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Mobile is clearly a big disruptive force in technology, but what markets will it disrupt and how?
Although most of us already have smartphones (in the West), a lot of what we do on those smartphones, such as surfing and email, is like talking heads on early TV. What are the mobile-native use cases that will disrupt major markets?
An early mobile-native use case made the headlines when Facebook acquired WhatsApp; this was mobile messaging replacing a lot of emails and browser based social networking. Facebook has spent $19bn to declare this “game over”. They may be right (I don’t think they are, but that’s another story), but entrepreneurs certainly want to go after markets where they don’t face a tough, agile behemoth like Facebook.
Fortunately there are still plenty of other mobile opportunities where you don’t need to deal with Facebook as a competitor. One of these “blue ocean” opportunities is “enabling enterprise rainmakers”. Outside Sales is one example of enterprise rainmakers; they are critical to making the transition from brilliant product to great company. These folks tend to not follow rigid processes; they innovate every day, using Big Data and Social Media to figure out what to do next. The good ones spend most of their time out of the office, so they live on their mobile devices.
One of the most interesting companies in this space is Clari. They were still in stealth mode when I was reviewing Salestech innovators here and here on ReadWrite. Since that time they raised a $20m Series B and are clearly on a roll and the market they are in is hot. Within days of Clari’s funding announcement was the news that Salesforce had snapped up RelateIQ and the CEO of Clari was writing a blog post entitled Did RelateIQ Sell to Salesforce Too Soon?
For RelateIQ, the answer was no, their timing was good. I am sure they could see Clari coming in their rearview mirror. In Enterprise-land, the second best technology with the best distribution often wins and in the CRM market, Salesforce has distribution nailed.
My assumption when I first saw Clari was that CRM was simply their market entry strategy to a much broader market of enterprise rainmakers who make a big difference mainly because they spend more time away from their desk than at their desk.
My work is teaching sales organizations the forgotten art of thought-leadership selling, which is another way of saying teaching how to be an enterprise rainmaker. This is an outside sales world. This world is not interesting to CRM vendors because the unit numbers are tiny. One rainmaker may transform the fortunes of a start-up but how many rainmakers are there and does it matter what CRM system they use?
The unit numbers today are at the intersection of Marketing Automation and Inside Sales, which is growing according to this expert on inside sales writing in Forbes:
“Over the past three years, inside sales grew at a fifteen times higher rate (7.5% versus .5% annually) over outside sales, to the tune of 800,000 new jobs.”
Inside Sales is all about big scalable processes, the world of CRM, Marketing Automation and Call Centers. If you price per seat (as most CRM vendors do), Inside Sales is much more interesting than Outside Sales.
Inside Sales is not really a mobile play; these folks work in the office at big screens.
However Outside Sales are only one example of Enterprise Rainmaker. Think of M&A bankers and VCs. Or think of the senior executives guiding the company; the best ones are out talking to employees, customers, partners and investors.
It might be better to call all these folks “difference-makers”. They are the ones who make a difference to your business. It is the rainmakers who do their work outside the office who will drive this. They can choose their own tools because they are rainmakers. They choose mobile tools because they do most of their work outside their office.
These rainmakers do not work alone. This is where Mobile intersects with Big Data/Data Science and becomes an enterprise story. The rainmakers are out there interacting with people in the market, but they are in touch with support teams “back at base”. In the case of outside sales people, they maybe working with a sales manager who can provide “just in time coaching” because the manager can see precisely where they are in a sales cycle and when they are available to talk after a meeting. Or they may work with sales operations folks, who rustle up the precise support they need at that point in time (such as collateral, data, demo, contact).
Clari has this nailed for sales teams. However I want to explore the broader market opportunity beyond sales teams.
The concept of a point-person with a back-up team is like a surgeon who is supported by nurses, anesthetists and others. The same is true for M&A bankers and VCs, who have analysts crunching data and assistants making contact requests happen.
These rainmakers and their backup teams are the key enterprise “resource”, so it is possible to think of these systems as the next generation of ERP.
The concept of enterprise rainmaker goes much further than today’s well-paid enterprise professionals. This is where the market intersects with other disruptions such as Internet of Things and Quantified Self.
This is more speculative. The actual implementations are not yet visible (I would love to hear from entrepreneurs working in this area).
In Healthcare, think of the market of personal trainers, nurses, caregivers, emergency response workers and physiotherapists who come to your home. Let’s call them health-makers. The market is strong due to the demographics of ageing populations.
The health-makers back-up team is critical. The health-makers can assess the patient using good old-fashioned analog tools known as the four senses (eyes, ears, smell, touch). This old-fashioned “data” can be augmented by data from devices attached to the patient (“quantified self”) and analyzed on the spot by experts across the globe; The back-up team has access to Big Data to compare this patient with millions of similar patients. This will be real time healthcare in action, not waiting weeks for results and another appointment. This will happen first in markets where the regulation allows skilled practitioners such as nurses to perform tasks that today can only be done by doctors (who are too important to come to you unless you are really rich).
The Health-Maker opportunity is much bigger on a user unit basis than Enterprise Rainmakers. It may also disrupt one of the biggest markets out there – Healthcare. However there may be an even bigger market. We all need help getting our bodies fixed (aka Healthcare) but what about our homes and all the stuff in our homes? As our homes become more wired and digitized with sensors sending data, the person who comes to fix something may come equipped with a smartphone linked back to Big Data systems – and may come before you have even noticed the problem. This will create a whole new generation of services and, now that service is the new marketing, create significant new revenues for many consumer products companies.
These front line people will become the new rainmakers. They are the brand experience as far as consumers are concerned. How well empowered they are by data will be key to enterprise competitiveness in future.
Enabling these new kinds of services will not need great mobile user experiences that are linked to cloud-based data systems and applications. This will need a new generation of application platforms that deliver context aware data just in time to the front line “rainmaker”.
