We have covered 9 markets in our Creative Destruction 7 Act series (Financial Services, B2B Media, Scientific Technical Medical Publishing, Education, Legal Publishing, Advertising, eCommerce, Accounting, Healthcare).

A quick summary would be; “in every market the incumbents are facing massive disruption”. Knowing how hard it is for incumbents to deal with disruptive innovation (as described in The Innovator’s Dilemma), we can be confident that some of these incumbents will fail to meet the challenge.

This will leave huge opportunities for entrepreneurs. There has never been a better time in history to be an upstart and a worse time to be an incumbent.

Precisely where are those opportunities? Well, if we knew precisely, we would be launching tomorrow! The entrepreneurs who will win are the ones who have deep knowledge of these markets, who can really understand the pain-points and have a unique solution. But we can offer a framework for thinking about these opportunities.

This should be helpful to entrepreneurs in either of these two places in your start-up journey:

1. Just figuring out what to build

2. Have built something, may have already launched, but figuring out if you have the right positioning.

Image courtesy Flickr and Sharon Yau.

We have covered 9 markets in our Creative Destruction 7 Act series (Financial Services, B2B Media, Scientific Technical Medical Publishing, Education, Legal Publishing, Advertising, eCommerce, Accounting, Healthcare).

A quick summary would be; “in every market the incumbents are facing massive disruption”. Knowing how hard it is for incumbents to deal with disruptive innovation (as described in The Innovator’s Dilemma), we can be confident that some of these incumbents will fail to meet the challenge.

This will leave huge opportunities for entrepreneurs. There has never been a better time in history to be an upstart and a worse time to be an incumbent.

Precisely where are those opportunities? Well, if we knew precisely, we would be launching tomorrow! The entrepreneurs who will win are the ones who have deep knowledge of these markets, who can really understand the pain-points and have a unique solution. But we can offer a framework for thinking about these opportunities.

This should be helpful to entrepreneurs in either of these two places in your start-up journey:

1. Just figuring out what to build

2. Have built something, may have already launched, but figuring out if you have the right positioning.

Image courtesy Flickr and Sharon Yau.

The Classic Entrepreneur’s Quadrant

Entrepreneurs should have a picture of this quadrant on their wall (or even better, internalized in their head):

Of course every entrepreneur wants to be in the top right hand corner, but the number of these per decade can be counted on the finger of one or two hands. That’s the bad news. $ billions may not be in your future. The good news is that you can build successful businesses in bottom right or top left. So with lots of hard work and a bit of luck, $ millions may be in your future. But they are totally different types of business. You need to have total clarity on which you are going for. If you fudge that decision, you end up in the Death Valley bottom left quadrant.

The social media era has thrown up huge numbers in the top left quadrant. It is appealing. The cost is low. So risk is low. There is a tiny chance of getting into the top right quadrant, like betting on a single number in Roulette. But unlike that risky Roulette “hope and pray” strategy, these simple features can be acquired for a decent exit price. That is because the standards of the programmable web make it very simple for an acquirer to integrate these feature-based start-ups.

But there is another quadrant you need to consider. Ideally we need a 3 dimensional quadrant, but that is beyond my drawing skills. So look at this quadrant and then overlay it on the other one.

The Product Fit And Defensibility Quadrant

This is where the semantic web phase of the market is different from the social media phase. In the social media phase, the technology was usually trivial. Engineers would look in scorn at say a Digg button and think “that is a weekend of coding, how can it be worth $ millions?” The answer of course is that the defensibility in this case is the network effect; patents would be totally meaningless. Nor is the cost/time of R&D a barrier in social media.

The semantic web phase is different. Hard core technology is essential. But entrepreneurs don’t need to develop this hard-core technology, just leverage the decade or so of academic R&D. The Semantic Web is in the transition phase from academia to the market. Fortunately, the market in 2010 is picking up the slack; we are seeing more exits and startup financing. That will also keep the academic pump primed.

Two recent success stories illustrate this “back to the future” flow of innovation – Palentir and SIRI – as we cover in this post.

A lot of the academic R&D in the semantic web is provided as open source. That is good news and bad news for entrepreneur:

- Good News: use it at no cost. This means you may be able to self-finance and bootstrap.

