All posts by: Daan Witteveen

New technologies and business models require businesses to innovate their products and services faster than ever. Organisations are facing mounting pressures to adopt digitisation, robotisation, artificial intelligence and flexible consumption models. Companies that fail to complete their business transformation timely will eventually lose their ‘right to play’ with closure or M&A as the only options left. Whilst most companies have established innovation processes into their business, business leaders are now facing a new and even bigger challenge. This happens the moment their playground starts changing from value chains to ecosystems …

Smart Cities, Self Driving Vehicles, eHealth and Smart Manufacturing are examples of developments that unfold in new ecosystems. Traditional value chains consisting of a limited number of preferred supplier relationships – albeit very efficient – no longer fit the ecosystem dynamics. Contrary to existing industry dynamics, the complexity of ecosystem value propositions requires intensive collaboration between technology vendors, infrastructure players, platform operators, government institutions, start-ups and universities.

To become relevant in new ecosystems, corporations need to elevate their partnership approach. Yet, despite the effort most corporations take to experiment with open innovation and corporate venturing, business leaders will experience that they need to fundamentally change their operating models too. A new approach is needed as the golden relationship between value creation and value capture – as we know from traditional value chains – is broken in new ecosystems.

In this article I will share my perspectives on the notion of ‘ecosystem value propositions’ and introduce three ecosystem-operating models for organisations to consider to participate, create and capture value in new ecosystems.

Ecosystem Value Propositions

The main characteristic of an ecosystem value proposition (EVP) is that no individual actor is having the knowledge or ability to develop and implement the solution entirely by herself. Examples of new ecosystem value propositions are found in IOT, autonomous-driving, eHealth and the energy transition movement, which are all pulling billions of investments into R&D, start-ups and infrastructure.

Value creation versus value capture

Most operating models have been developed for traditional value chains. These models are typically not applicable to EVPs. In traditional value chains actors are seeking the highest return on investment by optimising the equation between the efforts it takes to create value versus the possibility to capture this value. In the past decades, we have seen the rise of contract manufacturing, business process outsourcing and the services industry. With clear roles, and distinct activities amongst the players in the value chain, value creation and value capture were tightly linked and no profit leakage existed.

Once an industry is exposed to new technologies and business models, the order in the value chain will become diffuse due to new entrants and ‘vertical’ competition. This is even truer in the digital arena. A good example is the media industry whereby content creators, aggregators and distributors are seeing their traditional roles changing as a result of digitisation and over-the-top (OTT) enabled by new video distribution technologies. The clear division of roles no longer exists as content creators have found their way directly to the end-consumer and aggregators are no longer dependent on content distributors only. The result is a growing consumer surplus whereby the end-customers are getting the most benefit: more value at a lower price. The digital transformation in the media industry is a perfect illustration of a broken relationship between value creation and value capture.

Ecosystem-Operating models

For corporations to develop an operating model to successfully participate in the development of an Ecosystem Value Proposition, at least three questions need to be considered:

  1. How to deal with a wide range of different actors such as competitors, start-ups, universities, NGO’s and governmental organisations?
  2. How to organise participation in the ecosystem with regards to roles, activities and contributions?
  3. How to capture value in a situation of little control over the EVP creation process?

Three Ecosystem-Operating models

I see three Ecosystem-Operating models emerging to address the above described questions albeit in a different manner depending on ambition, abilities and risk appetite. The three models are: 1) the platform-operating model, 2) the interface-operating model, and 3) the operator-fund model.

 I.   The platform-operating model

Currently, the default response to industry disruption is the development of a platform strategy. In new ecosystems, platforms are needed to connect the various players, technologies, propositions and customers. The challenge is that for each Ecosystem Value Proposition there is only space for a small number of platforms with the number one taking a more than proportionate stake (see my article on the Value Stack on H17.co). With up to thousands of participants in new ecosystems, traditional industry players need to overcome significant roadblocks with respect to cannibalisation of existing revenue streams, channel conflicts with existing suppliers and clients and the development of a tech & data savvy organisation. Platform strategies may not always be the best option to go after unless one is very confident to successfully deal with above-mentioned roadblocks.

For organisations that are not in a position or don’t have the capabilities to develop a successful platform-operating model, two options remain: the interface-operating model and the operator-fund model.

II.  The interface-operating model

The objective of an interface-operating model is to enable ecosystem collaboration on an activity level throughout the enterprise stack. The purpose is to jointly develop, produce and service a better solution from a user perspective.

