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Who will create the Netscape of the Blockchain era? May 27, 2014

Posted by bernardlunn in capital markets, Fintech, Globalization, India.
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This is one of a series called Explorations down the BItcoin rabbit hole.

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:

Blockchain: Long

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.

This is one of a series called Explorations down the BItcoin rabbit hole.

Piketty is wrong because he misses the capital destruction caused by capital efficient digital disruption May 9, 2014

Posted by bernardlunn in Globalization.
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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:

  1. 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.
  2. 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.
  3. 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).

Talking To John Hagel About Emergent Business Networks November 29, 2009

Posted by bernardlunn in capital markets, Globalization.
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John Hagel is one of the leading business strategists, author of The Only Sustainable Edge. I interviewed him back in July about the research he is doing at Deloitte into the dramatic and overlooked plunge in Return On Assets (ROA). When Deloitte contacted me again about some new data which dug deeper into ROA in different markets, I wanted to learn more about the background story. In conversation with John, the story emerged. The story is what big western companies can learn from Chinese companies about peer partnering in emergent business networks.

The Return On Asset Bombshell

The Big Shift research done by John Hagel and his team shows:

“U.S. companies’ return-on-assets (ROA) have progressively dropped 75 percent from their 1965 levels despite rising labor productivity.”

That is dramatic. If you had to select a single measure by which to judge the value delivered by a CEO, board, or management team, it would be return on assets. To quote from the Wikipedia entry:

“The return on assets (ROA) percentage shows how profitable a company’s assets are in generating revenue. This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control.”

And here is the bit that matters:

“Return on assets is an indicator of how profitable a company is before leverage.”

If you want to understand the financial meltdown that happened at the end of 2008, just think leverage, i.e. debt. Companies juiced up their earnings using leverage. They have been doing this more and more in the last 30 years.

What happens when you take that away? You get the return on asset bombshell that the Shift Index reveals. It is like taking steroids away from an athlete and then saying, “Now, how fast can you run 100 meters?”

Give Your Lobbyist A Bonus

In their latest research the Shift Index team looks at how this is impacting different industries:

“While virtually every industry that Deloitte examined has been impacted by the “big shift”, the first wave of industries currently feeling the most pressure include technology, media, telecommunications and automotive.  They also represent a ‘canary in the coal mine’ for industries that have just started to feel the effects of the Shift Index, including banking, retail and insurance.  Finally, the report also reveals that heavily-regulated industries like healthcare and aerospace & defense are the most insulated, at least for the moment.

The take way for investors? Place your money in markets where the government has erected the barriers to entry through regulation. The take way for companies in that fortunate position? Give your lobbyist a bonus!

But what if you work in technology and don’t think that regulatory barriers are either desirable or practical? You certainly need to do something dramatic if you look at the ROA data in your industry:

“In terms of the technology industry, the report reveals that a decline in ROA of nearly 70 percent, despite the highest gains in labor productivity in the U.S. This industry is also experiencing a level of competitive intensity that has magnified almost four-fold since 1965 and is 30% greater than in the rest of the economy.”

What Companies Are Showing The Way?

This all sounded rather gloomy. Deloitte is in the business of advising large companies. So I assumed that John must have some role models, some tech companies that were prospering in this hyper-competitive economy. Surely the only answer was not just “work in a highly regulated industry and hire a good lobbyist”?

Yes, John had some role model of tech companies prospering despite hyper intense competition. But their location surprised me. In the past the role models brought out by management consultants were almost all American, with an occasional European or Japansese company thrown in for good measure.

The role models that Jon mentioned where Chinese tech companies.

As A Historian I Should Know About Quoting The Source

When he described how they were working, it reminded me of the Chinese motorcycle companies that I had written about in my original post on “Emergent Business Networks“.

I mentioned that I had written about this earlier having been impressed by the story about Chinese motorcycle manufacturers in Wikinomics by Dan Tapscott. Oops! John told me that Dan got the story from him. As somebody who studied History at college, I should know better. So, by way of an apology, here is a link to John’s book – The Only Sustainable Edge.

Peer Partnering vs PR Partnering & Platform Partnering

These Chinese tech companies are “partnering” to build products way more efficiently than they could by creating everything in-house. Nothing new there you might think. Partnering is what we all do, right?

