You start. You struggle against initial inertia to gain velocity. You succeed. You grow. Your success breeds more success. Momentum is now your friend. But the world changes: technology, markets, society… And your hard won momentum keeps hurtling your (now large and profitable) company down the same trajectory. And momentum is now your enemy. Ah, the joys of…inertia.
Microsoftâ€™s huge profits â€” $6.7 billion for the past quarter â€” come almost entirely from Windows and Office programs first developed decades ago. Like G.M. with its trucks and S.U.V.â€™s, Microsoft canâ€™t count on these venerable products to sustain it forever. Perhaps worst of all, Microsoft is no longer considered the cool or cutting-edge place to work. There has been a steady exit of its best and brightest.
What happened? Unlike other companies, Microsoft never developed a true system for innovation. Some of my former colleagues argue that it actually developed a system to thwart innovation. Despite having one of the largest and best corporate laboratories in the world, and the luxury of not one but three chief technology officers, the company routinely manages to frustrate the efforts of its visionary thinkers.
Innovation is a new way of doing something or “new stuff that is made useful”
I’ve of course added my two cents to this discussion, with my thoughts on the subject drawing on my personal experiences (and those of friends and colleagues) of having tried (very hard) to sponsor a pro-active approach to disruptive innovation in a very large company. For those of you not familiar with my hypothesis on the question, I’ll save you the trouble of digging through my blog, it boils down to the complex weave of organizational and personal dynamics that unavoidably emerge when you assemble large groups of people in one organization:
Loss aversion dominates: most people (and sub-groups) fear loss much more than they enjoy gain. This is why the status quo is so closely guarded (at any level of resolution, from the individual through to the overall company.)
Dancing with the one that brought you: at any level of seniority, it is likely that the person in charge got to be that person in charge by being particularly skillful or adept at navigating the existing business and/or organizational model. It’s like the America’s Cup: the winner sets the rules (and has no incentive to adopt “new rules” for which they are probably less well adapted.
In fact, Machievelli eloquently summed it up 500 years ago:
It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system. For the initator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders of those who would gain by the new ones.
These principles form the core of the corporate immune system which considers any disruptive innovation as a threatening virus. So what is a big company to do? Should they accept the inevitability of decline (hopefully slow, profitable and graceful) or can they postpone or avoid this fate?
In some (most?) cases, I would suggest that they accept decline but this does not mean giving up. On the contrary it means aggresively (and even creatively managing the exisiting assets to create as much value as possible as the business model and or product ‘runs off’. This indeed was my prescription for Microsoft when I wrote two years ago that they should break-up the company and re-jig the capital structure, running the Windows/Office businesses for cash (with a debt financed balance sheet) and let a thousand new baby Microsofts bloom. A conventional view would see this as a failure of management and/or ambition. Obviously I think this attitude is ass backward: running the core products for cash while releasing enormous amounts of human and financial capital, which in turn could be used to create hundreds of new companies could – using any metric you like – only be considered a triumphant success. But convention, inertia and ego means that this path to success is rarely if ever taken by the leaders of market giants. Just in the last couple weeks the idea that Google might becoming the ‘next Microsoft’ has gained currency (at least in the valley.) I asked this same question (in May 2008:)
I know it has been asked a million times before but is Google the next Microsoft? (At least from a financial point of viewâ€¦) At the start of 1996, MSFT traded at c. $6/share. Four years later they peaked at almost $60/share. GOOG IPOâ€™ed at c. $85/share in 2004, and just over three years later peaked at over $700/share. Both moves of approximately 10x. Since 2000, MSFT has been more or less range bound at around $30/share, despite continuing to grow itâ€™s top and bottom lines and produce prodigious amounts of cash. Iâ€™m not suggesting history will repeat itself exactly â€“ perhaps we have not yet seen the peak in GOOGâ€™s share price (sell at $850?), and Iâ€™m certain they will continue to grow their top and bottom lines and produce prodigious amounts of cast in the next 5-10 years. Butâ€¦will the stock eventually settle at around $500 â€“ 600/shareâ€¦? Is it conceivable that Google, like Microsoft before it, will become the place where good companies are bought only to disappear?