Through interfaces – in the digital world called API’s (Application Programming Interfaces) and SDK’s (Software Development Kits) – organisations define which functionalities, activities and data can be exchanged with third parties. More innovation, faster time-to-market and new revenue models are often the result.

There is one caveat of the interface-operating model. If one of the participants in an ecosystem has the ability to turn its business into a platform-operating model, the other players need be aware of the risk of getting locked-in to the platform and to loose the ability to differentiate. Furthermore, there is a tendency that the platform player will start adding along the way more services that were originally provided by the platform participants. Wrong choices in this respect can lead to a ‘race to insignificance’.

In traditional value chains – from sourcing to production to distribution – most companies have organised their relationships contractually. However, in new business areas, organisations are in the early stages of experimenting with open innovation, partnerships and open source. Likewise traditional value chains, these new collaboration models too require a governance approach for IP, data ownership & protection, confidentiality, risk and contribution & reward. For more information see my article ‘Ecosystems require corporations to rethink their corporate governance’ on H17.co‘. However, as there is no established ecosystem governance best practice, I suggest following a four-step approach:

  1. A well-designed interface strategy starts with an organisation to identify the areas to collaborate with third parties. Such collaboration concerns for example the exchange of data, IP, knowledge, insights, products, solutions, sales and customer relationship.
  2. Given the complexity, business leaders are recommended to first select a limited number of areas for ecosystem experimentation and collaboration. Once selected, a principle based partnership framework will govern a wide range of potential partnerships.
  3. From this point onwards, the organisation needs to consistently work on removing any friction that exists for ecosystem players to engage with your organisation. All governance related improvements would be reflected in a regularly updated partnership framework to ensure all learnings are captured.
  4. Only, once a certain partnership (model) is maturing or starting to make serious business impact, the involved partners need to start thinking about formalising the partnership framework into contracts.

III.  The operator-fund model

The operator-fund model consists of a portfolio of loosely coupled business units, portfolio companies, and/or (joint) ventures. While the realisation of cost synergies is not the primary driver, the companies in the group are collaborating on Ecosystem Value Propositions at scale.

Companies executing an operator-fund model pursue the better of two roles: strategic operator and venture capitalist:

  1. Through the strategic operator role, business leaders create a platform for the portfolio companies to develop a winning EVP. Portfolio companies stay relatively independent but are encouraged to seek collaboration within the group. The group only provides support in those areas where it makes a difference.
  2. Through the venture capital model, business leaders have the opportunity to take stake in the development of EVP’s by bringing together the relevant companies and start-ups. Depending on the desired involvement in the portfolio company and the maturity of the MVP, an operator-fund strategy enables a flexible approach towards deal structuring ranging from minority investments, joint ventures, to full acquisitions.

Most Fortune 500 companies have a corporate venturing arm, which is a first step towards the operator-fund model even though a more radical transformation will be needed. See also my articles ‘The return of corporate venturing: business first’ and ‘Ecosystems, driving the core or the developing edge?’ . The investment strategy and portfolio thinking at Alphabet, Naspers and Softbank show interesting elements of how the fund-operator model may unfold in the near future.

Conclusion

In this article I shared my perspectives on the notion of ‘ecosystem value propositions’ and I introduced three ecosystem-operating models: 1) the platform-operating model, 2) the interface-operating model, and 3) the operator-fund model.

Depending on ambition, ability and risk appetite each of the three discussed models could enable an organisation to successfully participate in the development of ecosystem value propositions and to re-establish the broken link between value creation and value capture.

Realising that it is still very uncertain how ecosystem propositions will unfold going forward, please consider the above-described models as a preliminary view in a new but very interesting field that requires more research going forward.

 

 

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Technology companies are disrupting industries, one after another. Yet, most traditional companies have no clue about the way technology companies operate and create value. As traditional strategy and investment analysis frameworks don’t help either, companies are turning from long term planning to agile experimentation. Whilst this is a positive and necessary direction, still lacking is a model that frames investment priorities and venture funding strategies once experiments are gaining traction. In the search for such a framework, I believe that the ‘value stack’ concept provides insightful perspectives on the development of technology companies.

The concept of the value stack was introduced to me by Mike Maples Jr. during his talk at the Stanford Entrepreneurial Thought Leaders program. Mike is partner at Floodgate, a renowned venture capitalist with investments in amongst others twitter, Lyft and Twitch.tv.

