Last night, I attended an inspiring talk by Nick Hanauer of Seattle-based Second Avenue Partners. The venue was Seattle University, and the topic was “breakthrough thinking and ideas”—what they are, how to find them, and which companies have developed (and will develop) them. The event was organized by the Northwest Entrepreneur Network.

Hanauer knows a thing or two about business breakthroughs. He was the first non-family investor in Amazon.com, circa 1995. (Some nice nuggets from Amazon’s early strategy coming below.) He founded Avenue A Media in 1996, which was later renamed aQuantive and bought by Microsoft for $6.4 billion in 2007—Microsoft’s biggest acquisition to date. And he led an investment in Insitu, the maker of unmanned aerial vehicles that Boeing bought for some $400 million last July.

I’ll give a few highlights here from Hanauer’s talk, which he delivered to a jam-packed room of about 130 people. The start was delayed by a technical glitch in getting Hanauer’s slides loaded onto the right computer. (Insert obvious irony about a room full of techies.)

The key elements of a breakthrough idea, Hanauer said, are value creation and social disruption. “Value is difficult but possible to quantify—it’s the ratio of benefits to cost, divided by those of the alternatives,” he said. Benefits are things like a product’s durability, speed, and appeal; costs are things like price, distribution, and training. “Is this thing in some way 10 times better than the existing alternative?” he said. “No breakthrough idea has ever delivered less.”

He gave some examples. “Amazon offered 10 to 100 times the selection of any other bookstore, charged far less, and was much easier to search. It was the first real e-commerce business,” he said. “Insitu was started by some windsurfing freaks from Hood River. They were aeronautical engineers. They delivered 1,000 times the surveillance per dollar that Predator did.” Insitu’s UAVs were smaller, which made them harder to shoot down, and could fly lower, which made their cameras smaller and cheaper. They were effectively invisible at 1,500 feet, could read a license plate, radio it back to a base station, and locate it to within a few feet—all for $75,000, versus $10 million for a Predator drone. “That’s a transformational amount of value creation.”

As for social disruption, Hanauer gave a quick summary of what he meant:

—If everyone thinks it’s a great idea, it probably sucks.
—If people understand it, you’re too late.
—If people don’t like it and don’t understand it, it probably still sucks.

So entrepreneurship is a dangerous field, he said. “The difference between being an idiot and being a genius is very, very thin.” And keep in mind, he pointed out, “you can be very successful without being socially disruptive. Great fortunes have been made doing incremental things. Burger King, which came after McDonald’s, was not transformational, despite what they tell you…But they made a great fortune.”

Hanauer said the “most transformational idea” he’s working on right now is …Next Page »

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