However, like with human life, I think there are probably a number of recipes to extend the natural corporate life (and the quality of those extra years) and to leave a more valuable legacy when and if the company ultimately disappears. Starting with investing some of their excess capital in the innovation ecosystem that surrounds them. As I have found however, this idea is anathema to most large companies. And with some reason. The history of ‘corporate venturing’ is indeed (as Azeem Ahzar eloquently writes) riddled with failure. My view is that this is because it is exceeding hard to do this in house: the corporate antibodies as described above will almost always do their job and sabotage any in-house venture program. And yet just investing as an LP in an outside venture fund – even if one that happens to focus on markets relevant to the company – is an understandably unsatisfactory and probably equally ineffective alternative.
But we think there is a third way: a focused, strategic innovation program run independently from, but in close collaboration with the company. Maybe we can help your company. You know where to find us: where innovation grows. 😉
This week NEA announced the close of their latest fund at $2.5 billion. That seems like a lot of money for one venture fund, although perhaps if the intention is to focus on (highly capital intensive) clean tech and/or biotech they will be able to deploy this amount effectively. Of course NEA, founded in 1978, has a long and successful track record, with I imagine many long-standing relationships with LPs and excellent ‘brand recognition’ within the universe of potential LPs, and so it is hardly surprising that they are able to raise such large funds. After all – especially with respect to institutional investors – the analog to the ‘nobody-ever-got-fired-for-buying-IBM” paradigm operates in their favor.
A couple years ago, when I first started thinking about what would become Nauiokas Park, a good friend told me that private equity was all about raising capital, not investing it. Of course I understood what he
…private equity is about raising money, not investing it.
was saying, but thought he was using hyperbole to make the point that raising capital was more important than just a means to an end (investing.)
Now I understand that however cynical it may sound, he wasn’t trying to be clever: the way the institutional marketplace for private equity (including venture capital) is structured is all about raising capital and only incidently about investing that capital.
For better or worse, the year-end is typically a time to step back and take stock, to reflect on the year that was and the year to come. And indeed I have been thinking about what we could have done better or differently last year and what we need to focus on in this new year. And the short answer is we need to spend less time thinking about the economic and industrial landscape, developing our investment framework, sourcing potential investments and nurturing our existing investments, and more time soliciting potential investors: pitching our skills, our approach and the opportunity we believe exists to people and institutions that will determine whether or not we can turn our vision into reality. And like any start-up, we are going to have to be hard-headed about how we approach this as the proverbial runway is running out. As they say, there is a fine line between tenacity and obstinacy. I want to try to stay on the right side of that line.
Of course, once the lightbulb goes on it becomes obvious that raising money would be the most important talent of any prospective private investment firm: your LP’s, shareholders, investors are your customers (and not your portfolio companies.) They are they ones that ‘pay the rent’. They consume your service which is to invest their capital. Ah but the better the service, the more customers you have and the more successful you will be, right?
Well not exactly. In investment management generally it is very hard to determine a priori the quality of service one is likely to receive, which is why so often prospective investors – be they retail or institutional – fall back on historical performance to make their judgements. This reliance on historical data is clearly imperfect. However, when considering (many types of) hedge fund or mutual fund, given the typical investment horizon and liquidity profile, a consumer of these services can at least adjust relatively dynamically if they make a mistake. The effect of this is to reduce the psychological barrier to ‘taking a risk’ on any particular investment manager in these asset classes. But given the long time horizons and relative illiquidity in private equity, investors cannot exit a decision easily and so are (even more) inclined to stick with well-established firms and are less open to considering newcomers.
Basically “track record” is the box that needs to be ticked. And is much more important than having a coherent, well-researched and plausible investment thesis. After all, if you have the money, the deals come to you. But a track record in private equity is hard to come by quickly. (And it needs to be the ‘right’ kind: the first time I was told (by a prospective investor) that having been a founding investor in two multi-billion dollar companies didn’t ‘count’ because I wasn’t “a professional investor” when I made the investments was frustrating and somewhat irritating I have to admit.)