The Content Quality Dilemma in the Media Business July 28, 2014Posted by bernardlunn in Uncategorized.
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Software is eating the world….one bite at the time. Are you Softzilla or are you Softzilla’s lunch?
The first bite was the media business. I was there when it happened. It hurt.
Softzilla (my shorthand for software, digitization, mobile, big data, etc etc) first bit into the print business. At the time I was running a startup that saw this coming and was helping traditional media firms to restructure, take out costs and become “online-first” firms.
In the print to online transformation, the mantra was that “$1 of print revenue becomes 10c of online revenue.” So, yes, you had to make the transformation, staying in print only was certain death, but you had to cut costs (translation: fire lots of people) to go online. Everybody had read Innovator’s Dilemma; it was obvious what had to be done. Online, with tose 10c of revenue, you could not afford lots of editors and people doing fact checking and research. So you cut into the muscle and fired the people who ensured that content was high quality, those well-paid journalists and editors, fact checkers etc. The content quality then, predictably, suffered and the audience clicked away.
Cut too slowly and you died fast. Cut too fast and you died slowly. This is what I call the Content Quality Dilemma.
The next startup was smaller but better known; it was ReadWriteWeb (now ReadWrite) where I was COO in 2009.
There was no Innovator’s Dilemma in ReadWrite. This was a pure-play online venture with low overheads (a global team all working remotely). However the dilemma was the same – how do you make enough money to pay for quality content?
In ReadWrite my COO job translated to a simple mission – sell enough advertising so that writers could get paid. That was where I saw the Content Quality Dilemma up close and personal.
The problem is very simple. It is that giant software only media firms like Google and Facebook set the rates for online advertising and with their scale and 100% automation (no messy journalists, editors and fact checkers who want to get paid) they can make huge profits on very low advertising rates. Those ad rates are too low to pay for lots of good journalists, editors and fact checkers.
In the tech blogging space it is easy to run this as an experiment. Take 15 days on a post with serious investigative journalism and analysis. Then take 15 minutes to dash off a post about a celebrity and use some pop-tech angle to make it tech relevant (the story is that the celebrity did something on Twitter or Facebook). The return on investment on that 15-minute post was stratospheric and the quality post was a financial disaster. Rupert Murdoch, when interviewed for this article, remarked, “what’s new buddy?”
This is now well understood. We are at the bottom of the Slough of Despond in the Media Business. Its not just the old pre web firms, its also the early web firms; look at the share price and derision hurled at AOL and Yahoo. They are both run by super-smart, driven CEOs who had big success at Google, but they are “rolling a rock up a hill”.
Most of the entrepreneurs who got early into the blogging game already exited, took the cash and left the owners figuring out how to climb up to the Plateau of Productivity – which some of them will do. There is a demand for Quality Content. The only job is figuring out how to get paid properly for Quality Content.
If you work as a journalist or editor, you have probably seen that Content Marketing is where the jobs are headed. In other words, you work directly for the advertisers, cutting out those intermediaries (aka Media firms) with their old fashioned rules about Church vs State (aka Editorial vs Advertising). However what about the folks who are running Media Firms? How do they create both quality content and quality profits?
I decided to look at who is making quality content as well as quality profits. In those stories might be clues to show how to climb up that tough slope to the Plateau of Productivity (to see which of these are replicable and scalable).
- Wired. This is one for irony aficionados, a glossy and profitable print magazine for the folks helping Softzilla to eat the world. My takeaway, we all need a pixel break, but I don’t expect many media firms to be able to emulate this. It has to be really, really good (and that costs money) and consumers only want one in their chosen domain. Not easily replicable, could translate to a few other domains.
- AVC. This is Fred Wilson’s blog (he is a top tier VC). The content is daily and it is great. The takeaway, first make sure you are a good host to your community and then find a way other than advertising to make money. Not easily replicable.
- Techmeme. Gabe Rivera bootstrapped a profitable online media business by first using Softzilla to find content and then hiring some old fashioned humans to help filter out the junk and float the good stuff to the top. I assume he tweaks his code to learn from what the humans do. This 95% code and 5% human model might be a mainstream model. Possibly replicab
- Bloggers Selling Expertise. Why do smart people blog/write for free? It is the same reason that smart developers contribute to open source – their fee rate and utilization goes up because customers can see how smart they are. The economics of blogging for attention are simple. This is powering lots of tiny micro-multinationals in lots of niche markets. Replicable but not scalable.
- Financial Time and Wall Street Journal with Paywalls. It works for them because “time is money” for their readers. I don’t see this as a mainstream strategy, because only the best of the best can get away with a paywall. Not easily replicable.
- Vice Media. They started as an underground low cost fanzine type of operation and have over time built a valuable business that had Rupert Murdoch swinging by with his checkbook. The model seems to be lots of stringers out where the news is being made plus a few editors back at base. It’s an old model re-enabled by mobile technology (the stringer is no longer waiting in line for the telex machine in the lobby of the hotel). Possibly replicable, but needs skill, style and technology.
There are a few experiments with peer rating rather than popular rating. Popular rating is simple Page Views, the currency of the web that is controlled by Google and Facebook, it’s a game you cannot win. The two experiments with peer rating are Reddit and Hacker News. It is too early to see how these experiments turn out because neither has yet tried seriously to monetize their audience. If they adopt a mass-market page view strategy, their audience will click away and we will be writing Myspace like epitaphs.
However if they can find a way to charge based on influence rather than views they will show the way to lots of other media firms. This could be the yellow brick road for media. Recall that tech blog experiment:
“Take 15 days on a post with serious investigative journalism and analysis. Then take 15 minutes to dash off a post about a celebrity and use some pop-tech angle to make it tech relevant (they did something on Twitter or Facebook). The return on investment on that 15 minute post was stratospheric and the quality post was a financial disaster.”