- Bad News: have to find defensibility from somewhere other than technology. You cannot use patents. This probably means getting rapidly to scale so that you can use network effects as a defense. Everybody wants to come to your site because that’s where everybody is – think Facebook, Twitter, Digg, Flickr).

The Final Quadrant: The Market Stage & Openness

This is the last quadrant – promise! This is the quadrant that we have been looking at in each of these series. Most entrepreneurs know the other two quadrants, they have been written up by many people. But this quadrant is not so well-defined. Most entrepreneurs know this in their gut and may refer to something like “window of opportunity”.

Market Stage – The Creative Destruction 7 Act Play

If you are in a market that is going through wild, disruptive change where nobody knows how it will play out, you might be thinking:
“We have seen this movie before.”
You have.
Markets go through fundamental disruptive change in fairly predictable phases, albeit with subtle variations that make it interesting. Understanding what act your industry is currently in will help you figure out your own role, whether as employee, entrepreneur or investor.
Here are the 7 acts in the Creative Destruction play:

Act 1. The Old Guard Dominate

This is when a few big companies dominate a market that has not fundamentally changed for decades. Mergers, debt leveraged acquisitions and “roll-ups” have locked the old guard into behemoth structures. No entrepreneur would think of competing against these companies and, if they did, no investor would back them.

Act 2. Straws In The Wind

This is when a few visionary/crazy entrepreneurs see opportunity. Occasionally VCs get active at this stage, but all too often VCs are part of the established order and do not see enough reason to believe that the times are changing. It takes guts to see a few straws blowing about and theorize that this is caused by an invisible wind. The signs of change are far from obvious but “the answer my friend is blowing in the wind”.

Act 3. Denial

The changes are now real and the old guard management can see it. But they don’t know how to react, so they reach for creative accounting tricks to smooth out earnings and make it look as if nothing has changed. So, when the new numbers do finally appear, it emerges as a crisis, often with a restatement of earnings and a change of CEO. Short-heavy hedge funds do well here.

Act 4. Wild creativity

The crazy entrepreneurs who started at Act 2 are now gaining real traction and major amounts of capital. They are experimenting frenetically to find what is really sustainable/scalable. There are lots of stories in the media about them but, as the old guard numbers still appear to be OK, the accepted wisdom is still that nothing will fundamentally change.

Act 5. Blow up

At this stage the reality can no longer be denied and we see bankruptcies, Chapter 11 restructuring and fire sales.

Act 6. Reconstruction

This is when a new power structure emerges clearly. This is when we see IPOs from the visionary entrepreneurs who started in Act 2.

Act 7.The new old guard dominates

Many entrepreneurs make the mistake of seeing how quickly the new guard arose and think that they can also be deposed quickly. The entrepreneurs who made to this stage will be tenacious, paranoid and really hard to beat – until the next wave comes along.

Which Act Is Your Industry In?

This chart shows our view on this. Note that we don’t show any in Act 1 as we are only looking at markets in Creative Destruction. Actually it is hard to think of any market that is not at least in Act 2, even ones that look absolutely immune to digital economics – oil (renewable energy), agriculture (local food) and manufacturing (“punk manufacturing”). But we also narrowed our scope to markets that are impacted by Semantic Web.

How To Look At This As An Entrepreneur

If you are just starting out and it is your first venture, you need to start with markets in the early Acts. Act 2 is ideal. Yes, you will need to be patient and if change does not come as expected, you will have to change course. But you need the long runway to get your service/product ready for market.

If you a serial entrepreneur with easy access to capital, look for markets in Acts 3, 4 and 5. If the market is in Act 5, you have to move very fast and this may involve acquiring other ventures, this is a game for those with deep pockets.

The biggest mistake that entrepreneurs make is going after markets in Act 7. Sadly this is where a lot of VCs put their money. It looks like a great opportunity. This is the money thrown at search engines after Google’s IPO for example.

The entrepreneurial hot spots are markets that are in Acts 3 and 4 – early enough, but not too early. These are:

1. Scientific Publishing
2. Legal Publishing
3. Educational Publishing
4. Healthcare
5. eCommerce
6. Accounting Systems

The Other Axis – How Open Is The Market?