A company active in a two-sided market provides it’s services to two distinct constituencies. Often times, they provide those services for free to one side of the market, in order to increase the value of the services they provide to the other side of the market. For example, Visa provides consumers a free payments service (and actually often pays consumers to use their service via loyalty programs, cash back, etc.); in so doing they can charge merchants to use their services which have value to the merchants because of the number of consumers who use their platform. In effect, Visa sells ‘access to consumers’ to merchants. In a different context but the same vein, Google sells access to consumers to advertisers.
Successful private equity and venture capital firms “sell” access to dealflow to their investors and limited partners. It is a two-sided market. And so it is natural that network effects apply and rational for investors to be pre-disposed to the biggest, most established players. It is reasonable to think that NEA (and KPCB, Index, etc.) or Blackstone (and KKR, Carlyle, etc.) will see a high proportion of the best deals. So far, so true. But unlike electronic payments or algorithmic online advertising, investing (in private companies) does not scale and so unlike these markets, the law of diminishing returns kicks in much, much earlier. The industry (well, much of it) admits as much: I suspect if you offered the GPs of NEA a $10 billion fund, they would probably demur. Indeed I suspect if you offered USV a $500mn fund, they would probably turn it down. The key point is that for any given private investment strategy (sector, stage, etc.) there is clearly a maximum optimal fund size. For a company like Visa or Google, this is not the case – more customers, more merchants, more searches, more advertisers – it’s all good.
Jeff Bussgang recently estimated that the (US?) population of active VC partners was approximately 1000. I don’t know how many mutual and hedge fund managers there are but I suspect it is at least an order of magnitude higher than this. This seems intuitively wrong: investing in a private company is more work and there are more of them. You have a thousand investors looking at a universe of tens of thousands (or more) of investable private companies and tens of thousands of investors looking at investing in a universe of thousands of public companies…
Paul Kedrosky (and others) have written extensively and intelligently on how the venture capital industry needs to shrink. How too much money, chasing too few opportunities has destroyed returns. The logic is compelling. However I would posit that the problem is not too much money per se, but too much money with too few and homogeneous investors.
Let’s look at these two constraints sequentially (although they are co-dependent to a large extent.) If you double the number of GPs but provide ten times more investment capital, on average the valuations of the investments they make will go up five times (thus significantly compromising their future returns.) Ah but this logic assumes a closed system – ie that both the number and types of investments are held constant, and so increasing the ‘money supply’ drives inflation (and lower real returns.)
And we uncover the Achilles Heel of the (otherwise extremely successful) ‘Silicon Valley’ model: the relative homogeneity of the environment leads inevitably to a collective narrowing of the universe of potential investments that is considered and amongst these, an additional narrowing in the way they are evaluated and considered. ie Everyone sees the same deals and runs the same slide rule over them. And so more capital simply means valuation inflation and ultimately, lower returns.
But what if we were able to disrupt this state of affairs? Having spent the past two years intensively researching the markets we are interested in, I simply don’t accept that the ‘problem with venture capital’ is a bounded set of investment opportunities. I’m sure there is some limit to the number of good entrepreneurs, viable business models and attractive market opportunities but we are nowhere close to reaching it. In fact, it is so far away we can’t even see it yet.
No, the problem is a failure of market design. (The irony being of course if this market design failure were in any other industry, venture capitalists would be aggressively investing in companies and business models designed to correct and take advantage of this failure.) The problem simply stated is too small a number of too many similar venture capital and private equity investors. The solution is more, and more diversity. The question is how?
I’m sure you won’t be surprised to hear that I have a few ideas on the subject, and for my first (and only) New Year’s resolution, I will endeavor to articulate these in a multi-part series I will call ‘Saving Private Equity’. Some earlier thoughts on the subject can be found here.
The more cynical amongst you might accuse me of simply ‘talking my book.’ Perhaps. Probably. A more flattering way to look at it is that I am living my convictions. And the lesson I’ve learned is that we need to focus almost exclusively on fund raising for now even if that means disappointing some of our portfolio companies or missing out on a great investment opportunity in the short term. It’s not fun or particularly interesting but like almost any other startup, without capital the rest is just theory. Time to stop thinking and start pitching!
