S01E01

Not the Silicon Valley Playbook: Winning in the frontiers

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Alex Lazarow takes us to the frontier where resources are scarce and competition is fierce to show us how entrepreneurs are re-writing the Silicon Valley playbook

Silicon Valley, considered the Mecca of startups by many, has given us some of the biggest names in the corporate world today such as Apple, Google and Facebook. It has also given today’s startups a playbook on how to operate and scale, a playbook that Alex Lazarow contends is increasingly out of touch and does not reflect the ground reality for the hundreds of startup hubs across the world outside of Silicon Valley.

Lazarow takes us to the frontier, where competition is fierce, venture capital funds scarce and the best talent is difficult to find, much less recruit and retain. He shows us how these frontier innovators are taking a creators’ lens at solving these problems, what techniques they use to recruit A-Teams, what lessons they can teach innovators in Silicon Valley, and how they build with sustainable unit economics to create camels that can outlast unicorns in periods of drought.  

Q: Alex, tell us about your early days and what informs your worldview  

A: I grew up in a small town in the middle of Canada, later I moved to Toronto and was an investment banker for several years. I later worked with McKinsey first in Belgium, then DC, principally working in emerging markets because I thought it would be important to work with different companies, advising different leaders and getting a sense of some of the challenges that plagued big companies. 

I ended up having the opportunity to join the Omidyar Network in 2013, right as it was building out a new financial inclusion team and was there for about five and a half years. When I left ON, It had grown from about 60 people to about 180 or so. 

Cathay Innovation the fund that I work at now is a globally focused fund, our fund two’s by 550 million Euro. A third of it invested in Asia, a third Europe, and a third North America. We also have a pan Africa venture fund in partnership with African Invest and the whole group is affiliated with Cathay Capital, a Paris based global cross border private equity fund so that’s what I’m focused on. Outside of work, I teach Entrepreneurship at the Middlebury Institute. 

Q: Your book ‘Out Innovate: How global entrepreneurs from Delhi to Detroit are rewriting the rules of Silicon Valley’ talks about how companies outside of Silicon Valley in different countries are innovating. What was your inspiration for the book?

A: As an investor, I’ve always had one foot in the Valley and one foot investing in entrepreneurs around the world, both in the US and in emerging markets. As an instructor of entrepreneurship, I was getting particularly frustrated that everything I had to share with my students was rooted in a time and a place – Silicon Valley for a very particular type of asset-light software-based startup that wants to grow extraordinarily fast.

Yet today around the world, there are 480 startup hubs globally. There are over a million venture-backed startups be it in Nairobi or Bangalore or Delhi. Yet no one is telling their stories and I decided I would. So I interviewed about 200 entrepreneurs and these are folks, leading some of the biggest and most successful startups in these emerging startup ecosystem. So a couple hundred million dollars, a couple of billion or already exited. The underappreciated story, the unconventional wisdom of this book is that many of these entrepreneurs are not only challenging the conventional wisdom, they are also increasingly reinventing startup best practices in meaningful ways and give us an alternate playbook on what it takes to scale and to succeed in tougher ecosystems that don’t have the same amount of capital, resources, depth of trained startup human capital or just exist in ecosystems that have more macroeconomic shocks. 

In the ecosystem that we’re in now with COVID-19 affecting us all, it’s from these entrepreneurs around the world, that the Silicon Valley cadre of folks also have an opportunity to learn from on what it takes to scale when times are tough.

Q: How are companies in the frontier innovating differently from the classic Silicon Valley model of innovation? 

A: First I define this notion of the frontier as different than Silicon Valley, it’s hard to say there’s Silicon Valley and not Silicon Valley. There’s a lot of nuances, the world is very heterogeneous and I make a gross oversimplification in the book, but just for the sake of setting it up; I talk about ecosystems that are in developing versus developed countries, and then of high ecosystem intensity and low ecosystem intensity.

