2014 Technology Predictions: The Death of Tech?

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Technology has flourished as an industry by creating continuous substitutes for human processes and, lately, even for itself. Increasing compute power, storage and bandwidth – speeds and feeds- have helped us automate, accelerate and connect ever faster and with increasing richness and context. Telecoms and then mobile phones replaced mail and in-person meetings. Mainframes and PCs replaced manual computations. The Internet displaced bricks-and-mortar businesses of all kinds. Even in today’s relatively stagnant macroeconomy, there is always growth in the area of tech that is displacing an incumbent solution. However, despite the impact that technology has had on so many aspects of so many people’s lives, “tech” has remained a standalone sector.

My prediction for the biggest underlying trend in technology for 2014 is the death of tech.

Or rather, the acceleration of the death of technology as a separate and somewhat independent sector.  We will see the “cross-pollination” of core technical advances applied to traditional industries, both by tech companies and also by leaders in those respective industries. Innovation, design and development will emerge from retailers, banks, medical companies, auto manufacturers and industrials. This will also affect the demand for hiring top tech talent as many companies hire directly into key business areas and not just the “IT” department.

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Creating Billion Dollar Businesses: Part 2 – Assess Your Team Risk

Team Risk

Creating Billion Dollar Businesses: Part 2: Assess Your Team Risk

It is not easy to build a sustainable technology business. Understanding the risks you may face and addressing them head-on can, however, significantly increase your chances of creating a billion dollar business.

In my last post, I talked about how to assess your market risk. Now, I will focus on Team Risk and how, once you have identified a market disruption, you can attract the right folks to build the right product and address the opportunity.

Team Risk = Why you?

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Creating Billion Dollar Businesses: Part 1 – Assess Your Market Risk

Risk

Aileen Lee’s “Unicorn” post on TechCrunch a few weeks ago accurately illustrated how hard it is to build a sustainable tech business, a premise I’ve written about before. I agree with her that there is no “unicorn-hunting” checklist, but I believe there are ways to identify and mitigate risk as you build your business. Understanding these risks and addressing them head-on can significantly increase your chances of creating a billion dollar business.

I bucket risk into four areas: Market, Technology, Team and Business. In this post, I will focus on Market risk and follow up in the next few weeks with updates on the other three areas.

Market Risk:  Would anyone want this?

The “market” is defined as the total potential demand for your product, and equals the average unit price x total units sold by you and all of your competitors.

To size an established market, start with your favorite Gartner, IDC or Forrester report. However, in new or rapidly evolving markets, it is not so simple. I recommend always to start with a customer analysis:

  • who are your potential customers?

  • how much are they spending or could they spend on your product i.e. is there an existing or predefined budget that could be allocated?

  • is the problem you are solving a priority for them now or in the future?

  • are they willing to pay someone to solve this problem?

Many companies I speak to say their new products have no competition, and therefore they cannot size their market opportunity. It is certainly hard when you are breaking new ground. But if you think a bit more broadly, usually, you will not only be able to scope it out, but you can also avoid getting blindsided by competitors and solutions you may not have taken into account.

For example, Salesforce.com pioneered an entirely new revolution around cloud based application delivery: there was no SaaS market per se at that time. But the market risk could in fact have been scoped by an analysis that tried to understand which customers would be willing to shift spend from on-premise CRM to a SaaS model i.e. a model  promised easier deployment and lower capital expenditure but created risk around data control and security. Or to understand whether customers who spent nothing on CRM at the time would receive enough benefit from this new model to be willing to start paying for it.

Market timing is also important as it is risky to build too far in advance of users recognizing that they have a problem, even if the market eventually gets large.  Salesforce.com took over 4 years to sign 8,000 paying customers and surpass 100,000 seat licenses. But today, SaaS startups do not have the same battle to convince IT managers of SaaS as an viable model. They can focus on their core value proposition and “ride” the customer interest and spend towards SaaS. Interestingly, they may face other challenges that Salesforce.com did not have in terms of “crowded markets,” search for talent and more savvy customer base. But these are Team and Business Risk issues, not Market risk, and I will cover those later.

These other risks underscore the point that a large market opportunity is not a guarantee of success, but without it a company will almost surely fail to grow. And while prioritization is important, if you find yourself boxed into a narrow market niche or just want to think bigger, here are some ways to do so:

  1. Lock-in customer spend: If you have designed for a specialized customer base, like Manufacturing, try to understand all the needs of that customer base and see if there is a way to capture more of that customer’s attention and spend. This also creates “stickiness” and makes it harder for customers to pull you out.

  1. Look for vertical adjacencies: If you are focused on one vertical, like Retail, consider like-minded customers in verticals adjacent to Retail, like Travel, Hospitality and Entertainment. You may lose some depth, but you could make that up in breadth.

  1. Consider geographic expansion: If you have optimized for one country, like the U.S., research whether there are other areas with similar demand characteristics that won’t take too much localization. For instance, maybe you could address all English-speaking countries or markets with similar broadband penetration.

  1. Expand customer segments: If you deliver product to large high-end customers, consider whether there are mid-market customers that would buy less feature-rich and more cost effective versions could be built simultaneously.

Of course, the execution involved in building and delivering product to expand your market opportunity is not always straightforward. I will talk more about those risks in ensuing posts, but thinking about whether those customers even exist will help scope out the market opportunity vs risk in clearer terms.