The value stack builds upon the notion that the technology industry is subject to three laws:  Moore’s law, Meltcafe’s law and the Power law. Taking the impact of these laws into account, Floodgate sees four hierarchical powers that make up the value stack. Similar to the ‘technology stack’ – a common approach to distinguish the different technology layers that together enable the functionality and performance of a system – the value stack differentiates the key powers that drive the value creation potential of a technology company.

In this blog, I will explain the concept of the value stack and the learnings the framework provides for investment priorities and venture funding strategies. For a first-hand explanation of the value stack concept, I refer to the Stanford Entrepreneurial Thought Leaders podcast by Mike Maples.

I  The three laws of tech entrepreneurship

“Technology eats the world” once said Marc Andreessen. Yet, the combination of three laws make technology entrepreneurship very different compared to running any other kind of business. For those who foregot, a short summary of Moore’s Law, Meltcafe’s law and the Power law:

Moore’s law – the power of exponential growth

Gordon Moore, co-founder and former CEO of Intel predicted that that the performance of computers would double every 24 months at a given price point. Since then, the semiconductor industry lived up to that expectation, resulting in an unprecented growth of the technology sector. Computing performance, internet, data & mobile networks and open source spurred innovation at an exponential rate. Moore was the first to recognise the ‘power of exponential growth’, a concept further being explorerd by Singularity University in a wide range of applications such as robotics, 3D printing and cloud services.

Meltcafe’s Law – the power of network effects

Robert Meltcafe, researcher at the Xerox Palo Alto Research Center (Parc) and founder of 3Com stated that the value of a network is a function of the square of the nodes. Social networks clearly benefit from the network effects. The more members a network has, the more relevant the network will become for each member. Another good example is a crowdfunding such as Kickstarter that succesfully applies ‘the power of network effects’ to unleash the hidden potential of communities to fund creative ideas.

The Power Law

‘The winner takes it all’. The Power law explains why there is often only one dominant player in industries that have become technology enabled.  You will find elements of the Power Law in any sector. Yet, in technology sectors the impact of the Power law on competivess is huge with the number one often having a valuation that is more than the rest of the entire industry and the same applies for the number 2 and so forth. To illustrate the relevance of the Power law, Mike Maples gives the exampe that out of the 10,000 start-ups (nowadays an exeptional 20-30k), start-ups account for 97% of the value creation. Also making the point why the CAPM (capital assest pricing model) is not applicable for valuation of start-ups. I will come back on this later.

Once technology makes its inroad into an industry, the three laws will sooner or later drive industry change. If Moore’s law, Meltcafe’s law and the Power Law are important for start-ups, they are critical for today’s largest corporations.

II  The value stack

Now you understand the impact of the three laws of tech entrepreneurship, you may ask yourself how to apply these insights to assess ventures more effectively. As there is no single right answer to this question, the Value Stack provides an interesting point of view by splitting the value creation process of technology companies into a hierarchy of four powers: proprietary power, product power, company power and category power. By looking through the lenses of these four powers, technology entrepreneurs, VCs and corporate executives are presented a framework to prioritise investment roadmaps and related actions. Let’s discuss the four powers and see how this works out in practise.

Proprietary power

Proprietary power finds its roots in hard core technology and Moores law.  It creates structural competitve advantage. Through innovation technology companies can create an unfair advantage and it helps to avoid the trap of competition. Being different is better than being better. Unique technology creates the basis for unique products and it opens the possibility for companies to seek IP protection and to file patents. Mike Maples recommends us to ask the following fundamental questions:

  1. “What is the advantage of the technology”?
  2. “Do we expect Moores law to happen and why is it that the technology will take-off now?”

Product power

The essence of Product power is product-market fit. It starts with the simple notion that companies need to build products that people want. In this respect, an interesting development is that some early stage investors started to make their investments conditional to succesfull crowdfunding campaigns at Indiegogo. This works out two ways: VCs will only invest once positive support from the crowd which can be considered as an early indication of market proof; for crowd funders, it is gives comfort that professional investors and standing behind a start-up they are funding. Yet, no matter how great the product, it is the market that determines its success. In great markets, the market pulls the product. Or as Mark says “Product power takes place in the tango between product and market”.

Company power

A scalable business model and scalable management systems are the key drivers of Company power. To realise growth technology companies need to consider the level of ‘management debt’ and ‘technical debt’.