If you imagine plotting that as a two by two matrix, you might say top right corner, you have Silicon Valley, developed country, very high ecosystem intensity, In the book, I bring us to places as extreme as Pyongyang, where you might say very developing country, very developing startup ecosystem, but also ecosystems like Bangalore, which have an incredibly thriving startup ecosystem that exists within a more developing country context and my hometown in Winnipeg, developed country in Canada, but very nascent startup ecosystem.

In the Valley, we’re obsessed with this notion of being a disruptor, around the world, the best entrepreneurs are taking a different frame. They are taking a frame of being a creator. That has three dimensions. The first is offering a product or service that was previously not offered at all in the market or not offered at all through the formal economy, second is thinking of the mass market as the core first customer. It isn’t about starting at the top of the pyramid, it’s targeting something that works for the middle class and below, the majority of people. The third is those entrepreneurs on the shoulders of giants upon which others build right there.

If you look at the data on the US research by Village Capital at the number of unicorns and what they did, less than 20% of them were in industries like healthcare, agriculture, financial services or energy in any of these kinds of really high impact industries and emerging markets, those numbers are flipped. I surveyed in Sub-Saharan Africa, for instance, there, it was well over 60% and I’m sure the numbers if you looked at it in India, It would look very different than what we have in the US particularly among the most scale and successful businesses and the range of products that they’re offering.

Q: You talk about an interesting aspect of the Silicon Valley model, which is growth at all costs and this is possible because you have a lot of money coming in, to back really smart entrepreneurs and the one thing that they care about is growing pretty fast and it doesn’t matter if you burn a lot of capital, you recommend that many startups don’t have to, or in fact, shouldn’t take this approach. Why do you say that? 

A: The growth at all cost mindset stems from this core Silicon Valley approach if you think of the objective in the valley, the moniker of the unicorn has been used where the unicorn represents a billion-dollar startup, but it also represents a philosophy, a method to achieve that objective, which is growth at all costs and in that construct, it’s okay to subsidize user acquisition or give things away for free in service of growth, it’s okay to scale burn rapidly in service of growth, and it’s okay to take a very short term lens on the world and your exit in service of growth. 

Around the world, the best entrepreneurs that are operating in tough ecosystems take a different approach in the book I use this analogy of building a camel, which is an animal that’s built to thrive when times are good. A camel can sprint across the desert, drink water faster than any other animal on the planet, but also can survive when times are tough and can survive in the world’s harshest environments.

That lens is one where entrepreneurs are building businesses differently. So one, they’re building with sustainable unit economics from the get-go, they’re managing burn. That doesn’t mean you’re avoiding burn every startup will lose money, in the beginning, as you’re building something, every startup has a Valley of death, the question is how deep is that Valley of death and how much are you willing to accept and are you willing to burn much more in service of jacking up the revenue line, or are you going to take a little bit more of a balanced growth approach? And that’s what I’m talking about with managing costs.

One story that I love, is the story of Grub Hub in the US because you often think of on-demand delivery as a market, they are raising extraordinarily extraordinary amounts of capital and that’s incredibly venture subsidized, and yet GrubHub raised a paltry amount by Silicon Valley standards, $80 million of the venture, to get to scale and ultimately a multibillion-dollar IPO. And when I interviewed Mike Evans, the COO, and one of the co-founders, he talked about how at every single fundraise they were sustainable and every single fundraise was for a very specific purpose. It was to do an acquisition or to grow to a couple of other cities and so they took this philosophy of managing costs and managing burns, still getting to high scale and success, but doing it with this more balanced approach so in many ways, it’s taking this long term view to get to a more successful risk-adjusted outcome.

When we were looking at a lot of these unicorn companies that that may or may not be successful, we’re seeing one iteration of that story but if you replayed that story a hundred times, how many times do you get to that outcome? and I believe that taking a camel-like playbook, obviously building a startup is risky and tough in every situation, but we will get to that outcome more often and more reliably and particularly if you’re building in tougher ecosystems. And so that’s how the best entrepreneurs outside the Valley are succeeding in scaling.

Q: In your book, you talk about how a lot of companies acquire customers by giving free or subsidized products in Silicon Valley. And that’s the popular model, but is there another way to do it? 