I thought I’d play a little markets jeopardy with the headline to this post. The question of course is: “what would happen if Google stopped mucking around and just came out and said it?” Said they were going to take their massive dataset, brilliant algorithms and (hire) all the smartest people in all the lands and offer a free service to “do anything anyone anywhere might conceivably want to do.” That should be enough to cast a pall over even the most profitable or promising companies. Sell everything (else) and buy Google, right?
Many of you are of course thinking no, not right: the premise is far-fetched (not to say ridiculous) and even if you accept it in the spirit of the thought experiment it so obviously is, the conclusion – that they take out every other competitor at the kneecaps – is not a given by any stretch of the imagination. And yet, when Google announced that they were going to launch a free property listing plug-in to enhance their UK maps product, the market reacted pretty much as if Google were indeed Merlin the Magician and just by waving it’s googly wand it could take over any market at will just by unleashing its fierce intellect and sizzling technology on the hapless incumbents. In this particular instance, Rightmove‘s (the leading UK property portal) shares collapsed on the news trading down 10% on the day and c. 15% in all since the story broke. Now to be fair, having traded as low as 156p at the start of the year, RMV shares have had a pretty solid 2009, hitting a high of just over 600p and trading around 550p before the Google ‘news’ hit the market. And since investing (and especially trading) is not about picking the prettiest asset but picking the asset you think most others will find prettiest, I don’t blame any fund manager for selling first and asking questions later. And I have much sympathy for those that think that Rightmove’s market leadership is vulnerable in the medium term; only I don’t harbor much fear that this threat will come from Mountainview. The competitor that Rightmove’s shareholders should be keeping a close eye on isn’t Google, but Zoopla of course. (Reminder: we are investors in Zoopla.) Ah, but Zoopla has a silly name, it can’t be a real threat. Google however…
And it’s not just UK property where I think the mainstream markets and pundits breathlessly get it wrong about Google. In area after area they have proven not to be a very successful or threatening competitor and in other areas their entry has often been a boon for specialist competitors in the segment due to the legitimizing power Google brings to the table. They are able to (implicitly) validate new business models in ways a smaller, more specialist start-up could never dream of, and yet this market validation very often plays right into the hands of folks who, well, know what the hell they are doing.
Don’t believe me? Let’s take just a couple areas where – if you believe the logic in the argument used to justify Rightmove‘s downtrade – Google should be causing wholesale panic and disruption:
Financial Information: maybe I’m wrong but I don’t exactly see Thomson Reuters or Bloomberg shaking in their boots, and yet here is a sector that is tailor made for Google’s engineering, distribution and technology assets, and one where they have had years to refine the value proposition; and yet Google Finance remains essentially a working prototype of a back-of-the-napkin sketch of what a Google financial information portal could become. Umair challenged CEO Schmidt to take up this challenge a couple months ago but I’m not convinced it would be as easy as it looks.
News aggregators: Google News is all we need right? (Perhaps supplemented with Google Reader…) There’s no reason for sites like Digg or Daylife or the Huffington Post to exist. I mean what are these guys thinking: some of them even started after Google News went into public beta. Crazy. Except they actually work, they have customers willing to use them despite Google News existing. But really, how long can this last?
Advertising: I must be joking now. After all advertising is the one market Google owns; the market that gave them their billions that allowed them to hire all the smart (non-evil) people and enter and take any other market at will. Right? Well if you think so, have a look at this recent post from Paul Kedrosky. It’s why vertical search and specialist sites exist. It’s why you (usually) go to Amazon.com if you know you are searching for a book, and not necessarily via Google.
