I recently read an excellent post by Alex Rampell, a General Partner at Andreessen Horowitz, which highlights the importance of distribution. It’s called Distribution vs. Innovation and its core premise is that “The battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation.”
Sometimes, innovation and distribution happen hand in hand because a product doesn’t need to rely on established distribution channels for its growth. The innovation inherent in the product causes it to spread through a combination of on-platform referrals and off-platform word of mouth. Facebook is a great example of this.
At other times, a specific innovation needs established distribution channels to reach users. In this case, taking the innovation directly to those that control the distribution channels is unlikely to produce a positive outcome for the startup. This is because the distribution channel is harder to build than the innovation. TiVo’s digital video recording innovation which relies on cable companies with access to content for its distribution, and TrialPay’s offers platform which relies on payment processors with access to merchants for its distribution, are great examples of this which Alex highlights in his article. Another example is online education marketplaces partnering with reputable universities with access to certificate or degree-producing educational content in order to achieve their distribution goals.
In those cases where a startup needs established distribution channels to spread its innovation, a startup can capture more value if it can establish its own distribution network before innovating. As Alex highlights, Stripe building a payment processor with merchant relationships is a great example of this. Stripe can now build and distribute its own innovations over its own payment processing network.
It’s arguably more challenging for a startup to build another cable company (although Chamath of Social Capital is trying to build a carrier) or another reputable university than for it to build another payment processor. So building your own distribution network isn’t a strategy that works in all contexts. But if you want to capture more of the value produced by your innovation, the more control you have over your distribution channels the better.