Partnering is perhaps one of the most overused and abused term in the business dictionary.

There are two predominant forms of partnership today:

  1. “PR Partnerships”. These are designed to make both partners look good and to get press but they don’t involve much real work or create significant revenue.
  2. “Platform Partnerships”. These are when a big company sets the rules in order to get small companies to create products for niche markets or to sell their product in niche markets. This is like calling a landlord/tenant agreement a partnership.

By contrast, the Chinese model is more like “Peer Partnership”. Each company is genuinely independent and each partnership is mission critical to both parties. This involves some hard-nosed negotiation.

Keiretsu 2.0?

Cynics might say “we have seen this movie before”. In the 1980s it looked like the Japanese model was going to dominate. Their networks of companies were called Keiretsu. The term became popular in the start-up world; Kleiner Perkins called their network of contacts a Keiretsu.

I asked John if the Chinese model was simply “Keiretsu with a Chinese Face?” John had clearly considered this and responded that the Japanese model involved equity cross-holdings (that’s why the model appealed to VC firms). The problem with that is that the equity position outlives the usefulness of the partnership. Rather than re-negotiating or ending the partnership, cross-holdings tend to lock them in well past their “sell by date”.

Chinese Jiu Jitsu

Necessity is the mother of invention. Chinese companies have grown despite lacking two critical things that we take totally for granted in the West:

  1. Intellectual Property (IP) protection
  2. Well developed capital markets.

The Chinese firms turned these weaknesses into advantages through their approach to partnering – classic Jiu Jitsu.

Large American companies may need to learn some of these tricks. We are entering an era that looks a lot like emerging markets when:

  1. Intellectual Property (IP) protection is threatened by the “perfect copy machine” of the Internet and the consequent move to open source, open data and open everything else.
  2. Capital becomes more scarce as debt leverage declines and equity investors demand a greater real ROA.

StartUps Know That Partnering Has To Be A Core Competency

The 3 golden rules of a start-up are focus, focus and focus. Startups know that have to focus on the one thing that they do better than anyone else partner with other companies for everything else. Some entrepreneurs now consider the art of partnering as a core competency.

It is possible that we are facing an interesting inversion of the norm. It used to be that start-ups studied at the feet of managers who used to run large traditional companies. “Teach me to manage oh great suited one”.

Now the big cats in the corner office are being asked to think more like a scrappy bootstrapped start-up in a garage in cheap location in America or an equally scrappy start-up in a dusty corner of Western China. It’s enough to make you throw up your 3 martini lunch!

Playing against 5 Aces December 6, 2007

Posted by bernardlunn in Globalization, India, start-ups.
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NOTE: THIS WAS WRITTEN IN 1997
I wrote this article 10 years ago, having spent a lot of time in India at that time. I have written the “10 years later perspective” and posted that to Read Write Web.

American software companies dominate the competitive landscape. Americans have no genetic advantage over Indians, a fact that is proven again and again by Indian immigrants to America. No, the advantage is environmental not genetic. America is a much, much easier environment within which to create great software companies. American companies start life with 5 major advantages – their 5 Aces:

1. A large domestic market
2. Access to intellectual capital
3. Reliable, low cost telecommunications
4. A culture that rewards innovation and risk taking
5. A well developed venture capital industry

If you were playing poker, that would be like having 5 Aces. Yes, I know you cannot have 5 Aces but, American companies have so many advantages that it almost seems like cheating. Stacked up against all those Aces, India has only one good card to play, an abundant supply of well-trained software engineers at reasonable rates. Sorry guys, America has the better hand.

So should Indian companies give up the dream of creating killer apps and just stick to Y2K and other low value work? Well let’s look at some of those Aces in more detail first:

A large domestic market.
America has a vast domestic market that serves as an ideal springboard for global ambitions. Unfortunately India’s domestic market does not serve the same purpose.

