A couple of months ago, I had the privilege to have been invited to speak at eComm 09 in Amsterdam. I have posted on this previously but recently the video of my talk was posted and perhaps will make it easier to understand my accompanying presentation. If you can spare 20 minutes (there is an additional 10 minutes of q&a at the end) and are interested in understanding how Nauiokas Park defines our opportunity space, please have a look as it is probably the most succinct expression of the worldview we bring to investing and analyzing potential investment opportunities.
And here is the presentation again, in case you would like to follow along as you listen to the video:
Well-built developer platforms are the future of every industry. (-ReadWriteWeb)
Note: Their is a small glitch around 7:40 where the video skips over a few seconds; funnily enough (for the conspiracy theorists out there) this is exactly where I say that had ZSIN’s existed, the extent of the disasters that occurred in the mortgage securitization markets would have been at least an order of magnitude smaller…)
Using the tried and tested TED 20min format, it was a great opportunity for me to collect my thoughts into (what I hope was) a coherent overview of how I think technological and economic forces will shape the optimally adapted ‘industrial stack’ for the sixth paradigm. It’s a great summary of the prism through which we look at potential investment opportunities and I hope will help us articulate this more powerfully to entrepreneurs and prospective investors.
I’d love to hear any feedback (good, bad and ugly) from any of the eComm delegates who saw my presentation and hope to continue the conversation with you and others here. You can also follow me on twitter @nauiokaspark.
Thanks to Paul and Lee for inviting me and especially to those of you who took the time to respond to my call for input – it was tremendously valuable in helping me to shape and refine my thinking and in building the presentation; just a few years ago, assembling this kind of distributed brainpower would have been impossible, and I hope I never lose my ‘childlike sense of wonder’ at the boundless possibilities that technology enables.)
Carlota Perez is one of my heroes. Her fantastic articulation (in Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages) of how technological revolutions mark turning points in long economic cycles, building on the work of Schumpeter and Hayek, is in my opinion an incredible lens through which to understand long term economic growth and its effect on financial markets. Her approach is a key foundational pillar for our investment thesis, and is why we feel confident that it is possible to generate excess returns by catching the long term secular economic waves that ultimately govern capital markets. (Think of it as the polar opposite of day trading.)
In her thesis, each successive long wave of the economic cycle is initially catalyzed by a technological revolution, usually only visible in hindsight:
My suspicion is that we are living through a “phase change” now (be careful, “now” in this context means a period of a few years, not “today” or “this quarter”…) – and so I’ve been wondering what will come to be seen as the foundational technological revolution of the sixth paradigm. The previous five, as defined by Perez, are below:
There are many possibilities, but I’m starting to think that the transition to cloud computing (enhanced by ubiquitous wireless connectivity) just might be it. And for the sake of taking a punt on what might be a good symbolic starting point for this revolution, how about the launch of Amazon‘s S3 and EC2 in 2006?
Amazon today said it would bring web-scale computing power for use in workloads such as web indexing and data mining to just about anyone. The bookseller now offers MapReduce (a programming model created by Google to help deal with incredibly large data sets) using Hadoop on Amazonâ€™s Elastic Compute Cloud and Simple Storage Service. This allows AWS customers to access the power of a Google- or Yahoo-style server and programming infrastructure to model business decisions and analyze huges sets of customer or corporate data without having to invest in thousands of servers (as well as dozens of programmers). Dana Gardner over at ZDNet says one could think of it as having access to a personal supercomputer.
Just as Intel’s 4004 microprocessor was the catalyst for a wave of creative destruction in the 70s and 80s, will AWS prove the same for the 00s and 10s? Probably. We’re seeing it already. And it’s going to disrupt the hell out of the mastodons of industry across most sectors of the economy. Why? Because their cultures and leaders are entirely ill-equipped to face such a fundamental paradigm shift. They know how to play by the old rules. The strategic competitive advantages they built up over decades risk suddenly – poof! – to become obsolete. (from Dan Gardner:)
Think of it as having your own tuned supercomputer that you can plug gigantic data sets into and ask questions that will determine the course of your businesses for the next decade. Oh, and you can pay for the pleasure on a credit card.
