Growth Expectations #006

On The Impossibility of Startups

Hi and welcome to this issue of Growth Expectations, a newsletter with thoughts about startups from GO Ventures’ Head of Investments Paul Grech

When you think about it, what successful startups manage to do is quite astounding. These idea-only-enterprises are often born in the shadow of huge behemoths - the large corporates that dominate their industry and who have more of every conceivable resource - yet in time manage to nudge them out.

Take the example of Canva. When Melanie Perkins and Cliff Obrecht first started pitching their idea back in 2012 they were met with skepticism. Every single one of the 100 VC they approached turned them down; no one could see beyond the existing Adobe suite of tools as the go to resource for anyone who was interested in graphic design.

Ten years on, however, Canva is used regularly by more than 135 million users per month whilst surpassing $1 billion in revenues in 2022. Their last fundraising round in 2021 came at a valuation of $40 billion.

They’ve achieved what some of the finest VC minds felt was impossible

And they’ve done that from a standing start and against a giant that had, in the minds of many, cornered the market.

Now, Adobe is still a behemoth with a market valuation of around $245 billion. They’ve made some very good moves (early adoption of cloud, bundling or products) that has seen their stock-price skyrocket.

Yet, clearly, they failed to react quickly enough to snuff out the rise of a competitor. Specifically they kept their eye focused on the customer that they already knew; the pro-designers who needed the tools that they were working on and were willing to invest the time needed to learn how to use them.

What Canva did, however, was create a whole new market. To use Canva you do not have to be a professional designer nor do you need much training. It takes minutes to understand how everything works and with the thousands of templates it is easy to come up with something that looks really good.

Through this simplicity - and also their freemium model - they opened design up to a whole new market and it has been incredibly successful. So much that Adobe eventually announced their own trial with the freemium model and then, in a bid to keep up with Canva’s progress in the area if AI, released their own Generative AI product of Adobe Firefly.

Yet the latter has come at a cost. Not only a financial one but also on employee morale, with stories emerging of dis-content and worry among Adobe staff that these products will result in design team downsizing. In other words, Adobe employees feel that the company is innovating in a way that will drive their users out of a job.

Although such debate is healthy it also highlights why it can be hard for established companies to innovate.

Canva’s business model is built around making design easy and accessible to everyone - that was the gap in the market that they’ve gone after - something which AI will help them do even further. Adobe, with their focus on professionals, will have a harder time justifying the move (they know that their customers will probably use this to save money by having not only less people but possibly even less licences) so how hard will they go on this front?

Ultimately how they answer this question and the level of innovation they are capable of pushing through will determine their future.

This ties back with the book highlighted earlier this month on Growth Expectations, the Innovator’s Dilemma. The inclusion of this book which is primarily aimed at corporates raised a bit of debate over just how much startup founders can take from it.

A key message of Innovator’s Dilemma is that corporates “risk failure when they prioritize sustaining current products and technologies over exploring disruptive innovations”. This is an important message for those companies but also for startups: unless they knew that despite all of their resources big corporates cannot innovate quickly, would any startup dream of a business in a corporate’s back yard?

Knowing those limitations and how to exploit them is fundamental not only to dream up new ideas but also, as Canva have done, achieve what many felt was impossible and win a share in a space that most felt was already closed off.

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