Distribution as Innovation

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Essays

The chronology tends to go: you have an idea, you build something, you go put it into the world and hope people like it. If they don’t, you figure out why, go fix what you’ve built, and then put it back out there. Rinse, repeat. In this chronology, product always comes first, but product is also at the center. If something isn’t working, perhaps you haven’t built the right product. If you iterate, you iterate on product. In earliest stage investing, this is widespread teaching, if not religion. But people focus too much on lighting in a bottle inventions, when what impacts a startup trajectory –– and people’s lives –– is another often innovation. After 40 years of innovation and learning, best practices have emerged and what’s been most disruptive is, more often than you think, distribution innovations.

A “network effect” is a distribution innovation. Each incremental person who reads USA Today does not directly improve the experience for every other reader. Sure, the profits may increase for USA Today, and they may get economies of scale in their production. But in a network effect, each network participant stands to directly improve the value of the network for all participants. So user growth is, itself a value-creating mechanism for all users. (Example: Instagram)

A “platform” is a distribution innovation. These aren’t unique to technology, but so often you will hear that a company is going for a “platform play”. This means they aren’t just selling widgets, but selling a widget-building service, and enabling others to build their widgets. It is a way to distribute your service by creating economic and productivity advantages for other people to become dependent on you, and therefore distribute your service via their products. (Example: Shopify)

An “ecosystem” is a distribution innovation. Similar to a platform, enabling not only building widgets, but allowing others to build and sell widgets and services . This is a way to make the land valuable under the marketplace, by encouraging people to transact on your so-called real estate. (Example: Salesforce)

Once you hear these concepts over and over, it becomes less obvious to call them ‘innovations’, as they are no longer new to your ears. But imagine an ecosystem of geneticists buying and selling strategies for analyzing and combining data sets. Imagine a platform for amateur music producers to build songs using a library of stems and loops they can also contribute to. Imagine a home-sharing network where you can buy into a massive REIT, and as a member you could actually live in the properties. It has been a hallmark of the last 25 years of technology innovation to apply distribution innovations to industries where they have historically been lacking. Even Tesla, a paragon of a product innovation, went to market without a dealer network, allowing (or forcing) them to capture more margin per sale, and building a direct relationship with their customers: a distribution innovation.

In digital health, one of the areas where we focus at Kindred Ventures, distribution *is* product for a majority of the companies we see grow. The product innovation that happens in clinical research, in pharmaceutical biochemistry, in medical device engineering is a separate universe from digital health. (In healthcare, the product iteration process that I described at the beginning of the post is heavily constrained by regulation.) Many of the most lucrative opportunities available today to digital health innovators are about distribution: the evidence and the outcomes are already substantially proven. The products work. The channels, the ecosystems, the platforms must be discovered, invented, and developed; this is where pediatrics, fertility, cardiology, elder care, et cetera, are being transformed today.

With these practices established, we’re seeing an explosion not of product ideas, but of impact as new industries learn from these models to actually get people to adopt their products to change the world.

Now, product innovation is incredibly important. In fact, “making the right product” is what I spend the vast majority of time with founders on at the seed stage. In some sense, that’s the purpose of the seed-stage of a company: to make a product, and to make it well. And product innovations are happening every day: new mRNA vaccines, breakthroughs in artificial intelligence, combining hydrogen isotopes to form helium, metallurgy processes for extracting metals, and beyond. And even within the digital world that dominates Silicon Valley, a product innovation is oftentimes the foundational kernel — using a new client-server architecture to allow for collaborative design, or encryption methods for securing sensitive data, or even, simply, applying the GPS on the smartphone to track people’s cars.

But distribution is not just sales, and is not just what you do after you invent. Often, it is the source of invention itself. Take heed.

(Thanks to Scott Belsky, Jeff Wessler, and Pat Kinsel for a few helpful nudges on ideas here.)

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