Seeing Clearly: Three Startup Strategies to Survive & Thrive the Gartner Hype Cycle

Apple Vision Pro, released in February, presents a bold vision for augmented and virtual reality (AR/VR). AR/VR has promised for decades to supercharge gaming, enhance education, inform work, and enliven our daily lives with mixed realities. The Apple Vision Pro is one step closer to fulfilling this vision.

Yet the Vision Pro has been received with a whimper, perhaps due to its gawdy $3499 retail price, and seems destined to join a long line of devices that have disappointed AR/VR expectations. Google Glasses launched in 2012 and won the hearts and minds of Technorati but not consumers. Microsoft HoloLens, Meta Quest and Magic Leap have since disappointed, and AR/VR sales dropped last year after reaching 9.1 million devices sold in 2022.

Augmented and virtual reality highlight the challenge of forecasting adoption of paradigm shifting technologies. When the Gartner Hype Cycle first appeared in 1995, virtual reality was one of ten technologies highlighted. Augmented and virtual reality each appeared on the Gartner Hype Cycle 15 times in the next 25 years, more than any other technology. Only Quantum Computing, which remains in the lab after 13 appearances, is close. Figure 1 indicates where AR/VR appeared on the Gartner Hype Cycle from 1995 to 2018.

Figure 1: Gartner Hype Cycle: AR/VR Placement from 1995 to 2015

Prospects and Perils of Paradigm Shifting Technologies

Why have some technologies exceeded expectations while others languished or disappeared? As Yogi Berra mused, “It’s tough to make predictions, especially about the future.” Assessing the potential for new technologies is essential as entrepreneurs and investors collectively wager billions annually in time, talent and treasure on new products that seem a coinflip away from success or failure.

The Gartner Hype Cycle offers a lens into this question. Every July since 1995, Gartner highlights up to 40 emerging technologies that deserve innovator and investor attention. The Gartner Hype Cycle anticipated the Internet, smartphones, cloud computing, big data, and artificial intelligence. The Hype Cycle also raised expectations for many technologies that have receded into the future. Autonomous driving, quantum computing, augmented reality and virtual reality seem caught in a spin cycle. About 35% of Gartner Hype Cycle entries have quietly disappeared altogether. One hit wonders include folksonomies, the information superhighway, intranet terminals, and RSS enterprise.

The Gartner Hype Cycle Explained

As a venture investor for more than three decades, I have seen a lot of technologies come and go. Most offer incremental improvements over existing technologies, but disruptive technologies — what Peter Thiel calls 0 to 1 innovation — are more complicated. They often require more technical validation, complementary adjustments across the value chain, and customer behavioral change. As Machiavelli observed in the fifteenth century remains true today: “There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new order of things.”[i]

Following is a brief review of the Gartner Hype Cycle and its evolution. Feel free to move to the next section if you know the model well.

The Hype Cycle model is rooted in behavioral economics, which Gartner pays homage to by including it as an ‘emerging technology’ three times from 2007 to 2009. The Gartner Hype Cycle forewarns us that technology, like markets, are prone to flights of fancy and fits of depression. Warren Buffett has quipped that the stock market is a voting machine in the short term and a weighing machine in the long term. John Meynard Keynes observed during the Great Depression that markets are prone to ‘waves of optimism and pessimism’. Nevertheless, the Gartner Hype Cycle suggests that market sentiment on emerging technologies follows a consistent pattern evolving through five stages:

1. Technology Trigger: A technology breakthrough sparks attention from innovators, investors, analysts and the media. Publicity raises expectations, often before a technology and products are ready.

2. Peak of Inflated Expectations: Heightened expectations often outpacing reality. Startups proliferate prematurely and a sector becomes overcrowded and overfunded.

3. Trough of Disillusionment: Reality and expectations collide. Interest evaporates as technologies and startups disappoint. Startups fail and funding dries up. Markets consolidate around firms that satisfy customers with proven products.

4. Slope of Enlightenment: Product market fit achieved with a growing set of customers. Products improve and use cases expand enabling a shift from early adopters to widespread customer use.

