Frontier techs ditch Silicon Valley’s values

Growth at any price is rarely a sustainable model.

High-growth tech start-ups have transformed the way we do business.

High-growth tech start-ups are the business ­miracle of recent decades. So-called unicorns — private-venture-backed companies valued at $1bn or more — have transformed the way we do business.

Most of these firms — concentrated in talent-rich cities such as Palo Alto, California, London and Tel Aviv — seem to follow the same playbook: begin with a plan to disrupt an existing ­industry; use capital injections to grow as rapidly as possible; tolerate high risk in a rush for market domination. But that is not the only way to launch a thriving start-up. As a venture capitalist, I have worked for the past decade with high-growth tech companies in unlikely locations far afield from any innovation hot spot.

In Silicon Valley, the quest for growth all too often trumps sustainable unit economics and profitability. It is not unusual for start-ups to burn through millions of VC dollars a month as they chase ambitious growth targets. Innovators on the frontier, instead, focus on both growth and profitability, build resiliency into their models, charge for the value they create from the get-go and take a long-term outlook.

Successful companies in markets serving very poor customers, for example, charge for their ­services from the start rather than subsidise the business until they’ve achieved scale. They’re able to do this because existing solutions are often so dysfunctional that customers are willing to pay for reliable, safe and efficient products. Take Zoona, a Zambian start-up. The company, which offers basic financial services to unbanked consumers, advertises its product around the ­values of “easy, quick, safe” — not “free” or “cheap”. Despite the fact more than 60 per cent of the Zambian population lives in poverty, Zoona serves more than one million customers and is ­expanding into other African nations.

In the mythologised view of Silicon Valley, start-ups rush to develop a minimum viable product, raise capital and lay waste to entrenched inefficiencies in the process. But in my experience a more balanced approach to growth doesn’t hinder innovation.

Basic services

Consider the case of Qualtrics, a start-up based in Provo, Utah. The company was run out of the basement of one of the founders in its early years. Profits, rather than outside capital, were used to fund growth. This was an extremely abstemious approach, caused partly by the local ecosystem — Utah had limited venture capital at the time — but was also a result of the founders’ long-term view of innovation.

Qualtrics’ first line of business was to offer schools access to online surveys. Across time and without pressure from investors, the company refined and tailored its products and services for large corporate clients. Qualtrics did eventually raise capital after 10 years of bootstrapping, when it was a highly successful company. It was ­acquired by SAP last year for $US8bn ($12bn).

A disproportionate number of the frontier start-ups I have worked with focus on providing services that meet universal human needs. That’s especially true for emerging market companies.

By offering basic services, companies have the opportunity to become necessary to untapped customers. OkHi, a technology-driven start-up, creates postal and delivery addresses in the ­developing world, for example. Fifty per cent of the world’s population lives in slums, favelas, shantytowns and other areas where governments do not designate official street names or numbers for residents. To solve this problem, OkHi offers crowdsourced digital addresses — a unique combination of a GPS point, a location’s photo and text descriptors.

Silicon Valley has one of the richest talent pools in the world. Away from innovation clusters, however, recruitment is a universal pain point. In a study of 628 entrepreneurs in emerging markets, 75 per cent of those whose firms were rapidly growing identified lack of available talent as the biggest barrier to their business.

One way frontier innovators overcome shortages is to build distributed workforces that tap the best talent everywhere. Fully remote working arrangements are increasingly prevalent among start-ups outside Silicon Valley.

Frontier innovators take a different approach to retention, focusing less on workplace perks and more on incentives that reinforce values such as global connectivity. Branch, which makes microloans to customers in emerging markets, is headquartered in Silicon Valley but offers employees the option to work from any of its many global offices and pays for flights.

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Alex Lazarow is a venture capitalist.
Copyright Harvard Business Review 2020/Distributed by New York Times Syndicate