Over the years he watched digital projects lose battles for research dollars. Even though film’s market share was declining, the profit margins were still high and digital seemed an expensive, risky bet.

He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but “it just didn’t work.” Venture companies in Silicon Valley are “pretty wild”, “in Rochester, people come to work at 8 and go home at 5.”

When disruptive technologies appear, there is a lot of uncertainty in the transition from old to new. “The challenge is not so much in developing new technology, but rather shifting the business model in terms of the way firms create and capture value.

These are just a few excerpts from a great piece “What’s Wrong with This Picture: Kodak’s 30-year Slide into Bankruptcy” from Knowledge @ Wharton that (inadvertently) does a terrific job explaining the context and gigantic opportunity that drove Uday and I to create Anthemis and it’s networked ecosystem approach to re-inventing financial services for the digital century. Let’s take each of these in turn:

< < Over the years he watched digital projects lose battles for research dollars. Even though film's market share was declining, the profit margins were still high and digital seemed an expensive, risky bet. >>

I lived this directly and in full Kodachrome color my last few years working for Dresdner Kleinwort, culminating in the creation and subsequent dismantlement following my departure (in 2006) of a new business unit in Capital Markets called Digital Markets. This was the brainchild of then CIO (of the year!) JP Rangaswami and myself, built on the basic premise that exponential technological progress was going to drive an entirely new optimal business model for capital markets activities (as opposed to simply enabling accelerating growth of the existing traditional business models which it had done so well for the previous two decades or so.) That technology, rather than simply being an (important) enabler of the business, was set to become the central driver and that accordingly we had an exceptional opportunity to get out in front of this disruptive change – embracing not resisting – affording us the once-in-a-paradigm-shift chance to fundamentally change (for the better) our competitive position. Further, we felt that Dresdner Kleinwort was ideally positioned in its mediocrity to seize this opportunity: we had much less to lose than the market leaders. (And as history shows, in fact the firm had pretty much nothing to lose…RIP.) But the problem was – and almost always is with large, established, publicly-listed companies – that the vast majority of decision-makers had significant vested interests in maintaining the status quo, and insufficient sensitivity to the downside. Classic agent/principal conflict. Turkeys just don’t vote for Christmas. It’s not rational for them to do so. This is a fact of life, not something really worth bemoaning.

< < He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but "it just didn't work." Venture companies in Silicon Valley are "pretty wild", "in Rochester, people come to work at 8 and go home at 5." >>

My experiences as a senior manager at Dresdner Kleinwort / Allianz led me to increasingly understand that there was a fundamental incompatibility between successfully managing a large incumbent organization and successfully nurturing dynamic, entrepreneurial, disruptive new ventures. I like to think of it as the corporate equivalent of Heisenberg’s Uncertainty Principle: just as one cannot simultaneously know the position and momentum of a particle, neither can one reap the advantages of a large-scale, established corporation and simultaneously drive and manage emerging, innovative new business models. (Call it Park’s Corporate Paradox?) And in the past 5 or so years since leaving the traditional corporate world, my empirical experience of working closely with start-ups (including starting one!) has only increased my conviction in what I now believe is a fundamental truth. Dresdner Kleinwort (and Paribas before that) – as old hands in the markets world will I hope attest – had positive reputations in the industry for their (relative) ability to innovate, to be at the forefront of new markets and ideas. I believe a key reason they were able to do this was actually because they were well, let’s just say “loosely” managed. They were anything but well-oiled machines. Which, frankly, if you are going to take best advantage of the benefits of being a large, established corporation, is what you need to be. The innovation that emerged in these organizations was a by-product of their relatively weak organizational structures. Put another way, if disruptive innovations are akin to viruses (which I think is not a bad metaphor) then these companies had relatively weaker immune systems (than their market leading counterparts like Goldman Sachs or JP Morgan for example.) However, that is not to say that they had no immune response, and ultimately the incumbent prerogative to maintain the status quo and protect the vital organs won out (in Paribas’ case accelerated by its acquisition by the more tightly managed BNP.)

The important truth to grasp is not that one (the incumbent) is better or worse than the other (the start-up), rather that they are incompatible – structurally, culturally, strategically – in the same host. Yet they are Yin and Yang, and need each other, “complementary opposites that interact within a greater whole, as part of a dynamic system.” The optimal state occurs when they exist in symbiosis – this is in fact the central tenant of Anthemis – our vision, our mission is to act as a substrate that catalyzes, nurtures and enhances this symbiotic relationship. We exist to “improve the health of other companies who grow near us.”