5. Plateau of Productivity: Market expansion. Rapid growth as a dominant design emerges that customers adopt widely. The market consolidates around leading products and companies.

This model has remained consistent, yet its usage has evolved over the past three decades. Gartner added timelines in 1999 acknowledging that technologies mature at different rates. Adoption categories range from 0–2 years, 2–5 years, 5–10 years, and 10+ years. Gartner expanded coverage in 2003 doubling new technologies tracked within four years. Gartner broadened coverage further in 2015 and developed different Hype Cycles for several major sectors while focusing on the first three stages of the lifecycle for emerging technologies.

The Gartner Hype Cycle is a useful strategic development tool for entrepreneurs. I highlight four startup strategies based on the Gartner Hype Cycle below.

The Gartner Hype Cycle is a Guide not a Roadmap

As with movies, viewer discretion is advised when using the Gartner Hype Cycle. Over 90% of Gartner Hype Cycle listings are foundational technologies, which could spawn many potential applications but are not yet ready for commercial use. Customers want solutions, not technologies, so entrepreneurs must package these technologies into new products that fulfills customers unmet needs.

The Gartner Hype Cycle has a high hit rate identifying promising emerging technologies: about 65% of the 200+ listings prior to 2015 now has solid commercial traction and 40% spawned significant new businesses. But most emerging technologies required at least 5–10 years for commercial adoption in widespread products and applications that leveraged the technology. Telematics, for example, has applications in mapping, logistics, insurance, location-based services and autonomous driving.

Three Startup Strategies to Survive and Thrive the Gartner Hype Cycle

Startup strategies differ based on many factors, yet consistent strategic themes emerge based on the market context and industry lifecycle. The Gartner Hype Cycle offers a useful market perspective that informs strategy for entrepreneurs and executives. Figure 2 shows three broad startup strategies that apply as technologies and markets mature.

Figure 2: Three Entrepreneurial Approaches across the Gartner Hype Lifecycle

1. Rapid Prototyping to achieve Product Market Fit / Eat When Served

An appearance on the Gartner Hype Cycle is a double-edged sword. Recognition brings legitimacy and possibly funding but also heightens expectations and attracts competition. Competition and funding accelerate development, yet expectations often outrun reality if a technology is immature or customer adoption slows.

The Gartner Hype Cycle measures technology promise more than readiness as Technology Trigger technologies are often ten years or more away from broad adoption. Entrepreneurs should consider several factors when deciding if, when and how to jump in. What is the killer app? Is it product ready? What other changes must occur across the value chain to bring the product to market? How big is the market opportunity? Is the technology a feature or catalyst for scalable new companies? Does the new technology favor incumbents or startups? What are the prerequisites for customer adoption?

Emerging technologies often have many potential applications that could support multiple winners pursuing different markets and strategies. When working below the radar, an entrepreneur has time to test different ideas and pivot based on customer feedback. But scrutiny increases and cycle times accelerate under the microscope of the Gartner Hype Cycle. Heightened competition and expectations accelerate the race to find product market fit.

Descending into the Trough of Disillusionment is not inevitable. About 30% of Gartner Hype Cycle technologies skip directly from the Peak of Inflated Expectations to the Slope of Enlightenment. Technologies that have made this leap include smartphones, Voice of Internet Protocol (VoIP), smartcards, instant messaging and enterprise portals. These technologies found Product Market Fit during the initial ramp-up phase.

As discussed in Six Product Market Fit Principles that Drive Startup Success, startups should stay lean and nimble prior to Product Market Fit so they can experiment and pivot quickly as needed.

Navigating a startup is a balancing act: as with mountain climbing, moving too fast or slow are both lethal. First mover advantage is useful only when the technology is proven and customers are ready to adopt. Otherwise, early movers may incur technical debt and burn through capital as the technology or market develops. It is difficult to stay lean during the Peak of Inflated Expectations when competition is fierce and investor funding is plentiful. The balancing act is to raise funding when it is readily available yet preserve cash and stay lean during the search for Product Market Fit. Paypal raised funding days before the Dotcom bubble burst and survived while lesser funded rivals failed or were acquired. Lean, well-funded startups are best positioned to capitalize on opportunities and survive the Trough of Disillusionment.

