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The Company-as-a-Product (CaaP) methodology for tech startups

The origin of Company-as-a-Product (CaaP)

Company-as-a-Product (CaaP) is both a concept and a methodology that views and approaches the ideation, design, creation, buildout, deployment, and transaction (e.g., exit or sale) of new companies from a “CaaP engineering” point of view, integrating business, technology, intellectual property (IP), and legal dimensions with a certain economic goal.

The CaaP concept initially grew from a striking observation of the tech startup space: There is a deep disconnection between the existing tech companies and tech startups. This is the case even when a particular tech startup noticeably provides a salient and much-needed solution to a conspicuous problem faced by an existing tech company.

Although many tech companies have a venture capital arm, the disconnection remains largely unsolved. This has much to do with the fact that these VC branches are managed by traditional VC managers, function like a traditional VC fund, and are counted as a financial component of the parent company rather than a more synergistic structural business development component. But there’s still more that causes the disconnection.

Why can’t an existing tech company simply go ahead and build the solution by itself?

In most cases, it simply can’t. This is often not due to a lack of talents and knowledge (as many established tech companies have highly competent tech teams from CTO down to engineers and developers), but due to an inherent incentive and decision-making corporate structures. This is a problem very well explained by Clayton Christensen in his seminal book ‘Innovator’s Dilemma’.

But there’s still more that causes the disconnection.

Why can’t an existing tech company buy the startup that provides a much-needed solution?

The answer is some do, but not only is the frequency of such acquisitions low, but also both the accuracy and timing are poor.

Acquisition mostly happens only when the startup has grown to a billion-dollar company, having become more than a solution provider but a competitor. Even then, the success rate is low due to a lack of pre-acquisition understanding and poor post-acquisition team synergy and compatibility. The cause for this is not a mere matter of lacking visibility but a lack of deep insight into startup valuation and how startup companies operate.

The kind of insight that is necessary for proper valuation of a startup does not simply come from general technological and business knowledge, but from deep domain-specific and even team-specific participation, which the existing tech companies simply don’t have, again due to the limiting corporate structures and business relations rather than a lack of talents in a general sense.

But why doesn’t an existing tech company become a partner with the startup from the very beginning?

Well, that’s a good question, and it is this very question that led to the concept of Company-as-a-Product (CaaP).

CaaP means building startup companies as a product targeting a specific market. The target market may be one type of corporate buyer or even a specific company buyer.

In other words, it is a mechanism of building a new company for another company (or a type of existing company).

But this targeting is not mere planning or aspiration but through concrete partnership in an early stage. That is, the potential buyer plays a partnering role in the new company’s early stage.

For example, the relationship may start as a consulting project for which by a major corporation hires a team of solution providers. However, unlike traditional consultant-client relationships, the parties eye for the possibility of the project becoming a standalone product or even a separate company. Together, they study and identify not only the custom needs of the customer company but also gaps in the marketplace in general, and collaborate on an innovative solution that is applicable not only to the customer company itself but to a broader market.

Not every project will become a product or a company, but the pre-existing planning and willingness to allocate resources accordingly make a fundamental difference.

Although the germination of a new company can happen accidentally in an ad hoc fashion, proper cultivation in the early stages can benefit it hugely. This has not only to do with initial funding but also a different kind of incentive mechanism, the importance of which cannot be overemphasized.

It is on the latter point, i.e., proper incentive mechanism, that corporates fail to understand why startups succeed or fail and why a corporate team with ten times more resources cannot beat a lean and mean startup.

But the other side of the coin is that entrepreneurs are often discouraged and even destroyed by the fact that many great technologies that clearly have the potential to provide a good solution end up failing in the traditional startup environment. That’s just one consequence of the disconnection identified above.

The unicorn disease

One significant consequence of the above-discussed disconnection between the existing companies and startups is a disease that’s called ‘unicorns’. Less than one out of a thousand (1/1000) startups become a so-called ‘unicorn’ with a valuation of $1 billion or above. This is being revered as the symbol of tech startup power, but in reality an unhealthy disease.

For entrepreneurs and society as a whole, it is far more productive, both short-term and long-term, to have ten $100 million companies than just one billion-dollar company.