< < When disruptive technologies appear, there is a lot of uncertainty in the transition from old to new. "The challenge is not so much in developing new technology, but rather shifting the business model in terms of the way firms create and capture value. >>

It’s not really about the technology per se, it’s about what technology allows you to do. Often I hear people describe us as “financial technology” investors, but at the risk of being pedantic, this is not really the case. We invest in people and companies that use technology to enable better, often disruptive, new business models. Businesses that seek to address the fundamental needs of their customers in new and better ways that were previously either impossible or sometimes even unthinkable without the enabling power of fast evolving information and communication technologies. It’s not the same thing. And although we invest in these new companies, we are not investors – at least not in the mainstream sense. We aren’t a venture capital or private equity fund. We are ourselves leveraging technology to create a new type of organization, one that we believe is highly additive to the existing ecosystem of large incumbents, start-ups and traditional venture and growth investors. Complementary rather than competitive.

Too often, the conversation around innovation is framed as big v. small, good v. evil and works against the grain of what we believe is the objective reality. We want to re-frame the conversation, work with the grain of the history and the market to help the various different participants in the (financial services) ecosystem leverage their innate advantages (and mitigate their inherent weaknesses.) And if we succeed in this mission, we are certain that we will create enormous value for our own shareholders along the way.

Networks not hierarchies

We believe that the most successful companies of the future – both large and small – will be the ones who embrace a network-driven philosophy and operating ethos. The vertically-integrated Sloan-ian corporation of the 20th century, so ideally adapted to the economy of the Industrial Age, will increasingly struggle to remain relevant in the environment of accelerating cultural and technological change the characterizes the economy of the 21st century Information Age. Large, sector-leading incumbents will need to become more self-aware of both their defensible strengths and core competencies and of their inherent weaknesses and blind spots, which includes the ability to manage disruptive change. They will need to purge all vestiges of not-invented-here mentalities and pro-actively support (both financially and commercially) wider, outside innovation networks while developing optimized methodologies for bringing these outside innovations into their organizations as they mature. And continuously remain aware of the always changing ferment on the edges of their competitive space. Small, cutting-edge start-ups will need to become increasingly good at leveraging existing infrastructures – not just compute and storage infrastructure – but distribution and industry specific infrastructures, or as John Borthwick of Betaworks points out, the best new disruptive innovators “do what (they) do best and outsource the rest.”

This new paradigm creates a significant opportunity for a new type of company to emerge. Companies that are natively optimized to act as a connective layer between the old and the new. Companies that are deliberately tuned to operate within the new network-centric economy. Companies that are explicitly built to nurture ecosystems of talent, technologies and products and services. Anthemis is one of these new companies – a “third place” so to speak – positioned between the established industry leaders and the emerging new innovators, acting as a sort of “translation layer” helping the former to understand and adapt to the changing environment and the latter to identify and focus on the biggest market opportunities while leveraging the core strengths of the existing industry infrastructure. While our focus is on financial services and marketplaces, I am certain this same opportunity exists across any number of industries or markets. Indeed, Betaworks – “A New Medium Company” is a good example of a successful emerging company with a similar positioning and philosophy but focused on the media space. If they don’t exist already, I am sure similar constructs would work well in other industries.

Rusting away

Often when I give presentations on our vision of the future of finance, I am challenged with the question: “But do you really think [insert favorite giant financial services company] will disappear?”, I am at pains to make clear that (a) I don’t know (b) it’s possible, though not necessarily likely, or will take a very (very) long time and (c) that it kind of misses the point in that one would hope that their aspiration is to thrive and not simply survive.

