The key to creating a great product and company is to create value for the customer. Value is that unique combination of emotional and economic benefits that motivate the customer to purchase. In the best situation the product enables the customer to create their own additional value. In an even better situation, value for the customer is derived from the value/content that the customers create. An example may help.
Options 2 and 3 allow for multiple opportunities to create value beyond just the code base from the platform.
If we examine Twitter, it is not clear there are use cases developed by the users or by curating the user content. So it is not required to be successful, but I think the more value creation the more attractive.
On a related theme, the proprietary code should be for the principal value creation for the customer. The remaining code in the stack can come from the open source community. This idea is explained very well here.
This quote in a story in Fast Company caught my attention:
"...a system in which a program can be written to find an answer—or to execute a smart contract that can buy something, sell something, or do something. In aggregate, a group of smart contracts could run what is known in Ethereum-speak as a "decentralized autonomous organization" (DAO) or a "distributed autonomous corporation" (DAC)—in other words, a corporation distilled to its most basic tasks, and operated by little more than code and the logic of if this, then that." (emphasis added) Companies will have a single asset, a code base using AI, that will enter into transactions with independent service provides to create, deliver and capture value.
Perhaps this novel idea caught my attention because I had spent the weekend reading about datafication, which is explained in a study by Ericsson "The Impact of Datafication on Strategic Landscapes". Digitalisation is the evolution of IT starting in 1950 which brought us apps, mobile devices and a focus on IT for productivity improvement. Datafication is the new approach to IT which recognizes the changes coming in IT from the large number of physical objects capturing or generating data. The differences in digitisation and datafication (from the Ericsson study) are summarized below.
Now, as every aspiring entrepreneur knows, one must understand the customer and their problem to successfully start a new business concept. The question one should be considering is whether datafication provides sufficient information for the code based AI company to successfully identify a large need and develop a solution. Ericsson believes the answer is yes and the data source will probably be your cell phone, which captures and generates data on your entire life. When a company with no humans is analyzing data about you, it brings privacy issues to a whole new level.
Maybe the solution to the problem of the morality of capitalism is to replace the human managed companies with "no humans" companies. Might be more socially aware :)
Instead of robot challenges every weekend, maybe we should have challenges for best code to autonomously operate a company.
Hubspot had an interesting article on the importance of recirculating old blog content. Turns out most visitors to blogs are reading old posts such as these SF classics on Excel modeling. A post from August 2007 I think is still valid almost eight years later.
"Natural phenomena tend to be explained by a normal curve. People can be explained by the normal curve in many ways--for example height and weight distributions, number of children, etc. Therefore, businesses, run by people, should demonstrate certain behavior consistent with normal curves. Stated another way, the limitations of people should manifest themselves with a certain regularity in the way they run their businesses.
These limitations in people determine the various stages of development for a company. If the owner adapts and changes the way the business is managed, the company can move on to the next stage of development. For example, many companies get stuck at about $30 million in annual sales. This level happens to be where the limitations of one person management take hold (for an average owner). If the owner learns to delegate, the company can go to the next level ($100 million in sales). If the owner insists on making every decision, the company frequently plateaus.
If we look at early stage companies, there is a certain consensus on the stages of development, which are described below:
Many VCs use these revenue levels as one way to measure the progress of company performance. Part of the reason is that at each level management needs to be developing or demonstrating a new set of management skills. Failure to develop the necessary skills strongly suggests that a company may not reach its potential. Many a technologist has developed a product and achieved limited sales but lacked the necessary skills to demonstrate a real market for a product (failure at stage 2). Many entrepreneurs are born survivors and can hustle up enough business to reach $3 million in annual revenue, but they lack the skills to build a sales force or put together a distribution system to support a sales force (failure at stage 3).
At each stage in the development of a company different management skills are required. My experience is that many entrepreneurs fail or plateau their companies because they do not actively consider what skill sets and disciplines they need to succeed in the next stage. The larger your company the longer you have to prepare for the next stage, but in a startup failure to prepare can be fatal. I am not suggesting necessarily that you hire a sales manager when monthly revenues are $40,000, but one needs to actively manage a company to be ready for the next stage.
The good news is that the stages and the management skills are pretty well defined up to at least $1 billion. In a future post I'll talk about the stages after $30 million."
Some very detailed work in the last two years with small businesses confirms that $1 million and $3 million are still high hurdles for most startups.
I am teaching a new course, "Risk Analysis in Business Concept Development for Engineers and Entrepreneurs", which is a graduate level course in the Engineering School at FIU. Most people think about business risk in terms of:
There is another more meaningful way to think about risk:
Assumptions=Risk=Cash Flow Variance
Two key concepts in the course:
Some readings for the course:
Image credit: http://commons.wikimedia.org/wiki/File:Variance_various.svg
A few observations I found interesting today:
This quote from FA Hayek on the Cafe Hayek blog reminds me of a book that I recommend highly.
Hayek quote from 1954 essay “History and Politics”:
"The complexity of social events in particular is such that, without the tools of analysis which a systematic theory provides, one is almost bound to misinterpret them; and those who eschew the conscious use of an explicit and tested logical argument usually merely become the victims of the popular beliefs of their time."
The book I recommend is Complexity and the Economy by W. Brian Arthur. Insightful examination of economics in a way that I have not seen before. Amongst other interesting observations, he advocates that technology precedes the need(s) that it satisfies. The discussion of just the concept of "formation" within economics makes the book worthwhile.