People tend not to realize that startup companies’ exit distribution is not simply a natural outcome but rather a product of the VC culture and business models. VCs are fixated on exceptionally large exits, almost dictated by their business model and culture. However, this expectation and aim create an adversarial environment for the vast majority of startup projects.

Many good solutions never come to fruition not because they are inherent errors destined to fail regardless of the support and partnership, but because of the way these companies are started, funded, supported, and partnered with others.

The problem is not merely that startups fail due to a lack of funding, but more importantly, because only a particular kind of startup is being created in the first place to appeal to the existing VC environment, many good opportunities simply never emerge to be tested. Instead of focusing on solving concrete problems for existing customers, everyone is forced to work on another potential unicorn, for otherwise, no investor would be interested in investing.

The unrealistic high-aiming achieves a precisely opposite result: the environment silently kills ten healthy $100 million practical solution providers, each of whom would have had a 25% chance of succeeding, in exchange for one glorious unicorn, which has a 10% chance of succeeding. Statistically, the difference would be a $250 million outcome (25% x 10 x $100 million) versus a $100 million outcome (10% x $1 billion). Even if the unicom also had a 25% chance of succeeding, ten $100 million companies would still be a better outcome than a single one billion-dollar company in terms of tech diversity and social benefit.

CaaP incubator

A CaaP incubator is the answer to the above problem. It does not aim for unicorns (although it does not prevent the project from becoming one) but focuses on solutions with the most synergetic partnerships. This allows solution products to naturally succeed and achieve their proper scale, be it a $5 million exit or a $500 million exit.

The CaaP model provides a foundation for a new kind of tech incubator. Taking pages from the success of traditional incubators, the CaaP incubator aims for a particular type of market with tailored organizational and business structures (including that of the founding team, key partner(s), employees, investors, etc.).

In addition to the common skill set of building startup companies, the CaaP incubator has a characteristic of a traditional consulting company that works with customers to provide custom solutions. Yet CaaP’s business model is different from that of a traditional consulting company, but rather a combination of both a tech incubator and a private equity (PE) fund, all designed not to maximize any particular party’s direct interest, but to maximize the chance of each CaaP company becoming a successful ‘product’ with a targeted exit, which naturally reward all participants according to the incentive mechanism.

Compared to traditional consulting companies on one extreme, and traditional incubators on another, the CaaP incubator provides an effective mechanism to capture and manage ‘Common intellectual property (IP)’ which is optimized to benefit both CaaP products/companies and the CaaP platform.

The CaaP IP model solves the problem of the existing environment which yields results polarized onto opposite extremes: IP is either wasted without a common platform as an economically efficient IP depository or completely falls into the hand of one lucky winner which tends to enjoy an unhealthy monopoly.

The above is not a trivial task, but at least CaaP provides a more decentralized framework to build it with a coherent strategy and mechanism.

The CaaP incubator becomes a platform on which various CaaP products can be produced. The concept allows a high level of flexibility in what type of CaaP products/companies can be built.

CaaP is firstly a methodology to approach conventional companies such as tech startups from a different angle for more efficient creation (production) of such companies.

We explore how the CaaP methodology is used to approach a tech startup as a product, aiming for a certain economic outcome.

However, the innovative model of CaaP introduces a new concept of “companies” which has led to the creation of completely new types of entities, ranging from virtual economic agents (which are nonlegal entities but organized in a fashion to achieve functions of a company) to virtual firms (which are legal entities but made up of virtualized workers). For example, Toolots is already developing patent-pending Virtual Firm Technology (VF Technology) to enable its more efficient cross-border e-commerce platform. This would require a separate article to explain.

CaaP methodology for building tech startups

As described above, the existence of an early-stage connection between a startup and a corporate client-partner is a unique initiator of a CaaP project.

But the CaaP is also a methodology. The CaaP methodology creates companies driven by a proper “powertrain” to become effective products with a specific target.

The core insight of CaaP methodology is that a tech company not only makes a product but is itself also a “product”. This product is built with a specific client-partner which is typically an established tech company. It also needs to be made (built) according to sound intellectual property (IP), business, finance, economics, and legal principles.

Creating an effective CaaP company needs a CaaP team as an insider expert.