Let’s say the 15 minute post got 100,000 page views and the 15 day post got 100 views. Case closed? No, not if 10 of those 100 views were partners in VC funds controlling $10 billion in aggregate funds and another 10 were CXO level in enterprises controlling $10 billion in aggregate budgets. How on earth do you monetize that without seriously invading privacy? If you have that one figured out, please contact me so that we can become disgustingly rich.
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I promise to keep this brief, it’s just an out take from another post I am working on. I have stopped seeing pitches for Big Data. They are now pitches for Data Science. Ho, hum, what’s the game? I think it is simply the realization that the “Big Data” roller-coaster is careening down towards the Slough of Despond. So you want to re-name it.
I think Big Data is an enabler for Mobile, which is a real disruptive wave of change. Unless Big Data is delivered within context to what consumers need right now, it is just another “digital land-fill”. This will need major innovation at the mobile UX layer and at the back end computer science layer.
How Telecom carriers are fighting the “dumb pipes” narrative with their own OTT services June 6, 2014Posted by bernardlunn in Telco.
Tags: dumb pipes, orange, ott, swisscom, telco, tmobile, whatsapp
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Facebook’s $19 billion acquisition of WhatsApp put the spotlight on the competition that OTT (Over The Top) ventures pose to Telecom carriers. Consumers love WhatsApp pricing at $1 a year and have no love for Goliath Telecom carriers, so we tend to cheer for upstart David vs Telecom Goliath. However, some Telecom operators have been quietly creating their own OTT services and, since WhatsApp is now owned by Facebook and Skype is owned by Microsoft, the story is really now Goliath vs Goliath.
ReadWrite has already covered 5 alternative messaging services to WhatsApp from start-ups (Kik Telegram, Tango, Line and Wickr).
Each of these Telecom operators has its own unique story to tell and a shot at winning over a lot of consumers. They need to do this. Whatsapp with its 200M base has moved more messages in the last 12 months than all the operators in both US and China combined. Battle has been joined. The Telecom carriers cannot afford to be “dumb pipes” that are used by other companies that reap the value. This has been going on for a while; the Facebook WhatsApp deal just put the issue on the front page and top of the agenda for Telecoms carriers.
Two major European carriers have adopted the same fundamental strategy. France Telecom created the Orange brand to go after global markets and Deutsche Telecom created T- Mobile to do the same thing. Both have an OTT play.
The Orange OTT service is called Libon. It has a free ad-supported and a Premium paid service. That was conventional Freemium wisdom in SaaS, but may not work so well in consumer communications services. Ads interrupting us when we are communicating are unpopular and at $1 per year who would not choose the paid option? The WhatsApp $1 per year price with no ads or stickers or gimmicks may be the communications equivalent of the Google price or China price, too low to undercut.
What is clever about Libon is that in their recently released 3.0 version, you don’t need to download an app to use it. There is only one thing worse than high costs for roaming, texting and international calls and that is not being able to communicate with people outside your walled garden. The telephone system,for all it’s faults, connects anybody via their unique number. Multiple apps that only communicate with each other would be a seriously retrograde step. Facebook is betting that this won’t matter because all 7 billion folks on this planet will use WhatsApp. You cannot fault Mr. Zuckerberg for lack of ambition! With Libon you can message somebody using their phone number. They get an SMS message that links them automatically to Libon’s cloud based service, without any need to register. It’s disruptive because it avoids the friction created by having to download an app. The app game tends to winner takes all, and the Telecom carriers cannot win that.
Deutsche Telekom may be the incumbent Goliath in Germany, but in America T-Mobile is seen as David challenging the AT&T and Verizon Goliaths on their home turf. Back in 2009 I covered how T-Mobile was challenging the incumbents using their WiFi phone, so they clearly view disruptive technology as their friend rather than their enemy. T-Mobile is the carrier for people who don’t like carriers.
The current T-Mobile OTT service is called Bobsled. It is a free service and if works on most devices but favors Android for more advanced features such as group messaging. T- Mobile is an innovative company, but they don’t appear to have cracked the code with Bobsled, there is simply not enough differentiation.
The Swisscom io strategy looks different. Swisscom did NOT launch a separate brand to go after global markets. It is very clearly branded Swiss. Why would anybody use Swisscom outside of Switzerland? One reason is simply friends and family of people living in Switzerland, but with such a tiny population (about 8 million) that is hardly an exciting story. The two other reasons are a) voice calling and b) privacy.
As I do a lot of international business and have friends and family all over the world, I have been a huge Skype fan for a long time. My perception is that Skype call quality is now declining (no data on that but I am hearing this anecdotally from others). It is certainly true that the mobile user experience of Skype is a bit clunky compared to born-mobile services such as Swisscom io. This is the other part of this story. WhatsApp maybe the leader in texting but they are playing catchup in voice (it’s coming we are told).
The other Swisscom story is about privacy. Many people do not trust Facebook with privacy. The question is, how much do consumers really care about privacy? We may say that we care about privacy and make a fuss occasionally when Facebook changes the rules, but when faced with even the smallest inconveniences or cost to get privacy, most people choose easy and free and forget about privacy. A messaging service like Telegram should do well if people are worried about privacy and they did see an uptick when Facebook bought WhatsApp. Telegram has the most rigorous approach to privacy and as is a non-profit there is no amount of money that will change their minds. It is significant that Telegram comes from Germany where memories of both Fascism and Communism make people guard their privacy more zealously than people in America who have not suffered in the same way.
The reason that OTT messaging apps take off like a rocket is simple – they get access to our mobile contacts. That makes them easy to use. To give a service access to your contacts you have to either not care at all about privacy or you have to trust that service. Swisscom io also accesses your contact data. The privacy angle relates to a) trust that Swisscom has no business model linked to selling your data (as Facebook does) and b) the Swiss legal protection for privacy. America may be the last place where Swisscom io gets traction as fewer Amercans care about privacy; it is possible that it will get traction in Germany first.