There are a number of different failure modes for established market leaders, most of which are relatively unspectacular and many that don’t actually result in the company disappearing. We remember the Lehmans, the Enrons and the WorldComs but thankfully these are actually the exception. The greatest risk for these companies is not catastrophic overnight disaster but a slow inexorable decline into irrelevancy or even bankruptcy. Big companies typically don’t blow up, they mostly just rust away. The actual speed of this decline often depends on the nature of the sector, it’s “installed” base and particularly it’s regulatory “relevance” in particular. Leaders in highly regulated and deeply embedded (in our economies) industries like finance and telecoms can survive for years and even decades by deploying their considerable resources to protect their position and slow (but not stop) their decline. But how much better off would their shareholders, employees and customers be if they instead marshaled these same resources in a more constructive direction, embracing their real strengths and acknowledging their structural weaknesses in order to evolve and succeed in our changing world, rather that just settling for survival? (Side note: this strikes to the heart of the principal/agent problem that plagues many big, listed companies – for the middle and senior management of these firms, simply ensuring their company survives is often a more than good enough outcome, requiring significantly less energy and psychological commitment while delivering sufficient financial rewards and positional prestige to meet or exceed their personal aspirations. I am not criticizing so much as acknowledging that human nature being what it is, that it is damn hard to resist such a path, even for those with the best intentions.)

Say Cheese

The experts at Wharton note that “adapting to technological change can be especially challenging for established companies like Kodak because entrenched leadership often finds it difficult to break old patterns that once spelled success. Kodak’s history shows that innovation alone isn’t enough; companies must also have a clear business strategy that can adapt to changing times. Without one, disruptive innovations can sink a company’s fortunes — even when the innovations are its own.”

The world is changing. Financial services are no longer immune to these forces of fundamental change. Changing technology, demography and culture are unstoppable forces that if ignored will slowly but surely rust away the competitive advantages of traditional business models. Resist it or embrace it. But you can’t change it. It’s a bit scary sure but also incredibly exciting. Jump in. If you are in financial services, we can probably help.

It’s a better choice than waiting for your Kodak moment.

Related articles

• Kodak: its all about the separation of information from distribution (richardstacy.com)
• Lessons learned from Kodak’s collapse (theglobeandmail.com)
• Kodak pays the price for not re-inventing itself (wheresthesausage.typepad.com)
• Introducing Anthemis (parkparadigm.com)
• More competition beats more regulation (parkparadigm.com)

Financial institutions are already highly regulated and one could argue that at best, this has not achieved the desired outcomes and at worst has actually contributed to some of the most egregious behaviors as the clever folks in financial institutions lost sight of the end game (ie the products and services and customers that lie at the heart of their raison d’etre) and focused increasing amount of energy and talent to working the system.

And not unlike Br’er Rabbit fighting with the Tar Baby, getting stuck and then pleading with Mr. Fox not to be thrown into the Briar Patch, the large incumbent banks pleading with the regulators not to write more rules may just be a brilliant case of misdirection.

but do please, Brer Fox, don’t fling me in dat brier-patch

Of course more regulations hurt the large financial institutions, but they hurt new entrants more. And competition is a whole lot scarier than regulation to incumbents. If you want to get a sense of this, you could do worse than reading Aaron Greenspan’s take on US payment regulations. And similar examples exist across the spectrum of financial services and across the globe.

The irony is that most financial regulations are born through the desire to protect the little guy from losses, and to some extent they achieve this on one (direct) level but following the law of unintended consequences, the result to often is to create an environment where far larger risks (and losses) are incurred at a systemic level. And who pays for that? Well as we all know now, increasingly it’s all of us (including of course, the little guy.) Via government subsidies, interventions, increasing costs to maintain ever larger and more complex regulatory regimes, all of which need to be paid for with higher taxes and more importantly slower economic growth. Here the bankers are right, all these new regulations make our current system less able to produce growth which of course hits the 99% hardest. But then the bankers stop before asking for a level regulatory playing field that would pour fuel on the smouldering fire of new, innovative, disruptive entrants. Please Lord deregulate me, but not just yet.

I’d like to coin a new phrase, “regulatory theater” inspired of course by Bruce Schneier‘s “security theater“:

Security theater is a term that describes security countermeasures intended to provide the feeling of improved security while doing little or nothing to actually improve security…Security theater gains importance both by satisfying and exploiting the gap between perceived risk and actual risk.

Regulators (and politicians) sensing the need to be seen to be doing something about the risk, fall into a trap of creating more and more regulations hoping to protect all of us from ourselves, only to create new (almost always) more dangerous and costly risks higher up in the system. Rinse and repeat. Until these risks reach the top of the pyramid and can no longer be shuffled and redistributed. At which time, they come tumbling down on all. This regulatory theater can be comforting in the short term but actually takes us further and further away from a sustainable solution to managing financial risks in our economies.