Management debt is the capacity to scale such as having a founder/management team in place with the right experience and expertise needed for the job. Yet, in addition to the quality of the team, a high performance team will only function if the culture and practises of the organisation are in line with the company’s values.  Think of for example the employee compensation structure and related KPIs’s. Are they aligned with the company’s values? Another important element of the DNA of an organisation is the purpose it serves. Purpose gives a company a meaning that goes further than profit alone. It gives direction on bith strategic as well on a every day operational level. This is importanf for fast growing start-ups where time and resources are a constant constraint.

Technical debt is the capacity of the technology systems to scale. A very straight forward question in the respect is whether the applications are sufficiently scalable and prepared for high volume processing? Or do we need to rebuild the system?

A scalable business model often makes use of network effects (Meltcafe law). Mark Maples recommends to ask yourselves the following questions to asses the effectiveness of the networks effects a start-up a looking after:

  1. What is my network?
  2. Where are the nodes?
  3. How do they connect?
  4. Where are they strong and where are they weak?
  5. Is it a global or hub & spoke?
  6. What does it mean for me to be the network operator?

Category power

Companies with category power don’t just sell things. They introduce the world to something new. Kevin Maney recently published a book on category kings with the title ‘Play Bigger’. Kevin researched the US venture captital backed start-ups from 2000 tot 2005 and found that category kings are responsible for 76% of the market capitalisation of their market categories (source Newsweek, no 45 2016).

Category power changes our point of view on how we send money. Companies with category power are capuring a significant part of the value the industry they shaped themselves. It speaks for itself that the Power law is most applicable for technology companies with category power. Starbucks, Facebook, Uber and Alibaba and Tencent are just a few examples of leading technology companies that have category power.

III A note on fundraising

You may have noticed that the power laws will start to play out once a technology company makes its way up through the hierarchy of ‘powers’, a fast forward with tail wind from the power laws only to occur by timely navigating the powers. That’s why I believe that the value stack is very applicable for investors and corporations to assess the phase in a company or start-up in, each requiring a different investment strategy.

Proprietary power is seldom  developed by start-ups on its own. Often, universities or R&D labs are involved. The development of product power is typically funded with seed capital, whereas company power is being developed with A/B rounds. Category power, finally, is the domain of late stage investors.

I hope you will benefit from the concepts in this blog. I am looking forward to learn from your reactions.

 

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In the venture economy a constant flux of innovations is hitting the marketplace at an increasing pace. No longer corporations can rely on their existing cashflows from products and services. A three-year forecast horizon is challeging, if not impossible. Yet, despite the rapidly changing business environment, most organisations remain very financially driven. Business cases are required to have a positive return on investment (ROI) and KPI’s are alligned with shareholder returns.

It is common practise that business plans need executive approval. Consequently, the execution leaves little room for flexibility. Current corporate governance models implicitly require a business plan to address specifically how to create value. In ecosystems, however, participants contribute and create value together. This happens step by step in multiple iterations. No business plan, no upfront approvals. Most companies struggle to actively participate in ecosystems. Partnerships, co-creation or open source development don’t fit the current governance models. That’s why corporations rely on corporate venturing and acquisitions to develop new growth areas. Even partnerships are mostly transactional.

To adapt for successful participation value in ecosystems, corporations need to rethink their corporate governance. This blog builds on the ideas presented in my articles ‘The venturing operating model’ and ‘Ecosystems. Driving the core or developing the edge‘, both published on H17.co.

New value creation takes place in ecosystems

I cannot underpin this statement with figures, but my guess is that already today more value is being created in ecosystems than by companies on its own. I am not aware of any newly defined growth area these days that is not ecosystem centric. You only need to take a look at developments in ehealth, tech finance, connected driving, smart cities, or internet of things and you will realise that corporations, knowledge institutions, governments and start-ups are work intensively together. Collaboration is the new business imperative with new emerging business concepts that cover rules of engagement, platforms, contribution & reward and open versus closed.

In the new ecosystems its participants are creating value together. This is very different compared to the traditional supplychain and BPO driven ecosystems whereby transactional value is created by operational optimisation and efficiency.

Ecosystems require a new definition of succes

Assuming that value will be created in ecosystems, companies that take the leap to learn how to navigate in ecosystems will be the winners of tomorrow. Not surprisingly, companies that successfully shape ecosystems have adopted a different definition of success. Let me explain this by setting out five notions that illustrate the point but also give direction to a solution:

I    The ability to contribute effectively to winning ecosystems

The traditional corporate finance view is that success of a business is ultimately measured by the returns to the equity holders set off against a perceived risk profile. From a financial investment perspective this makes sense in an asset based economy. Yet, as organisational goodwill is by large the bigger part of today’s business valuations (versus assets in the past), I am arguing that the key value creation KPI will become the ability of organisations to contribute effectively to winning ecosystems.