None of these services has yet leveraged the real strategic advantage that Telco carriers have, their subscriber and billing relationship with consumers. We are entering a period of disillusionment with the app economy; the degree of control exerted by Apple for example and the % of revenue going to app stores and the winner takes all nature of these stores are aggravating a lot of people. This is a window of opportunity for Telcos.
If your enterprise software brings revenue it is worth a lot more than if it just cuts costs – the revenue model shift from Subscriptions to Transactions June 4, 2014Posted by bernardlunn in Corporate Strategy, Enterprise Sales, SAAS, start-ups, Strategy Workshop.
Tags: b2b2c, crossing the chasm, revenue sharing partnerships
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Historically, the objective of enterprise software was to make employees more efficient by automating tasks. The software industry moved from cutting G&A costs to making people at the front line more efficient through software such as CRM, Marketing Automation, Business Process Management and Collaboration.
In all cases, the business model was licensing. The licensing model moved from perpetual to periodic (monthly or annual). Seen in this context, SAAS is just an evolution of the old licensing model (plus bundling the hardware into the price). Consumerization of software is a natural response to the risk/reward shift of periodic pricing in SAAS. When vendors got all the money upfront, they could afford an expensive sales process. SAAS shifted the risk to the vendor who got investors to fund the cash flow gap. Investors were happy funding that cash flow gap because periodic SAAS revenue is more predictable and therefore more valuable. To reduce the cost of sale and therefore minimize dilution, entrepreneurs created consumerized services and Freemium.
That about brings us up to date.
So, what’s next?
What’s next is usually an evolution when it comes to enterprise. There may be a disruptive 10x technology shift driving the change, but big companies tend not to make big disruptive shifts. There are exceptions of course, the most famous being Intel’s shift into semiconductors under Andy Grove. That is such a compelling story (told in Only The Paranoid Survive) and so many enterprise executives reference it in glowing terms that we can easily believe that it is the norm. It is not the norm; it is “more honored in the breach then the observance”. Enterprises have built-in inertia, because senior managers are incentivized to optimize short-term profits.
The next iteration will continue the risk/reward shift that was started by SAAS. This will change the revenue model from licensing to % of transaction/revenue (in any shift we see hybrids of old and new so many ventures will mix subscriptions with transaction revenue). I am observing a few innovators who are combining digital consumer marketing techniques with selling a partnership model to enterprise. This is where the puck is going. These ventures get their revenue from a % of the transaction/revenue. This is obviously highly scalable. These ventures take on more risk and have to generate more value before they get paid, but if they can get there they have great scalability and moat.
The idea is simple. You create a consumer service and get enough users that you prove the proposition. Then you scale by partnering with enterprises. One way to look at this is as a technique for crossing the chasm. You can easily find early adopters online. (I say easily, it is of course not easy, but the techniques for doing so are well understood and documented). However, scaling beyond that is hard. Only a tiny % of ventures, blessed with great virality and addictiveness, cross the consumer chasm. As always exceptions (such as Facebook) prove the rule while blinding us to the rule with their brilliance. Many other ventures will cross the chasm by partnering with enterprises. One reason that enterprises are so big is that mainstream consumers trust these large enterprises.
If you prove the proposition directly with consumers you have created a lot of value. You can exit at that point. You can sell to a company that can cross the chasm to the mainstream consumer. Or you can partner with the enterprises that have access to those mainstream consumers in a shared revenue model and scale to become a large enterprise. You will typically be making one or more of these propositions:
- Get more revenue from their existing customers. You are accessing their customer base and they are using your service to get extra revenue from those customers.
- Bring them new customers. This is where the big $$$ prize lies. If these new customers represent the early adopters, the enterprise will be worried that eventually their mainstream customers will “see the light” and want to switch to your model. If they see that they will buy you for a big premium or partner on terms that are more advantageous to you; in this situation you have real clout.
You can create these partnerships on a white label or co-branding basis. Obviously you get higher margins if you get co-branding. There is a spectrum of co-branding. The more traction you have with consumers, the more clout you will have in those co-branding negotiations. Once again, Intel was the thought-leader, with their Intel inside campaign. These negotiations are fundamentally about “how big is my logo vs your logo?” Screen real estate is precious, so this matters. If you have 1 million consumers and the enterprise has 1 billion consumers you have reasonable clout if your 1 million represent early adopters and they can see their 1 billion moving to your model at some point. If you have only 1 thousand consumers, you will be limited to offering a white label service.
Back in the days of the Dot Com Boom/Bust era we saw the concept of B2B2C. Like many concepts from that era, it is easy to ridicule this one, because it did not happen then. That may simply be related to the % of people online. Now that more than 50% of the global population have mobile phones, the concept of tiny ventures getting millions of consumers directly is no longer a pipedream. However it is not wise to ignore the power of the incumbent enterprises. Rather one should get enough traction with consumers to have some clout when negotiating revenue sharing partnerships with those enterprises.
Who will create the Netscape of the Blockchain era? May 27, 2014Posted by bernardlunn in capital markets, Fintech, Globalization, India.
Tags: bitcoin, blockchain, globalization, M-Pesa, marc andreessen
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The Blockchain is exciting because The Perfect Copy Machine has its flaws.
Let me unpick that, starting with an anecdote.
In 1992, somebody showed me the Internet (thanks Charles Rawls). I ignored him. Silly me! The reason I ignored it was that I am not a developer and could not see how to use it.
The next time I saw the Internet was in 1996. I was in India and needed to use email in an Internet cafe. A developer showed me Hotmail.
The rest, as they say, is History.
In between those two events, a student at University of Illinois at Urbana–Champaign co-wrote the first browser for the Internet (thanks Marc Andreessen).
