The Incumbents Rise Again!

For over a decade, we have seen start-ups pop up in almost every industry, challenging the incumbents and finding niches to operate in and achieve impressive growth. A lot can be said as to why they were/are successful and how the incumbents couldn’t put up a fight. Start-ups are faster, more risk taking, more in contact with client/customer needs, more innovative, more agile and the list can go on. However, this is only the shiny side of start-ups we get to see. The disruptors and challenges making the industry nervous and the large funding rounds and valuations they receive with the promise of changing industry and maybe the world.

Recently, the AI arms race has shown that there is a strength in incumbents and maybe they have been waiting it out as the start-ups had their fun and supposed victory lap. For the few start-ups that have made it, far more have failed. Why do they fail? And have incumbents found a way to go toe to toe with the fast-paced start-ups?

The term “disrupt” has been overused to the point where it has lost much of its meaning. Many disruptors become celebrities, promoting a set of dogmas that can be used to justify almost anything. The concept of disruption, often hailed as a cornerstone of start-up success, may not be as solid a business strategy as it is believed to be. There are several issues with the disruption model. For instance, disruption is often selectively applied to only include successes, ignoring the numerous failures. The theory itself is not reliably predictive and often only makes sense in hindsight. Moreover, the theory of disruptive innovation tends to be bulletproof via circular reasoning, making it difficult to challenge.

The staggering failure rates among start-ups – 75 per cent go under, and 90 per cent never generate revenue. Furthermore, they have twice the employee turnover of established companies. Start-ups often fail for a variety of reasons, with some of the most common factors being related to the idea, timing, business model, funding, and team execution. A start-up’s idea may not be sufficiently differentiated, or the market may not be ready for it. For instance, Z.com, failed because broadband penetration was too low in 1999-2000. Timing is another crucial factor; a product might be too early for the market, as was the case with Webvan, which struggled because the concept of grocery delivery was ahead of its time.

A lack of a clear path to generating customer revenue often dooms start-ups as well. Without a solid business model, even the best ideas can flounder. Underfunding is another critical issue, as many start-ups do not secure the necessary capital to sustain operations and growth. Additionally, the success of a start-up is heavily dependent on the team’s ability to execute and adapt to change. Poor execution or an inability to pivot, when necessary, can lead to failure.

So how to incumbents play a role in start-up failure? Well, this is the wrong question to ask however, we are now seeing an interesting shift in how incumbents are moving. The AI arms race as it is called, has led companies into a race of research and development to build the best and then find a way to turn it into a valuable product. Almost every month a new benchmark is set by a new AI model, or a new model is created. Even Moore’s law is expected to square up as AI aids in the development of products, services and of course better AI.

AI needs a lot of money, the infrastructure is expensive, the talent is not cheap by any stretch and the money itself seems to be meant only for a select few. This is where incumbents are preparing to take on the start-ups and disruptors. Not just the incumbents in the AI development space, who have single-handedly set the bar so high that almost no start-up can spring up now and become a challenger of any sort. They are fighting for total control; there will be scraps – thousands will fight over. While the larger 80 per cent will be dominated by these incumbents. Who are now working at speed and cornering all resources?

A trickle-down effect from these global tech giants to other incumbents is regulation. Yes, regulation is expensive and requires a lot of experience. Regulated markets are not easy to break into and with the power of AI and regulation, existing incumbents might just take advantage of the opportunity to secure themselves firmly within the market they operate in.

It’s not all doom and gloom. I believe some start-ups will make it through if we change the start-up culture and meaning of disruption. Open source, one of the largest threats to AI dominance by Big Tech, is a possible silver bullet that AI start-ups, and other start-ups, can use to get a grip of the market. And how about looking to change the start-up narrative away from funding rounds to impact rounds celebrating milestones of significant growth and contribution beyond the raising of funds?

The AI arms race is introducing an opportunity for incumbents to get ahead of start-ups and stay ahead of them. This arms race might fundamentally change start-up fundraising, the start-up culture and start-ups collectively.