Another way to look at this is, how vulnerable are the incumbents to disruptive innovation? A market is closed when the incumbents have a hard lock-in. This is a sensitive subject because regulators are supposed to prevent monopolistic behavior. So the companies that have a very strong position – think Google in search, Microsoft in PC operating systems – go out of their way to show how open the market is to competition.

But entrepreneurs have a simpler test. They don’t need a regulator to tell them to stay way, they look for markets that are open.

In general, a market with one dominant player is fairly closed. A market with an oligopoly is a bit more open. A market with lots of players is totally open.

To keep it simple, we rated these markets as:

- Closed

- Open

- In Between

So, to look at quadrant, here are the ones in the right Acts with their openness:

- Scientific Publishing: InBetween

- Legal Publishing: InBetween

- Educational Publishing: Open

- Healthcare: Open

- eCommerce: InBetween

- Accounting Systems: Open

Here Is The Market Magic Quadrant

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CONVERT BREAKS: __default__

The Classic Entrepreneur’s Quadrant

Entrepreneurs should have a picture of this quadrant on their wall (or even better, internalized in their head):

Of course every entrepreneur wants to be in the top right hand corner, but the number of these per decade can be counted on the finger of one or two hands. That’s the bad news. $ billions may not be in your future. The good news is that you can build successful businesses in bottom right or top left. So with lots of hard work and a bit of luck, $ millions may be in your future. But they are totally different types of business. You need to have total clarity on which you are going for. If you fudge that decision, you end up in the Death Valley bottom left quadrant.

The social media era has thrown up huge numbers in the top left quadrant. It is appealing. The cost is low. So risk is low. There is a tiny chance of getting into the top right quadrant, like betting on a single number in Roulette. But unlike that risky Roulette “hope and pray” strategy, these simple features can be acquired for a decent exit price. That is because the standards of the programmable web make it very simple for an acquirer to integrate these feature-based start-ups.

But there is another quadrant you need to consider. Ideally we need a 3 dimensional quadrant, but that is beyond my drawing skills. So look at this quadrant and then overlay it on the other one.

The Product Fit And Defensibility Quadrant

This is where the semantic web phase of the market is different from the social media phase. In the social media phase, the technology was usually trivial. Engineers would look in scorn at say a Digg button and think “that is a weekend of coding, how can it be worth $ millions?” The answer of course is that the defensibility in this case is the network effect; patents would be totally meaningless. Nor is the cost/time of R&D a barrier in social media.

The semantic web phase is different. Hard core technology is essential. But entrepreneurs don’t need to develop this hard-core technology, just leverage the decade or so of academic R&D. The Semantic Web is in the transition phase from academia to the market. Fortunately, the market in 2010 is picking up the slack; we are seeing more exits and startup financing. That will also keep the academic pump primed.

Two recent success stories illustrate this “back to the future” flow of innovation – Palentir and SIRI – as we cover in this post.

A lot of the academic R&D in the semantic web is provided as open source. That is good news and bad news for entrepreneur:

- Good News: use it at no cost. This means you may be able to self-finance and bootstrap.

- Bad News: have to find defensibility from somewhere other than technology. You cannot use patents. This probably means getting rapidly to scale so that you can use network effects as a defense. Everybody wants to come to your site because that’s where everybody is – think Facebook, Twitter, Digg, Flickr).

The Final Quadrant: The Market Stage & Openness

This is the last quadrant – promise! This is the quadrant that we have been looking at in each of these series. Most entrepreneurs know the other two quadrants, they have been written up by many people. But this quadrant is not so well-defined. Most entrepreneurs know this in their gut and may refer to something like “window of opportunity”.

Market Stage – The Creative Destruction 7 Act Play

If you are in a market that is going through wild, disruptive change where nobody knows how it will play out, you might be thinking:
“We have seen this movie before.”
You have.
Markets go through fundamental disruptive change in fairly predictable phases, albeit with subtle variations that make it interesting. Understanding what act your industry is currently in will help you figure out your own role, whether as employee, entrepreneur or investor.
Here are the 7 acts in the Creative Destruction play:

Act 1. The Old Guard Dominate

This is when a few big companies dominate a market that has not fundamentally changed for decades. Mergers, debt leveraged acquisitions and “roll-ups” have locked the old guard into behemoth structures. No entrepreneur would think of competing against these companies and, if they did, no investor would back them.

