AI Won’t Replace Humans — But Humans With AI Will Replace Humans Without AI

Before the Color Labs photo-sharing app was launched, in 2011, its developers raised $41 million from Sequoia Capital, Silicon Valley Bank, Bain Capital, and other investors—an extraordinary amount for a startup that hadn’t even released a product. In less than a year, the app surpassed one million downloads on Apple’s App Store. But its success was short-lived. Users began complaining about Color Labs’ lack of features, technical problems, and poor user experience. But, rather than tweaking the app to address those issues, Color Labs remained focused on signing up more users. Usage plummeted. By December 2012—and with $25 million of funding capital still unspent—Color Labs’ investors and board members voted to cease operations. Where did Color Labs go wrong? Most analysts concluded that its massive early funding worked against it, creating pressure for the company to scale up quickly instead of refining the product. To put it another way, Color Labs shifted too quickly from experimentation to exploitation—and its large early investment probably played a major part in that. The company’s failure illustrates that when startups receive funding can have as big an impact on innovation as how much funding they get does. Some research has shown that financial constraints can benefit startups by forcing them to be scrappy and resourceful. But other studies on the effects of startup capital have gotten conflicting results, and researchers don’t fully understand exactly how or why the timing and size of first investments influence a venture’s subsequent moves. When Harsh Ketkar of the University of Texas at Austin’s McCombs School of Business and Maria Roche of Harvard Business School decided to study this issue, they opted to focus specifically on how early funding affected firms’ ability to develop unique technical innovations. “We wanted to conduct this research because we were always baffled by prior studies that said being constrained is actually very good for startups,” says Roche. “How can not having a lot of cash be a good thing?” Using data from the market research firm PitchBook and the data analytics company BuiltWith, Ketkar and Roche recorded information on 11,853 U.S. tech companies (most of which were creating apps and websites) founded from 2010 to 2019. First they identified when each company’s earliest funding arrived and how big the round was. Then they set out to analyze how those factors influenced subsequent innovation. To measure how innovative companies were, the researchers looked at how unconventional the combinations of technologies used to make each startup’s product were compared with those of other firms in its industry. For instance, a firm using Microsoft Azure (a cloud provider), Amazon RDS (a relational database), and Tableau (data visualization software)—components of a popular tech stack—would be considered more conventional and less innovative than a firm combining lesser-known products such as DigitalOcean, CockroachDB, and Metabase. The researchers say companies using more-novel technology combinations tend to create more-innovative and -functional products. Previous research had measured innovation using metrics such as patent filings, but because filing a patent is a cumbersome process and many startups never seek patent protection, the ways firms combine technologies is a more relevant measure, the researchers say, noting that breakthrough products such as the iPhone came about primarily from combining existing technologies in novel ways. The researchers drew several conclusions from their analysis. First, the later that startups receive their first round of funding, the more likely they are to keep experimenting after the money arrives. Second, startups that receive a bigger investment use more technologies after cashing the check but combine them in less unusual ways, signaling reduced experimentation. Last, the track record of the investors (including whether they exited past investments through IPOs or acquisitions by other firms) affects how much companies continue experimenting after launch, and the timing and size of the first investment can impact how long a startup survives. “Although earlier (and/or higher) availability of funding may ease survival pangs during a firm’s infancy, it also may diminish the need to experiment and search for technological combinations that constitute an innovative product,” the researchers write. “This situation also may preclude firms from developing innovation-oriented capabilities early in their lifecycle and thereby stymie later innovation as well.” Roche recommends that entrepreneurs who build products using technology ask the following questions before taking on a new investor: Does the investor share your appetite for experimentation? Startups that wait, or are forced to wait, to accept funding aren’t constrained by investor oversight and the need for immediate success, Roche says. They can test and pivot without having to prove viability or growth potential. Experimentation then becomes part of the company’s DNA, which ultimately propels firms to be more innovative. “Firms that don’t accept early funding can afford to wait and experiment until they find the innovation that separates them from the competition,” Roche says. Roche recommends finding an investor who values experimentation and tolerates risk as much as you do. Early investment from large institutions that demand immediate or short-term financial results will likely cease or limit experimentation. Is there a strategic fit? Roche advises startups to consider the investor’s preferred exit strategy, whether it be acquisition, IPO, or allowing the startup to keep growing as a