And I could go on. But the point of this post is not to say that Google are useless, yesterday’s game, past their prime. In fact my best Google-fanboy guess would be that they are far from the point of diminishing returns and structural foolishness. My point is rather that they are not – or at least not universally – the ‘destroyers of all economic worlds’; that as they grow to become a company of thousands of employees in dozens of locations they will inevitably have to deal with some of the structural pathologies that this involves, including rising mediocracy and products looking more like camels than horses. Oh yeah and evil too. Yes they are a fierce competitor and certainly there is some risk that they could destroy your business model and take your business with it. But this is far from certain. They are human. They make mistakes. They execute poorly. They don’t always (or even often) win. And best of all, once you’ve proven that you can beat them, they just might buy your company.
When speaking to start-up investors about their track record most of the time the conversation revolves entirely around the investments they have made in the past. The winners, the losers and why. More rarely do people talk about the investments they didn’t make. This is understandable for a number of reasons, one of the most important being there is usually no obvious record to fall back on and there is no way to short bad start-ups. So one relies on the investor keeping track of the investment opportunities they looked at and passed on, and further keeping tabs on how these companies did. Not many investors do this – at least not publicly, one (great) exception being Bessemer who with great humor points out their heroic misses – opportunities they declined that turned out to be home runs – in what they term their ‘anti-portfolio.’ But it would also be interesting to see a record of the deals an investor didn’t do that failed. But this is even harder (if one is to avoid noise) – even a small, relatively new investor like us sees hundreds of proposals and even this depends on what one considers as having ‘seen’. Is it an email in passing saying XYZ is raising money, would you like to look? Is it spending a few hours going through an executive summary / pitch book / website finding out more? And it is also important (if this information is to be meaningful) to qualify why the investment wasn’t made. Is it because it didn’t fit a certain sectoral or geographic investment criterea? ie Good prospect but not for us. Is it because of a conflict with an existing portfolio company? ie Good idea but we like these guys better or they were first in the door and now we’re stuck. Is it because of apathy or lack of resources (time, money)? ie Good idea but just can’t focus and isn’t top of the list? Or is it because, well it’s just not a very good opportunity? ie Mediocre or downright bad idea.
In order to have the discussion, an investor needs to keep a record of all of this. How many do? We are trying to – or at least have plans to do so – but I’ll admit it’s harder than it sounds. It’s not something that generally gets anywhere near the top of a priority list, when the days are filled with making and managing the investments you do make. (And when you are trying to raise capital and/or keep existing investors happy or informed if you are a professional.) Don’t get me wrong, it’s not rocket science and I think it probably comes down to spending a bit of time and energy upfront to put a workflow in place to be able to capture and manage this information efficiently. And to be truly useful, this record needs to be ‘timestamped’ and auditable: we all suffer from hindsight bias. ie We definitely would have invested in Google given the chance, and obviously we passed on Webvan….
OK, fair enough, but why is this important? It’s because I think knowing which investments (and why) an investor didn’t make, and comparing these to the ones they did make, is a much better way to analyze their skills and approach. I think this is true in any asset class, only in most (all?) others it is practically impossible to do the kind of analysis I describe above if they are a long only investor (private equity perhaps being the exception.) Of course for long/short hedge funds this type of thinking is embedded in their performance.
Nauiokas Park is too new for this kind of analysis to be relevant but I was thinking about it in the context of my prior angel investing experience. I didn’t keep a complete record but there are a few deals that come to mind, two of which I was fortunate enough to blog about before the outcome was known, one after (discount appropriately) and so are public record. Hopefully you’ll trust me on the other two.
The first example is a company called SpiralFrog which is now the poster child for the second wave of bad ‘internet’ investments. I was approached in early 2006, through my Wall Street/City network to look at this, as people new I was interested/knowledgeable about “tech” start-ups and had had some success as an angel investor. When I saw the prospectus (and yes it was a prospectus) and looked at who else was involved as investors, I was immediately suspicious: this wasn’t a nimble start-up, it was packaged like a Wall Street deal – the scale and approach were way too heavy. Looking into the plan and the projected financials it just got worse. I passed and when they launched to considerable fanfare, I wrote this in September 2006 and followed up with this a year later.
The third is Powerset. What attracted me was the great team they pulled together and my conviction that semantic technologies were going to become increasingly important and valuable. I didn’t directly have the opportunity to invest but was one degree away and think I could have if I had agressively pursued.
