The Big Disruption
The hottest topic in the press over these last weeks is Universal Basic Income whose arrival and necessity is predicated on the assumption that many jobs are going away. However, the second level implication never comes to the fore and that is that all of these employers are also withering, or will wither over the coming two decades. This has profound implications for everything from Venture Capital, employment and the identity of the Fortune 500, S&P 500 and any other list of corporate America you can think of.
If in the last 30 years the thrust of the technology and PC revolution has been about using technology to improve the productivity of businesses and “corporate America.” The next 30 years will be about rebuilding every part of the value chain in every business on a new technology stack. Instead of business that purchases technology, future business will be built on new technology.
In this next series of blog posts, I want to explore this phenomenon from a number of vantage points. The first is venture capital.
Sam Lessin did a great job of calling an end to the lean start-up era. Sam suggested that the low hanging fruit in digital-only businesses like media, social and pure cloud software are already picked and those are the ones best suited for a lean startup model. I think he overstated it for effect but is directionally correct. Startups like Snapchat and/or Nexar* will continue to be built in lean startup fashion. As Social interaction evolves, so will the platforms and apps that support these social interactions or whatever comes next. These will be built leanly and iteratively.
However, much of the next level of innovation will play out in the physical world, the financial markets and the world of experiences. Those innovative companies will take more money up front and they will become ever larger parts of VC portfolios.
I learned this firsthand at WeWork*, which creates an innovative membership business that is built on community and experiences but lives on a commodity physical platform (buildings). Those physical commodities and curated experiences require more capital than say an online user generated media business. You need to buy or lease (through your balance sheet or external financing means), the physical commodity at scale to make the community business work and then you invest upfront in community. Entrepreneurial startups build technology platforms that enable the stack (operating your business) and those software platforms and apps are not sold to others. That costs a lot of upfront money. As more and more physical plant becomes commodity and we move to increase utilization on it, those aggregators** of customers will need to pay for the physical plant and software infrastructure in one way or another and that costs more than a seed round. Oftentimes, those physical environments or platforms rich in customer service require an upfront investment in human beings to insure that they run smoothly.
Our portfolio company Lemonade* is another example of a company for whom the lean startup method would not and did not work. When you try to innovate in regulated industries, you oftentimes need lots of capital both for the regulator and to live through the regulators endless deliberations. Fintech also often requires capital to gain customer trust that you are around for the long haul.
Companies in the logistics and freight area such as our portfolio company Freightos* or Flexport also require larger capital basis as they tackle entrenched industries with arcane business methods and a lot of handholding. These are higher touch businesses with big prizes but they require real capital to get after them.
Robotics, faster transportation such as hyperloop, the warehousing and analysis of big data, sensors and even the scale out of Uber are further examples of a need for larger capital bases to get to product-market fit and early customer success. When you roll out to many cities, you need to slightly alter the product experience to achieve fit and then scale.
All of these trends and upcoming innovations will either increase the amount of early money needed from venture funds (which could impact size of venture funds), or force VC funds earlier, or, encourage VC funds to partner with other types of financial institutions more than they have in the past.
In our next post, we will look at the implications to the Dow, S&P 500 and Corporate Giants of innovation making its way to real world problems.
*Aleph portfolio companies
**Please read Ben Thompson’s epic piece on Aggregation theory.
