Defensibility: Multi-wave markets
Part 5: When multiple stacks become viable in rapid succession, companies must “AND” or “OR”.
This is the fifth in a series of posts dedicated to understanding defensibility in technology-driven markets.
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As we’ve seen, multi-wave markets occur when companies don’t have long to scale one tech stack before another disruptive stack is able to better serve customers. Because of the cascade of disruptive new stacks on the horizon, companies must be prepared for a possibility where they can only surf a given wave for a year or two before the underlying technology shifts. When this happens, they’ll need to build a new tech stack. In contrast, single-wave markets occur when waves of disruption are widely spaced: so far out as to be strategically irrelevant at the moment.
Most examples of disruptive technology in the past were single-wave markets, so few will be able to “pattern match” their way to success in multi-wave markets.
There are two potential strategies when facing a multi-wave market:
“AND” — catch each consecutive wave1, paddling like hell to continue winning as each new disruptive stack becomes viable. Be ready to re-imagine products multiple times.
“OR” — pick the final foreseeable wave of disruption and put all of our energy into beating incumbents.
There’s no universally best strategy; each market will present a unique set of prospective execution paths. This section is dedicated successfully navigating AND vs. OR decisions.
Is it really multi-wave?
When confronting a potential multi-wave market, we should first make sure there will actually be multiple waves of disruption in short succession. While there might be a first wave of disruption today, if future advancement along the path to super-intelligence can be cleanly integrated, it’s only a single-wave market. Similarly, if there’s a very long time between waves, it’s also a single-wave market. In both cases, traditional startup wisdom applies.
Markets with fixed customer requirements are perhaps the only time when it’s safe to assume only a single wave of disruption. With no future disruption expected, it’s safe to invest in structural power. Robotics for manufacturing, as we’ve discussed, will likely present only a single wave of disruption, with future advancement being evolutionary and on a path to sufficiency.
Multi-wave markets require at least two waves of disruption between now and super-intelligence. ChatGPT was disruptive to search because interactive dialogue necessitates a very different interface. As models become more advanced, it’s likely that dialogue-oriented interfaces will in turn be disrupted by other interaction modes. A multi-wave market. Co-pilots disrupt manual workflows. Agents will disrupt co-pilots and super-intelligence will disrupt agents. A multi-wave market.
Because it is so risky, companies should AND very carefully.
Reimagining a product to take advantage of a new stack is possible, though risky, because a company has to question all aspects of their business—design, technical architecture, pricing/packaging, messaging, and go-to-market… to name a few. Netflix famously was so paranoid about the transition from DVD-by-mail to streaming that they maintained separate executive teams for each of the two business lines and nearly completely separated the brands (the DVD business was to become “Qwikster”) before customers revolted.
OR should be the default for most companies because it’s so risky to willingly attempt to survive multiple waves of disruptive technology change in rapid succession. However, if a particular set of requirements are met, it’s possible for AND to be a coherent strategy:
Viable first wave: When pursuing an AND strategy, a startup’s first step must succeed or they won’t survive to face the future. If a tech stack cannot viably solve customer problems or customers aren’t ready to adopt the new stack, then “being too early is indistinguishable from being wrong”. Zeppelin never became fully viable for mass adoption by the time fixed-wing aircraft were. Don’t build Zeppelin.
Enough time on wave: With the right amount of time to execute, startups might be able to build transferrable advantages; however, if subsequent waves come too quickly, investment in prior waves is a handicap vs. unencumbered competitors. Can we scale our co-pilot before agents are viable? Can we scale our agent before super-intelligence makes agents cumbersome?
Transferrable advantage: There must be some benefit for taking the risk of building a product that will soon be disrupted. Otherwise, why not just wait to build the right product?
Transferrable advantages in multi-wave markets
Power in one tech stack does not always confer an advantage in future tech stacks. If it did, we wouldn’t call it disruptive technology because incumbents would continue winning forever unless they truly screwed up.
Execution power transfers perfectly into new waves. If we’re fast, we can take advantage of the new tech stack before others. If we have taste, we’re more likely to build an exceptionally designed/architected new 10x product. If we can rain-make, we can get a lot of customers and quickly dominate the new market. Execution power (speed, taste, and/or rainmaking) is universal. If a company has this rare talent, they can focus on great products for their customers. Others will go slower, build worse products, and/or be unable to command marketshare. The trick here is knowing whether a company really has execution power, or they’re just arrogant and delusional.
