As Easy Money Fades, Disruption Will Require Distribution (Forbes)

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POST WRITTEN BY

Cory Capoccia

President at Womply, a SaaS company that provides a technology and data platform to small business merchants.

For years, Silicon Valley has benefited from low interest rates, with investment dollars generously flowing to startups hoping to disrupt big industries. While rising rates aren’t likely to impact the tech economy in the short term, the end of easy money will certainly mean a tightening fundraising climate for startups seeking investment. In light of this, companies with more nascent business models must concentrate their focus on perfecting their distribution strategies.

Distribution strategy may not be as sexy or fun as product strategy, but it’s a driving force behind any company that realistically wants to replicate what Amazon did to retail or Uber to transportation. For all the examples of scrappy startups taking down big behemoths, there are thousands of counterexamples of abject failure. One of the most overlooked reasons is simple: While companies may be able to build great products, they are unable to establish attractive unit economics and therefore can't scale distribution.

In fact, I would argue that two conditions are universally true about disruption:

  1. Incumbents are disrupted only after insurgents figure out how to build great products and come up with efficient ways to distribute them at scale.
  2. Disruption is still quite rare because incumbents’ distribution advantages are an incredibly potent defense against startups.

On the first point, I’m watching with interest as Square attempts to broaden its disruption strategy. I’ve spent most of my career in the payments industry; it’s a complex space with lots of entrenched players. Until now, Square’s growing relevance as a payments innovator has been based mainly on the power of its incredible product. During a recent earnings analysis, however, Square shared its intentions to expand its distribution strategy by gunning for new channel partners. It’s a smart strategy, and I see it as further evidence that in any industry, a great product leads to relevance and impressive business traction, but market-sweeping scale demands excellence in distribution.

On the second point, we’re witnessing the protective power of mature, robust distribution networks as the banking industry deflects Silicon Valley’s takeover attempts. For startups and investors, the original hypothesis was that the startup ecosystem would eventually replace banks altogether, but that proved to be presumptuous. Today, many of the startups that once aimed to supplant banks are partnering with them. Ultimately, fintech ran into a buzzsaw as startups tried, and failed, to cut into banks’ sprawling customer networks in any significant way. Simultaneously, startups have recognized that while a partnership strategy may require new DNA and a different set of capabilities, it can still lead to substantial long-term success.

Of course, we can’t discuss anything related to Silicon Valley these days without invoking Uber. Despite Uber’s omnipresence in public conversation, it seems clear to me that an oversimplified explanation of its rise to dominance has taken root. A common refrain is that the taxi industry could have prevented the emergence of ride-hailing apps like Uber and Lyft by simply building its own mobile app. There may be some truth to that, but Uber’s app isn’t its disruptive secret. In addition to making transportation a mobile experience, which undercut the taxi industry’s outdated product, Uber beat Lyft and other upstarts to the punch in achieving massive, global distribution with drivers and consumers. Without that leverage, the taxi industry, or Lyft, really could have sunk Uber just by building better software.

Distribution is the main barrier to disruption because it’s really hard and requires companies to win a series of battles, not a single, winner-take-all war. Not every company has the endurance and focus necessary to persevere through the inevitable gut punches. Here again, we tend to oversimplify disruption narratives in hindsight, but when we look closer, we see that overnight success is a myth. Startups have to steel themselves for a grueling marathon if they hope to topple their industries.

In the SMB space, Intuit illustrates what it looks like to win the marathon. The company achieved disruptive scale through a series of smart, gritty distribution victories that played out over a long period of time. Intuit initially clawed its way into traditional accounting and bookkeeping channels to build a powerful beachhead. Then, it used its growing traction to secure distribution deals with boxed-software channels. From there, the company used its installed base as a foot in the door and built a successful brand. No doubt each of these victories was hard-fought, but as a result, Intuit is one of the very few SMB-focused companies that counts its customers in the millions instead of thousands.

Despite the seemingly obvious competitive advantages for incumbents, Silicon Valley has ascribed too much power to startups in the era of easy money. When cash is flowing, it’s tempting for founders and investors to believe that every market is ripe for immediate disruption and that legacy players are just complacent dinosaurs awaiting extinction. That kind of thinking is wrong, and tightening capital markets will expose more startups’ strategic flaws and shine a brighter light on the inseparable connection between distribution and disruption.