Zopa is the fourth. I was approached by a friend when they were raising their initial outside round. I loved the idea but didn’t think it could get traction – at least not enough, fast enough to disrupt the market it was targeting, especially given how free and easy it was to get credit (something I new about…) I think I was right then. But I still love the concept and would be open to taking a closer look again in the future should the opportunity present itself. My focus would again be on understanding whether or not they can scale and whether or not the business model is optimal.
The final example is Skype. I didn’t directly have the chance to invest, but again at one degree of separation I could have tried. That said, I’m pretty sure had I been given the opportunity I would have passed: I didn’t see (until everyone had figured it out) how it could be a good investment despite loving the product. I’ve changed my mind and if I were running a big private equity fund, I’d definitely be trying to run my slide rule over them to see if I could make eBay a better offer than the public market.
Good investing is about managing your failures, your losing trades. The best way I know of doing this – whatever the asset class – is working hard to figure out what could go wrong before putting on the trade. (I guess it’s the bond trader in me…) There is always something that can go wrong. If it is big or likely enough you should pass. If not, by having a clear understanding and focus on these risk factors, you give yourself the chance to adapt and/or mitigate before its too late. This is especially true in venture investing as many risk factors in these companies tend to be endogenous; obviously if your basic premise turns out to be wrong that’s tough (but not impossible) to mitigate and sometimes it doesn’t work out. But by actively knowing what is going wrong and why at least you can avoid throwing good money after bad while also knowing when the odds are in your favor and you should double down.
GigaOm writes today on the growing divide between the leading and lagging companies on the web:
The web is entering a period of intense creativity. Companies like Google and Apple are positioned to ride, if not generate, the momentum driving that creativity. The laggards are at risk of being stuck in perpetual catch-up mode. If that happens, the bluebirds will have flown for good â€” and the landscape of Internet companies will soon look dramatically different.
And yet this is nothing compared to the ‘creativity gulf’ that is emerging between leaders and laggards in other sectors of the economy, including in banking, insurance and finance generally. Only here, the leaders are still small and just starting to emerge. Further, GigaOm points out that even once this creativity divide is created and continues to grow, the deleterious effects of being on the wrong side of this divide can take many years to really start to bite:
Other Internet names seem mired even further in the past. Yahooâ€™s interest in a deal with Microsoft for â€œboatloads of moneyâ€ is a headline that belongs in 2008. eBay keeps trying to recapture the magic it had five years ago. And MySpace is still trying to renew its lifeline to Google.
None of these laggards will see a quick end. Theyâ€™ll be able to endure for years serving the people who havenâ€™t taken to Facebook or maybe tried and then abandoned Twitter, people who are comfortable with a simpler, more familiar experience on the web. But itâ€™s an ever-shrinking crowd. A decade ago, AOL chose a complacent path by maintaining its gated online community, shunning the migration of content and services to the web itself. And look where AOL is today.
Substitute ‘financial’ for ‘internet’ in the analysis above and the parallels are obvious. The big difference of course is that the analogs for Google, Facebook, Apple and Twitter in finance are not yet obvious and indeed probably don’t yet exist (or are at the very early stages of their development.) However, the environment supporting the emergence of new digital leaders in finance has never been more fertile. This is one of the main reasons I created Nauiokas Park with Amy: in order to discover, support and develop the next generation of leading companies delivering financial services and products from the right side of the digital divide. The next several years promise to be exceptional vintages in our opinion.
Well after 6 days essentially without email or web access, I’m back online. Â From the giant number of unread emails in my inbox, Â I’m sure one or two of you are wondering why the radio silence. Â Apologies. Now you know.
