Every startup is a new species

Where do startups actually come from? New companies come out of nowhere, grow exponentially and make a huge impact in the daily lives of millions in just a couple of years. Darwin can help us understand why.

The truth is a mobile army of metaphors, Nietzsche infamously wrote, and the best metaphor to grasp the essence of startups is perhaps to look to nature, specifically Darwin and the theory of evolution.

Charles Darwin tried to figure out how and why new species originated and how change and adaptation took place in nature. Much in the same way we try to comprehend how new companies come to life and the dynamics of society.

Through thorough world-wide research, Darwin reached an understanding of a universal principle of life, which he named natural selection. The principle of evolution means that inherited traits will be carried over from generation to generation only if the traits increase the likelihood of survival and reproduction – survival of the fittest.

Valid for all forms of life

However, Darwin was not able to identify the source of change. Mendel and later research found that DNA and random mutations are the actual driver of change, and natural selection decides which mutation will be carried over to the next generation. Darwin’s theory of evolution is valid for all forms of life and explains both the vast diversity and the incredible complexity of nature.

But is this relevant to startups? I think so, even if society can’t be compared to nature directly, the theory of evolution gives us clues to understand the origins and life of startups. They are also a special type of new species with particular traits, and they have to successfully adapt in order to reproduce and survive.

A striking example of how startup evolution works is the Norwegian company Zaptec. They originated in Stavanger, the oil capital of Norway, and they were incepted within the oil business, making a super tiny but powerful transformer suited to deep ocean drilling.

When I met the company back in 2014, they had left the oil industry and had set their eyes on other business areas. They were particularly enthusiastic about space exploration. The Zaptec team thought their transformation was perfect for drilling and exploration on Mars.

Fast forward five years and Zaptec has recently gone public on the Oslo stock exchange with a market capitalization just south of NOK 1 billion. Has their startup journey ended up in space, digging dirt on Mars? No, today you find Zaptec’s solution just underground, most likely in a large parking house owned by a housing association.

The explosion of electric cars in Norway in the past few years has led to a high demand for reliable, easy and secure charging. In large parking houses, that’s a lot easier said than done and it’s not an issue every single car owner can solve by himself. Based on their original transformer, Zaptec has developed a complete and simple solution for housing cooperatives and apartment buildings in need of facilitating convenient car charging on their premises.

A particular niche in the market

Zaptec’s solution is not only the charger in itself but a complete shared infrastructure for electric vehicle charging, including intelligent distribution of the available capacity between the charging stations and billing of the individual car owners. Zaptec have by mutation, trial and error been able to identify a particular niche in the market, in which they have created a powerful value proposition where there happens to be a high willingness to pay.

The company illustrates the bumpy road of a startup and how iterations, random concurrence of events and changes in the market may work together in order to create a solution that the users love. The roller coaster journey of Zaptec is probably something that all entrepreneurs may learn and get inspiration from, and in particular through Darwin’s spectacles.

The key is to find a problem (or niche in the term of evolutionary biology) that you are able to solve in a desirable way with an attractive price tag. How the solution has originated, how much sweat, tears and money that have been invested and the composition of the team is really not relevant, if the company is able to deliver on their value proposition with a sound business model. In startup lingo this is often referred to as product/market-fit and I think that is pretty close to Darwin’s principle of natural selection.

The theory of evolution might give us some clues as to how new companies originate and fill new niches in the market. But how is it possible that tiny startup companies can compete with big corporations in the quest for product/market-fit? Why didn’t a large and established player in the energy industry develop the same solution as Zaptec and in a considerably shorter period of time? They should have both the resources and knowledge to do so.

From time to time you will observe big corporations that come up with new and innovative solutions: Lyse Energi has been a successful pioneer within fiber-based internet access through the brand Altibox. Schibsted’s fast-growing company Helthjem is a new logistic solution provider based on an old newspaper distribution network. However, I think it’s fair to say that such initiatives are not the rule.

Often big companies will try to take advantage of their existing resources and know-how when they set out on a journey to innovate. That’s understandable, since they will try to figure out where they have a competitive advantage. The downside is that then you initiate the process with a solution already in mind, the efforts you are making are directed towards what’s possible to do. All too often that carries with it the endless and fruitless search for a problem to solve.

It begins with a problem

In my opinion most successful start-ups begin with a defined and often self-experienced problem of some kind, e.g. Daniel Senn made the highly celebrated learning game Poio in order to help his own hearing-impaired son to read. Starting out with such a clear value proposition, helping children crack the reading code, is not a guarantee for success, but it reduces complexity and the startup team has no choice but to focus on the task at hand.

In large companies the opposite is often the case. The newly established ”startup team” is pretty large and consists of stakeholders from the entire organization in order to gain strong support. This also implies a decrease in speed due to necessary coordination within the team and dialogue with other parts of the company. In a true startup they can move fast and there is most likely only one agenda.

Large companies also tend to issue a set of different policies. Google is well-known for letting their employees use part of their work time to innovate new products and services. However, Google and other big companies also foster cultures and processes optimized for the market they are present in already. As a Google employee you are expected to use Google’s own tools and systems even if you try to make something entirely novel. It is also expected that the solutions you make are universally accessible and of high quality from day one. A startup might pick development systems and tools of their own choice and are not obliged to launch perfect products, instead they go through different paths of trial and error. This enables startups to keep up the speed, encourage many iterations and a high degree of flexibility.
But still, a startup has a limited number of resources available. Some may have a longer runway than others, but it is always definite. Innovation projects in large corporations are seldom restricted by funding, but they tend to get shut down too early, whereas startups stay put until they reach some kind of breakthrough.

The reason for this supposed anomaly might be that incumbents have a steady cash flow from existing products and services and are in no hurry to come up with new revenue sources. To close down an intrapreneurial initiative will create no short-term negative effects, but in most cases increase the profitability.

A startup team faces an entirely different reality. They definitely have skin in the game, to quote Nicholas Taleb. They must act in order to stay alive. They must continue the quest for a niche in which they can reproduce or at the very least, they must convince investors that they are on a path to success.

They want to make a difference

Common wisdom indicates that entrepreneurs are driven by a high financial reward. I am not sure about that; I think that the best entrepreneurs are driven by problem-solution and to make a difference. On the other hand, it’s very hard to see why you should join a corporate startup. The reward is most likely limited, and you expose yourself to criticism and probable failure. Since it is by definition a startup and something new, it is hardly a strong career move in the current legacy business.

All these factors work together to make startups better suited to go through the necessary struggle and make enough experiments to achieve product/market-fit. From an evolutionary perspective, startups often beat incumbents even if the large players have the upper hand.
The logical consequence of this insight for large companies is not to stop internal innovation projects, but rather to add startup investments to their innovation toolbox. However, this should be done in a manner in which the founders are still in control and the investors accelerate (but don’t redirect) the journey of the startup.

In Schibsted’s case this implies that we support entrepreneurs in different ways. The most important is probably through brand building and marketing. Schibsted has vast experience both operationally and strategically when it comes to launching new brands and strengthening established ones. We also support our startups with legal advice, internationalization, business development, recruitment and more. Other corporate venture investors might support their founders in other areas.

Regardless of how you choose to support the entrepreneurs, the most important aspect, I believe, is to recognize that every startup is unique and is a new ­species trying to get a foothold in an unknown territory. And it must run through large and small mutations on its evolutionary path to survival.