Dispense with the chasm? No way!

Jeff Bussgang, a co-founder and general partner at Flybridge Capital, recently wrote an Extra Crunch guest post that argued it is time for a refresh when it comes to the technology adoption life cycle and the chasm. His argument went as follows:

1. VCs in recent years have drastically underestimated the size of SAMs (serviceable addressable markets) for their startup investments because they were “trained to think only a portion of the SAM is obtainable within any reasonable window of time because of the chasm.”
2. The chasm is no longer the barrier it once was because businesses have finally understood that software is eating the world.
3. As a result, the early majority has joined up with the innovators and early adopters to create an expanded early market. Effectively, they have defected from the mainstream market to cross the chasm in the other direction, leaving only the late majority and the laggards on the other side.
4. That is why we now are seeing multiple instances of very large high-growth markets that appear to have no limit to their upside. There is no chasm to cross until much later in the life cycle, and it isn’t worth much effort to cross it then.

Now, I agree with Jeff that we are seeing remarkable growth in technology adoption at levels that would have astonished investors from prior decades. In particular, I agree with him when he says:

The pandemic helped accelerate a global appreciation that digital innovation was no longer a luxury but a necessity. As such, companies could no longer wait around for new innovations to cross the chasm. Instead, everyone had to embrace change or be exposed to an existential competitive disadvantage.

But this is crossing the chasm! Pragmatic customers are being forced to adopt because they are under duress. It is not that they buy into the vision of software eating the world. It is because their very own lunches are being eaten. The pandemic created a flotilla of chasm-crossings because it unleashed a very real set of existential threats.

The key here is to understand the difference between two buying decision processes, one governed by visionaries and technology enthusiasts (the early adopters and innovators), the other by pragmatists (the early majority). The early group makes their decisions based on their own analyses. They do not look to others for corroborative support. Pragmatists do. Indeed, word-of-mouth endorsements are by far the most impactful input not only about what to buy and when but also from whom.

They rely on herd dynamics to make their calls. When enough of the herd have signaled the safe way forward, they move with the herd. Prior to then, they wait — unless they are put under duress. The whole crossing-the-chasm playbook is based on targeting a segment of pragmatists under duress, getting them to adopt ahead of the herd, then getting adjacent herds to follow their lead, building more and more momentum until a tipping point is reached. Then the whole herd stampedes, and that’s when high-tech fortunes are made.

As Jeff notes, we are in such an era at present. Software really is eating the world. Cloud computing is now mainstream. No need for your own data center. Smart phones are mainstream. No need to get to a PC. Apps are mainstream. No need to train your end users. APIs are mainstream. No need to reinvent what someone else already provides. Software as a service is mainstream. No need to manage the next release of a mission-critical application.

Pragmatist customers are being offered more and more value at less and less adoption risk. Moreover, because each of these waves of innovation can build upon the ones that came before, it is much easier for vendors to deliver the one thing pragmatists want to see more than anything else. That is the whole product — the complete answer to their business problem, with all the pieces already in production, all readily integrated into one solution, all backed by references from people they know and respect.

Now we are no longer talking about “Crossing the Chasm.” Instead, you might want to take a look at the book that followed it: “Inside the Tornado.” The tornado represents the influx of demand that happens when the pragmatist herd sees enough of its members piling onto the next big thing that everyone stampedes to get on the bandwagon. Fear of being too early gets replaced by fear of being left behind. Every boardroom in America is demanding to hear about what the CEO is doing about their enterprise’s digital transformation.

That’s why Amazon and Google and Facebook, as well as Salesforce and Microsoft, can enjoy such extraordinary growth rates even at their amazing scale. All these companies are core to bringing any such transformation to fruition. No wonder their bookings are flying off the charts.

But don’t kid yourself. They all had their chasms to cross before they could get to this very enviable place. Amazon was ridiculed for thinking that it could lead the cloud computing market. Salesforce was ridiculed for thinking any rational customer would put their business data in the cloud. Both of them had to find their early adopters (the CIA was a key one for AWS, Merrill Lynch for Salesforce). Both had to find their beachhead markets on the other side of the chasm (independent software developers for AWS, high-tech sales teams for Salesforce). So don’t mistake the destination for the journey. Both had to take a lot of heat to get where they are today.

Looking ahead from here, where will the next generation of chasms appear? There is no question that the everything-as-a-service (XaaS) movement has raised the bar for anything to qualify as being truly disruptive. But there are still two fundamental existential challenges that remain at large in the B2B economy:

1. Modernizing an enterprise’s operating model. This is a challenge the financial services sector has been addressing for the past decade, and it still has plenty of work to do before it gets to the finish line. But now it appears that every business will have to modernize its operating model to incorporate a work-from-anywhere future of work scenario. No one knows how to do this, and so the early market will lead with visionary attempts, and the mainstream market will hedge its bets until it sees which way the wind blows. Hard to think of a better place for an entrepreneurial startup to make its mark.
2. Reengineering an enterprise’s business model. This is a much bigger hill to climb. The most dramatic example is healthcare. It still needs to migrate from a fee-for-service to a lives-under-management business model. Meanwhile, the energy sector needs to reengineer itself around renewable energy, higher education around remote learning, manufacturing around onshoring, retailing around inventory and delivery, and industrial products around transitioning from a licensed product to a subscription service model. Again, no one knows the best practices for getting any of these things done, so there is a ton of opportunity for software-enabled next-generation approaches.

That’s why my partners and I at Wildcat Venture Partners are raising a new fund dedicated specifically and exclusively to investing in companies at the point of crossing the chasm. Far from seeing the chasm as passé, we believe it is the next big thing!