Can innovation come before a business model?

I’ve just come back from showcasing at the Finovate conference in San Francisco, which bills itself as “the visionaries creating new ways to bank, manage personal finance, and appeal to financial consumers”.

Being a US focused conference (Mozo was the only Australian site presenting), it was a chance to see the latest and greatest in finance based innovation to come out of the US.

My first observation is that the level of innovation in the US, in the internet based finance space at least, is a long long way ahead of Australia. The level of product proposition and sophisitication is simply much higher than we have.

BUT, and for me it is a very big but…

In many cases there were no clear business models associated with the innovations.

I saw presentation after presentation (companies gave a 7 minute demo of their site) with nifty functionality and tools, but for most of the 7 minutes I looked for, and failed to find, the associated business model. It was simply unclear to me how many of these companies intend to make money.

So it got me pondering the question – can innovation come before business model? Is it a valid strategy to develop a product or application, without thinking through the business model up front?

On the whole, the US seems to think so. Because many of these ‘no revenue in sight’ companies have been exceptionally well funded, some of them in excess of US$10m before seeing any revenue. And that’s for an internet business, which is by it’s nature low cost to set up. That’s a lot of money to invest in an unknown business model! In fact in their list of “highlights” many companies were listing the money raised as an “achievement”, with a sense that the more the better. Big teams, fancy offices, all before starting to code the website. On the whole the US seems to operate on the principle of raise the money first, start the business second.

I think it’s fair to say that on the whole Australia operates the opposite way around. For a start, we tend to guard our financials very closely to our chest. We also tend to startup our businesses differently, by first trying to get the business going for as low a cost as possible, prove up the business model, and only then seek greater capital to expand. We have small teams and very basic offices, often working from home for the early stages. We tend to take the view that the less we spend on getting things started the better. Quite the opposite path.

I have to say that I struggle with the concept that innovation can come before business model. So for me the answer is no, you shouldn’t develop an application without a clear view of how you’ll get back your investment in it. It doesn’t need to be immediately obvious to everyone else, and to be fair many of these early stage companies may have longer term views of their revenue models which are not yet apparent, but to leap and hope doesn’t cut it for me.

Of course people will counter this view with examples of companies which developed a product first and successfully went on to later work out how to make money. But these are the exceptions, and for each of these there are many many more failures. Which is why I struggle with it being a starting point of how to go about things.

So I predict that while the list of new ideas from Finovate may deliver one or two big successes, I fear that for many trying to log in to their websites in five years will deliver a “site not found” message.

Of course there were also some standout companies at Finovate that had BOTH great innovation AND a clear business model. I’d tell you which ones, but then I’d much rather keep that to myself and rollout those ideas for instead!!

Can innovation come before a business model? was last modified: June 29, 2015 by Rohan Gamble

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2 Comments - Write a Comment

  1. I’ve had the same observation. What it’s easy to forget is that most entrepreneurs are just looking for the quick exit to make their money and it will be up to the second round of capital to commercialise the proposition. There is a lot more support for entrepreneurialism in the US than Aus. Good or bad?

    I agree with you (may be the conservative in me), it makes sense that there needs to be a clear commerical path for the product/process before I invest.

    It may just be capital looking for a return given the state of the markets? Red or black on the roulette table may be a viable alternative?

  2. Rohan Gamble

    David – I agree that there is definitely far better support for entrepreneurialism in the US than Australia. It’s certainly great to feel that entrepreneurial energy in the US. So that part is definitely a huge tick. We could certainly learn a lot and get better support for entrepreneurs in Australia. I think a lot of people here are put off by the obstacles, many of which are much easier to overcome in the US. So no question, the entrepreneurial culture in the US is a clear winner!


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