The conventional startup model is a one-legged model with clutches. The “leg” is the founder(s), while the clutches are third-party service providers such as an incubator, lawyers, and other consultants.  

The conventional model therefore almost completely relies on collaboration, which is necessary but not sufficient or optimal. 

Collaboration is based on communication and communication, in turn, is based on understanding, but true understanding is often lacking. Today, people collaborate a lot and communicate even more, but true understanding rooted at a deep “first principle” level about the economic value creation mechanism and business drivers such as intellectual property is rare.  

In today’s tech realm, especially in cutting-edge technologies such as blockchain and AI, the conventional demarcation of various “disciplines” is being blurred and disappearing. Technology, law, economics, and finance are combined (or at least need to be combined) in a way that is far deeper than what people usually call cross-disciplinary collaboration.

This calls for an “interdisciplinary” approach, but I believe even this very word “interdisciplinary” represents a misunderstanding.  

For example, people call someone like me “interdisciplinary” because of my multidisciplinary background in physics, law, economics, and finance. But I never consciously wanted to be “interdisciplinary.” I just wanted to understand how innovation-driven economies and businesses actually work. To me, the very idea of the disciplines is artificial. Reality is a coherent single fabric.

But exactly how do innovation-driven economies and businesses work?

From a microeconomics point of view, we need to develop an ab initio Company-as-a-Product (CaaP) approach to each tech startup. Ab initio means it is the case (i.e., a CaaP) from the start or from the instant of the startup rather than from when the company is being sold.

This is not to diminish the central importance of technological innovation itself in tech startups but to integrate technology with coherent mechanisms of law, intellectual property, economics, business, and finance that grow out of insider understanding (an organic “leg”) rather than “crutches” borrowed from outside.

This also does not diminish the importance of outside collaboration. The core of a CaaP company is to be fundamentally sound from within at an early stage and remain so after that. Only then will the utilization of outside help become more effective and less wasteful.

What should you do as a startup founder?

If you are a tech startup team, you should presumably already have a very strong “tech leg.”  But beyond that, it helps to have a CaaP member (team or individual) who not only understands 100% the technological aspects of the company, but also has deep insight into intellectual property (IP), law, economics, business, and finance, and knows how to actually “machine” a Company-as-a-Product?

CaaP as a startup methodology is not merely a management method but a type of “engineering” with full-stack development. The CaaP principle means more than a lean startup philosophy; it is a holistic and inter-functional methodology of building a company as a “product” for the capital market (which is different from the consumer market defined by the end users of the company’s products).

CaaP is the integration of business, technology, intellectual property (IP), law and finance. 

Here, especially, IP refers not just to a bunch of patents but to a business strategy and system that works as both a business and a tech driver rather than just a pile of intangible assets. In other words, proper IP should be an active driver of a CaaP vehicle (company) or a part of the powertrain rather than cargo rather than a passive result of R&D. Mere IP in the conventional sense is not enough.

CaaP builds an “Intelligent Portfolio of Intellectual Property” (IPIP).

In addition, the CaaP expert must also have a keen sense of the values and incentives of different team members (including the founders) and know how to build a team with balanced motivations and relationships. This good sense needs to be applied to both hiring and the company’s equity structure, such as employee stock option plans.

Conventionally, this is considered a pure HR job with some assistance from a lawyer, but the conventional approach misses an extremely important factor of building a startup company: the knowledge of the underlying values themselves, and how they are created and interconnected.

HR professionals and lawyers know how to build business constructs that properly connect various value pieces, but they lack a deep understanding of the underlying values themselves and how they are created in the first place. At the same time, while some entrepreneurs intuitively understand these values, they are exceptions rather than commonplace among tech startups. This is the general condition of today’s superficial collaboration model in a tech startup ecosystem.

In addition, the CaaP team must also be an expert in championing a cause, whether it is the company as a whole, a technology, or an idea.  This takes much more than “salesmanship” because it requires deep understanding and personal conviction of what is being championed at the CaaP level.  

Finally, the CaaP expert knows how to “machine” a company as a product. Value is created by integrating the technology, IP, business model, and financing of the company, but all this starts from effectively communicating complex concepts across all sides.