Mario Andretti's Law
Disruption, Being Fast, and How to Choose Your Tech Stack
Welcome to Money in Transit, a newsletter on the technology to move money around, from the insides of merchants that, despite not considering themselves fintech, can’t stop thinking about payments.
Today’s post dives deep into the meaning of that buzzword, disruption, and how successful founders make technological decision when it counts. As always, consider sharing this post with a friend, especially that one who thinks that “disruptive” and “new” means the same thing.
To maximize your chances of success as a founder, your startup must face uncertainty in at least one crucial way. By uncertainty, I don’t mean trying something that you’re not 100% sure is going to work. That’s called risk, and incumbents do that on a daily basis. Uncertainty is something so derisive and absurd that incumbents wouldn’t even consider trying it.
Which is precisely the point: uncertainty allows startups to survive by temporarily removing the incumbents’ competitive pressure. If something is in the consensus, then it cannot be the foundation of a startup. By the time you read about it in the Wall Street Journal, it’s already too late.
Former Formula One driver Mario Andretti once said that if everything is under control, you’re not going fast enough. Successful startups must look like a jet powered Beetle: insane, barely legal, and blazingly fast.
A Case Study on Business Insanity
The defining feature of disruption is that it is a race against the clock. To the extent that no incumbent has entered the race yet, a startup is innovative. Controversial is good, unaddressed markets are good; but the key is always speed.
Consider Klarna, now in the pole position of Buy Now, Pay Later. BNPL transactions are interest-free installment plans, adopted by customers when they buy something. The merchant receives full funds up front from Klarna, and Klarna takes on the custody of that debt incurred by the shopper.
Before it existed, if some manager at MegaCorp were tasked with building such a product, they would ask who in their right mind would underwrite debt for free?
What MegaCorp managers wouldn’t have seen is that in Sweden, where Klarna was founded, the government makes it straightforward for companies to find all debts allocated to a person using their ID. And unlike traditional banks, Klarna leverages the fact that simple, easily accessible variables from a person’s digital footprint equal or exceed the predictive power of credit bureau scores like FICO. For instance, customers purchasing from midnight to 6 am or those who have an Android, rather than an iPhone, are at higher risk of default.
Powered by that insight, and having the cultural stigma of debt in Nordic countries on their side, you get repayment rates in the 95 to 99 percent. Good enough for Klarna to charge merchants just a little bit more than a credit card fee, who are happy to pay if it makes it easier for new customers to part ways with their money.
Klarna is an example of a startup whose technology enables the business on top to be daring and have initiative. Reliable technology allows Klarna to push further than any incumbent can, underwriting debt that no traditional bank would get nearby. Boring moves will never get you to startups like Klarna, much like climbing successively taller trees won’t get you to the Moon.
Cool is not Daring; Familiar is not Boring
But a startup cannot be made of boldness only; it would become a time bomb. Always choosing daring moves results in startups that look like a handful of bright spots amid a background of gray issues and black instability.
Successful founders select their technology in the context of their startup’s business model, and they do so in opposition to how innovative it is. Innovative business models demand boring technology; boring business models demand technology that is daring.
This way of looking at startups stands in stark contrast to how many founders tend to choose their software’s building blocks. They let themselves be swayed by marketing and peer pressure, and end up choosing between what’s cool or what’s familiar.
But unlike coolness and familiarity, proactively choosing between boring and daring technology stands firmly on the grounds of time. Daring technology becomes boring by gaining the support from an established community, in the form of bug fixes and day-to-day usage. Cool tech becomes familiar when some vendor manages to put their product in front of you more often than their competition.
Marketing is the reason why engineers feel like software evolves at a breathtaking pace, when in reality it gets adopted, studied, and slowly improved over the course of years.
The paradox of software is that it’s both information and machine. And when it works, especially in those situations where it’s expensive to write and difficult to fix, it survives the way information does: in perpetuity. There is an overwhelming bias towards leaving legacy software alone, because it works, and nobody really wants that to change.
When to Make Daring Tech Decisions
Early on at Jane Street, engineers decided to make an obscure programming language named OCaml the foundation of all their enterprise architecture. They did so because OCaml forces programmers to be precise about the format of the data, which is advantageous when you’re dealing with many and disparate data sources. To the market maker, trading off the power of OCaml’s type system for a smaller engineering hiring pool makes sense, and its business success is a consequence of that early technology choice.
Daring businesses on top of daring technologies crash into a barrier of unforeseen technical challenges. Boring businesses on top of boring technology get overtaken by a few computer mavericks in a garage.
Innovation can be thought of as a scarce resource. When it comes to deciding which technology to use, startups are constrained by the type of business they serve. Boring, by virtue of time, has failure modes that are understood. Daring, by the same token, has unexpected success modes.
Build your tech like you would race a Formula One car: drive safe, but as fast as you can.