These risks exist and cannot be regulated away. Call it the 1st law of Financial Dynamics: the of conservation of risk. And I would postulate that pushed down to the base of our economic system, these risks would be easier and less costly to manage. With a more competitive and open system, with continuous renewal through many new entrants, the end users of financial services would get better (higher quality, lower cost) products and services with much lower risk of catastrophic systemic failures. Certainly – statistically – some of these new entrants would be managed incompently. Some would be frauds. People, customers would lose money. But the costs of dealing with these failures would pale in comparison to the multi-trillion dollar, economy-crushing losses that the existing system has allowed, nay encouraged to build up.

I’ll finish with an example, take UK retail banking. Concentrated, uncompetitive, legacy. No new entrants, no competition. Metro Bank, NBNK, Virgin/Northern Rock in my opinion are just shuffling deck chairs; better than nothing I would grant but essentially no real innovation, run in the same way with (mostly) the same assets, same people and same business models that previously existed. A token nod for the industry and the government to be able to say their is new competition (much as a dictator allows a hapless opponent to run in an election…) – window dressing. And even here, look at the hoops Metro Bank (who claim to be the “first new UK bank in 100 years”, QED…) had to go through to get a new banking license… If I were Cameron/Osbourne/Cable, the first thing I would do to start fixing the problem would be to create a new “entry” banking charter. Light touch. Basically just vet the founders and investors for fitness. Perhaps make them put up a certain minimum amount of the equity and/or guarantees as a percentage of their net worth. 90 days from application to charter. Nothing more. But restrict these new banks to say £50mn of assets until they have a 2 year track record (at which point they could apply for an increase in permissible assets and/or a full license.) Then oblige the large banks to open up their core banking infrastructure via APIs – analogous to obliging BT to make available their core telecom network to other operators.

I wouldn’t be surprised if within a year or two you had 30 or 40 new banks competing in various different ways, with many different (and differentiated) value propositions. And some would go bust. And some would be frauds. But even making the (ridiculous in my opinion) assumption that they all lost all of their customer’s money, and all of this money was insured by the government, we are talking about £2bn. Compare that to the direct losses of c. £23bn on RBS and Lloyd’s alone, not even considering the contingent losses and indirect costs born by the UK economy as a result of their predicament. Of course, I believe that many of these new banks would succeed and grow and any losses would be substantially smaller than £2bn. But none of these new banks would be too big to fail for a very long time (hopefully never) and although failure of even just one of them would attract headlines and aggrieved customers giving interviews on BBC1, especially if the cause of failure were to be fraud – it would behove us to put this into perspective. To not forget the difference between perceived and actual risk. To remember that huge failure even if diffuse and “no one individual could credibly be blamed” even if more psychologically comfortable, is actually much much more damaging than smaller point failures where cause and effect are more brutally obvious.

The world’s incumbent financial institutions are deeply mired in Christensen’s Innovator’s Dilemma, protected by regulatory barriers to entry that while not fundamentally altering the long-term calculus, have pushed back the day of reckoning only to make that day seem ever scarier. It might seem counter-intuitive, but I think we should be calling not for more regulation but for de-regulation of financial services (the real, robust, playing-field-leveling type and not the let-us-do-what-we-want-but-keep-out-any-competitors type). Competition is a far more robust route to salvation than regulation. Let a thousand flowers bloom.

I didn’t know Steve. But he made my life better. And he inspired me to have the courage to give up my safe, well-paid job to do something that is more meaningful to me. To try to change the world, if only a little.

So we started Anthemis with a mission to help build the Apple’s of 21st century finance: to bring elegance, simplicity and deep engineering to create financial services that just work and empower their users.

The world needs more leaders like him. Perhaps his passing will shock some of our other leaders into pulling up their socks and start acting their parts. Or inspire new, better leaders to emerge. I hope so.

And I will stay hungry. And foolish. And I won’t settle.

Thank you Steve.

To meaningfully differentiate yourself from everyone else in the same space, you have to define the situation in the industry, segment, or category that you want to challenge. Here’s what a list of what you want to challenge might look like:

• This is an area in which everyone seems to be stuck in the same predicament and nothing has changed in a very long time.
• This is an area where profit performance is average—it really should be more successful than it is.
• This is a category where growth is slow and everything seems the same.