The Blockchain does not need a browser, but it needs something like a browser that makes it accessible to ordinary people. Today we only know the Blockchain because of Bitcoin. Now I will play the Long/Short game that FT journalists use in interviews:
Bitcoin: Short (it’s primary value is to teach us that Fiat currency is like Winston Churchill’s description of democracy “lousy but better than any of the alternatives that have been tried”).
My inner editor is saying, get to the lede (thanks Owen Thomas). What is wrong with The Perfect Copy Machine of the Internet? Simple: I cannot value something because it can be copied for free. That has been a dream opportunity for developers to make fortunes by offering ways to navigate the oceans of freely-created digital data. It has been a nightmare challenge for creative people, who had over time learned how to control of the analog copy machine, but then lost control of the digital copy machine.
However that is not where the Blockchain is needed. Creative people will finally find ways to make a living using The Perfect Copy Machine (as musicians are finding with iTunes and Spotify and writers with Createspace).
That is a First World problem and it is being solved.
I think the Blockchain will find use in the Rest of the World. Then it will come back to the West.
This is a “First the Rest then the West” story. To think about this, travel to Kenya and see where a digital currency/mobile wallet accounts for 30% of GDP. No, it is NOT Bitcoin. It is M-Pesa, derided by techies as utterly simplistic but massively useful to the billions emerging into a global middle class (which is the biggest story of the 21st century). One reason that M-Pesa works is because individuals can prove who they are using the most basic mobile phone. Yes, that is right your mobile number is your identity!
Like the other 7 billion people on the planet, I am unique. That is scientifically true, check my DNA. But my identity can be copied and my work can be copied. Again that’s a Western World problem and I can live with it. What if the title to my house or the access to my bank account could be copied? That is not fanciful; anything that has access to the Internet is accessible to criminals who can steal any of my assets that are recorded digitally (stealing is another way of saying copy it without my permission).
What if there was a way to protect the uniqueness of assets (creative or land or financial or whatever) that was not controlled by anybody other than you? That would be a powerful enabler for the billions emerging out of poverty who will then buy the products and services that our children and grandchildren in the West will be creating in order to make a living.
The Blockchain could give me the same control over all my assets as WordPress gives me for over my scribbling.
That is why I am excited about the Blockchain. Other people share this excitement, but it strikes me that it is like the excitement for the Internet around 1992 before the browser made it accessible. Making the Blockchain accessible to the 7 billion people who will soon have mobile phones (it is over 5 billion today) will create a seismic shift.
If you are building something like that, I would love to hear about it.
Emergent Business Networks May 27, 2014Posted by bernardlunn in Corporate Strategy.
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As my blog title is Emergent Business Networks, I need to explain what I mean by that. I have been groping around this story, like a blind man around an elephant. Prodding, pushing and pulling on the beast, it has seemed very different depending on the point of view:
- New networks for buying and selling. What used to be done within a company needs to done across companies. We will see more platforms and networks that create trust, aggregate demand and enable transaction efficiency.
- Leveling of the playing field between big and small companies. This is a golden age of start-ups. 50 years ago, small businesses accounted for 2/3 of economic activity. Today it is 1/3. That trend maybe reversing (I hope so).
- The end of information arbitrage. This makes the end consumer more savvy and hard to sell to. The buyer is king. This forces innovation by suppliers who collaborate faster and more efficiently to deliver what is needed.
- Reduction in transaction cost. Vertically integrated firms arose because it was usually more efficient to transact internally than externally. The Internet changes that calculation.
- New markets for investing/raising capital. As more start-ups get created in more places, the capital markets need to adapt with new ways to raise and to get liquidity.
- Globalization. This opens up new opportunities to source and sell but also reduces barriers to entry and ratchets up competitive intensity.
I first tried to define this in a post on Read Write Web in September 2007. A year later when the financial markets went into meltdown, it became apparent that the pace of change was accelerating. The meltdown looked like a symptom of a deeper wave of change.
This is what I am trying to chronicle.
Here are some other posts around this theme:
My SAAS Writing on ReadWrite May 27, 2014Posted by bernardlunn in Uncategorized.
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I wrote a lot about SAAS on ReadWrite, this is just me being a diligent digital archivist of my own work. I trust WordPress to always be here in some form and to always let me be in control, so no reason not to archive here. Some posts are like looking at bad fashion pics, “you had to be there at the time” in order not be too embarrassed now. Some are keepers IMHO.
My Posts On SAAS for RWW:
06/26/09: Why Enterprises Don’t Like SaaS
05/ 5/09: Where Is My Dashboard Aggregator?
11/20/08: 10 Things to Know About Salesforce.com
09/23/08: Zoho Part 2: The Cookbook
06/10/08: Where Are We in The Enterprise 2.0 Wave?
08/ 8/07: Who Will Be Your Web Office Provider?
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Think of these Four Gates like a funnel, with lots at the top and very few at the bottom (just like a sale funnel):
Gate #1: Conceptual Clarity.
Gate #2: Prove the Concept.
Gate #3: Scale within Niche.
Gate #4: Expand and Dominate.
It takes totally different skills to go through each of these four gates. Few founders have all the four different skills needed, which is why so many ventures fail as they attempt to pass through these gates. Even harder is the fact that the skills, techniques and attitudes that make you successful going through one gate are exactly the opposite of the skills, techniques and attitudes that make you successful going through the next gate. Each gate requires a wrenching pivot.
Gate #1: Conceptual Clarity.
This is the “fit to the future” phase. This is where you have a vision of “a world where….”. From this you have a mission for the venture along the lines of “in this future world, we will…”. Finally, you have a strategy, as in “we will do this by….”
There has been a lot of fruitless debate about whether concept or execution is more important. This debate is silly, because you must have both. A bad concept that is brilliantly executed will be nothing more than a tough uphill slog with relatively little reward at the top if you get there. On the other hand, a brilliant concept with weak execution is nothing more than “woulda, coulda, shoulda”.