Some structural powers are transferrable if managed strategically. An exceptionally strong engineering team that builds a market-leading co-pilot can probably also build the best agent. Network effects might apply in similar ways across stacks. A great brand adapts to changing technology. Economies of scale and process power persist if some components are re-used across subsequent stacks.
Netflix leveraged its distribution and economics of scale in content licensing to win in the transition from DVDs to streaming. Uber is the dominant ground transportation brand while also having process power in managing vehicle liquidity: both relevant to autonomous vehicles.
These examples, however, are in single-wave markets because disruption was widely spaced and it’s unclear if transferrable structural power matters in multi-wave markets because structural power takes time to build. In a single-wave market where companies have a long time to build power before being disrupted, transferrable structural power is meaningful.
Many structural powers do not transfer. Companies might achieve power in a given tech stack by optimizing cost structures, filing patents, hiring the best talent, or increasing switching costs by becoming intertwined with customer workflows. In a new stack, the cost structure might be different, the patent portfolio might be irrelevant, the talent might be mismatched, and customers’ workflows might need to be re-engineered. These sorts of power don’t confer an advantage in future tech stacks.
On the other hand, distribution scale in a prior stack speeds up adoption in new stacks. Companies with scale can cross-sell new products into their existing customer base and grow faster than those starting from scratch. However, if companies are reluctant to cannibalize their existing revenue in the face of a future wave of disruption, then scale can actually hinder success.
When starting from scratch in multi-wave markets, only startups with exceptionally fast growth can build enough distribution to confer an advantage in future stacks.
The fog of war is thick in fast moving markets—assume uncertainty.
In the case of Zeppelin and fixed-wing aircraft disrupting ocean liners, both stacks were visible: a careful observer could understand customer preferences, components in the stack, and figures of merit needed to make each stack viable. As a prospective founder or investor choosing whether to AND or OR, there weren’t many surprises. OR was the correct strategy: airplanes won and Zeppelin were relegated to the annals of history.
If we can see multiple disruptive stacks on the horizon, it’s best to OR—we won’t have enough time on wave to build distribution or structural power betting on both. Co-pilots, for example, are likely to be obviated by agents within two years in many use cases. Companies pursuing an AND strategy won’t have much time to get distribution scale and it’s unclear whether they can build significant structural power (e.g. switching costs, data network effects) before the agent stack becomes viable. Let’s pick the best wave and make sure we win.
In all other circumstances, we should expect future waves of disruption, even if not yet visible. AI is moving so fast that we can’t see more than a couple of years out; we don’t have the luxury of a long-distance view into the adjacent possible. We might start with no new stacks on the horizon. However, by the time we build our 10x product and start acquiring customers, an even better tech stack will be on the verge of viability. Uh oh.
If a first disruptive stack becomes viable, but we can’t yet see the next one, it’s reasonable to AND. In markets where new disruptive products are likely or there’s induced demand, then it’s difficult to justify OR when we have no idea what we might be waiting for, even if we’re reasonably sure another disruptive wave will come. If the first wave is viable, then a fast-moving startup might have enough time to build distribution and structural power that transfers into the next disruptive wave.
Because it transfers cleanly, execution power is especially valuable given the uncertainty of multi-wave markets. If we can’t predict which structural powers will transfer into the next disruptive stack, how do founders and investors know what to strategically bet on? Execution power is the most reliable form of defensibility—practically speaking, this means building a team with speed, taste, or rainmaking ability. However, we need to make sure we have more execution power than anyone else. If everyone has it, it’s not power.
Defensibility
A series of posts dedicated to answer the question: Where will value accrue in AI?
"Execution power” is becoming more important than classical “structural power”.
Market revolutions occur when “critical" technology makes a new stack “viable”.
When multiple stacks become viable in rapid succession, companies must “AND” or “OR”.
Power within the AI stack—hardware, hosting, models, and infrastructure.
Power in AI applications—big tech, switching costs, network effects, and the $100 trillion of global GDP up for grabs.
The surfing analogy doesn’t entirely carry: most surfers can’t catch a wave and then paddle back out to catch the one behind it.