Tech and the Fortune 500: Building Sustainable Businesses

I was reading an article recently on how Wal-Mart re-took the top spot in the Fortune 500. I clicked to see the latest ranking

Fortune500

Seems like just yesterday that Apple was the biggest company in the world, leading many of us in Silicon Valley to mentally pat ourselves on the back. Finally, everyone could see what we already knew – tech was king. Yet here we are a year later and Apple isn’t even in the top 5. Scroll through and you see that there is only 1 tech company in the top 10, 3 in the top 20, and 5 in the top 50. We can argue all day long about what the right metrics are to measure “big”, but the fact remains that the last 40 years of exceptional innovation and growth in technology as a sector has only resulted in a handful of sustainable companies. Why?

All of the things that I adore about working in tech – the speed of change, the innovation, the entrepreneurial spirit – have created the potential for and threat of disruption in every market and vertical. And yet, building a world-class technology business has never been harder. As the Atlantic points out, “…failing fast–the crux of the lean approach–doesn’t make succeeding easier. It just makes it cheaper and less risky.”

All of this innovation, which can be had for a fraction of the historic capital, is also continually lowering the barriers to entry. Sounds good, but with so many new companies entering the market, competition is fiercer than ever. Gone are the days where a company can rely on first-mover advantage or technical differentiation alone for long term sustainability.

For example, major advances like “the cloud” with all of its instantiations of infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and software-as-a-service (SaaS) is making it easier for smaller players to build new products, but it is also making the value proposition of the product much more important than ever before, because that is the only differentiator. Capital, too, is cheap and plentiful as many investors rush to find the next quick flip or as they seek outsized returns in one of the only growing markets in the macro-economy.

Of course, “getting product out” is still critical, but it isn’t the only step in building a long term, sustainable company. Not only does that product have to solve real business problems for customers, the product also needs to be part of a viable business itself.

As an investor, I have developed some “predictors”  – the 3 Ls – to gauge the longer term viability and sustainability of a company.  In my view, a business that can they go beyond great technology must have:

  1. Loyalty: Loyal customers who will wait for new product, because they love the company, the service and the value. Nothing makes me smile more than when I speak to a customer of a portfolio company, and I feel like the customer is actually pitching to me. I want to hear the ardor of a true fan. It is this type of advocacy that helps penetrate a solution throughout a customer deployment, getting more users, stickiness and executive buy-in.And “tough” customers can be the best fans. I was doing a diligence call for a data & analytics company and spent 20min writing the list of all the features the customer wanted in the product and didn’t have today. I was getting disheartened and asked ‘So, you will likely not be renewing your contract?’ The customer was stunned and said ‘Of course we will. Why else do you think we would be investing so much time into how these guys should develop?’”
  2. Leadership: Self-aware management who knows the power of true leadership. Every team needs internal cohesiveness and singularity of purpose to achieve their goals, and while collaboration is important, employees go the distance when they believe that they are a part of something bigger. Good leaders also know what they don’t know, and when they do, they ask for help. They think long term and choose partners carefully. They hire only the best, but also create a strong culture by investing in training, career development and culture. In this period where secondary sales of private company stock and start-up hopping to diversify the chances of quick riches is becoming normal, I love seeing high, multi-year employee retention rates and fully vested founders who continue to take risk and grow the business. I had the pleasure of hearing a CEO in an intro call recently say, “I have been the darling of Silicon Valley at least twice over the last 6 years. Now, I need to build a real business.” I made sure I met him in person as soon as possible.
  3. Longevity:  What is a brand? It’s more than any set of products or employees or even customers. It’s what persists as the image of a company in the minds of not just customers, but an entire ecosystem. It is longevity. It’s what allows Microsoft to be months or even years late with new technology, but still survive. It’s why you felt bad when Apple didn’t come out with the best new iPhone ever. And it takes time and investment to create. I once heard a senior executive respond, when asked what was the difference between marketing and branding, “Marketing is what you do, branding is what you are.”

And that seems to be the crux of it. Building a sustainable business takes all of what you are. It’s not about building a quick app and trying to sell to Facebook, or raising the valuation you get on your Series C. I’m trying to do exactly this with my two partners, and it’s not easy. But it’s who we are.

Tech and The Common Good

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I have lived in Silicon Valley and worked “in tech” since 2001 – the majority of my career. However, I am still an economist by formal training – and in my heart and mind – and I have always brought this lens to the world of tech. Initially, I remember carrying a bit of a chip on my shoulder, not having a traditional engineering degree or technical background. But I have found that my ability to “cross-pollinate” ideas and concepts from the realm of business and economics and apply them to tech problems has helped me to innovate from a different perspective, solve problems with a new approach and ultimately help me to build new tech businesses. As I launch a new venture as a tech investor, I’m also launching a new blog that I hope incorporates this outlook for the benefit of those who may be interested.

In economics, “Common goods” are defined as goods which are rivalrous and non-excludable. In other words, resources that we all share that get depleted if one person consumes too much and does not contribute. This has of course been expanded to a more general philosophical term. Lately, with the economy still so fragile, many have raised questions about whether the tech industry really does contribute to the common good. Tech corporate profits remain relatively strong as cash piles up on their balance sheets and exec compensation skyrockets. There are outcrys of outsourcing overseas to save money and of technology replacing jobs, as corporations make substantial productivity gains without hiring. Those of us who live and breathe the daily energy and innovation of tech sometimes miss the broader implications of what we do, or at least, perhaps, how we are perceived. This blog is my small attempt to think about and comment on these themes, and perhaps, indirectly, contribute to the common good.