Once you have a situation to focus on, describe it in one sentence: “How can we disrupt the competitive landscape in [insert your situation] by delivering an unexpected solution?”

I guess if you had to boil our mission statement at Anthemis Group down to one question,

How can we disrupt the competitive landscape in financial services by delivering an unexpected solution?”

would probably do the trick quite nicely.

Of course, our approach to answering this question is perhaps not to answer it directly but rather to seek out and support a constellation of passionate, brilliant, “what if?” thinking entrepreneurs who are asking this question with respect to specific sectors, products and geographies in financial services (banking, payments, risk management, identity, investing, etc.) and contribute our intellectual and financial capital towards amplifying their vision and improving their chances of success. For all you capital markets geeks out there, we think this approach generates (as close as you can get to) pure “alpha” in that our returns are pretty much divorced from general market movements as the impact on valuation of success (or failure) in building these new businesses far exceeds the second or third order impacts on valuation of prevailing overall public (or even) private market conditions. Clearly, our success is not guaranteed – not by any stretch of the imagination – but at least the input parameters, the choices we make, are the key drivers and within our control. (And not subject to the vagaries of a co-hosted blade pumped up with algos in New Jersey…cf my last post.)

This in our opinion is a much better set of reference terms. Even more so because it doesn’t rely on our unique genius, but rather structurally taps in to a deep and expanding pool of talented people, pursuing their own visions and goals, loosely-coupled through the ecosystem and networks we strive to nurture and grow. We don’t have to make all the decisions. We don’t have to have all the brilliant ideas. We don’t have to do all the heavy lifting. Which is certainly a relief to us and I suspect to our investors as well. If you want to take the ecosystem metaphor a bit further, I guess it would be fair to say that our position is akin to dirt in forest. Or swamp water in a wetland. ie Trying to provide a fertile and supporting substrate upon which the wonders of evolution and life can flourish and grow. Perhaps not a very sexy image, but ask any farmer and she’ll tell you there is nothing as wonderful as a field of deep, dark, steaming dirt.

And coming back to Luke’s three foundational criteria, I think it is clear to all that you can take pretty much any sector of financial services and it would emphatically tick each box. It’s an incredibly fertile environment for disruption. So you know, we’ve got that going for us. We just need to make sure we plant the right seeds.

Anthemis (Án-the-mis) is a genus of about 100 species of aromatic herbs in the Asteraceae… Nicknamed “the plants’ physician”, it seems to improve the health of other plants grown near it. (source: Wikipedia)

I was reminded the other day that I’ve never introduced Anthemis Group to the world. And our website, although not bad, definitely needs updating (we’ll get to it…) But in the mean time, I thought it might make sense to have a go at starting to explain who we are, our world-changing ambitions and our unique plan for achieving same.

Our ambition – our “big hairy audacious goal” – is to work with passionate and talented entrepreneurs to build – from the ground up – a “digitally-native” diversified financial services group, naturally adapted to the society and technology of the 21st century. It’s our take on working on stuff that matters to create more value than we capture by taking a long view.

As many of you know, I’ve spent much of the last decade thinking hard about how advances in information and communications technologies can enable a fundamental re-invention of business models in the financial services sector, and over the past four years I have focused my energies on figuring out the best way to go about catalysing the creation of new businesses that will drive and profit from this amazing opportunity. It hasn’t always been easy – advocating change never is – but ironically, the global financial crisis of 2008 was actually very helpful as it opened many eyes to the manifest weaknesses and diminishing returns of a financial system and actors that were finely tuned to operate in the “industrial economy” of the 20th century but poorly adapted to address the opportunities and challenges of the 21st century’s “information economy.” Anthemis has emerged out of this work and we are convinced that our approach is ideally suited to profit from the vast opportunity for disruptive innovation in financial services.

Our ambition is to build the world’s first “digitally native” financial services group: a group of companies and businesses uniquely adapted to profit from the emerging competitive landscape of the Information Age.

