What types of innovations matter for startup growth? | by Early Metrics
When people hear the word innovation, the first thing that comes to their mind is a new, shiny piece of tech. In other words, they think of product innovation. Now, many entrepreneurs know that they don’t necessarily need to invent a revolutionary device or service to blaze a new trail. They can indeed make a difference through their process or marketing.
Process innovation entails the creation of a new method to make a product or a solution to significantly improve existing production processes (e.g. 3D printing, predictive maintenance, robotics…). On the other hand, developing a new way of selling a product or service is considered as marketing innovation. This can include the business model, pricing, targeting strategy and distribution.
Some startups choose to focus their energies on one type of innovation while others dabble in two or three simultaneously. Needless to say, entrepreneurs also need to prioritize where they put their resources if they want to see their business grow. That is why we set out to find what impact different types of innovations have on startup success, based on our analysis of 3000 startups.
Process innovation can give you the upper hand
We found that the startups that put process innovation first in average received better scores in competitiveness and traction than the peers that prioritized product or marketing. Indeed, companies are always looking to improve their processes in order to reduce the cost of production, increase their speed, improve the quality of their products, generate greater customer satisfaction…the list goes on. Therefore, there is a great appetite for startups that address these universal business ambitions. It is worth noting that some of the main hurdles faced by these startups are their ability to fit their solution in legacy systems and scale it for mass producers, especially in industrial settings. Strategic supplier partnerships and co-development with large clients are some of the ways such startups can overcome these challenges.
Product innovation is a double-edged sword
When comparing the correlation between types of innovation and startup growth, we found that new products or services came in second place. Real product innovation is hard to come by and investors are always on the lookout for the next big thing, meaning these startups are likely to attract the interest and support of players in the ecosystem even early on. However, the success of this type of innovation is highly dependent on the complexity of the sector and the technology developed. For industries that are highly regulated, such as healthcare and insurance, it can take much longer for a startup to be proven compliant and bring its product to market. Moreover, the research, equipment and skill required for bleeding-edge tech development can demand much more resources. Unsurprisingly, lack of resources and low market readiness can negate the benefits of coming up with a completely novel product or service.
Marketing innovation may hurt your business
Instinctively, one could think that marketing innovation could be the winning strategy. Surely if you are not developing a cutting-edge technology or process, you need less time for R&D and less funding to get started, right? Although that is true, the reality is that disrupting traditional sales cycles and marketing channels can be tricky to implement. In fact, our ratings showed that startups who prioritized marketing innovation grew slower than other types of innovative ventures. The main reason for this is the need to educate the market, which can slow down the rate of adoption and decrease the competitiveness of the startup. For the same product sold, customers will generally prefer buying through a familiar channel than through one that deviates from the market standard.
Hence, while all types of innovations entail risks and opportunities, it’s interesting to observe that new products and processes usually generate faster traction and growth. Meanwhile, marketing innovation is a more difficult area to succeed in as it is hard to build barriers to entry and is highly dependent on the client’s education and readiness to accept novel purchasing methods. Still, our ratings have shown that putting together the right team for the project and creating a solid business network make a bigger difference in startup survival than the type or quality of innovation.
Early Metrics is an international rating agency specialized in the assessment of startup growth potential. The agency has developed a methodology to reliably evaluate both qualitative and quantitative metrics in early stage ventures. These ratings then allow decision-makers from funds and corporate groups to build better relationships with startups. Early Metrics has rated over 3000 startups to date for more than 250 clients, including L’Oreal, Barclays and LVMH.