Found the book through a friend's FB post about meeting Arthur at Santa Fe Institute.
I have become something of a collector of different models of social entrepreneurship. For the purposes of being accepted as an example of a different model of social entrepreneurship, the company must be for-profit and have a unique way of delivering measurable social impact. The examples I have collected are not necessarily the first such companies. The only distinction I make is I do not accept CSR projects.
Two examples recently caught my eye:
Wonder how much seafood, if any, Carnival buys from Norton Sound or any other native corporation in Alaska. The new division should consider such questions.
I have just returned from vacation in Alaska. Most majestic landscape I have seen anywhere in the world. As is my custom, I read some books about Alaska and the indigenous population. The indigenous people have been in Alaska for 16,000 years and have survived two ice ages. After 16,000 years in the same place a people develop a comparatively advanced culture very suited to the surroundings. All was bliss and comparative harmony until the Russian explorers arrived in the 1700s.
These early explorers were charged with determining whether a colony should be established. With the abundance of furs, Alaska was a natural location for a colony. In keeping with the "business model" of the time, to establish a successful colony one maximized financial return with complete disregard (exploitation) of the local population. The Russians improved on run of the mill exploitation by kidnapping the natives' wives and children until a ransom was paid in pelts. As the fur trade grew in monetary terms the Russians looked to change the business model from exploitive to sustainable. The Russians were never able to achieve sustainable colonies in Alaska, which prompted them to sell Alaska to the U.S. government for a mere $15 million. The Russians failed because they never engaged the self-interest of the locals and the local market forces to support the colony.
The errors by the Russians are the mistakes I see frequently in social entrepreneurship:
I believe that social entrepreneurship is a temporary form of entrepreneurship and that over time we will no longer need the adjective "social" to differentiate a form of entrepreneurship. With education companies will come to serve a wider range of stakeholders and provide more "social" benefits. Should such a realization be achieved, perhaps that will quiet the critics of capitalism. Such critics claim that capitalism is immoral.
The Institute of Economic Affairs has a well written defense of the morality of capitalism in "Free market capitalism and morality". The article has some excellent citations from Adam Smith's writings. If I could figure out the legal issues, this is the first article in eight years of writing this blog where I would just reprint the article.
BCG.Perspectives has a very interesting new article, "Navigating a World of Digital Disruption". The article focuses on how the BCG clients (F500) can be disrupted and how they can position strategically and tactically to improve their performance. However, I found the more valuable parts to the article to be:
I really liked the graphic below. One point to note, I think you can only strategically focus on one "architecture" at a time for an line of business. For example Amazon uses communities to do book reviews, but the Amazon strategy is a platform strategy for its original business. I THINK A LOT OF STARTUPS TRY TO COMBINE PLATFORM AND COMMUNITY AND THAT IS WHY THEY DO NOT GET FUNDED. YOU CAN ONLY BE ONE.
The article also has an interesting proposal for how NGOs and multi-laterals could re-organize agriculture to be more sustainable and effective through big data.
This is an article worth reading slowly and not speed reading. Thanks to @John_Menenzes for the heads up.
I spent yesterday at the eMerge conference in Miami. While there was a nice list of speakers, I spent most of the day talking to the early stage companies exhibiting and catching up with people in the entrepreneurship community in Miami.
My takeaways from the conference:
In a recent post in Marginal Revolution Tyler Cowen states:
"Some economic sectors are distributed everywhere, like every city has its dentist[s], and other sectors are quite clustered. Banking is pretty clustered — New York, London, Hong Kong. Tech has been evolving in a pretty clustered way; I don’t mean simple software support, which is more like dentistry, but big, grand projects — the next Google, the next Facebook, Uber. We see those come out of quite a small number of places, so Skype coming from Estonia is quite the exception. Even then, it was improved by people in the clusters.
I think any location, not just Canada, has to ask itself, ‘are we going to be one of those clusters or not’? And the correct answer may be ‘no’. It may also be the sector evolves so it’s less clustered and more like dentistry, and then everywhere including Canada would partake. But maybe the future is Canada will have a knowledge sector doing small-scale things like software design for local projects but not anything like its own Silicon Valley. I guess at this point that seems likely — that Canada will not be a huge innovative part of the knowledge economy."
While the Internet Age floats all boats and the standard of living improves in most U.S. cities, not all cities will be centers of entrepreneurship. Critical mass is important, but some comparative advantage is also required to create an entrepreneurship cluster. It is the failure to focus on developing comparative advantage which will undermine the popular entrepreneurship efforts in many cities.
Where can Miami find comparative advantage:
Such a targeted view looks a lot like the "investment thesis" approach of many VCs. Must be a coincidence :)
When I wrote my first book, "Billion Dollar Company: An entrepreneur's guide to business models for high growth companies", I stated that I thought Michael Porter had missed a basic strategic alternative. Porter said there were three alternative strategies:
Based on my experience in Indonesia growing a billion dollar company in seven years, I thought there was a fourth strategy--access to capital. More capital (than the competition) offers two important benefits:
Together these benefits are sufficient to formulate a sustainable strategy, provided product/market fit is well documented.
Yesterday a friend was telling me that Blue Bottle Coffee had raised $45 million in venture investment with only six stores in New York and San Francisco. Subsequent to the investment the company was on a tear to make acquisitions and grow quickly. Looks like a relatively small company planning to grow fast and big through its access to capital. This "strategy" is common in today's market of high valuations and plentiful capital. Appears I may have been right when I said that Porter missed an alternative strategy.