ is critical for success.

Anonymous said...

You call yourself a b-school graduate, where are your other two quadrants? - CA