profitable, stand-alone company. The investor’s ultimate goals can significantly impact the startup’s growth trajectory and operational decisions. Investors seeking a near-term IPO are more likely to push for quicker results over constant experimentation. Startups should also consider how hands-on investors will be. Do they want to select the technology you use? Or are they content to provide strategic guidance? How innovative your company becomes is ultimately dependent on how open it is to change. Micromanaging investors can close firms off to it. Has the investor helped other innovative startups? Roche advises entrepreneurs to think about a potential investor’s reputation, capabilities, and possible influence on the company’s direction. Experienced tech investors have probably worked with resource-constrained startups that must balance growth against innovation. They are more likely to encourage experimentation and scrappiness than first-time investors or investors who don’t have experience with technology companies. “The experience and approach of investors can significantly impact a startup’s ability to remain flexible, innovative, and unconventional, even when they receive large amounts of funding,” says Roche. “Who you allow to invest in your company is a strategic decision that can stop innovation in its tracks.” About the research: “Combining for Unconventionality: When Resource Constraints May Promote Innovation Capabilities,” by Harsh Ketkar and Maria Roche (working paper, 2025) “A Large Investor Would Have Cut Their Losses” Josh Walker is the cofounder and CEO of Sports Innovation Lab, a Boston-based AI company founded in 2017 that provides fan intelligence, insights, and analytics to brands and sports properties. He recently spoke with HBR about the company’s early struggles and how they drove his team to innovate. Edited excerpts of that conversation follow. Photo of Josh Walker Bryan Derballa What was the original idea for Sports Innovation Lab? Initially, we focused on evaluating and teaching sports organizations about various technologies, such as wearables and immersive media. Our business model revolved around offering memberships to clients. But during the pandemic, we faced significant challenges. We lost 30% of our clients from March 15 to March 16, 2020. We then pivoted to hosting virtual events to maintain engagement with our market through a period of uncertainty for the sports and entertainment industries. The events were opportunities for clients and prospects to ask us about specific sports technology and how sports organizations approached and used technology in a broader, categorical sense. We were surprised to learn that our clients needed insights into fan demographics and behaviors more than they needed to understand sports technology. So, we shifted our focus to investing in fan data to help our clients make more-informed decisions about marketing, engagement strategies, and technology investments. How did your choice of early investors give you flexibility to pivot like that? We wanted to find the right relationships at the earliest stages. We weren’t focused on how much money we could raise; we wanted people we knew and people who knew us. Our first investor was a family friend who gave us about $500,000 in seed capital to get the company started. Our second investor had a personal relationship with me and my cofounder (and Harvard alum), Angela Ruggiero. This investor provided the first million dollars of our second round of funding in 2021, following the pandemic. Both investors were betting on the founding team rather than the specific product we were building or the technologies we were using. When you have personal relationships with investors, they tend to trust you. They care about your ideas. Our early investors believed in our team. They trusted us enough to follow us down the path we decided to take to better our business. Did the shift in business model pay off immediately? No. This was a significant change in our business model, and it took some time. Even back then, our chief technology officer was experimenting with things like building a ChatGPT for sports. He was scraping research articles and modeling pattern recognition so that we could surface the most relevant information for our clients. We didn’t have a way to monetize it while he was experimenting with it, but we knew that data analysis, AI, and pattern recognition would all be important for the future of our business. Wouldn’t a heavily funded Sports Innovation Lab have come to the same realization? We may not have made it to that point. A large investor would have cut their losses. They are more willing to write a company off if it doesn’t have a track record. In our case, we lost a third of our clients early in our company journey. A massive investment firm would not have had the patience to continue investing with us after that. But because we had strong relationships with our investors, they stayed with us until we turned the business around. What advice would you give innovation-focused startups seeking early investments? First-time entrepreneurs should be cautious about taking large amounts of capital too soon. Avoid a high valuation without revenue to back it up. This can create significant pressure to deliver rapid growth and big returns. It also results in equity dilution for your founding team and early investors, which reduces your control over the company’s direction. High valuations also create unrealistic expectations from investors. This can lead to increased scrutiny and pressure, potentially causing management changes or strategic shifts that may not benefit your company. I suggest seeking substantial investments only after you have proven your ability to sell and renew contracts.