I must admit, although I wouldn’t say it was surprising per se, this episode did open my eyes on howÂ indispensibleÂ (only 15 odd years after it’s popularization) fast, unfettered, continuous access to the web is for the way I (and many others I’m sure) work. Â
Had I known that I would not have access to the web for 6 days, I obviously would have organized my time differently (and I wouldn’t have spent the better part of three days in a futile bid to fix it) – there are still things that can be done offline, but even for many of these – reading, research, writing – my default mode has evolved to weave in annotating, footnoting, elaborating, complementing these activities with online tools (the most common, but by no means exclusive being Google, social bookmarking, wikis, social networks…) Â
I guess if there is a silver lining to this disaster (I feel like I’ve fallen a month behind in my ‘to do’ list…), a ‘learning’ to take away, it is that the productivity enhancing power of the ubiquitous web (at least or especially for ‘knowledge workers’) is truly incredible. Â And I’m not sure we really appreciate it. Â It’s like aging: Â if I look in the mirror, I don’t think I look much different than I did 15 years ago; Â until I look at a photo of myself from 15 years ago! Â
So here’s a challenge. Â Take a moment to reflect on how you live and work today. Â Now try to transpose this to 1994: Â could you do what you do today? Â more slowly? Â at all? Â And if you have the luxury and inclination to do so, Â try switching off the internet/email and your mobile phone for a week (landlines and fax machines allowed.) Â If you do, what you might find will surely excite – because you will appreciate how much more productive you now are – and frighten you – because you will realize how dependent you are – in equal measure. Â
If banks are systemically important to our economic and social system, then telecommunications infrastructure is vital. Â I wonder if our politicians understand this.Â
There is strong demand for technologies that do the same for less money, rather than more for the same price.
The focus of the article is on computing and software – obvious and direct beneficiaries of Moore’s Law:
The â€œgood enoughâ€ approach also works with software. Supplying â€œsoftware as a serviceâ€, via the web, as done by Salesforce.com, NetSuite and Google, among others, usually means sacrificing the bells and whistles that are offered by conventional software. Google Docs lacks the fancy features of Microsoft Word, for example. But hardly anyone uses all those features anyway, and Google Docs is free. Once again, many users are happy to eschew higher performance in order to save money.
But this is one of the key foundation pillars we look for in the business models of companies we look at in the financial services space as well; ie can you give the same (or better) service at a paradigm-shifting price point. A (successful) mainstream example of this would be ING Direct. However – even in a recession – price is rarely the only, sometimes not even the main driver in a purchase decision. This is especially true when it comes to (many) financial services; often the key driver is trust. And “trust” provided a significant barrier to entry, protecting incumbents irrespective of how anachronistic their business model may have been. How ironic then that it would seem that most large financial institutions played loose and fast with what ultimately was their one true differentiating asset, and largely trashed the trust they had built up (often over decades or even centuries) potentially opening the door for much better adapted new competitors to compete in their markets for their customers.
Last week, Eric Schmidt – the CEO of Google – gave a talk on the future of technology at the offices of Bloomberg in New York. Â For many readers of this blog, much (most) of what he says is old hat, and indeed I’ve been evangelizing on many of these same points for many years. Â But of course I’m me, and Eric is well…CEO of Google. Â So I suspect that if you are trying to convince your management, your colleagues, your peers of some of these points of view, citing Eric Schmidt will be more powerful than a reference to the Park Paradigm!
For those of you who can’t spare the time to watch this, here are a few of my favorite quotes:
Everyone has a thirst for information.
(The) web is about speed and access and quick manipulation.
Set no limits to your platform strategy. Take the biggest risk you can to get the most reach for every single idea you have.
The notion of restricting access to information doesn’t work anymore.
Better decisions are made by teams that see all the information.
The internet is shifting power in a really really fundamental way: it’s shifting from institutions to individuals. And it’s not going away.
I have to admit it’s always exciting to see validation points for strongly held convictions. As you know I firmly believe that the confluence of technology and emerging – or in the new jargon more precisely ‘frontier’ – markets will generate significant and exciting new innovations and opportunities, and I remain convinced that fundamentally new and robust business models will emerge as a result. The fact that this might improve the human condition in some of the world’s heretofore least fortunate corners is of course icing on the proverbial cake. And so I was happy to read that Google, for example seems to share (at least some of my) sentiments on this:
We believe that the Internet is a transformational force for societies. And it’s making us all much more powerful as individuals, regardless of whether one is in New York, Stockholm, Bujumbura, Ouagadougou, or Cape Town. Regardless of background, education, social status, gender, age or economic situation, online access to information enables people to create opportunities for themselves. Seeing a student in a cybercafe doing his research using a search engine, a businessman chatting with a colleague abroad with instant messaging, or a young woman posting her photos to a social networking site – it’s clear the extent to which academic, business and social life is fundamentally changing all over Africa.”
