Featured image source: Caitlin Kenney/NPR 

I hear the word innovation thrown around like a football. Lets all stop for a minute and think about what is real innovation. I like to go back to first principles when I hear a lot of hyperbole. Innovation is not just software or even automation. Innovation has to result in something that is valuable, I mean 10 times more valuable. The conundrum is that at the time of looking at something innovative, it does not always seem like it is 10 times better. That is the counter-intuitive thing about innovation. As Paul Graham famously said great startup idea at the start sound really bad, technically it had to be that way. The same is true for innovation.

Listen to this Planet Money podcast by NPR.

The History of Light

Go ahead, listen to this first I will be waiting. Did you listen? the story of how light bulbs and electricity was invented or should I say “how innovation came into the business of light” is fascinating. Can you imagine telling people using candles made of animal fat or whale fat that one day they can press a button and they can have all the light in the world? Do you think they would have thought it was a bad idea? Maybe even told you that you were crazy? Do you not think that is an exponential innovation? Also notice that it was not a marginal improvement on the prevailing technology, it was a radical shift. That is the basis of innovation.


Time Square New York City – Display of lights

Lets unpack innovation, but before we unpack innovation we need to clearly state what is valuable, because value begets value and the ability of a person, process or technology to actually capture value allows more value capture especially in the world of power laws. Oh, the entire world is driven by power laws if you have not yet noticed. You have heard the term, Faster, Cheaper and Better right, it is subjective but there is more to it. If anything can do a certain task significantly faster than it was previously done then there is value. The same is true if something or someone is able to do the same task significantly cheaper. The last attribute “Better” is subjective and depends on a number of factors like culture, background, geography etc

I have argued before that Design, Data and Networks are the only things that are going to be valuable in the future. A product designed intuitively that allows for the task at hand to be done faster is valuable. We can sense that. The fact that a 2 year old can learn to work the iPhone or iPad or an Android tablet is an example of good design. If a product is intuitive and does not need an operators manual to learn and use is valuable.

Let us talk about Data, why is data valuable? well data is information, not all data is information, there is noise and there are signals. If you want tons of data look at the financial sector or the stock market, there is pricing data of every stock, commodity and security traded available by the minute. Is it valuable? maybe, maybe not. The ability of a product or tool to cut through the noise and help you look at signals to enable better decision making is valuable. So, Data for data sake is not valuable; what is valuable about Data is that there is signal in it and anyone or anything that can cut through the noise and clarify the signal is valuable.

Networks are inherently valuable because they allow for communication. I am using the term Networks loosely, it is any network, for example a network of connected machines or network of connected people or things. Once again, a network in itself is not valuable only a network that creates what is called a network effect i.e one more person or device getting connected to the network makes the network exponentially valuable. Think about the fax machine, you do know what a fax machine is right? the first fax machine was not valuable, the second fax machine made the first machine valuable, the 1000th fax machine made the network of connected fax machines immensely valuable. There is a lot of study on network theory and how to really calculate the network effects and the power law behind networks. I am not going to bore you about that. It is enough if you realise that whatever you are building and the connections that it enables should make each node (read person or thing) inherently more valuable. There are fancy words used in our vernacular to describe this, you have heard of synergies, 1+1 =3 or 1000 etc

Coming back to Innovation, innovation is possible in Design, Data and Networks. One of the most under appreciated innovation is the innovation of Business Models. What I mean by Business Models is the value equation, i.e The function that describes the value captured by a device, process, person or technology and the price to use that thing. I believe if something you are building is valuable if and only if some is willing to pay for it. Paying for it can be in the time they devote to using the product or service or actual price they are willing to pay. Innovating in the business model is actually quite hard because people don’t perceive value until they start using it, hence the famous Freemium business model, give something away for free, let your potential customer use it and then charge for additional service that is derived from the initial use. Alexander Osterwalder has done a great job in cataloging most of the innovative business models in his book Business Model Generation. If you don’t have that book in your reference library, I highly encourage you to get it.

Building companies with innovation in all aspects described above is generally hard but not impossible. As a startup founder or an entrepreneurs, the dilemma at the start is usually trying to put their finger on which aspect should they innovative on? Good question, I don’t have a straight answer but I can say that having no bias and open mind is needed to innovate. Think about it this way, in order to come with an innovative solution you cannot be at the same level of thinking. Yes, I know Einstein said it better, the gist is to have an open mind. In order to innovate you need to think in possibilities, some call it pipe dream but I believe it is fundamental to innovation. You cannot innovate if you think something is not possible. Ironically, those who get frustrated about problems and get to a point of obsession are usually the ones that I have seen innovate. So if your pain is bearable, chances are you are not going to innovate. You need to have something that fundamentally changes how you see the world to change the world. I am not talking about any earth shattering idea. All I am referring to is the obsession to make something 10 times faster, cheaper or better. That in my view is innovation.

Technology has been an enabler, the Silicone Chip or Integrated Circuit is atomically faster at calculation and has become progressively cheaper thanks to Moors Law. This first principle has changed the trajectory of many things in the past half a century. I believe we are only scratching the surface of what is possible. If you are a founder or an entrepreneur, go back to the first principles. Ask yourself are you truly innovating? Is your product really 10 times better than what is out there? If not, then you have work to do. You can make most thing marginally better, I believe 15% improvement is possible in any process. Ask yourself are you making something marginally better or exponentially better. True innovation makes things exponentially better. Don’t fool yourself into believing otherwise. Remember the easiest person to fool is yourself.