STARTING UP and speeding up is complex, often confounding work, as my early AOL experience makes clear. Elon Musk once compared starting a business to “staring into the face of death.”1 Whether that sounds bleak or exhilarating is a good litmus test for whether you’ve got what it takes to start and run a successful Third Wave business. The upside, both in terms of lives improved and value created, couldn’t be higher. Indeed, the startups of the Third Wave will collectively shape what could be one of the most thrilling chapters in the history of American entrepreneurship. They will be propelled by bold, ambitious thinkers, people who know how to navigate a set of complicated challenges strategically and confidently—and who relish the chance to do so.
The superstars of the Third Wave will pursue bold visions, but their true gift will be mastery of execution. AOL was not alone in believing in the idea of the Internet, but we outhustled and outexecuted our competitors. The big companies, like IBM and GE, should have prevailed, but they didn’t. Their lack of agility and entrepreneurial passion and culture hobbled them.
When I talk to aspiring entrepreneurs about the Third Wave, I’m often approached by people excited about the possibility but concerned with the same basic question: What do I need to do differently if I’m going to start a Third Wave company?
I tell them that it all comes down to the three P’s: partnership, policy, and perseverance.
There’s an old African proverb I’ve come to appreciate: “If you want to go quickly, go alone. If you want to go far, go together.” As simple as this advice may sound, I think it’s one of the most important lessons in business. It’s particularly true for the Third Wave, where the success of a company will depend largely on the partnerships its leadership can forge—sometimes even with the very organizations they are trying to disrupt.
During the Second Wave, some of the most successful companies were those that essentially optimized a niche app, figured out a way to get traction, and then drove viral adoption. They were able to follow a fairly straightforward playbook: Focus on product. Focus on audience. Don’t worry about monetization until you have millions of users.
During the Third Wave, a great product will only get you so far. You typically won’t be able to build an audience by dropping your app in the App Store and waiting for users to sign up. That’s because most Third Wave industries have gatekeepers. There are key decision makers in school districts who will need to approve any products that have to do with classroom learning. The same is true in healthcare, transportation, finance, education, and food.
For the most part, success will hinge on an entrepreneur’s ability to form constructive, supportive partnerships with the organizations and individuals that can influence those decision makers and, eventually, with the decision makers themselves. These Third Wave companies won’t have the option of going it alone.
The story of Apple’s work on the iPod is illustrative. Steve Jobs saw great potential in portable MP3 players when they debuted in the 1990s. But he and his fellow executives were surprised by how poorly companies were commercializing them. “The products stank,” Apple vice president Greg Joswiak told Newsweek. So Jobs organized a team.
“Picasso had a saying,” Jobs explained, according to biographer Walter Isaacson: “ ‘Good artists copy; great artists steal’—and we have always been shameless about stealing great ideas.” The nascent MP3 player and online-music industry was no exception.
I met Jobs to discuss the music business about a year before he launched the iPod. The two of us sat in a dark corner of a quiet San Francisco sushi restaurant, hoping that nobody would recognize us so we could talk in peace. At the time he was still just envisioning the iPod, and he lit up when he talked about it. I thought it was a great idea, and I encouraged him to continue to develop it and told him I would do whatever I could to be supportive. AOL later offered to be the online music store for the iPod, but Jobs decided to create his own iTunes store instead.
Soon after, Jobs put Tony Fadell, an engineer with Apple, in charge of the iPod project and gave him three key requirements: It had to be fast, simple, and beautiful. It also had to be ready by Christmas. Fadell worked with Phil Schiller, Jony Ive, and other Apple talent—and they beat the deadline. Newsweek rapturously described it as a “double-crystal polymer Antarctica, a blankness that screams in brilliant colors across a crowded subway.” It would launch alongside iTunes.
Yet, no matter how beautiful the product or well built the software, Apple couldn’t go to market alone. They still needed to license the music content, which meant building a working partnership with the same companies that would be threatened by Apple’s success.
Apple handled this dilemma in a clever and artful way. They approached the music companies and told them not to worry, that iTunes only worked with Macintosh, which at the time had a meager 2 percent market share. Apple pitched iTunes as a risk-free laboratory for the record labels, the opportunity for the industry to test a different model—a model seemingly more sustainable than endlessly litigating piracy, which had been the music industry’s primary strategy to that point. In the end, the pitch worked. Had Jobs been more frank about his ambition—that is, had he admitted that he was aiming for a billion users—he likely wouldn’t have gotten the licenses, and iTunes would have gone the way of Bill von Meister’s ill-fated Home Music Store.
