The Sean Ellis Paradox

The lean startup movement is democratizing entrepreneurship.
But are we better off?

by T.T. Nguyen Duc

The conventional guidepost for product-market-fit is whether 40% of your users are extremely disappointed if your product isn't there.  The converse logic would suggest that for those companies that do meet product-market-fit (and as a result have higher chances of succeeding), the technology is indispensable. 

However, if we were to take an honest and critical assessment of recent commercial innovations, most products are nice-to-haves rather than must-haves.   As expressed by Peter Thiel and Max Levchin, few have the potential to transform lives and move the economy forward. 

"We wanted flying cars, instead we got 140 characters."

This brings forth the centrality of the Sean Ellis paradox: if companies need to meet the 40% indispensability test, then why aren't we seeing more transformative high-impact businesses?  Are entrepreneurs, investors, and consumers conflating must-haves with nice-to-haves?

Not all startups are innovative.  Not all innovations are disruptive.

Lean startup economics resulted in massive participation in entrepreneurship.  The minimalist startup culture, combined with supporting technology infrastructure (e.g. cloud computing, open source software, APIs) has reduced barriers to entry, allowing almost anyone to start a company.  However this larger pool of entrepreneurs doesn't necessarily translate into a larger pool of visionaries wanting to change the world.  Instead, we are observing a rise in mom-and-pop tech start-ups: a long-tail cluster of killer-app, daily deals, social gaming companies that resemble brick-and-mortar businesses with a technology makeover.   The ability to geo-tag, friend, follow, and share becomes the Web2.0 recipe for innovating on a business model. 

As a result, there is a trade-off of long-run meaningful change for high-growth incremental innovation.  Start-up resources are expended on optimizing for faster, easily commercialized incremental improvements (in efficiency, scale, and connectivity) rather than on transformative change.

Tackling bigger problems requires longer time and capital commitments and higher risk tolerances.  The lean startup methodology conditions entrepreneurs and investors to seek solutions with low latency iteration cycles, to aim for minimal resource wastage, and to de-risk product development.  The desire for quick, easily measured results and returns isn't indexed against social value or genuine societal progress.   Instant gratification becomes the nemesis of innovation.

Seeking rockstars rather than heroes: An incestuous gene pool of ideas

Networked groupthink inbreeds a narrow pool of ideas.  We are in a new inflection point: a brain drain - away from finance - into tech, with a growing concentration of great minds working on the next gamified-social-local-mobile-photo-filtering app.   The celebritization of successful founders like Kevin Systrom constrains the societal and economic potential of entrepreneurship; unintentionally these precedents set the standard and scope for future innovation.    

Institutional factors fuel this trend.  Increased risk aversion amongst investors result in capital channeled towards lower risk, mid- to late-stage companies.  Even the most capital unconstrained investors shy away from deep innovation, compounding on the Valley of Death effect; Oliver Samwer declares, "There are two things that I don't do: healthcare and education."  Raising $30 million for another photo sharing solution is relatively easy, but almost impossible for a point-of-care medical diagnostic tool.  Without precedents of successful exits within the healthcare or education space, the only problems within the space that would get funded are proven models that treat symptoms (e.g. better grading/efficiency tools for teachers) rather than those tackling endemic root causes (e.g. improving accountability).  Private funding commitments in addition to existing public grants to certain issues could help jumpstart innovation in orphaned issues.

The battle of the Steves: Steve Job's reality distortion field meets Steve Blank's customer development

For intractable problems, it's hard to apply the lean methodology and test falsifiable hypotheses; longitudinal and conclusive studies are cost prohibitive and time intensive.  In this case, can the reality distortion field be valuable?  Validated customers are still a prerequisite, but sometimes it might be necessary to take a leap of faith. 

An antithesis to Sean Ellis' PMF framework is that customer adoption doesn't mean that they need the product.  It is an indication of consumers' preference of the technology over a lack of better alternatives.  This is particularly true for innovations aimed at the margin of our lives.  An improved version of Angry Birds might take off but the non-existence of this product would not move the needle on the quality of life. 

Along the way, entrepreneurs have stopped dreaming big and working towards a radically improved future.  Shifting the mandate from "changing the world" to "saving the world" could catalyze a new wave of transformative innovations.