2. Survive and Thrive the Trough of Disillusionment

Though the Trough of Disillusionment is avoidable, most sectors experience downturns before achieving ultimate success. Leaders often seem to ride above the din of daily events but only because they are publicly visible once they have achieved leadership. Steve Jobs, Jeff Bezos, Elon Musk and Larry Ellison survived disappointments, and their ultimate success was based as much on their survival skills and persistence as their ability to scale once market conditions permitted.

“Survive and Thrive” is the resonant theme when playing through a market downturn. As a global investor and entrepreneur, I have experienced seven severe downturns, and they have all been painful. Market downturns seem inevitable when unproven technologies meet fickle markets. Yet companies that survive periods of consolidation during a downturn typically emerge from a Trough of Disillusionment in a stronger position than when they entered it.

The software industry reached the Peak of Inflated Expectations in the late 1960s but fell into the Trough of Disillusionment in 1972 when the nascent venture industry collapsed and stayed there until the rise of personal computers resuscitated software in the early 1980s. Software has blossomed over the past forty years into a $700 billion industry, yet prospects dimmed for a decade.[ii]

Troughs of Disillusionment may delay but do not diminish prospects for the technology sector. As Figure 3 illustrates, technologies in the Trough of Disillusionment have a higher success rate than those at the Peak based on Gartner Hype Cycle data. Examples of emerging technologies that have successfully traversed the Trough of Disillusionment include blogging, cloud computing, desktop videoconferencing, digital cash, mobile devices (PDAs), online video, SaaS software and tablets.[iii]

Figure 3: Gartner Hype Cycle Emerging Technologies — Success Rate by Stage[iv]

Troughs of Disillusionment are periods of market consolidation. While money flowed freely during the Peak of Inflated Expectations, capital dries up as customers and investors sit on the sidelines awaiting clear signals. Startups cut costs to extend runways during a market downturn. For startups with sufficient runway, a downturn is an opportunity to refocus on the core value proposition, pivot to find Product Market fit, and improve unit economics of the business.

Troughs of Disillusionment obscure the light at the end of the tunnel. The light reappears when startups find Product Market Fit supported by a proven business model and scalable go to market strategy. Those few firms that survive emerge with a proven business with fewer competitors. In those cases, the light shines brightly indeed.

Counterintuitively, Troughs of Disillusionment are also good times to start companies. Startups are not burdened with cost cutting or technical debt. They also have more access to experienced talent and more time to perfect products and business models with less competitive noise. The list of companies founded during downturns is long. Successful startups founded during the financial crisis from 2009–2011, for example, include Instagram, Pinterest, Slack, Snapchat, Square, Stripe, Uber and WhatsApp. Other iconic technology companies that rose to prominence during downturns include Apple, Cisco and Google.

3. Scaling and Winning Market Leadership

Competitive dynamics shift on the Slope of Enlightenment and Plateau of Productivity. A new generation of startups arrive unencumbered by technical debt but unseasoned by the wisdom gained during more challenging times. Incumbents arrive once market uncertainty diminishes with scale advantages and established customer relationships.

The skills that got a startup here won’t win success there. Altered market dynamics and competitive pressures shift operating requirements from agility prior to Product Market Fit to scaling thereafter. Based on a decade long study across forty countries, Bain, a global consulting firm, observed a shift from a Founder’s Mentality to an operationally intensive mindset aimed at scaling and winning market share.

Figure 4: Winning Product Market Fit then Scaling the Business[v]

Market consolidation, which started in the Trough of Disillusionment, accelerates on the Slope of Enlightenment as firms vie for market leadership while scaling to the opportunity. The ante rises as scale requirements increase when incumbents loom as potential competitors. One indicator of rising scale requirements is that the median revenue level for 75 unicorn initial public offerings from 2019 to 2021 was $300 million at the time of their IPO listing, more than double the level a decade earlier.