There are many brave companies creating software products for the Indian market. They are the unsung heroes of the business. Usually they have tiny revenues and therefore they never appear in the usual roll call of Indian software champions. Yet what they are doing is far harder than shipping a bunch of engineers off to USA, which is still the primary activity of TCS, Infosys et al

Let’s face it, India is a tough market. Indian buyers assume that foreign products must be better. In fact Indian software gets much more respect internationally than it receives at home. The local vendor typically only gets a look in at the low end of the market, where price is the main consideration. For example, a lot of Indian companies are going after the “low end ERP market” because the giants such as SAP are not interested in this segment, at least yet. Will any of these domestic companies make it into the big time before SAP and other global players decide that the low-end market is worth tapping? This is a tough game that has been called “picking up peanuts in front of a steamroller”.

This lack of respect works both ways. The big Indian software companies contrast the wealth of opportunities in USA and Europe with the slim pickings in the domestic market. They naturally put their best people on international projects, treating the domestic market as a training ground at best. This is a vicious circle. Indian industry, which is facing its own struggle to become world class, is not keen to be treated as second best.

Access to intellectual capital
Intellectual capital is the reason why a healthy domestic market is so important. Intellectual capital is much more important than revenues. You can have a world class software company that has no revenues from India. You cannot have a world class company without world class intellectual capital.

Intellectual Capital usually comes from customers. Think about how most new software products get built. The process usually starts with a visionary customer who wants to make a major impact on their business by using new technology. Looking around the market they see no off-the-shelf product that meets their visionary demands. So they tie up with some bright software guys. The visionary customer is more concerned with innovation than size and understands that innovation usually comes from small companies with no vested stake in the old way of doing things. So small, innovative software companies get their first break.

Look at virtually any software company and this is the pattern you will see. Bill Gates, received his first break through a contract from IBM to deliver DOS. Other giants such as SAP and BAAN follow a similar pattern.

When people in India talk about intellectual capital and the Indian software industry, they tend to focus on technology. They point out that most technological innovations come from the USA and that this puts India at a major disadvantage. In fact, this is only a minor issue. The latest version of Visual Basic or whatever is available in India at much the same time as it is launched in America. Through the Internet you can research all the latest technologies and download what you need.

No, the intellectual capital gap relates to industry. You need customers that are innovators and world leaders in the area of Supply Chain Management or Derivatives Trading or Electronic Commerce and these are hard to find in India.

There is one industry where India has innovators and world leaders (or nearly) and that is software. Maybe that visionary customer is in your own back yard. There is a huge population of software engineers in India that is always looking for innovative ways of doing their job more productively. Maybe the Indian “killer app” will be a new software productivity tool?

Reliable, low cost telecommunications
When Bill Gates was being wooed by the high and mighty in Delhi, he was often asked, “what should the Government do to ensure that India becomes the next software superpower?”

Rather than respond with a whole laundry list of initiatives, his answer was very succinct: “make the telephones work”.

Telephones are the single greatest tool used by the software industry. Telephones provide the means to reach your market, to transfer software to your customers and to access all that intellectual capital on the Internet.

Coming from Europe and America I took reliable, affordable telephones for granted. When I started calling on Indian companies I became all too familiar with a young lady telling me that “all lines on this route are busy. Please call back after some time”.

If you have always lived in India your reaction is probably a fatalistic “so what…that’s life…keep on trying”. Well I was selling rather than buying and so I did keep on trying. What if I was buying? What if my next calls were to companies in Israel and Russia where I got through the first time? Would I have persisted in trying to buy from India? Probably not.

A culture that rewards innovation and risk taking
There was a story in Fortune magasine recently where the big consulting firms, prestigious names like McKinsey, Anderson, Booz Allen, were complaining that they were having a hard time attracting the pick of the MBA crop. Why? Because the best and brightest wanted to work in tiny start-ups in Silicon Valley where they can make a difference.

I doubt that the consulting firms face the same problem in India. The best and brightest would flock to the status and safety of the big firms rather than face the uncertainty of a garage start-up. Without the best and brightest, Indian software will not hit the big time.

The difference is a culture in the USA that rewards innovation and risk taking. There are so many role models for the budding entrepreneur to emulate. Indeed high tech entrepreneurs in America receive almost as much attention as the Indian cricket team!

The role models are available in India and some of them, such as Shiv Nadar and Narayana Murthi, receive a lot of press attention. It is increasingly clear that software is one of the industries where India can become world class and this will help to attract the best and brightest.

America has a very healthy attitude to risk and failure. Start-ups are risky by nature. A lot will fail. Does a young engineer in America, leaving a failed start-up find doors closed and people and looking at him in a funny way? Not usually. Indeed most people would assume that the person has learnt some valuable lessons and will succeed next time. Magazines are full of people who tried numerous ventures before hitting on the successful formula.

A well developed venture capital industry
Venture Capitalists in Silicon Valley vie for the opportunity to tell their story to first year students at Stanford University. They hope that the bright kid with dreams will come to them first. Can you imagine this happening at an IIT?

Actually, yes I can imagine that! Venture Capitalists are thirsty for new ideas and don’t care where they come from. There is plenty of Venture Capital right here in India looking to invest in software ventures. OK, there are not as many as in the USA, but how many do you need? You only need one to fund your venture.

The talk about a lack of Venture Capital in India is misguided. Talk to some of the Venture Capital firms operating in India and you get a rather different story. “Indian software companies do not understand Venture Capital. We have plenty of money to invest. What we lack are good business plans promoted by credible and seasoned management teams.”

You need to understand the Venture Capitalists and talk to them in their language, but that is the subject of another article. If you have the right idea and the right management team, you will get funding.

So should you continue to play when your competitors have 5 Aces? Maybe it would be more sensible to stick to bodyshopping.

“Insanely great products”, as Steve Jobs calls them, are not created by sensible people. They are created by obsessed individuals, who forge ahead when everybody is telling them that they are crazy. There are entrepreneurs in India today who can turn those 5 Aces to their advantage and add the Indian advantage of abundant low cost talent.

There are great software companies that grew up outside of America. Look at SAP from Germany, BAAN from Holland, Business Objects from France and Checkpoint from Israel.

These companies treat America as their home market. They raise capital in America, have most of their customers in America and bring in American management talent to help them to better understand this key market. In other words they make those 5 Aces work for them and not against them. You had better take those 5 Aces and make them your own and do it quickly, because American companies are taking the one Indian Ace, your talent. Most of the major US software companies are setting up 100% owned subsidiaries in India in order to tap Indian engineering talent. That Ace no longer belongs exclusively to Indian companies.

If you think that the situation looks tough from India, look at Israel. Israel is tiny compared to India and does not share India’s English language advantage. Yet Israel received over $800 million in high tech Venture Capital from the USA last year, more than any other country and far more than India.

So, yes it is possible to create killer apps outside America. It is possible to create them right here in India. Do you have the ideas and the drive to make this happen? Do you know where you want to go but lack a road map? The Dataquest “In search of India’s Killer App” series of articles will give you a road map.

In our next edition, Bernard Lunn will describe the financing options for entrepreneurs, helping you to have fruitful discussions with Venture Capitalists and Angel Investors.

Global audience development August 9, 2007

Posted by bernardlunn in B2B Media, Globalization, India, Online Advertising.
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American Business Media firms have a big opportunity to globalize. There is no other country that has a large enough market to support most of the niches that make up the 1,000 titles in the B2B Media world. So American B2B Media firms are the only ones with the scale and brand to go global in most of these niches. The question is how to take this opportunity.

The traditional answer has been licensing. That was the right answer for a print-centric world. You needed a local partner that understood the local nuances of content, circulation, production and advertising.

However the print economics in some of these markets are challenging. Take India as an example. That 300 million middle class is an enticing market and the opportunity in consumer publishing is growing fast; this is is country where new Newspapers are starting up! However B2B makes up only 1% of the media market and 50% of that is within IT. Advertising rates are far lower than in the US and with print costs pretty similar it is hard to see the economics working out.

However online it is a different story. With an almost zero cost per additonal online subscriber, the gross margins look good. Many Publishers tell me that they get a lot of traffic internationally and they know a lot of smaller vendors who want access to their US audience. This is not just classic English-speaking markets (UK, Canada, India, Australia, New Zealand) as the “business class” globally tends to speak English and seek out content from US based sites.

With User Generated Content (UGC) techniques it should be relatively easy to localize content; but even without this there is a big market as markets globalize.

Currently many Publishers are in reactive mode. They know from the weblogs that international visitors are coming but they don’t know enough to really sell that audience to advertisers. This requires a more proactive global audience development strategy.

What it feels like within an economy growing at 10% August 4, 2007

Posted by bernardlunn in Globalization, India.
2 comments

Coming back from a week in India, I am reflecting on how different business feels like when GDP growth is in double digits. This is very different from simply growth in asset valuation (i.e. stock & property prices). This is the whole economy growing at 10%. It is certainly not just outsourcing, in fact that is not where you saw the excitement. Think Eisenhower America building the physical infrastructure that enables a mass-scale consumer economy, but at Internet speed.

I have been doing business in India since 1994 and this boom looks very different. One acid test I have is looking at the Billboards on the way into Mumbai from the airport. In 1994 they were advertising stock exchange shares and my instinct was bubble and that proved right. In the shortest bubble in history, for a about 3 months in late 1999, you saw Dot Com billboards. Now it is what you would expect for billboards, consumer products and services.

Looking at the newspaper on the first day, two stories jump out: 

One. A company called Suzlon Energy, making alternative energy from massive wind power farms, buying a $10m SAP implementation from IBM. Another story relates how Suzlon is a huge success story for American investors through funds such as Citi and ChrysCapital. This is certainly not another outsourcing story.

Two. An article about how Indian entrepreneurs and old family business owners are more willing to sell out. This is leading to capital formation within India, liquidity that is going
into Indian based VC/PE funds as well as angel investing.

Now a quiz. I am eating airplane food that is fresh and tasty using real cutlery and a cloth napkins, served by 4 cabin crew in a two aisle plane and they seem genuinely pleased to serve people. My personalized entertainment system has a huge choice of movies, news, games, music. Am I on long haul business class? No, this is domestic Economy on Jet Airways from Delhi to Mumbai. The founder CEO of Jet, Naresh Goyal, goes down in my book as one of the truly great entrepreneurs. Building this kind of consistently high levels of service in a country where infrastructure is a challenge and where large institutions have typically treated customers as annoying pests is a massive achievement. Jet has set the standard that has forced the other airlines to follow. Now the airports are starting to get revamped as customers come to expect the same quality on the ground.

Social Networks and other clubs, guilds, cliques and associations July 7, 2007

Posted by bernardlunn in Globalization, social networks, start-ups.
2 comments

Social Networks do seem to be the next evolution of the web as a communication medium, fulfilling a need as basic as email. The desire to network is as old as humanity. I have been thinking about the taxonomy of human networks from the perspective of basic motivation and how this might impact the evolution of Net-based Social Networks.

Looking at the the networks, I see two basic forms of motivation – Trust (I trust you because you are in my Network) and Visibility (I can make connections and enhance my status by being visible and seeing/contacting people who are important to me). Some Networks are more focused on Trust, others more on Visibility.

I believe we are still in the early days of the evolution of Net-based Social Networking and that we will say many different forms to meet many different needs – that. My basic taxonomy has:

  • Exclusive professional. The oldest form would be Freemasons and other Medieval Guilds, where you could only belong if you met certain professional accreditation standards. The secret Freemason hand-shake was an ancient form of spam control. The American Medical Association (AMA) is a modern example. You can only join the AMA if you can prove that you are a Doctor. This exclusivity has value based on Trust. A Doctor is more likely to talk honestly to another Doctor about an important issue if they believe that their “conversation” is not being overhead by the general public or, more importantly, by people who run Pharmaceutical or Health Insurance companies. These are “gated communities” for a reason.
  • Non-Exclusive Professional. This network is defined by a market, technology or other subject of interest. This could cover what I have heard described as “The Tech Crunch 5000” (the 5,000 people who matter in Web 2.0). The more traditional version of this is covered by the 34 million subscribers to 1,200 trade magazines in America. The exclusivity/status is not binary it is a range. My position in the network is defined, formally or informally, by other people in the network. So in this network, Visibility is more important than Trust (which is still mostly created offline). Web 2.0 as a social network is different because it is so new and future-oriented, even established players are new and the rules are very fluid. So we should not make too many assumptions about the mainstream networks based on the the one that we work in today.
  • Family and Tribe. Family is the network that you don’t choose. In less developed parts of world it is loyalty to family first and then tribe. This network is more similar to Exclusive Professional as it is all about Trust and very little about Visibility.
  • Old-School Tie and Alumni. These are Exclusive Networks based on Trust.
  • Social snobbery. Another Exclusive Network but thankfully fairly porous as you can break in by making money, changing your accent, joining the right Charity and otherwise “fitting in”. As snobbery embarrasses people we are unlikely to see a “snobs network” 🙂
  • Company. One impact of the Net is to reduce transaction friction, making it easier for networks crossing organization boundaries. From the viewpoint of history, the 1950’s era “organization man” and the companies they worked for are unusual and we can now see them as a transitory phenomenon. Companies are now far more “porous” (open to the external world) at every level and so in our work life we may be part of many networks not just the network defined by the organization chart. A few command and control type organizations may try to resist this but it is pushing against the tide. A healthy Company has many networks that are open to clients, partners and other stakeholders and they are based on both Trust and Visibility.
  • Franchisees, trading networks and other inter-company networks of mutual interest. Unfortunately we can also add Terrorist Networks to this list.
  • Ad Hoc Interest. As we browse we join and leave networks of interest regularly. As we get more committed we stop “lurking” and register or identify ourselves in some other way. As content is increasingly user generated we are getting our information from social networks (is Wikipedai a social network?)
  • Political parties. I have never been a political animal, so no comment.
  • School friendships. School is when friendships become so important. This is when cliques form and cliques are not much fun except for the clique leaders. I suspect that one key motivation for Web-based social Networks is to expand beyond these cliques and that means expanding beyond the physical boundaries of the neighborhood. As a parent I believe that the Trust issue is critical and the issues with this and MySpace have been well addressed elsewhere. I think these Social Networks have to evolve a lot further before they meet the delicate balance of needs that exist between children and the adults (parents, teachers) who take care of them.
  • College Friends. College is a formative experience because for most people it is the first time they are exposed beyond the very narrow boundaries of family, neighborhood and school. Suddenly Trust becomes critical as your choice of friends is much broader. I think this may explain the difference between MySpace and Facebook (but not being a member of either, please take that with a pinch of salt).
  • Clubs. It is possible that old-fashioned Club rules will become more prevalent in Net-based Social Networks. The two principle rules are a) a new member has to be proposed by an existing member and b) through some form of voting arrangement a member can be “blackballed” (thrown out of the club). These rules help ensure Trust through member/peer pressure.

Maybe you think I am stretching a point to see all of these as a social network? In 2002 I worked in a start-up that applied network theory to analyze all kinds of networks including human networks and I came away from that with the habit of looking at everything as a network.

Looking at all these types of social network (I am sure there are many more, these are just the ones that occurred to me while writing), I see 4 questions that will drive the evolution of Net-based Social Networks:

  1. When will the novelty of the medium recede and let the basic motivations come to the fore? When I looked at all the social networks that have existed in the real world throughout history and asked “what is different this time?” the answer was “it’s the medium, stupid”. (Clever guy that Marshall McLuhan). The evolution of consumer behavior on the Net has tended to go from “wow I can do that, way cool” to “so what, what does that do for me”.
  2. At what point does Visibility and Trust collide? I think this is the critical question determining the business value of Social Networks. There is an implicit assumption that Metcalf’s Law applies. However if Trust erodes, what’s the point of a Network? The open Internet is The Network, so if you want everybody they are here right now. The Social Network is valuable because it is exclusionary. MySpace is cooler/more valuable because older folks are not there. That implies some optimal network size. There is some good theory on this. However if this is true, it is a reverse network effect and that will have a crushing effect on Social Network valuations (but may do wonders for Social Network enablers like Ning). So count me a skeptic on the Facebook “social graph” theory; it is a great pitch but I don’t buy it.
  3. How can we be members of multiple networks? I have never been a clique type of person and find myself part of many networks but not really an insider in any of them. Maybe I am unusual, but it is certainly true that most of us need to be members of multiple networks and these change as we get older (school to college to work to parenthood etc). Something like OpenID is part of the answer but also tools to transfer our digital stuff between networks and decide what stuff goes in what network.
  4. How do we preserve the “strength of weak ties”? A network that is only strong ties (everybody knows everybody very well) is not valuable on its own. Genetically that can lead to birth defects, in companies it leads to stagnation, in social circles it can lead to snobbery/prejudice. The outsider with a new perspective is valuable. Today the Social Networks are very open. They are likely to close down to preserve Trust.