Act 2. Straws In The Wind

This is when a few visionary/crazy entrepreneurs see opportunity. Occasionally VCs get active at this stage, but all too often VCs are part of the established order and do not see enough reason to believe that the times are changing. It takes guts to see a few straws blowing about and theorize that this is caused by an invisible wind. The signs of change are far from obvious but “the answer my friend is blowing in the wind”.

Act 3. Denial

The changes are now real and the old guard management can see it. But they don’t know how to react, so they reach for creative accounting tricks to smooth out earnings and make it look as if nothing has changed. So, when the new numbers do finally appear, it emerges as a crisis, often with a restatement of earnings and a change of CEO. Short-heavy hedge funds do well here.

Act 4. Wild creativity

The crazy entrepreneurs who started at Act 2 are now gaining real traction and major amounts of capital. They are experimenting frenetically to find what is really sustainable/scalable. There are lots of stories in the media about them but, as the old guard numbers still appear to be OK, the accepted wisdom is still that nothing will fundamentally change.

Act 5. Blow up

At this stage the reality can no longer be denied and we see bankruptcies, Chapter 11 restructuring and fire sales.

Act 6. Reconstruction

This is when a new power structure emerges clearly. This is when we see IPOs from the visionary entrepreneurs who started in Act 2.

Act 7.The new old guard dominates

Many entrepreneurs make the mistake of seeing how quickly the new guard arose and think that they can also be deposed quickly. The entrepreneurs who made to this stage will be tenacious, paranoid and really hard to beat – until the next wave comes along.

Which Act Is Your Industry In?

This chart shows our view on this. Note that we don’t show any in Act 1 as we are only looking at markets in Creative Destruction. Actually it is hard to think of any market that is not at least in Act 2, even ones that look absolutely immune to digital economics – oil (renewable energy), agriculture (local food) and manufacturing (“punk manufacturing”). But we also narrowed our scope to markets that are impacted by Semantic Web.

How To Look At This As An Entrepreneur

If you are just starting out and it is your first venture, you need to start with markets in the early Acts. Act 2 is ideal. Yes, you will need to be patient and if change does not come as expected, you will have to change course. But you need the long runway to get your service/product ready for market.

If you a serial entrepreneur with easy access to capital, look for markets in Acts 3, 4 and 5. If the market is in Act 5, you have to move very fast and this may involve acquiring other ventures, this is a game for those with deep pockets.

The biggest mistake that entrepreneurs make is going after markets in Act 7. Sadly this is where a lot of VCs put their money. It looks like a great opportunity. This is the money thrown at search engines after Google’s IPO for example.

The entrepreneurial hot spots are markets that are in Acts 3 and 4 – early enough, but not too early. These are:

1. Scientific Publishing
2. Legal Publishing
3. Educational Publishing
4. Healthcare
5. eCommerce
6. Accounting Systems

The Other Axis – How Open Is The Market?

Another way to look at this is, how vulnerable are the incumbents to disruptive innovation? A market is closed when the incumbents have a hard lock-in. This is a sensitive subject because regulators are supposed to prevent monopolistic behavior. So the companies that have a very strong position – think Google in search, Microsoft in PC operating systems – go out of their way to show how open the market is to competition.

But entrepreneurs have a simpler test. They don’t need a regulator to tell them to stay way, they look for markets that are open.

In general, a market with one dominant player is fairly closed. A market with an oligopoly is a bit more open. A market with lots of players is totally open.

To keep it simple, we rated these markets as:

- Closed

- Open

- In Between

So, to look at quadrant, here are the ones in the right Acts with their openness:

- Scientific Publishing: InBetween

- Legal Publishing: InBetween

- Educational Publishing: Open

- Healthcare: Open

- eCommerce: InBetween

- Accounting Systems: Open

Here Is The Market Magic Quadrant

———————————————————————–
• Don’t forget to propose your startup for our Semantic Web Impact Awards. The deadline is Sept. 15.

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