A: It starts rooted to build with sustainable unit economics from the get-go. It isn’t about giving for free in service of adoption, price is a feature of the product, it is a strategic decision on the positioning of where the product is and by pricing the product at something that works for you, you also get a sense of it works for the customer if it has value for them. If you do it the other way around and you have nice user acquisition numbers, but people don’t value the product people will churn. 

Some dynamics are different for every business, there are some very narrow set of businesses that are truly winner takes all, perhaps some of these approaches might work, but for the vast majority of businesses, customers are coming on to partner with your business and with your product because they have a need to fill and you are offering a solution to that need. There’s a value that’s transmitted and figuring out what that value is and pricing accordingly is key because that’s, actually how you scale successfully over time.

One of the things that’s interesting in more emerging markets is It’s tougher to raise capital. There’s less capital available, one of the strengths of this camel approach is getting to stay sustainable and having more flexibility to be able to endure the marathon as well so it’s about positioning to be able to succeed within the reality of the market, particularly in markets with less VC.

Q: The whole concept of desk-based marketing is taking off well. I want to talk about the whole distributed aspect of these global companies and how the COVID-19 pandemic is playing into that. How do you see this shaping the future? 

A: Distributed teams, is a unique strategy that has emerged at the beginning out of necessity that is becoming a strategy writ large. In many startup ecosystems around the world, the best entrepreneurs have looked to build a distributed team to tap the best talent from wherever it is. 

If you’re an entrepreneur from let’s say Winnipeg and you’re hiring a Chief Marketing Officer, there aren’t 500 of them in Winnipeg that can scale start-ups, nowhere near close to what there might be in Silicon Valley or other ecosystems and so as a consequence, you are forced to look, wherever that talent is. That’s kind of the notion of building distributed teams it’s finding the best talent wherever it is. That comes with other advantages, in some cases, If you are a Silicon Valley company, you’re building a distributed team, you can tap lower costs and talent centres, particularly given how expensive it is. It can be, a developmental muscle. if you’re going to be a global company selling in multiple markets, you can build a culture that can function in a distributed context, that can also work. 

There’s also a whole range of the ways you can do it, one extreme is fully remote and the other extreme is everyone is in one location, one office, you can also have a blended model, et cetera. COVID has pushed us all into one extreme because what we’re doing right now is not normal. This version of distributed work is not normal, it’s not normal to have your kids at home, to not be able to go outside, to be worried about a pandemic, to be worried about a recession and all the while also managing your business all those things are not normal.

I don’t believe that remote work will be the be-all, end-all and the standard ever, but I do believe it will be more normal. Outside the Valley, it has been more normal and it has been, almost standard practice among many of the best companies because they are taking these strategic approaches to build their team’s and we’re going to see more and more of that.

Q: Something that you point out is that frontier innovators build A-teams and not just hire A-players. How is this different? How is the approach of a frontier innovator different from someone who’s trying to build a team from hiring a bunch of A-players and hoping for the best? 

A: Teams and people are one of the core resources for startups, of three inputs. One is an idea, the second is the team, including the leadership and third, is the capital depending on the business model. There was a survey by RippleWorks, in emerging markets startups and it looked at what the biggest challenge was in the early days. A lot of founders talked about capital and team but the team is the one that has become harder as the company scales. So this is a big pain point building A-Teams. 

There’s this philosophy around, look, we’re going to hire the best players, we’re going to bring them in and it’s okay for the business model to include high employee churn. You look at the average tenure of employees at Uber and it’s less than 15 months, it’s built into the business model and then the approaches of how you recruit, retain stock options model around incentivization, all that stuff is built into that model and it works well within the Silicon Valley context and this is one of the areas where we’re seeing some of the more nascent developments and reinvention. 