At the same time, a couple of days ago, a very interesting article in the NYTimes also leant support to my thesis that the infrastructural constraints and challenging business environment of sub-Saharan Africa would engender innovative and resourceful approaches and a unique approach to harvesting the potential of information and communications technologies:
Still, Nairobi is home to a digital brew that invites optimism about its chances for creating unusual innovations. The city has relatively few wired phone lines or networked personal computers, so mobile phones are the essential digital tool. Four times as many people have them as have bank accounts. Text messages are far more popular than e-mail. Safaricom, the dominant mobile provider, offers a service called M-pesa that lets customers send money with text messages. Nokia sells brand-new phones here for as little as $33.
While engineers in the United States lavish attention on expensive phones that boast laptoplike features, in Kenya there are 10 million low-end phones. Millions more are used elsewhere in Africa. Enhancements to such basic phones can be experimented with cheaply in Nairobi, and because designers are weaned on narrow bandwidth, they are comfortable writing compact programs suited to puny devices.
â€œApplications are heavy in America,â€ says Michael Wakahe, a Nairobi code writer. â€œHere we have to make them light,â€ because simpler hardware requires smaller programs. These can have advantages in wireless systems…
…The prospect of marrying low-end mobile phones with the Internet is earning Nairobi notice from outsiders, who wonder whether the city might emerge as a test-bed for tomorrowâ€™s technologies. One intriguing possibility is broadcasting local television programs on mobile phones.
In Nairobiâ€™s highest-profile validation, Google opened a development office here last September. â€œAfrica is a huge long-term market for us,â€ Eric E. Schmidt, Googleâ€™s chief executive, said by e-mail. â€œWe have to start by helping people get online, and the creativity of the people will take care of the rest.â€
One of the most obvious – yet no less powerful or potentially transformational for it – themes is the combination of mobile communications, internet and geo-location technologies to disseminate information and increase connectedness from the bottom up. This emergent collective intelligence is all the more remarkable, given the typical history of entrenched ‘top-down’ politico-economic structures in place in these countries. Much of the early innovation is centered around information gathering and crisis management with tools like Ushahidi (quickly developed in response to the post-election political unrest in Kenya earlier this year) and FrontlineSMS being quickly adopted by citizens and NGOs and having an immediate positive impact on the ground. It doesn’t take much imagination to start dreaming up additional – more commercial – potential applications for these kinds of platforms. Ken Banks, the man behind FrontlineSMS describes his view as developing the ‘long-tail’ of mobile applications as the right approach for not-for-profit “social mobile”:
low-end, simple, appropriate mobile technology solutions which are easy to obtain, require as little technical expertise as possible, and are easy to copy and replicate. From my own experiences the number of NGOs present in this space is by far the greatest, making it the area to focus on if we want to create the highest amount of mobile-enabled social change. Add up all the value here, and it easily outweighs the rest along the higher (more lucrative) parts of the tail.
I would suggest that this approach might work equally well to enable commercial, for-profit, applications as well. Indeed on the other side of the continent you find Mark Davies esoko/TradeNet: Africa’s first mobile2mobile peer2peer trading platform and market information network:
…designed to provide the very latest agricultural market information to stakeholders. Accessed via SMS, fax, web, PDAs, farmers and traders can get daily price information, download video/audio files, access research documents, post buy/sell offers to the community, and contact other market participants. The concept is to make african markets more transparent and efficient, improve intra-regional trading, and provide stakeholders with enough recent and accurate information to make better decisions on bringing products to market and at what price.
I’m sure it won’t be easy or without enormous challenges but the opportunity is vast. Africa: it just might be the new new new thing.