This maneuver was a tightrope walk for Apple. But it would have been even harder for any other company. When Jobs approached the music labels, he was doing so as a well-known and well-respected brand in his own right. He was coming to the table with ideas and resources and a strategy that was thoughtfully de-risked.
But if a young startup had come up with the same idea, what are the chances they would have gotten the meeting? And even if they had, what was the likelihood that record labels would sit across the table from an unknown quantity and have the confidence that any partnership was worth their while? This lack of credibility may be the single greatest challenge for Third Wave startups. It’s also one that can be overcome. What it requires is more partners. Different partners. Partners who can lend credibility and provide momentum and help create a sense of inevitability.
This was a particularly acute challenge in AOL’s early days as well. We had to build credibility—and create a sense of possibility—not just around our company but around the emerging industry itself. We had to convince potential partners, first, that the Internet would become a core part of everyday life and, second, that even though there were a lot of big companies, little AOL was the one to bet on. But we couldn’t do it alone, and we had to start small. Our first deal was with Commodore, and because we did that deal, we could do one with Tandy. And because of those two, we could do a deal with Apple. And because we had Apple, we could get IBM. And because we did deals with all of them, we had the credibility that enabled us to raise capital and gain traction in the market.
We would never have gotten funding if we had said, “We’re going to create this company on our own, and we’re going to market it on our own. We have no brand, we have no money, we have nothing but will.” That’s what our biggest competitor—Prodigy—was doing, but they had $1 billion in investment. We couldn’t compete against them alone. Our only chance was to stitch together enough alliances to create a sense of possibility—and, we hoped, inevitability.
Often, forging external partnerships depends on bolstering the internal team. A brilliant developer who comes up with a new way for hospitals to track patients isn’t likely to get an audience—or a fair hearing—from the medical community on her reputation alone. But that dynamic changes instantly if she shows up with her newest board member, the former CEO of the Cleveland Clinic. Now she has a foot in the door, and a serious shot at a partnership. If she manages to land the deal, she’s more likely to land the next one, creating a virtuous cycle of credibility. These endorsements can attract and assuage prospective investors. And credible investors will ratchet up the founder’s own credibility factor even more, opening the possibility of raising a new round with others.
Securing partnerships can be very difficult. In 2005, I put together a company called Revolution Health, with the goal of (you guessed it) revolutionizing the healthcare industry. I recruited a dream team of investors and board members, made bold statements about our plans and ambitions, and launched a full-scale effort to attract the right partnerships. We invested in a company that provided health screenings at retail stores, and one that would focus on remote concierge health services. We purchased a software company that made personal health management software and another that would help small businesses and corporations form their own healthcare plans.
Some of it ended up working. We sold one company to Towers Watson for $435 million, and another, Everyday Health, is a public company today. But much of the effort fizzled. It was partly an issue of timing: A lot of the technology being leveraged to disrupt healthcare today wasn’t available to us then. But it’s hard to blame the timing alone. We tried to do too much too soon and we failed to secure critical partnerships. We did come close to getting the use of the Mayo Clinic brand for convenient care clinics, and almost got Walmart to team up with us. But in the end, we couldn’t get the discussions across the finish line. Both concluded that it was too early and too risky to take a leap.
Partnerships in the Third Wave are the prerequisite for success. And that can create a Catch-22—where a company needs a partnership before it can get funded, but can’t secure a partnership without showing proof of concept (or, at least, proof of life). Getting over that hump will require persistence—and patience.
For anyone who has worked outside of tech, this advice may sound easy and obvious. For anyone who has worked in the business, you know how hard it can be. There is an attitude and a culture among some people in the tech world, where money equals merit, and where people are celebrated for brashness.
During the Second Wave, this swashbuckling attitude often worked to the benefit of companies, but mostly because they didn’t need to build partnerships. In the Third Wave, this same attitude could be devastating to a company’s prospects. In the Third Wave, disruption cannot be a mantra; it has to be a strategy. And while your product has to be great, your partnership skills may end up determining your success or failure.
We saw this with the rise of MOOCs, or massive open online courses. The original idea was that these companies were going to offer a platform for learning, where anybody could be a professor and anybody could be a student. But it didn’t take long before the folks behind these companies realized that they had to pivot to an enterprise model, selling the platform to companies rather than consumers. And to be credible, they realized, they had to partner with Harvard and MIT and other top schools, bringing in credible brands to give their corporate customers comfort about the quality of the learning.