It starts with this different philosophy of wanting to build an A-team, how do you recruit and find candidates? in my book, I profile the story of hotels.ng in Nigeria, who instead of using a resume based model, where they’re only going to continue finding the same candidates from Lagos in Nigeria, they did a digital internship over Slack, where they were looking for the best engineers, wherever they came from across the country. The way it works is there’s a paid internship where every week they would send an assignment and those who completed it will move on to the next phase and so on. In the beginning, they start with a thousand people and at the end, they end up with 25 people, but they end up with the 25 people that were judged based on the outputs of their work and most of the people came out, not from Lagos, but a lot of towns all over the country. 

So it starts with that, how do you reinvent the way you search for people, measure outputs, instead of the traditional ways of looking at candidates, and then it extends the whole way through to compensation and retention and growth.

Q: How are these innovators rewriting the rules of finance as we know today 

A: The venture capital model is really considered symbiotic to startups and indeed it has worked extraordinarily well in Silicon Valley and frankly also around the world in supporting entrepreneurs. But I believe that as entrepreneurship continues to proliferate around the world and startup ecosystems scale we’re going to see a range of startups that get built and as a result, we’re also going to see a range of tools to support those entrepreneurs as well. 

The VC model originated not in the valley, but the whaling industry. One of the reasons it’s called carried interest was because it was literally what you could carry off the boat back in the day and that model was adapted to the Silicon Valley construct. 

We’re starting to see some green shoots, some early tests, around new models and of the changes that I think is interesting is that we are re-visiting investment structure.

The mining industry, for instance, has to contend with high-risk investments and has developed a model to support it- The Royalties Based Model. We’re also seeing some entrepreneur VCs, pioneering different structures with revenue share models for emerging markets, and evergreen funds. Having a longer-term horizon to support camels that are taking a longer-term to build their business. We’re seeing evolutions in how decisions are getting made. We’re seeing more of that, where VCs are born global, they can scale and invest in entrepreneurs around the world.

We’re seeing the rise of different types of investors in ecosystems beyond just VC, we’ve already seen the rise of impact investing, we’re seeing a rise of corporate investors across emerging markets as well so we’re going to see some more evolution in how startups get funded and how they scale and it won’t just be the VC model. 

Q: As an investor, what are you seeing on the ground in terms of startups getting funded? Are you seeing any changes in the momentum due to COVID-19 and going forward how do you see this shaping up not just for the US markets, but for the rest of the world. 

A: We’re in the eye of the storm right now and there’s a question of what happens in the medium term, and then the long term. 

Starting with the long term, I continue to be incredibly bullish on entrepreneurship globally over the long term. It’s never been easier to start a startup now there is a range of business infrastructure including the SAS ecosystem that makes it easier to start and scale a business. VC is becoming more global, the culture of entrepreneurship has become more global and it’s starting to become at the top of policy agendas around the world and so the tailwinds of this over the long term are going to continue to scale. 

In the medium-term one of the things that I am hopeful for is that we’re going to see a shift in what startups tackle and what problems are getting solved. COVID-19 has laid bare some of the biggest challenges that we have in our society. They’re not new challenges like in the US for instance, 60 million Americans are unbanked or underbanked, 80 million people have inadequate health insurance. These are not new challenges but ones laid bare through the crisis. 

These incredibly large intractable challenges are also incredibly large opportunities for entrepreneurs to tackle these problems with a new approach and a new attitude, but also a new business model and a new technological innovation to make a dent and so I’m hopeful that we’re going to see a rise in startups, both in emerging markets and in the Valley that are tackling some of these big problems and it will hopefully give us some more solutions for the future. 

Q: Alex, thank you so much for coming on the show, tell us where to find your book and what’s the best way to reach out to you
A: The book ‘Out-Innovate How Global Entrepreneurs from Delhi to Detroit are Rewriting the Rules of Silicon Valley’ is available anywhere where books are sold. In terms of connecting, LinkedIn and Twitter are the two best, and I also have a newsletter that’s easy to follow

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Join the Freshworks for Startups Program and unlock superpowers to run your startup. Eligible startups can claim up to $10,000 in credits on our intuitive, scalable and affordable software suite. We also offer white glove onboarding, mentorship, market access and resources to help startups scale faster.