II   Contribution and reward go hand in hand

A participant may capture a part of the value created for as long as she continues contributing postively to the ecostem. Contribution and reward go hand in hand. If no one contributes to the ecostem, no value will be created and no rewards will be earned. The open source movement illustrates the power of this principle.

A growing number of technology companies embrace open source software development. They have learned that participating in open source software communities is important to keep up with the latest technology developments. However, more important is that an active open source strategy pulls new talent and ideas to the company.

III  Ecosystem rewards go beyond financial KPIs

In ecosystems, there is a correlation between the rewards and the role & contribution of the respective participants. A reward can be anything that is valued positively by a participant. Financial rewards cover this to only some extend. A useful approach to identify and map ecosystem rewards is the Open Incubation Reward Framework. I have developed this framework for early stage venture teams but the approach can be applied to ecosystem collaboration as well.

Rewards can be anything from learning, speeding-up, access to talent, knowledge, IP, distribution or capacity sharing. According to the Open Incubation Reward framework, most rewards can be grouped in 4 categories. These categories are: Leadership (rewards such as purpose, involvement, influence or decision making); In Kind (rewards such as free products or services, IP, shared capacity, access or learning); Cash (rewards such as payments, fees, salary or royalties), and Equity (such as vesting* shares, options or warrents).

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In my experience setting up a similar framework for orchestrating ecosystem participation can be very helpful as it facilitates a transparent discussion on the roles, contributions & rewards of the participants. Transparency is a key enabler of trust in ecosystems … and trust in it self is the enabler of high energetic collaboration.

IV  Contributions & rewards need to be ‘in balance’

In order for a participant in an ecosystem to continue participating, it is required that its contributions and rewards are balanced and fair. Yet, the sum of the rewards may ad up differently for the participants. A fair balance is not only required for the individual participant. It is also important for the participants accross the ecosystem. This makes the governance of effective ecosystem architecture more complex than conventional management & control practices.

V   Accomomdate for different roles and levels of contributions over time

As always in developing new products or services, the needed skillsets and capabilities may vary over time. Moreover, as the development may shift in unforeseen directions, other skillsets need to be added, whilst other may become obsolete. A well-designed ecosystem governance model needs to accomomdate for different requirements regarding roles and levels of contributions over time. Again transparency is hugely important to cope with time differences.

Conclusion

As more companies are making ecosystems part of their core strategies, a well thought through developed view on ecosystem governance is needed. Both internally as well as in relation to collaboration partners. Most advanced ecosystem strategies take an integrated approach to IP management, talent development, innovation, venturing, mergers & acquisitions and partnerships. Often it is the ecosystem that implicitly sets the rules of engagement to its participants. Companies that have learned how to navigate in ecostems will be the winners of tomorrow.

* A “vesting period” is a period of time an investor or other person holding a right to something must wait until they are capable of fully exercising their rights and until those rights may not be taken away.

 

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On 22 June 2015, Daan Witteveen and Toonbranbergen gave a workshop on the Open Incubation model at LaunchBase, the incubator program of Maastricht Univeristy. Some 1o teams participated in the workshop. In the workshop the 5 main challenges that ventures teams face were discussed:

  1. How to start an open venture together with multiple co-founders and partners?
  2. How to find a balance between contribution & rewards of the venture team members?
  3. What types of contribution & rewards do we recognize?
  4. How to deal with he need for ventures to attract different skillsets both at the start and over time?
  5. How to combine an economical viable business model with social entrepreneurship?

To deal with those questions, the particpants learned how to apply the Open Incubation Contributon & Reward model and the Venture Governance framework. For an impression of the workshop, see the episode on Vidacle.

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With the increased popularity of entrepreneurship, lean, collaborative and open start-ups emerge. Everyday, thousands of new ventures embrace open source software development, common creative licensing, collaboration platforms, crowd sourcing, crowd funding and social entrepreneurship from the start. Technology start-ups have redefined competition. To stay in business, corporates increasingly realise the importance of innovation through venturing and ecosystems. Traditional ecosystems are primarily supply chain driven. In the new ecosystems, we see corporates, start-ups, universities, students and VC’s collaborate to develop new products and solutions. The venture economy is taking of.