In consumer web ventures, the investment in this phase is coding an early version of the service; these ventures are usually founded by developers who can invest their moonlit coding time, knowing that the best way to articulate the concept is to show something. In enterprise software, the investment in this phase is talking to lots and lots of potential customers to really understand their pain points both now and the likely pain points in the future world that you envisage. The founder is often a sales executive in an established company who keeps hearing the same request from customers that his/her current employer has no interest in fulfilling. They start with a crystal clear understanding of the pain, but only when they team up with a great developer do they create a solution to that pain. The established vendors are nor being totally blind, nor are they only inhibited by the innovator’s dilemma from cannibalising their core business. Usually a technological breakthrough is needed as well. Thanks to Moore’s Law the world is awash in technological breakthroughs but most of them are solutions looking for a problem. What differentiates the great enterprise software ventures is a crystal clear understanding of the problem, because they have heard the pain described by so many customers and prospects.
Conceptual clarity must address these 3 dimensions:
Huge market. A niche might make for a great venture that can be bootstrapped or flipped, but these are criteria for ventures that can “go the distance” through the four gates into multi-$ billion in value.
Massive disruption hitting that market. This is the kind of disruption that creates an existential threat to the major players in the market – think of Skype vs telephone companies or Google vs traditional advertising. If it is not disruption of that scale, the existing vendors will add the features they need to stay competitive (“adding that feature” may mean acquiring your venture, so this is fine for ventures that will be acquired before they go through all these gates).
You have a 10x proposition. You have to be 10x better or faster or cheaper than the incumbents. That seems like a high bar, but it needs to be this big to overcome the start-up risk that you are asking customers to take. Tactically you may start by offering say 3X knowing that as the technology rolls onwards you have much more in reserve, but you must see where that 10x is coming from.
Here are the two things you do NOT need to have at this stage:
- A strategy that seems viable to most people. Most great ventures look totally ridiculous to most sensible people in their founding days. You do need a couple of smart people to believe in the strategy, whether they be co-founders or investors. But get comfortable with the fact that most people think you are crazy (unless you actually are crazy, there will be times when you doubt yourself and when you think most people are right).
- Any proof that any of the three things on that checklist are true. Anybody who asks for proof at this stage does not know how this works and does not deserve to be your partner.
Many great entrepreneurs have conceptual clarity but are weak at articulating it, or too busy executing on the next phase. At this stage nobody cares about your concept. Only after you have passed the next gate does anybody care.
Gate #2: Prove the Concept.
This is the “fit to today’s market” phase. This is also what VC call “traction”.
Enterprise software ventures focus their pitch on the immediate needs of customers who are ready to make a commitment now, leaving out all the futuristic, big picture stuff which would only scare potential customers. Consumer ventures seed the market and prove the value proposition in a tiny little niche; at launch all the market will see and all the entrepreneur is thinking about is that tiny niche.
However, somewhere in the back of their mind, the great entrepreneurs carry a conceptual vision that is a lot bigger than the immediate solution that they offer to get through Gate # 2.
That almost certainly means you get traction in a niche that is tiny compared to the big vision in your concept. This process of digging deep into a niche and focussing 100% on the present day needs is a vital step in turning dreams into reality. It is also 100% opposite to what you do to get through Gate #1.
In enterprise software, getting through Gate #2 means getting the first three paying reference customers. This is a tough job because most customers prefer to wait until you have these three references before committing; one way to drive enterprise software founders crazy is to ask them about this chicken and egg problem. These need to be real enterprise-wide deployments with customers paying 6 figures. A few logos of customers deploying the software in one small area and paying a few thousand dollars won’t make the grade. Lots of enterprise software ventures reach this stage and become cash flow positive without raising any VC, but then stumble at the next Gate.
In consumer ventures, getting through Gate #2 means month to month growth rates in attention. I am using the word attention because the specific metrics such as page views, uniques, downloads, active users tend to change a lot as people “game” the old metrics.
Gate #3: Scale within niche.
This is the “make it work as a business” phase.
For consumer web ventures, the big obstacle at this Gate is proving a scalable and profitable revenue model. There are now trade offs and conflicts to be managed between the needs of free users and the different needs of paying customers (i.e advertisers) and that is often hard for the entrepreneur who won in the last Gate through their self-proclaimed single focus on user experience.
Some enterprise software vendors that made it past Gate # 2 get acquired for their R&D value with a bit of credit for the quality of your customer relationships. If you raised VC, the acquisition value will be a disappointment to investors. As VCs usually get liquidation preference, this will be an even bigger disappointment to founders and management. If you bootstrapped past Gate # 2, the value you will get from the trade sale will still be life-changing as you don’t have to share the spoils with VC. However the big money, the fame and fortune, is reserved for those who make it to Gate # 3. One way to look at this is, don’t raise VC unless you are determined to make it past Gate # 3.
Consumer ventures can exit for great multiples at Gate # 2 as deals like Instagram and WhatsApp show. However these deals are few and far between, it only ends that way if you get massive growth in attention at a time when a big acquirer is facing disruption (think Facebook facing disruption from mobile and thus paying a big premium for both Instagram and WhatsApp).
Enterprise software ventures that make it through this gate need to make the tough transition from founder-led sales to a scalable, professional sales team. This is harder than it sounds for reasons that I describe in this post.
Businesses that make it through this phase are “in the catbird seat”. You have a profitable, scalable model that you can grow with internal resources as long as you like. You will be fending off acquisition offers all the time, both from financial buyers (private equity funds) as well as strategic buyers (the enterprise software Bigcos). You get to choose when and who you sell to. Or you may choose to go all the way to Gate # 4.
Gate #4: Expand and Dominate.
This is the post IPO sustainable public company phase. This is where ventures grow into their original conceptual potential, moving beyond the niche orientation that you need in order to get through Gates 2 and 3.
