Big tech companies, once the largest disruptors in their industry, are now faced with a challenge: they need to balance their risk appetite with their need to turn profits. As startups, companies such as Facebook and Amazon changed the way we connect with each other and shop.
However, the fact that they are publicly traded increases the pressure to produce larger profits year on year, possibly stifling long-term innovation and risk appetites that led to their initial rise. These developments lead to a crucial question: Is big tech losing the ability to innovate, and if so, is this innovation happening elsewhere?
At Avasant’s latest Empowering Beyond Summit (EBS), in a session titled, “Big Tech vs. Emerging Tech: Where is the real innovation happening?,” Rakesh Patro, Partner at Avasant, discussed this issue with Oksana Mindyuk Malysheva, Managing Partner and CEO at Sputnik ATX VC, Nneka Ukpai, Chief Investment Officer at Pop Venture, and Dr. Sanjit Singh Dang, Chairman and Co-founder at U First Capita.
“We all think about innovation in different ways,” Ukpai explained. “The word means something different to different people depending on where you sit.” She divided innovation into three arcs of growth: core, immediate value creative, and moonshots. These three arcs are how seasoned investors approach helping a company grow from its initial size to many multiples larger in later stages.
The Core Arc
This arc identifies your primary source of revenue or core offering. Innovation in this arc focuses on streamlining existing offerings for efficiency and increased profitability. Meta’s social media platforms—Facebook, Instagram, and WhatsApp—are examples of this streamlining. According to Forbes, nearly 95% of Meta’s revenue comes from advertising on these apps; this focus on core offerings is a key driver of its current valuation.
An example of this could be new features that increase the efficiency of any businesses core offerings such as the adoption of artificial intelligence to algorithmically pick content for users, which Facebook chose to do a few years ago. They thus learn from their users’ activity to suggest and rank content to be suggested to them. While these innovations seem minor, all three EBS panelists emphasized the importance for large corporations to focus on main revenue drivers and competing priorities. As they became publicly traded, the bureaucracy that companies must deal with also increased, stifling innovation.
In contrast, emerging tech companies do not have to deal with these competing priorities. As Dang explained, smaller companies can gain similar funding compared to larger corporations’ projects but have a higher appetite for risk because they have nothing to lose. Malysheva put it similarly:
“Your job is to discover something. That is inherently risky; you are doing it at a super high speed, and you have nothing to lose but your time and your dreams. So, you’re going bold because you have no infrastructure to defend.”
Immediate Value Creation Arc
According to Ukpai’s definition, this arc is, “Things that are immediately value creative to the first arc.” Essentially, how can you modify your core offerings to increase revenue or further satisfy your customers?
Keeping with the example of Meta Platforms, in the past, they have had many such features. The addition of stories to Instagram is one of them. It not only added value to users but also created additional revenue with advertisements in stories. This may not be the disruptive innovation that comes to mind when considering innovation. Still, it empowered Meta while giving its users a new outlet to share and engage with each other, which is the essence of social media.
Emerging tech companies often face limitations with the immediate value creative arc during their early stages. Unlike established players, they may not have a well-defined core offering to modify. However, some established companies within emerging tech might still need to adapt their core offerings as they develop. The three experts on the panel said that, unlike big tech, emerging tech can pivot very quickly because, going back to their larger appetite for risk, they have nothing to lose.
Dang emphasized this fact by stating that startups would rather have a great product and “make their mark” than make money. He further supported this by saying, “Self-motivation is largely missing in corporations.”
Malysheva built on Dang’s point by talking about how she sees the process of innovation as two planes. One in ascent taking off where founders have nothing to lose. The second at cruising altitude where they want to innovate but must play it safe to manage risks. According to Malysheva, the key is to find out how to bridge the two planes together so that big tech can increase its risk appetite. Flying just one plane will either stagnate innovation or prevent mass adoption.
In a conversation with Patro after the EBS session, he offered insight into what bridging those two planes together looks like from the perspective of big tech and emerging tech companies. With big tech, their outreach to the take-off cycle comes in the form of their investment portfolios and in-house development teams. While with emerging tech, investors make the connection to the cruising plane by mentoring and molding leadership into being capable of cruising and by connecting them with the right people and resources to be able to cruise.
Moonshots
As Ukpai explained, the final arc is the big bets, something that might work, and if it does, it could be the company’s future or change how we do things every day.
Historically, this is how big tech became “big.” Meta Founder and CEO Mark Zuckerberg innovated with the idea of social media and gave us Facebook; he gave us a level of connectivity we use daily. But, before its inception, Facebook had competition from MySpace and others. But Facebook took off, and MySpace collapsed. Why? Zuckerberg took the moonshot. According to a Forbes report “How Facebook Beat MySpace,” Facebook was willing to let users dictate how they wanted to use the site. At the same time, MySpace became resigned to the notion that it would be a “niche social entertainment destination.” It wasn’t willing to make that big bet. Facebook retook the moonshot when it changed its name to Meta Platforms and shifted its focus to playing a huge role in the emerging metaverse.
Emerging tech companies can do similar things on what seems like a much smaller scale. Nearly every day, or so it seems, people found new tech companies with ideas that seem unimaginable today but that could change how we live. At one point, all big tech companies were emerging. Apple revolutionized computing and phones to become one of the most valuable companies on the planet and the world leader in mobile market share as of May 2024, according to Oberlo. Tesla took its moonshot when setting goals for the amount of cars its factories can produce so it could reach mass adoption. All of big tech took moonshots in the early stages of their creation and are now household names. Maybe that is what emerging tech holds for us today as well.
Innovation Happening in Many Sectors
Recent innovation from big tech companies rose from the success of OpenAI, leading to companies such as Google and Meta making their own generative AI models, bringing their own developments to the products, such as Meta adding its AI natively to all its platforms. In contrast, others such as Apple have partnered with OpenAI to improve Siri, focusing on immediate value creation while developing its own MM1 model in the background. According to Akshay BS on Medium, Apple’s MM1 model benchmarking shows it outperforming all other large language models (LLMs) in most metrics such as Visual Question Answering (VQA2). This makes you wonder why Apple is sitting on such a potential disruptor and instead partnering with OpenAI? The point is big tech is still taking those moonshots, but they might be sitting on more of them than we know.
Another example of the arcs of growth given to us by Patro is in the highly active SaaS sector. In this sector, new companies are emerging all the time, forming their core offerings and improving them. Then they need to expand to mass adoption, finding partners who will connect them with clients and give them opportunities to grow the business. In SaaS, the moonshot looks different for every company. For some, it’s in their core offerings, trying to break into a new market or offering new services. The conclusion is that these three growth arcs are mimicked in all sectors, not just consumer-facing tech.
In exploring these arcs of growth, the panel provided many perspectives on the differences in innovation between big tech and emerging tech. The biggest takeaway is the fact that innovation is happening in many sectors of the industry; it’s just that this innovation has different manifestations, depending on what stage a company is in, and both big tech and emerging tech are innovating. They just have various obstacles and priorities to deal with when innovating. Innovation hasn’t stopped at any level and will never stop. The question is just whether we notice it or not and how successful it will be.
By Avi Manik, Avasant