Why You Will Miss Out on the Next Big Thing

Dear Early Investor,

Edison invented the light bulb on October 22, 1879. It lasted 13.5 hours.

We’ve all heard the stories. It took Edison hundreds of attempts to get it right. And the lesson of persistence our schoolchildren learn from the story is nice.

But the grown-ups should revisit the story. Other lessons are much more valuable.

For one, if Edison had decided to stop right there and then, we’d still be playing baseball only in the daytime. The most interesting stuff is what happened after October 22.

Three critical steps turned the light bulb from a curiosity and a toy (more on this in a minute) into an essential tool of modern life.

Step No. 1: Rapid improvement of the product. The following year, Edison discovered carbonized bamboo. It allowed filaments to last over 1,200 hours. Only with this advance did the light bulb become a viable product.

Step No. 2: An ecosystem built around the product. In 1881, Edison patented a system for electricity distribution. The following year, he switched on his Pearl Street generating station’s electrical power distribution system. Fifty-nine households in lower Manhattan became the first U.S. customers of an electric grid, and were the only ones equipped to light their homes using Edison’s invention.

Step No. 3: Efficient scaling of production (and/or sales). The light bulb’s widespread availability was assured only when a fellow named Lewis Latimer joined Edison’s company in 1884. He brought a patent for the “Process of Manufacturing Carbons.” It made the production of carbon filaments cheaper and more efficient.

All three of these things had to happen for electricity and the light bulb to catch on. You see, electricity spread hand in hand with the light bulb. It lit houses, stadiums and steamships (its earliest commercial use).

Who knew the light bulb would have such an impact? I bet not many.

And that’s not unusual, says Clayton Christensen.

Our Greatest Life-Changing Technologies Begin as Toys

Mr. Christensen’s “disruptive technology” theory says all disruptive technologies are dismissed as toys at the beginning. Why?

Because the technology is so young and undeveloped, it typically undershoots user needs.

Chris Dixon has a great blog on Christensen’s theory. Dixon, by the way, is a general partner at Andreessen Horowitz and CEO/co-founder of SiteAdvisor (an eBay property now). You can read the whole thing right here.

Or, if you have the time, check out Christensen’s book, The Innovator’s Solution: Creating and Sustaining Successful Growth.

Christensen is right on the money here. I have little trouble coming up with products I considered toys when they first appeared. Mobile phones. iPads. Skype. Going back further, the desktop computer.

Dixon, borrowing from Christensen, gives the example of the telephone.

The leading telco back then, Western Union, didn’t bother acquiring the phone because it could only carry voices a mile or two. It failed to anticipate how fast telephone technology and infrastructure would improve.

But that’s not unusual. People make the same mistake time and again. They intuit that products get better over time. That’s an obvious dynamic.

But why do we consistently underestimate its speed? To get an answer, we need to better understand how they improve so fast.

Part of the problem is that we tend to focus on the additional features products get over time. But that’s a relatively weak force, says Dixon. More powerful forces are…

  • The rapid advancement of external technological forces: for example, microchips getting cheaper, bandwidth becoming ubiquitous or mobile devices getting smarter. (And, for our light bulb, electricity becoming cheaper and more accessible.)
  • A key Christensen rule: Technologies get better at a faster rate than users’ needs increase. Dixon points to Wikipedia: “Since users’ needs for encyclopedic information remains relatively steady, as long as Wikipedia got steadily better, it would eventually meet and surpass user needs.”

It’s one thing to understand what Dixon and Christensen are saying. It’s quite another to internalize it.

Many times when I delve into a startup’s technology, I think it’s too “frivolous” or “whimsical” to meet widespread needs.

For example, I’m now looking closely at a company called HeatGenie on the SeedInvest startup portal. It makes quick and safe self-heating food packaging.

I like the technology. But at first, I had trouble taking it seriously. It seemed too “toy-like.” But I quickly got over it. And now I believe it’s only a matter of time before this or a very similar technology enjoys widespread adoption.

As a startup investor, remember that most disruptive technologies and some of our favorite products began as toys: toys that made their early investors very wealthy.

Good investing,

Andy Gordon,
Founder, Early Investing