There are many ways to grow a startup, but recent history suggests that the market building method coming out of Stanford is superseding the technology-driven method of MIT. Simply put, "Technology is not a prerequisite for business success, but marketing is." This is the conclusion of an insightful story posted last week by (triple degree) MIT grad (and now San Francisco resident) Amir Hirsch on his Reconfigurable Computing blog titled The Stanford Startup and the MIT Startup.
Hirsch himself has an illustrative backstory here. After MIT and a stint working on processor upgrades for a nuclear power plant (kind of like rocket science) he began hacking the Kinect motion sensor and was a member of YCombinator's class of 2011 with his Kinect UI startup Zigfu. So after degrees at MIT in Math and Electrical Engineering (undergrad) and a Masters in Electrical Engineering & Computer Science, Hirsch found himself in the very belly of the Stanford infused startup beast.
Who better to compare the two schools of thought on startups?
According to Hirsch, the difference between the two approaches is "The dichotomy… between a focus on technology development and a focus on market development." While an MIT company "seeks to develop an unassailable technical advantage, optimizing their product or process in terms of kilojoules, units per second, and dollars," the equivalent Stanford company "gets a product out quickly, they make money, iterate and then raise money." And here is the sad truth, in Hirsch's experience. The Stanford company will use "network effects to lock-in customers or viral growth tactics to get super-linear returns on marketing investment," whereas as the MIT company will "either find a market-fit or sell their technology to a Stanford company." (Italics mine.)
Zigfu, Hirsch's writes of his YCombinator startup in a previous post, stood out in its class (partially because what they demonstrated was not a web or mobile app) but never got proper funding. It remains profitable, but has not attained the scale that its demo presentations seemed to promise. In retrospect, he realizes, Zigfu should have just focused on building revenue first and chased funding later. "Revenue is just like funding," he writes, "but it costs you less to get it." By this token, all of his MIT training did not prepare Hirsch well for the reality of the SF startup culture. The YCombinator model presupposes an instinct for growing users and building revenues when it places young companies in proximity to venture capital. It is perhaps the secret handshake they don't teach at schools on the East Coast!
Now lest you think I am taking sides here, it is important to point out what the West Coast style does not automatically factor in. If you are, MIT style, trying to build a complex, proprietary technology that will require years of funding before it will generate revenues, you will have trouble with VCs. "Investors look for 'order of magnitude better' when vetting technology companies to determine if the technology is defensible," Hirsh explains, and the more original the scope of that technology, the smaller the pool of potential investors who will possibly understand and fund it. Many technologies that the world desperately needs are the same ones that will have the most difficult time getting funded.
In truth, the funding component of startups is a matter of marketing as well. Mobile apps with hockey stick user growth are the fast food of startups. They are easy to explain and easy to fund. But novel technologies are often more acquired tastes and require more discerning investors. On the other hand, if a high-growth startup does not possess an actual competitive edge in terms of technology it may not be able to maintain its first-mover advantage. In the end, Hirsch says, "the best startups develop technology and a market simultaneously." This is a lesson, hard learned in his case, that all startups need to heed.
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