Anthemis Group is a holding company (think Berkshire Hathaway, DST, Naspers, LVMH…) organised around a small number of key themes and principles:

• that an enormous opportunity exists to harness technology to fundamentally rethink how financial services are designed, consumed and delivered.
• that a healthy, resilient and relevant financial sector is absolutely critical to the well-functioning of our economies and societies
• that loosely-coupled networks and ecosystems (not hierarchies) are the optimal organisational forms in the information economy
• that assembling and retaining teams of talented and passionate people is the key to building great businesses.

We’re not a venture capital or private equity fund, although clearly in some respects we share characteristics and often work closely with both; think of us as a fractal start-up – a company that deliberately seeks to connect and grow an ecosystem of complementary and vibrant new businesses by marrying patient long-term growth capital with expert operational and strategic advice.

In future posts over the course of the next several months, I will explore in more detail the themes outlined above and also dig deeper into both our operating model (we have three key operating pillars: principal strategic investments (anthemis | holdings), corporate advisory (ft advisors) and an innovative specialised expert consulting network (anthemis | edge)) and our investment framework (see if you can reverse engineer it by looking at our existing portfolio!) But today, I want to finish by highlighting a great post by Stowe Boyd (which inspired the timing of this post) titled “More Like A City Than An Army.”

In recent appearances, I have used a certain example to make a case about the openness in businesses of the future, contrasting today’s organizations with cities. ‘You don’t have to ask if you want to move to NYC’ I say. ‘You just show up, and start doing your thing, interacting with people, renting a storefront, buying things.’

‘Imagine a business where you can just show up and say, I want to work here. And you’d be engaged in the workings of the business by making connections with people.’

When I read this, it was immediately familiar: it resonated strongly with some of our thinking on how to best manifest the fourth principle above and indeed our business model in many ways adopts a somewhat analogous approach.

Cities exhibit superlinear performance, unlike businesses which are sublinear. As new employees are added to a business, performance decreases per employee. Cities are the only human artifact that break this trendline: they increase in productivity as more people move in.

So, business should aspire to take on the characteristics of cities — to the degree feasible — to break past sublinear performance.

Think of Anthemis as a city. Of our portfolio companies as neighbourhoods. And of our anthemis | edge business as municipal services and resources. The metaphor isn’t perfect of course but our structure and approach is indeed designed to achieve the superlinear performance Stowe alludes to. Before you get too excited, we’re not (yet?) in a position to let people “just show up and say, I want to work here”; I think reputation and trust filters – albeit not necessarily (just) the traditional ones – are relevant, but in terms of our starting bias, I’d say our philosophy is more in tune with this approach than the traditional talent paradigm. After all, why wouldn’t we want to embrace talented, energetic, self-selecting people. To be fair, Stowe acknowledges this potential problem and offers a potential solution:

Of course, the company would have to be organized in a vastly different way. People could ‘work’ at such a future Apple by just showing up, but they might have to convince others to let them participate on projects, or get an idea funded, or change a product’s features. (my emphasis) We’d have to have a wildly different notion of ‘management’: one that would be fully distributed in some way.

This theme is an aspect of what I call messiness-at-scale: for companies to go superlinear, they have to drop all plans to keep things tidy, and accept a state of near chaos, out at the far edge, where the power curve of innovation, creativity, and resilience is at its strongest.

Indeed, the biggest issue I see with a completely open-door policy is one of protecting the reputation and integrity of the firm – (which is really just the community of people associated with it.) Basically, the NAA (no assholes allowed) rule. But the fabulous thing is that in today’s world, it has never been easier to run this filter. Globally. Using both traditional social (old boys’) networks sure but also and much more excitingly (and more scaleable) by using the vast array of digital tools (Twitter, LinkedIn, Quora, Namesake, blogs, etc…ergo PeerIndex, an Anthemis company!) to build up a picture of a person’s authenticity (who they are, what they believe in, what they know and how passionate they are… (Which of course highlights how crucial it is to nurture and maintain a robust digital identity, something that is anathema to most of the corporate leaders of today…)

And if we can solve the reputation / authenticity issue, this just leaves the issue of how can you afford to pay people who “just show up.” We don’t have a fully-formed answer to this yet, but a starting point for thinking about this is: you don’t. Or framed less controversially, you provide them a substrate upon which they can ultimately earn their own way and in parallel you provide a framework by which the firm and its people can invest risk capital (time and money) into the new joiner to buy them the runway they need to become “cash flow positive”.

