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Crossing the 2nd Chasm - the Real Challenge

By Dr Uday Phadke, Director, AcceleratorIndia.

We are outstanding in the UK at generating new ideas and innovations: over the past ten years many of these ideas have been turned into product and service demonstrators, using proof-of-concept funds provided mainly from public sources, via research institution grants and regionally-targeted funds. I refer to this as Crossing the 1st Chasm (see my paper 'Building High Technology Businesses: the Triple Chasm Model').

Where we have been very poor is at crossing the 2nd Chasm, which is about turning the proven concept into a product or service with a viable business model. Historically, this was the area that Venture Capital was supposed to concentrate on, consistent with its mantra of high risk-high return. Unfortunately, since the collapse of the first dot-com bubble in 2001 and the continuing problems in investment banking, VCs have been increasingly reluctant to invest in crossing this 2nd Chasm, instead focusing on what they call growth stage. In reality, their focus is now on scaling up proven propositions, by crossing the 3rd Chasm, the Chasm originally highlighted by Michael Moore, in his book on high-tech marketing.

So we are faced with a seriously broken funding environment, which needs to be fixed if we are to create new businesses, jobs and revenues. This problem will not be fixed by tinkering with tax breaks for investors (although every little bit helps).

We need to think about how we mitigate the risks associated with crossing the 2nd Chasm. This includes shaping the product proposition (‘impedance matching’ to customer needs), finding viable, sustainable business models, and dealing with the execution risks, especially the expertise of the management team.

We also need to educate potential investors about taking a more ‘enlightened view’ on the risk vs reward equation, so they recognise that getting involved at this stage provides a genuine prospect of high returns, quite different from their experiences with returns from most VC funds over the last ten years.

And finally I think we need to think about more structured responses such as the establishment of TSB Catapults, but being careful to ensure that these new interventions don’t merely end up adding more proof-of-concept funding.


A version of this blog was originally published at _connect platform for the Creative Industries Knowledge Transfer Network, run by Technology Strategy Board (TSB), UK.

Published on 08 February 2012

Last updated: 19 Jun 2013