For consumer technology ventures, consider the difference between Apple and Google and many of the batch of 2011 IPOs. Apple and Google look good on all financial metrics, they built a superb monetization engine, not just superb products.
In the enterprise software space, only one company has broken through into the big league during the last decade and that is SalesForce.com. There have been plenty of SaaS IPOs, but only a few of them have escaped the “small cap hell” by getting a valuation over $2 billion. It is possible that Splunk and Workday will grow into their premium valuations and join the big league.
The “expand and dominate” Gate #4 is about getting back to that original founding conceptual clarity, of realising the big picture potential. All the long years of the earlier Gates are simply laying the groundwork to make this possible. This is another wrenching pivot. The skills, techniques and attitudes that got you through Gate # 4 are all about focussing on a niche, constraining ambitions for the future while concentrating on the immediate opportunities. If you have done a good job in the transition through Gate # 3, you will be able to leave the quarter by quarter growth to a highly competent team. That frees the founder CEO to focus on expanding into adjacent markets and dominating their market. Dominate may sound harsh to some ears but it is what public market investors expect, that is what the high valuations given to fast growth tech companies are based on.
Entrepreneurs that make it through Gate # 2 get the opportunity to exit and that can be a good result if they have bootstrapped to that point. Entrepreneurs that make it through Gate # 3 get the opportunity to exit and that is a good result for founders, management (this is when those stock options become life-changing) as well as any investors who are fortunate enough to be along for the ride.
The Silicon Valley VC orthodoxy for a long time was that no founder has the right profile to make it through all the 4 Gates. Therefore VCs have usually tried to either sell the business at each of these Gates or find professional management to replace the founder CEO. (I refer to the Founder CEO as the key, even though there are often co-founders it is one of them who emerges as the leader). That conventional wisdom is being seriously questioned today as we witness the failure of “professional managers” from big companies to drive the growth of start-ups. When you look at the really great success stories, you tend to see one highly charged entrepreneur who takes it all the way through these 4 Gates – think of Gates, Ellison, Page, Zuckerberg, Bezos, Jobs, Benioff. Their ability to pivot and personally change at each of these Gates is the story of their success. It would be crazy to see these entrepreneurs in their founding days and envisage them as the CEO of a multi-billion $ publicly traded company, yet some of them actually do that. The current VC fund structure, with its need for exits to return money to the Limited Partners, is not conducive to backing entrepreneurs all the way through these four Gates. So we are likely to see some innovation in this area as the rewards for backing entrepreneurs through all four gates is very big.
Piketty is wrong because he misses the capital destruction caused by capital efficient digital disruption May 9, 2014Posted by bernardlunn in Globalization.
Tags: inequality, oligarchy, piketty
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Before Piketty’s famous book, Capital in the 21st Century, came out, his ideas and research had already influenced Occupy Wall Street. In 2011, I found myself sympathetic to the 99% and their story, but around that time I went to a meeting where I learnt why Piketty is wrong; his book is brilliant research and insight – looking in the rear view mirror.
The meeting that changed my perspective was at a Wealth Management firm whose mission was to preserve wealth for future generations. Looked at from the perspective of the barricades in Zucotti Park, these were the folks ensuring that the 1% won and that we drifted into Oligarchy.
The Wealth Management firm had put up a list of their highest conviction stocks. Right at the top of the charts was a mega big Global 100 type company that had just that day had some horrible story that had decimated their share price. Oops. When questioned they responded:
“Stuff like that happens, it’s impossible to predict that kind of thing where rogue employees run amok”.
Yes that is true and the rationale for putting that stock top of the charts based on financial metrics was impeccable. Yes, the problem that crashed the stock that day was a Black Swan event and they are by definition impossible to predict. The rogues were fired. Story over? No. Nobody could predict who would go rogue and when and in what form, but it was reasonably predictable that somebody would go rogue fairly soon in some way. It was an inevitable event even if it was not an imminent event where you could predict the timing. The reason that the employees went rogue was that their business was slap bang in the path of digital disruption. It was a great big firm, run by an awesome entrepreneur and yet it was roadkill in front of the digitization truck. The boss refused to accept this, they were the #1 winner dammit! So he piled on the pressure to hit the numbers any way they could. That leads to employees cutting corners and if they get caught it’s labelled as rogue behavior. Anybody who has toiled in the management ranks of big corporations will recognise this.
If you distrust anecdotal evidence, consider the trends about how fast companies are entering and exiting indices of bigness such as the S&P500 or the Fortune 500. Or look at the time taken to get to $100m in revenues for digitized consumer ventures. Look at how many now get t0 over $100m, in some cases nudging $1 billion, within 5 years. That is disruption at work. The pace of change is accelerating now that 50% of the 7 billion people on the planet have mobile phones. It’s no longer just book shops that worry about being Amazoned, it is now also WalMart heirs who have to worry about that as well. I am writing this on the day the Alibaba IPO prospectus loaded, so now Amazon has to worry about being Alibabaed.
What’s a poor trust fund kid supposed to do?
What does this have to do with Piketty? The simple concept is about what happens when R exceeds G. R is Return on Capital. G is GDP growth. His thesis is that when R exceeds G we drift to Oligarchy. That makes sense. If Capital gets 6% Return when GDP is 3%, then Capital gets a bigger share of a smaller pie, which leads to increasing inequality.
But what if R is only 3%? What if R cannot even keep up with inflation? What if the trust fund gets wiped out over time by inflation, fees from all those fund managers and tax? Plus the fact that the wealth managers will do the prudent thing that they are paid to which is to invest in those safe solid companies with wonderful financial metrics – some of which will be slap bang in the middle of the road waiting to be run over by the digitization truck. Those $ billions in revenue created by digital start ups do come from somewhere, it is coming from the big companies that are maladapted to digitization that the trust fund kid is invested in. This leads to “shirtsleeves to shirtsleeves in three generations”. That is as it should be. People should work for a living. It gives them self respect and a purpose in life. “Shirtsleeves to shirtsleeves in three generations” means we have something close to an equal opportunity society and we avoid the drift to oligarchy. I would not wish for my children to live isolated lives in compounds protected from poor people because they are rich enough not to have to work. I would wish for them to do work that is fulfilling to them, with peers that they like and respect, in a society where most people are doing the same.