If this sounds similar to the general approach to financing entrepreneurs and start-ups it is not by accident. Investing in people or investing in groups of people working together on a project are fractals of the same problem set. A cynic would argue that this is just semantics and that what I have proposed aboveis effectively what any company does when it hires a new employee – essentially committing risk capital on the future expected productivity of that person. Sure, perhaps. But by making this social contract explicit – by devolving the process – making it bottom-up, emergent; not top-down – I am convinced that the resulting relationship is very different (and more robust, honest and mutually beneficial.)

So we’re working hard on putting the substrate and framework in place that will ultimately allow Anthemis to welcome all the talented, passionate, self-motivated people out there that share our vision and want to direct their energy towards building a digitally native financial system fit for the 21st century. We’d love to hear from you if you think you can help (but just remember we’re a start-up too, so please indulge us if we’re a bit uneven in our ability to engage, we know we have room for improvement in this department.)

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” – Buckminster Fuller

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Change is not death. Fear of change is death.

I woke up reasonably early this morning with a long list of things to do today.  But given that it’s Saturday, I thought it’d be ok to start slowly with a cup of green tea and a few minutes with one of the many as yet unread books beckoning from the coffee table.  So I picked up Hugh MacLeod’s “Evil Plans: Having Fun on the Road to World Domination”.   I first met Hugh about 6 or so years ago via my friend JP, and was immediately charmed by his great cartoons and unique and brutally insightful characterisation of the “corporate world.”  Sort of a grown-up’s Scott Adams…

About 5 years ago I read Po Bronson‘s “What Should I Do with My Life?” and it made an impact.  Not too long after I ended up leaving a long and pretty successful career in investment banking to take a new path – one that has led to the creation of Anthemis Group and to moving our family to Geneva.  If you aren’t sure you are living your life the way you’d like to, as a first step I’d say read this book.  If nothing else Po is an entertaining and engaging writer and I’m sure you’ll enjoy the stories he tells.

As long as you feel inspired, your life is being well spent.

Hugh’s book took only an hour to read, but it brought back into laser focus the real reasons for which I chose the path I am now on. As he states – and all entrepreneurs know – there are a lot of times when it just seems overwhelming. But he also reminds us that that is where passion and purpose come to our rescue. Without these, we are doomed to fail. With them, we succeed even in failure.  Buy it. Read it. And keep it close to your desk to lean on in those moments of doubt.

And start working on that evil plan!

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• Book Rec: Evil Plans by Hugh MacLeod (kennykellogg.com)
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• Laughing Squid Featured In Hugh MacLeod Comic (laughingsquid.com)

When I invest in an entrepreneur, I’m going into a foxhole with this guy and he has to be the right choice. The question is, who has all the qualities that will provide leadership to the company, cause me not to worry for a second about whether anything was going on that would subsequently embarrass the company, or cause it to fail through lack of ambition or effort. When I talk to entrepreneurs what goes through my mind is essentially the same questions that would go through your mind if you were deciding who you wanted to be a trustee under your will, or who you wanted to have marry your daughter. I look for the kind of person who is going to be able to make decisions as to what should get to me and what could get solved below the line. A person who will tell me all the bad news, because good news always takes care of itself in business.

And when I look across the founders of our portfolio companies, I would definitely be comfortable with any of them being trustees of my will. As for my daughter, well they’re all too old for her anyway and besides they wouldn’t stand a chance…

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• Warren Buffett: Culture, Not Rules, Determine Organizational Behavior (wrightingsblog.wordpress.com)
• “Warren Buffett’s Annual Letter 2010: Key Takeaways” and related posts (marketfolly.com)
• Buffett’s Shareholder Letter: The Post-Mortem. (blogs.wsj.com)

So what was my initial reaction? Completely underwhelmed. The question that immediately popped into my head was: “Is that it???” Is that the most exciting, most optimal path to future growth that these management teams and their armies of advisors could come up with? And if so, what next? Even theoretically, only one more iteration of the global consolidation game exists and I’m not sure anyone would really advocate for a monolithic NYSEEuronextDBCMESGXetc… So the question that still will haunt the new, bigger boardrooms is not answered but only postponed: whither future growth in an increasingly commoditized business??