The problem was, even though companies could get to market with the core MOOC technology relatively quickly, they made a lot of noise doing so. They were unwisely public in their criticism, calling universities irrelevant and pledging to drive them out of business. Then one day they realized they needed to pivot, and the very universities they had said would soon be irrelevant became important partners. One of the leading MOOC companies, Coursera, even hired the former president of Yale to become CEO. The credibility and relationships he brought were viewed as critical to the future of Coursera.
Third Wave industries are some of the most regulated in the country—and usually for good reason. We don’t want businesses selling drugs that haven’t been approved by the FDA, or companies selling unsafe food to our children. We don’t want a startup to unleash self-driving cars onto our highways or self-flying drones into our skies unless we’re sure they’re safe. And whether you want to build a wind farm or a solar farm, companies can’t build things in the real world with the same freedom they might in the virtual world.
It doesn’t matter whether you think that’s a good thing or a bad thing. It is not going to change. There are battles over unnecessary regulations—and there should be—but the changes sought, even when meaningful, are always going to be marginal in comparison to the size of the regulatory regime.
Government will always play a role in Third Wave industries, and that means Third Wave entrepreneurs must have a fluent grasp on the policy issues they will encounter. New lending platforms require Securities and Exchange Commission (SEC) clearance. Personalized genetic testing requires approval from the Food and Drug Administration (FDA). Delivery devices can’t be flown without clearance from the Federal Aviation Administration (FAA). And the list goes on and on.
Third Wave entrepreneurs will need to engage with governments. The challenge, of course, is that few founders are policy wonks, and even fewer have the time (or desire) to become regulatory experts. They’ll have to hire them—or at least rely on them—from the beginning. A lot of companies won’t be able to get venture funding without demonstrating a credible go-to-market strategy, including how to manage regulatory issues. No matter how good an idea, a Third Wave company that lacks a clear strategy for policy is a dangerous gamble for investors. It’s not that success is impossible; but the odds make it a difficult bet.
We’ve watched the risk factors change as each wave evolved. In the First Wave, technology risk was the great concern—can you build it? In the Second Wave, market risk was paramount—if you build it, will the masses adopt it? In the Third Wave, policy risk will become more important—will you be able to navigate the rules and successfully bring your product or service to market?
Perseverance is part of the story of every successful company. But Third Wave entrepreneurship will require a special kind. A great Third Wave idea will have dozens of obstacles to viability, not just with hardware and software but with logistics and supply chains, with partnerships and policy. And it is all too easy to see any one of those obstacles as fatal. A partnership fails. A regulator objects. The company is adrift. But during the Third Wave, things can change quickly. In 2014, when genetics-testing company 23andMe was prohibited by the FDA from selling its products, many observers believed the company was dead. But less than a year later, the company was able to get a special exemption from the FDA and restart its sales. Had they not persevered, they wouldn’t have been around to relish the victory.
AOL was a decade-in-the-making “overnight success,” and we had many near-death experiences before we succeeded. The same will be true of many Third Wave companies. There will be the occasional come-out-of-nowhere phenomenon, but the next generation of entrepreneurs is going to need to be prepared for a long slog. And the Third Wave will require a high degree of adaptability. Your initial product may not survive its first contact with the marketplace. Or with regulators. Or, perhaps partners you seek to align with will demand some adjustments. You’ll have to keep adjusting, tweaking, pivoting.
The winners of the Third Wave will be those who chase big-impact ideas with a sense of urgency—but also methodically and diplomatically. Third Wave companies will have to find a perfect balance between two competing ideas. On the one hand, disruptive success depends in some ways on ignorance. It requires a fresh perspective and the ability to look at new paradigms without being burdened by legacy dogma. The founders of PayPal like to say that if any of them had actually worked in the credit card industry, they would have been too fearful to give their new business a try. In this sense, thinking like an incumbent is a disadvantage. Yet on the other hand, understanding the dynamics at play in the industry and having a clear view of potential partnerships and policy issues will increasingly be prerequisites for success—or at least for avoiding major roadblocks. Third Wave entrepreneurs must find a way, then, to bring both viewpoints to bear—the nuanced perspective of the defending incumbent and the relentlessly disruptive mind-set of an entrepreneur on the attack.