Do Startups Change Consumer Behavior?

I had lunch with a very successful technology investor friend of mine and he made a very interesting comment. He pointed out that he no longer hears about startup companies trying to “change consumer behavior” anymore. Smart companies that he sees are instead trying to capitalize on changes in consumer behavior. I think that there is more here than meets the eye.

In exploring this topic with other investors, some people shake their heads and suggest that this is strictly a semantics issue. In their mind, there is not a meaningful difference between changing consumer behavior and capitalizing on changing consumer behaviors or tastes.

From my point of view, whenever you are looking at a new technology there are two rates of change that one should consider:

Rate #1: Rate of technology change
Rate #2: Rate at which consumers can adopt new technology

Most of the really big wins in information technology have happened when the two rates of change have lined up in a way to create a market opportunity. Why does Palm work when Grid and other pen-based computer technologies did not? Well, in the intervening years consumers became more comfortable with computers and the cost of pen computing went down. That’s just one example and I could name others.

I believe that startups can make positive contributions to affecting the rate of technology change; advances in semiconductors, software, or communications can fundamentally accelerate the rate at which new products are developed or remove cost from previously expensive processes. So, score one of the startups.

However, I am less convinced that startups can fundamentally shift the rate at which consumers are willing to adopt new technology. This is not to say that there is some “natural” rate at which consumers are willing to adopt new technology. The reason that startups have a much harder time affecting this curve is that consumer adoption of new technology is driven by several factors, including ease of use, cost, availability, frustration with existing alternatives, and support services. While a startup could take on all of the aforementioned items (ease of use, cost, marketing to highlight how the new product is a remedy to the frustrating state of affairs, cost-reducing production processes, and world-class customer support), that is a tall order for a company trying to get a new product to market on a budget.

I am sure that someone will raise TiVo as a counter-example. TiVo has created a near cult-like following of people who talk about how the device has changed their lives. So, is TiVo the ultimate counter-example? No, it is not. If you look at why TiVo has been successful, the cost (via subsidies) is becoming reasonable, the current alternative (programming your VCR and using VHS tapes) is frustrating, the consumer experience was carefully considered, and the product is fairly widely available. None of these factors is about radically redefining consumer behavior — it’s about capitalizing on a market opportunity in one of those great cases where people are really crying out for a better solution.

Why do I care so much about this topic? Well, I have found that companies that have a more modest appraisal of what they are doing (changing vs. capitalizing on change) are consistenly more realistic in the way in which they see their markets unfolding. Companies that see themselves as change capitalists (those who capitalize on changing circumstances) as opposed to change agents are also much better at understanding what other parts of the value chain they need to recruit and sign up in order to become wildly successful — they are not under the illusion that they can change a whole market on their own.