Are Startups naturally Creative?

In her book, The Artists Way, Julia Cameron, insists that every individual is creative. It is only a matter of harnessing that creativity. How does creativity apply to organizations and businesses? A survey commissioned by Adobe in 2014 on large company decision-makers correlated creativity to exceptional revenue growth, greater market share, competitive leadership, and a positive work environment. Despite the perceived benefits, only 11% of 324 respondents said their practices were perfectly aligned with firms readily recognized as creative. Conversely and by very definition, startups are novel, and one could intuitively relate startups to creativity. Steve Blank distinguished startups as “temporary organizations designed to search for a repeatable and scalable business model; existing companies execute a business model, start-ups look for one.” However, are startups really creative?

The standard definition of creativity requires the bipartite criteria of both originality and effectiveness. Monkeys and artificial intelligence can generate something original on word processors, but it is useless if not effective to some ascribed value.

Let us consider the Silicon Valley definition of startups, the ones born to be big, to be acquisition targets, to innovate or evaporate, or to be driven to make a difference. Such startups raise risk capital to fuel the search for a scalable business model phase. Now, it is well established that 3 out of 4 such startups fail. Moreover, “if failure is defined as failing to see the projected return on investment — say, a specific revenue growth rate or date to break even on cash flow — then more than 95% of start-ups fail”, based on research at Harvard Business School. However, it would be unjust to dismiss the concept of startups as not effective by merely observing the majority of startups that fail. The essence of building startups is trial and error, and it is subject to high failure rates by its very nature. Do startups fail for want of effect? CBInsights compiled the top 20 reasons startups fail, the chief reason being no market need. The rest of the reasons alluded to management failure. “Tackling problems that are interesting to solve rather than those that serve a market need was cited as the №1 reason for failure, noted in 42% of cases.” It may be interpreted that most startups that fail either do not meet the perceived value in the eyes of the consumer or do not provide value to the economic stakeholders. If the rest of the sliver of startups that see success is taken to be effective, are they original?

The modus operandi of venture capital investments would be on the basis of early perception or later more defined evidence, of effect, and originality. Many might readily agree that a large number of startups are copy-cats where successful versions of startups from advanced economies are copied later in different geographies, and existing novelties in one domain are transferred to another. Ecommerce, ride-hailing apps, payment apps, aggregators would be a few examples. A look at Alexander Osterwalder’s Business Model Canvas, the most popular graphical representation of a business plan, would point out the various ways a startup can be considered original. The value provided to the customer is not the only reason by which a venture capitalist may perceive originality. It could be a different Customer Segment for the same product, a new way to reach the customers through new Channels or retain them through Relationships, a Partner, or a Cost Structure, which gives a competitive advantage over other startups in the category. Each block in the picture potentially represents originality.

There are a few key basic parameters for investment for VCs. These parameters, however, can not be immune to irrationality or a more heuristical approach. How can we forget Sir Isaac Newton’s quote after being drawn into a $20,000 loss by a collective investment frenzy prevailing in the 1720s financial markets? “I can calculate the motions of the heavenly bodies but not the madness of the people.” In an article titled, “Even geniuses make bad investors”, Thomas Levenson points out how history recreates itself in making an economic bubble. “Research published last year by the mathematician Andrew Odlyzko into Newton’s actions during the South Sea bubble illuminates not just the great thinker’s long-ago mistakes, but also a pattern of human folly that recurs over and over again. When financial markets offer the temptation of ever-rising values, not even the smartest people can resist.” True to any financial market, VCs too have long been accused of herd mentality. A category creator investment is a category of one, and the rest of the VCs which follow are not investing in anything original. Thus we see that originality is one of the reasons and not a sufficient criterion for VCs. This is amply exemplified by CBInsight’s compilation of VC blogs. The parameters for investment range from a snazzy new app interface to the passion or the execution ability of the founders. VCs optimize for effect and not originality. The most significant factor in the decision-making for the first investor of Uber, as per the FAQ section on their website, is always the founding team. Research shows a causal relationship between the strength of the founding team and startup performance.

The effect variable at any given point in time during the life of a startup is in a state of flux. The sunk cost bias is real in the VC world. Unable to extract themselves because they are in so deep, they just keep funding failing businesses. Startups are routinely propped up by reinvestments despite bleak evidence of effectiveness. Consumer startups dole out deep discounts or use penetrative pricing to capture the first-mover advantage or gain market share against the competition. The temporary creation of value at the expense of VC money further complicates determining effect. Effect is typically analyzed only in hindsight.

The sufficient criterion for VC investments is the expectation of return, and the rest of the reasons and biases conform to that expectation. For startups that raise risk capital, it, therefore, remains to be seen if startups are both original and effective. Milestones of time or investment rounds are required to analyze the delivery of value. Originality in the eyes of the economic stakeholder, the customer, or by a third party is subjective. One may conclude, by stretch, that startups are provisionally creative, or not creative until proven so.