The famous global macro hedge fund manager George Soros once said,
“I don’t play the game by a particular set of rules; I look for changes in the rules of the game.”
Inside the House of Money
Soros' insight is equally well applied to startups. Successful startups discover and leverage changes in the rules of the game.
Discovering the changes in the rules of the game is one of the hardest things about starting a company, but understanding precisely the change and developing a hypothesis for exploiting the change is essential.
Typically, there are three types of changes in the rules of the game that startups pursue: technology discontinuities, ecosystem discontinuities, and behavioral discontinuities.
Technology discontinuities, those changes in the rules that occur as a result of new technology are often the most apparent. Clay Christensen’s smaller hard drives is the classic example.
More recently big data technologies like MapReduce, OpenFlow Networking, enterprise grade flash storage and NoSQL databases represent fundamental advances in technology.
Technology discontinuities afford opportunities first in commercializing new technologies (MapR, Pure Storage, BigSwitch) and second capitalizing upon them as advantages in other, pre-existing markets (risk modeling in financial services and real time bidding ad tech, for example).
Ecosystem discontinuities arise when the costs to serve customers in a sector suddenly change dramatically. In the last five years, social media and mobile app distribution have built platforms offering unparalleled access to billions of customers at a fraction of the cost of highly efficient search advertising. This fundamental change in the rules has spawned tens if not hundreds of fast growing social and mobile companies like Pinterest, Kabam, PocketGems and others.
Ecosystem discontinuities typically offer short term customer acquisition advantages for first-movers and fast learners. Whoever can learn the new rules of the game the quickest will win.
Behavioral discontinuities are the most nuanced and subtle changes in the rules of the game. They require entrepreneurs to examine and extrapolate small changes in user behavior into new opportunities and build precisely the product that enables users to say, “Yes, that’s exactly what I needed.” Behavior changes typically start very small and then grow quite quickly.
Social networking represents a fundamental shift in communication patterns that started by satisfying two human desire, curiosity and vanity, and provided the substrate for a massive behavioral change.
Behavioral discontinuities require a deep understanding of changing user wants and needs. These are often discovered through self-observation, introspection or field research.
Other discontinuities: Of course there are many other types of discontinuities. Swings in the financial markets both public and private, government regulation and antitrust rulings, industry consolidation, and so on.
And there are myriad ways uncovering these discontinuities. But common to most startups is the successful identification of a discontinuity and hypothesis for how to exploit it.
Discovering the changes in the rules of the game may take years of observation or it can happen in a flash. It can happen in any number of ways. But ultimately, it’s what we’re all chasing.
Published 2012-12-18 in Strategy