I’ve been reading and thinking lately about stories and narratives and how it shapes us and the world. I hope to create a series of posts exploring this theme. Here, I look at the implications for startups.
I recently reread one of my favourite books, The Origin of Wealth by Eric Beinhocker, where he applies Darwin’s theory of evolution by natural selection to the economic world (an emerging field called Complexity Economics). Of course, my mind started wondering about the implications for startups. Let’s first take a quick tour of Darwin’s theory and Dawkin’s version of Neo-Darwinism.
Darwin and Dawkins, Genes and Memes
The summary of Darwin’s theory of evolution by natural selection is this: organisms produce more offspring than can be supported by the environment. Individual offspring have some variations in their traits. These individuals compete against each other, other species and the ever-changing environment to survive. The ones that are better fit to compete have a higher likelihood of survival (“natural selection”) and, through reproduction, passing on their traits to their offspring. This process keeps repeating and, over time, the population evolves to have more individuals with better fit and less (or none) of those with worse fit in the population.
There are a few things implicit above:
- There is a variation of traits among individuals of a species; otherwise evolution cannot occur
- While there are random (and sometimes sudden and extreme) changes in the environment over time, chances of survival of an individual are not purely random but rather dependent on fit with the environment
- Survival of individuals with better fit (and death of those with worse fit) is not guaranteed, just more likely
- There is a method for passing on traits to the next generation
- This process never stops (that is, evolution is iterative and happening all the time)
One implication of all of this is that evolution is path-dependent, that is, each ‘step’ of natural selection is determined by which variations exist at that point of time, the environmental conditions at the time and how chance plays out. A change (in the variations, environment or through randomness) at any point in time has implications for what the population looks like at any point in time in the future. Also, since there is competition for resources, the variations existing at any point determine the competitive landscape and are an integral part of the environment.
Neo-Darwinism further proposes that the selection process happens not on the organisms themselves but rather their genes (the building blocks that cause traits). Building upon Neo-Darwinism, Richard Dawkins, in his book The Selfish Gene, proposes that the genes that are better able to replicate, rather than the ones that are best fit as per Darwin, become more prevalent in the population over time (i.e., get selected). If what Dawkins proposes is true (and there are proponents and detractors), this places primacy on reproductive capacity, rather than fitness, for growth.
In the book, Dawkins also draws a parallel in the transmission and evolution of human culture, introducing the concept of /memes/ as ‘units of cultural transmission’. In his words:
“Examples of memes are tunes, ideas, catch-phrases, clothes fashions, ways of making pots or of building arches. Just as genes propagate themselves in the gene pool by leaping from body to body via sperms or eggs, so memes propagate themselves in the meme pool by leaping from brain to brain via a process which, in the broad sense, can be called imitation.
[…]
But just as not all genes that can replicate do so successfully, so some memes are more successful in the meme-pool than others. This is the analogue of natural selection.”
Because memes are ‘software’ (i.e. they are ideas that live in the brains of people rather than their physical manifestations), successful ones can also propagate much faster (go ‘viral’) than genes.
Enough theory. What does this have to do with startups?
The Startup Jungle
According to Steve Blank, a startup is “a temporary organization designed to search for a repeatable and scalable business model”. We see a plethora of startups being birthed every day. Each of them is a variation of a particular idea (for example, easier B2B payments), searching for a viable business model in a changing economic, technological, cultural, and political environment, and competing against others in the same ‘idea-space’ for the limited resources (customers’ attention, employees’ skills, investors’ dollars) available. The ones that fit better with the environment tend to survive and grow. Sound familiar?
Yes, the framework of evolution applies well to the startup world and their search for fit, except that startups that find fit don’t replicate but rather grow (as Beinhocker puts it, they ‘amplify’). Covid was a stark reminder of how startups are subject to evolutionary processes – the environment transformed nearly overnight and suddenly some startups found product-market fit and grew incredibly while other once high-flying startups faced sudden death. Existing startups had to create variations on their business model to see what fits the new environment. New startups with business models more suited to the changed environment sprung up and started competing for resources.
The aspect that is more intriguing to me, though, is path-dependence. To apply the concepts from above, the startups that are able to survive one iteration of the ‘evolutionary algorithm’ will have the opportunity to grow, garner more resources and affect the competitive landscape and environment for the next iteration, thus creating a ‘path’. This path is dependent on myriad factors, including chance and environmental changes. However, it can be influenced, and one of the most impactful ways, in my opinion, is through the startup’s narrative.
Tell Me a Story
Startups are very fragile (as Covid, again, demonstrated). At the beginning, there’s nothing much: a small team, no product, no customers, no moat, no viable business model, just an idea. An idea, though, is a meme and ‘fertile memes’ can spread like viruses. And when the startup’s idea goes viral, it attracts the resources that the startup desperately needs: customers’ attention, employees’ skills and investors’ capital.
Therefore, one of the key roles of a startup founder is to create a narrative around the idea that captures people’s attention and spread rapidly – the story of a damsel in distress, a despicable villain, a valiant knight, and a grand vision of the future. With the tale of how the valiant knight will save the damsel, you get customers’ attention (and hopefully their dollars). The grand vision helps attract talented employees who are willing to take equity in lieu of cash. Investors jostle to invest in your story at any valuation you desire. In his excellent post on Narrative Distillation, Kevin Kwok gives the example of how a key early advantage for Stripe, now a $95 bn company, was their ability to attract great engineers to work on payment integrations and internationalization, something engineers at the time didn’t want to do in general, by creating a developer first narrative.
And the best part is, once these people have become hosts for your idea virus, they transmit it rapidly to others – even have an incentive to do so – which can create a snowball effect. So startups with strong narratives increase their chances of survival through meme propagation and also help shape the environment in which other variations of the idea need to compete and survive. By surviving themselves, they shape the path not just for themselves, but others, too.
Note that I haven’t mentioned anything about the business model or the actual product or service here. And I don’t want to sound cynical (I’ve spent most of my working life in startups and will probably do so for the remainder, too). The business model and actual product utility, I believe, determine long-term fit with the environment, and therefore, survival. But the truth is, a lot of that can be uncertain in the early stages, and a strong narrative gives founders the time and capital runway to experiment, evolve and find the right variation that fits the environment best. And the process never stops – as the environment and competitive landscape changes, the startup needs to continue to experiment with variations and evolve.
But if a startup continues to evolve, what happens to the narrative?
Striking a Balance
A gap between the narrative and what the startup is doing can create dissonance for stakeholders but at the same time, if a startup doesn’t evolve, the chances of survival are low. So the founders need to strike a balance – Jeff Bezos’ maxim on being “stubborn on vision, flexible on details” comes to mind. In other words, founders need to create a strong narrative around the ‘why’ but keep the ‘what’ and ‘how’ open. An example Beinhocker cites in the book is Ford’s “a car for the multitudes”. It was very clear on why the company existed, but didn’t define the how and what.
However, as a startup grows and achieves its vision, the narrative can change wholesale. The old villain has been vanquished, and the knight searches for new ones to remain relevant.
The financial analyst in me loves to focus on numbers and proof. However, over the years I’ve increasingly understood the role that narratives play in all aspects of the world, including in helping startups create ‘something from nothing’. I hope to dive into the elements that create a strong narrative in the next few posts.