Scaling a business requires different skillsets and it is often at this stage a startup augments its team with those running larger businesses. Among unicorn IPOs, 25% recruited experienced CEOs as the business scaled, often within two years prior to the initial public offering. Other executive positions that typically enter as the business scales are chief financial officers, chief revenue officers, and chief operating officers.

Gartner Hype Cycle: Is the Hype Desirable?

In Zero to One, Peter Thiel highlighted the value of secrecy. Operating below the radar attracts less competition, allows more time for startups to hone their technology and business model, and lowers capital requirements. The Peak of Inflated Expectations attracts funding but also competition reducing success rates for entrepreneurs and investors. As David Packard once observed, more companies die of indigestion than starvation.

The best opportunities may be those that others overlook. Of the aforementioned 75 public unicorns, over one third of founding CEOs indicated difficulty raising initial funding, including almost half of Zero to One startups. At the outset, both the Gartner Hype Cycle and investor interest are unreliable indicators of startup success. Persistence is a key attribute of founder success regardless of whether startups operate under the radar or in the spotlight.

Emerging technologies enhance but are rarely sufficient for startup success. Among the aforementioned 75 public unicorns, over 90% augmented their business with technologies referenced in the Gartner Hype Cycle. Only 20% emerged directly from Gartner Hype Cycle technologies and only 45% required these technologies to enable their business.

Entrepreneurs should neither seek nor avoid reference on the Gartner Hype Cycle. Operating under the radar has advantages and recognition brings challenges. The Gartner Hype Cycle reminds us that markets ebb and flow. Entrepreneurs must stay balanced even when markets are not.

Prospects for Augmented and Virtual Reality

A corollary to the Gartner Hype Cycle is Amara’s Law, which observes that we overestimate technology impact in the short term but underestimate its potential in the long run. Computers and mobile phones are two of the most transformational technologies over the last century with over 2 billion computers and 15 billion mobile devices used worldwide today, yet few foresaw their potential when first introduced. Digital Equipment Corporation initially dismissed the idea of home computers and McKinsey advised AT&T to focus on landlines as they doubted widespread use of portable phones.

Augmented and virtual reality retain much promise though they have disappointed for two decades. Disruptive technologies often have long development cycles as the history of computers and mobile telephony suggests. AR/VR will likely fulfill early expectations and more once the technology catches up with the vision.

Recommended Resources:

· Gartner Hype Cycle explained by its sponsor. Discussion oriented toward corporate executives.

· Mike Mullany nicely summarized his observations of the Gartner Hype Cycle based on an earlier 20 year review from 1995 to 2015. His observations are insightful and remain relevant today.

· Gartner Hype Cycle on Wikipedia. Good basic overview describing the framework, its uses and limitations.

· TechNext.ai: Measures pace of technology change.

[i] Niccolo Machiavelli, The Prince.

[ii] Software history source: Martin Campbell-Kelly, From Airline Reservations to Sonic the Hedgehog: A History of the Software Industry, MIT Press, 2003. I applied the Gartner Hype Cycle, which started in 1995, to the software industry in the 1970s for this example.

[iii] Technologies in the Trough of Disillusionment: in some cases, I have updated the technologies that have rebranded to reflect current usage rather than names used at time.

[iv] Gartner does not publicly report on the ultimate success of emerging technologies that appear on the Gartner Hype Cycle. I kept a scorecard for all emerging technologies listed by Gartner from 1995 to 2015 anticipating that nine years would be sufficient time to ascertain a degree of success. For listings prior to 2015 that Gartner no longer tracks in the Hype Cycle, I placed technologies in one of three categories: (1) Startup Success indicating that at least one startup achieved significant success based on the technology; (2) Incumbent Success indicating that established firms used the technology to significantly expand an existing business or expand into a new segment; and (3) Not Impactful in the absence of #1 or #2. Success rates are based on (1+2)/(1+2+3), which are reported in Figure 5.

[v] Source: Chris Zook and James Allen, The Founder’s Mentality: How to Overcome the Predictable Crises of Growth.