The obvious answer for the trust fund kid is to put money into the start-ups that drive the digitization truck, to get the massive returns that go to backing the winners. There are three problems with that:
- Venture Capital is a totally Darwinian game, the lion’s share of the returns go to a tiny number of Funds. These top tier VC Funds don’t need money from the trust fund kid, the partners invest their own money and tap a few investors who put money into their first fund and so have the right to put money into other funds.
- If you invest in a first time fund, you take a massive risk. If you invest in second tier funds you may, if you are lucky, make the same returns as an S&P Index Fund and quite likely you will lose money. If you invest directly in startups as an Angel you may get very lucky (the same is true in Vegas) and you may get non-financial benefits, but your chances of accelerating the destruction of your wealth is statistically far more likely.
- Digital startups are naturally capital efficient. That is why they are so disruptive. So they don’t need a lot of cash from the trust fund kid. That makes it really, really hard to make high R on large amounts of capital; it is far easier to get high R on small amounts of capital. If you are investing large sums you tend towards investing in big old companies that are roadkill in front of the digitization truck. Those big funds, whose managers make money on the amount of funds under management are the funds that our trust fund kid gets invited to invest in. Building a digital business is not like starting a factory or a diamond mine or some other 20th Century type enterprise. With smarts and hustle you can now reach billions of consumers directly. The cost of building the technology to do this is pathetically small. Its all about the smarts and the hustle (plus a sprinkling of luck). Founders of tech start-ups increasingly view capital as the least interesting ingredient in the cake they are baking. If asked could they have $50m or a co-founder like Steve Jobs, most would choose the latter because you cannot buy that kind of talent. That world – where talent is more important than capital – is not the world that Piketty is describing
It is not a coincidence that Piketty is French and his biggest fans are in America. When an economy is in slow growth mode, the people with the money use political power to grab an increasing share of pie. It is a diminishing pie that is based on the old 20th century businesses, but the pie is still very big. The License Raj in India up to 1990 was the archetypal example of this.
The reason that this power grab cannot last long in the 21st century is that digital bits don’t stop at borders. The digitization tsunami amplifies the globalization tsunami and vice versa. India could hide behind the License Raj import substitution walls for decades and by doing this the people who were close to the political power became vastly wealthy while the rest of the people were relegated to poverty. This was a classic example that illustrates Piketty’s thesis – R was a lot more than G if you knew who to bribe in the License Raj.
However as governments learnt in the Arab Spring, you cannot turn off the Internet for long. If you turn it off or regulate to death the disruptive startups that use it, you kill the chance of the kind of wealth creation that you see in Silicon Valley and that other regions of the world want to emulate.
Piketty’s France is known for being run by a political elite. It is a slow growth economy where enough money is redistributed to keep voters happy. France today is similar to India in the License Raj days; it is only nominally a free enterprise society.
How can you see America in that context? America has nothing in common with socialist France and License Raj India, surely? Well in GDP terms, America is now a slow growth economy. And one can see a power grab by people with control of 20th century businesses like the Koch Brothers. That is why Piketty’s book is selling and being talked about so much and why Zucotti Park was crowded.
Yet America is also the home of innovation, the place where most of the digitization trucks get built. This is the real battle for the future of America. Forget about Democrats vs Republicans, that’s just a battle for who controls the spigots of the 20th century economy. The real battle is between 20th century America and 21st century America.
Ground zero in this battle for 21st century America is Stanford University. In 1999, two Stanford kids started Google. Ever since then, VC Funds (some of which are trying to make sure that the trust fund kid’s R is more than G) have camped outside Stamford dorm rooms waving check books. That has led to some embarrassing wealth destruction in ventures such as Color and Clinkle. Investing early in the great digitization winners is not a simple “wash and repeat” formula.
Who can blame parents for wanting to get their kids into Stamford? This is a return on education which is increasingly a return on capital since tax-payer funded education is in decline in America and many other countries. So once you get into Stamford you are made for life? Well no, not if you think you are made for life. That won’t make you work hard and will make you think like an insider when the disruption always comes from a well educated outsiders.
For this insight I am in debt to another book that covers similar territory to Piketty but in a very different way. This is Christina Freeland’s Plutocrats. She looks at where the first generation Plutocrats come from and that is very consistent all over the world. They come from smart, driven people who got a great education outside the elite centers of power. Yes there is an increasing return to education, but the results are better if that education is in a place where kids feel like outsiders who can only make it if they disrupt the existing order.
The poster boy for this is Marc Andreessen. Educated at Champaign-Illinois, in the midwest of America, he went on to found Netscape (and thus help start the digitization wave) and then started one of those top tier VC Funds (Andreessen Horowitz, where he coined the phrase that “software is eating the world”). He is now an insider in Silicon Valley, helping to build those digitization trucks that wipe out the inherited wealth invested in the 20th century economy. So it is significant that he shared his worry about the sense of entitlement at Stamford in a series of tweets (I am paraphrasing, check him out on Twitter, he is usually thought-provoking).
His tweets, inspired me to write this on a 12 hour flight from “old Europe” to “new California” without the distraction of Internet access.
Disclosure: I have NOT read Capital in the 21st Century. I am quite willing to admit that, I am no longer at College so I don’t need to prove to my Professor that I read the book. I got the “fundas” by watching this Moyers interview with Krugman. I recommended it to all who have an interest in the subject but are too busy to read a 700 page book. I did read Plutocrats and highly recommend it (an entertaining read while also being very insightful).