Don’t get me wrong, it’s a hard question. I don’t have an answer either. But you won’t be surprised if I suggest that it is probably to be found in thinking about post-consolidation de-consolidation aimed at creating new companies focused on various horizontal layers in the stack. Indeed, if the only path possible to get to a very small handful of global core exchange platforms was this flurry of mergers, then perhaps it was not all in vain. I would accept that in this layer of the “exchange stack” there is truly economies of scale, much as for instance with core communication infrastructure.

But then I would suggest that management of these platforms then needs to focus intensely on dis-investing themselves of other layers of the stack where economies of scale are less in evidence or absent completely. I don’t want to be cynical but giving the combination of normal 20th century management dynamics (bigger is better) and the particular emotio-political aspects of the exchange business, I would be very surprised to see anything like this happen. If I were a shareholder of any of these companies my fear would be that any of the advantages that arise from these combinations are ultimately subsumed by the disadvantages engendered by complexity (in every dimension.)

Giant financial exchanges – like the giant banks – aren’t going to disappear overnight. Possibly never. But to frame the debate in this “new” vs “old” / “mammal” vs “dinosaur” context is to miss the point. There are dozens of good (and some less good) reasons why these incumbents will be very hard to dislodge, and to focus on this – while potentially entertaining – skirts around the really interesting question which is to ask: where (and by whom) will value be created in digital transaction execution and management over the the next decade or two?

I don’t envy the management teams that lead these exchanges – they are forced to operate in a highly constrained political and cultural space and having fairly recently lived through the golden age for their traditional business model would seem – at least in the short term – to have huge asymmetrical downside in terms of the world’s expectations for them. Not fun.

There are some very interesting opportunities for these giant trading platforms in the years ahead. I just think that things will have to get a lot worse first before the management of these firms are in a position to act on these opportunities and think laterally. Or should I say horizontally!

Related articles

• TMX-LSE: Will politics trump economics again? (theglobeandmail.com)
• NYSE’s grab at a $3.7 quadrillion market (money.cnn.com)
• Analysis: Asian exchanges could miss M&A wave (reuters.com)
• Stock exchange mergers: the fight for global dominance (telegraph.co.uk)
• Exchange Mergers: Who Is Coming To The Dance? (businessinsider.com)

In effect, there are two kinds of organizations in the marketplace today:

• Organizations that keep finding new ways to to delight you – and those that are trying to make money off you.
• Those that help you solve problems – and those that are pushing their stuff at you.
• Those that are steadily innovating – and those that are doggedly tweaking their value chain.
• Those are responsive and agile – and those that are busy doing their own thing.
• Those that are easy to do business with – and those that make you feel queasy.
• Those that surprise you with unexpected extra value – and those who surprise you with unexpected extra charges.

We have a strong conviction that companies that behave in this way, that have this cultural DNA, will generate much higher risk-adjusted returns over the medium to long term than the other kind. Further, we believe that the performance gap between these two types of company will only get wider in the Information Age.

Related articles

• Steve Dennings’s book review: The New Capitalist Manifesto by Umair Haque (fredzimny.wordpress.com)
• How Technology Affects Business Operations (thinkup.waldenu.edu)
• 5 Steps to Retooling Your Business Model (inc.com)

But as you might suspect if you have watched the video, this is just a start… Indeed, this initial video could be considered as simply the trailer for a longer form video which will look at the period from 2008 to 2028 in more detail; similar in some ways to the AmazonBay video of several years ago. The first draft of the script for this story is already written but I am very keen to build on and enrich it, not only with the fascinating concepts and insights that I absorbed in the Innotribe sessions at Sibos last week, but also – insofar as anyone is interested – with comments and ideas from the wise crowd of Park Paradigm readers. I’ve got a few ideas as to how best to go about this, and plan to post these later this week or next, but in the mean time if you would like to share your thoughts, please feel free to comment below.

ps I’d like to give a special thanks to the amazing team at Motherlode who were instrumental in turning my ideas into reality and who worked tirelessly to deliver the video in time for the world premier at Sibos;  I’d also like to thank and congratulate Peter, Kosta and the rest of the Swift Innotribe team for what was simply an incredible four days.  I hope Swift gives you the recognition you deserve!

Related articles

• Breaking: Lazaro Campos opens Innotribe @ Sibos 2010 (petervan.wordpress.com)
• Innotribe @ Sibos 2010: Here are the finalists of the Innotribe Start-up Competition ! (petervan.wordpress.com)