This high-end BI value has pretty much been the sole purview of large, skilled and deep-pocketed enterprises. But there are plenty of people, researchers, government agencies, academics, small to medium enterprises, venture capitalists and the like that would hugely benefit from sussing out important trends and findings from the growing reams of raw data generated by modern businesses and societies. Talk about metadata on steroids!
“This high-end BI value has pretty much been the sole purview of large, skilled and deep-pocketed enterprises.” Not anymore… Think about that for a moment.
Size used to be an advantage in almost any industry…now? Not so much. New rules, new winners.
Thought experiment: Let’s take, oh say…banking. Which would you rather run (if say your life depended on success, which I know these days is a bit far-fetched but humor me…)?
A greenfield start-from-scratch-bank (assuming you had access to sufficient capital to get started, say $100 million or so)? Or,
[insert favorite megabank here] (assuming you had access to sufficient capital to not be immediately insolvent, say $100 billion or so)?
Well unless you are a sociopath as per Hugh and see the key metric of success being how many people report to you and whether or not global political leaders will take your call, I think the answer is pretty bloody obvious.
So what does all this mean? Well, for us it means investing in companies that are positioned to ride this wave (not build a levee against it, hoping it won’t break.) Some – like cohesiveFT are right in the heart of the technology facilitating this new paradigm. Others, like our most recent investments Zoopla and FX Capital Group, are building new business models adapted to the new technological landscape that will allow them to disrupt and extend existing markets. But it also means remembering that you can be right (about the future) but still not come out on top:
One of the most important ideas one can understand from reading Kurzweil is humans propensity to think of the future as a linear extrapolation of the present when very clearly in many domains the appropriate framework is exponential change – the power law. A good way to get better at thinking in power laws is to look in the rear-view mirror from time to time, a great example of this being Bret Swanson’s recent look back to 1992 (at Forbes.com).
Today, an average consumer can buy a terabyte hard drive (1 million megabytes), on which she might store her family photos, videos and other digital documents for as little as $109.99. In 1992, a terabyte drive, if such a thing had existed, would have cost $5 million. The chief digital storage medium at the time was the 3.5-inch floppy disk, which held 1.4 megabytes. When digital photos came along and consumers found the huge square disk could only hold one photo, it was instantly obsolete.
In mid-2008, the four-gigabyte (or 4,096 megabytes) flash memory chip in an iPod Nano cost $25. Late in 2008, four-gigabyte flash cards and USB drives are selling for $14.99. But back in 1992, four gigabytes of flash memory would have cost $500,000. This means a hypothetical iPod Nano circa 1992 would have set back the teenage Nirvana or Boyz II Men fan around $3 million.
Apart from research scientists and a few early adopters of Compuserve and AOL, the Internet essentially didn’t exist in 1992. Monthly Internet traffic was four terabytes. All the data traversing the global net in 1992 totaled 48 terabytes. Today, YouTube alone streams 48 terabytes of data every 21 seconds.
He goes on to worry about the possible damaging side-effects of the current swing towards massive government intervention in the economy:
But innovation is by definition unexpected. We can’t force it or compel it. Certainly not from Washington. The dramatic centralization of money, power, information and influence now under way seriously threatens the entrepreneurial revelations and technological revolutions that drive long-term growth. If we quasi-nationalize the energy, finance, auto and health care markets, and possibly bar dynamic new business models on the Internet, as with possible network neutrality regulation, we will close off many of the most promising paths to needed efficiencies and, more important, new wealth.
I sympathize with his anxiety; while overall I would grudgingly endorse recent government economic interventions (as lesser evils) I would be much more comfortable if the explicitly stated goal was to facilitate an orderly winding down of the many obsolete corporate institutions in order to make way for a new crop of vibrant, innovative, 21st century-adapted companies and sectors. Basically a giant defeasance scheme for the old economy. (There is precedent for this – Charbonnages de France comes to mind…)
Of course this is what Perez had in mind when she spoke about the disconnect between techno-economic and socio-institutional paradigms…
Working to bridge the disconnect between the socio-institutional paradigm and the techno-economic paradigm, which as Carlota Perez so eloquently writes will lead to a golden age for the emerging digital generation: