We continue our series on market themes we like, a combination of bottoms up observations and best practice from portfolio companies and the broader ecosystem, combined with top down research. At Episode 1 we still believe the best days of tech investing are ahead of us – the scope for building $1b businesses has never been greater.
Theme 6: Industry 2.0
A simple thought experiment I like to try on my non-tech friends – attempting to justify why they should care about what I do – is to challenge them to name the largest tech firms they can think of. Chances are two of the names closest to mind are Google and Facebook – and then I point out to them they are in fact both basically tech enabled advertisers. Their competitors are advertising companies, the industry their revenues are counted against is advertising. The only thing either of them do to addressable markets in the technology sector is to reduce them by giving stuff away other firms try to charge for – like video conferencing or email.
Now of course you already knew this – it is after all a very simple idea – but it is a point that is often missed because if you look at other large cap tech stocks that might also have come up – Apple, IBM, Microsoft, Oracle, Cisco, Intel, Huawei, Samsung, HP etc. – this is not true, they are selling software, hardware and services to consumers and businesses. The point here is the basic idea behind what Google and Facebook among others are doing – give away tech to mobilize critical operational data to transform an industry – is coming to an industry near you, and very soon. The first wave of tech was about selling infrastructure into IT departments. A lot of the last 10 years has been about expanding that into sales, marketing, engineering and so on. But the future is about reinventing – or even becoming – the business. It’s about peeling away lucrative, typically data rich aspects of a given industry and disrupting the incumbents. And that includes heavily discounting the core product, and sometimes even giving it away for free.
“The basic idea behind what Google and Facebook among others are doing – give away tech to mobilize critical operational data to transform an industry – is coming to an industry near you, and very soon.”
Good illustrations are to be found among the next wave of industry unicorns – most of who are reinventing different businesses rather than selling more enabling technology. You can think for example of AirBnb with hotels and lodging, or Uber and transportation, and of course Spotify with music. Once you get the hang of the idea examples are everywhere. According to Forbes, 4 of the top 30 tech unicorns are heavily funded ride-hailing companies – so it seems investors have bought into the idea transportation is ripe for reinvention. This theme relies on the conflux of many of the other trends we’ve discussed – for example the disruptive power of mobile computing, the transformative capability of a global cloud and IoT-ready platform or the redefinition of work and what employees value in an employer. But make no mistake, this is no second order effect, every industry and every market is under siege from the new technologies, and if this isn’t issue number one in every boardroom then it ought to be.
Many of the ideas here are about new distribution models – aggregating an online audience and either working within the existing industry structure or dis-intermediating it. For example, Spotify goes to rights-owners (mostly record companies) rather than artists directly. Conversely, Google goes straight to brands rather than through the existing advertising industry. Alternatively, you can have a technology or business model that is so disruptive it turns an entire industry on its head – like autonomous vehicles or VR/AR. Amazon’s AWS – although it wasn’t the first cloud platform – brought a retail mentality to the idea and drove a great big bulldozer through industry profits.
“Many of the ideas here are about new distribution models – aggregating an online audience and either working within the existing industry structure or dis-intermediating it.”
It’s interesting to think through an entire industry like automotive. When discussing company results, analysts talk about production numbers, dealership sales trends and average sales prices. But the real action is elsewhere. We have Uber et al improving the utilization of the installed base, driving down new sales and making owning a car or learning to drive an option in many cities. We have Tesla, Google, maybe Apple and a 100 others working on electric – and increasingly software defined – vehicles. A number of companies are producing mapping, navigation and entertainment tools that are way better than anything the manufacturers themselves can come up with. And dealership networks are being disrupted by lots of services to empower consumers to make better – and cheaper – purchasing decisions. It’s no wonder that Uber is worth more than either Ford or GM – or indeed that as GM goes so goes the nation – FinTech, InsuranceTech, PropertyTech, MedTech and even SpaceTech are all things.
To successfully disrupt an established industry, with all the branding, loyalty and distribution power of the incumbents, you need a powerful, transformative idea. Start by identifying where the most valuable operational information is being created – find this information intensive piece of the value chain and apply Silicon Valley logic – do it faster, better or cheaper. Look at the flows of things – who makes them, distributes them, sells them, uses them, services them. Things can have IT added to them. IT creates data. When you have all that data things can become services. And then the data ends up being more important than the thing itself. Think about that for a moment – data about things is worth more than things themselves.
Another approach to disruption is by bringing consumer expectations to B2B applications – what people want from their experiences with large companies is being transformed by what they get on their mobiles. If you can deliver more transparency, more choice, increased personalization, better ease-of-use or a lower cost of ownership through compelling and engaging technology you may be able to build an audience. Perhaps you can do this by going straight to the consumer and aggregating powerful enough data in order to force the industry to work with you. More likely you’ll be integrating into the existing supply chain, with a new distribution channel or a better mobile experience. Here you need to be careful – you must avoid being just a clever front end, with no fundamental innovation taking place or you risk just becoming subsumed into the existing industry structure.
In any case, once you have found your disruption vector and figured out how you are going to do something extraordinary to address it, just as importantly you need to develop an adoption strategy. Because B2B disruption is typically not like consumer disruption – you will need to change behaviour by influencing the existing decision makers and procurement processes. It’s a case of disruption – meet adoption. Even the “giving-away-stuff-to-sell-advertising” model requires having teams of experienced people who know how to sell advertising and put together a brand campaign. Putting a demo on Youtube of your new cool thing and directing professional buyers toward it may not work as well as you would like.
“B2B disruption is typically not like consumer disruption – you will need to change behaviour by influencing the existing decision makers and procurement processes.”
This typically means you need someone on the team who knows a lot about the sales and GTM model of the industry you are disrupting. Lots about it. Someone who knows how purchasing decisions are made, how regulations work and can manage a complex sales process – this is someone with deep industry contacts and experience. We’ve lost count of the number of businesses we meet which have a breakthrough idea for a really cool thing that is so much better than what happens now – but they think it will be adopted by putting up a self-service SaaS website. Probably not going to happen.
The second important point in your pitch is the disruption had better be bloody good – if adoption is going to require painful changes of behavior and probably some time, your new thing had better be much faster, much better or much cheaper. And there needs to be a good reason why this is true now. Developing an internal champion who is prepared to go to the mat with procurement for you, championing a solution that could have a significant benefit to the bottom line or transform customer outcomes is what we’re shooting for. It’s a bit like English Public Schools – disruptive teenagers get sent down, really disruptive teenagers get invited to join the SAS.
“If adoption is going to require painful changes of behavior and probably some time, your new thing had better be much faster, much better or much cheaper. And there needs to be a good reason why this is true now.”
Finally, you need a really good financial plan. Everybody does of course, but creating a product that is truly transformational, with all the technology and regulatory debt that can require, and what can be a costly customer acquisition process takes some serious thought. It starts with a strong technology roadmap and milestones, and continues with sensible projections for customer engagement (product market fit will likely be iterative and time-consuming), early adoption and then large-scale rollout. You may not know at this point what the business model is – per lead, per customer, per transaction, volume-based – nor yet the balance of classic SaaS, app or Enterprise revenue streams.
So disruption, adoption, good planning, senior hires – sounds like a heroic journey. And like any great quest it’s about identifying the prize, choosing the right team, the best mentors, top equipment – and of course picking the right battles. So if you’re the kind of hero or heroine who’s in it for the long haul, likes to ask questions such as “why do we buy insurance that way?” or “why do we design how a building looks before we think about how it operates?” or “why is everything in a hospital organized around the doctor rather than the patient?” we know of an industry near here that needs your help.
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