Open Incubation

Starting-up of a new venture – commercial or social – is nowadays accessible to anyone wanting to cross the chasm[1]. Venturing platforms and forward thinking by Steve Blank, Eric Ries[2] and Alexander Osterwalder – to name a few – have shown us a new approach to entrepreneurship, venturing and business model design. However, in my conversations with founder teams, I came to realize that it is not only the venture methodology that is changing. The way ventures are being incubated – at the start – is changing as well. Contrary to the 20th century economic model, which was very focused on economic value creation, a new generation of entrepreneurs has started to think differently about the purpose of a venture, its values, organizational design and equity ownership. Thomas Malone describes in his book ‘The Future of Work’ the emergence of loose hierarchies[3]. Lean, open and collaborative venturing approach is what we defined as Open Incubation.

In progress: the Open Incubation Playbook

Lean, open and collaborative ventures need to develop a different perspective on venture governance. A new playbook is required to enable ventures to align the roles, contributions and rewards of their participants. Yancey Strickler, co-founder and CEO Kickstarter, said in an interview with Wired Magazine[4] that projects on Kickstarter “are often funding things on the bleeding edge, we’re tasked with thinking about how the future should be governed. We take this responsibility very seriously”.

In the Open Incubation Playbook, we want to address the challenges that lean, open and collaborative venture teams are facing: How to start an open venture together with multiple co-founders and partners?; How to find a balance between contribution and rewards & benefits of the venture team members?; What types of contribution and rewards & benefits do we recognize?; How to deal with he need for ventures to attract different skillsets both at the start and over time?, and; How to combine an economical viable business model with social entrepreneurship?

Interested? Take a look at the first draft of the Open Incubation Playbook paragraphs

See also the Open Incubation workshop at LaunchBase Maastricht

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Last year as part of the Growth Track program at Deloitte, we invited a number of thought leaders to share with us their view on the world in 2020. Although the speakers were experts in a variety of domains such as technology, social media, economics, life sciences and data analytics, they shared some of the same insights. Those insights covered the obvious and increasing importance of data, analytics and social networks. But also the impact of bio & nano validation and new emerging business and organization models that have to cope with increasing uncertainty and change. Although I had a fairly good understanding of the impact of technology on the way we live and work, it became crystal clear to me that it is the combination of all of those areas that makes it that the tipping point of the future is TODAY.

The tipping point is a concept that describes the moment that a previously unnoticed development has rooted so deep that it suddenly explodes with an overwhelming power. In mathematical terms it can be best explained through a pattern of exponential growth. If you double your results during each period, your performance is times 1000 by period 10 (1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024 …).

Exponential growth is counter intuitive as we typically frame series of events on a linear scale : for example 1,2,3,4,5,6,7,8,9,10. As exponential growth models are difficult to understand we typically we project linear growth in business. This is obviously not correct, as many happenings by nature have an exponential growth component. Moreover, our exposure to exponential growth is increasing as we further move in the hyper connected world. It works out two ways: In a positive sense, exponential network effects are one of the main drivers behind the success of ecommerce and social networking. On the down side , the same network effects are causing more and more black swans of unexpected and unforeseen risks. Our increasing exposure to exponential growth factors makes the search for resilient organizations and business models more relevant than ever ..

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Traditional media companies manage diversified portfolios of newspapers, magazines, Internet, radio and TV channels. As a result of decreasing (print) volumes and a shift of advertising spend from print to Internet, mobile and TV, profit margins are diminishing year over year. Despite the economic down turn, the main reason for the decline is the ‘end game’ which traditional media are experiencing in most of its activities. This accounts for newspapers and magazines but it happens even so for 1.0 websites often acquired by media conglomerates in the late zeros.

Unfortunately, no best practices have been developed in the media sector that show case a new future with a sustainable business model. Where this is true for individual, mostly traditional media companies, a new media model is emerging following the ‘open incubation’ principles based on open innovation and distributed entrepreneurship. I call this ‘platform publishing’ a development that traditional media companies should embrace, but ignored so far …

Platform publishing

Contrary to vertically integrated, non-collaborative media companies, platform publishing is an ecosystem whereby platform based service providers enable the emergence of new innovative micro-publishing models. Platform publishers offer media initiatives, start-ups, bloggers, app developers and content owners access to all services required to develop, manage and exploit a media proposition.

A successful platform publishing provider is WordPress. WordPress, founded in 2003, enables bloggers to easily develop a blog or website. Yet, WordPress would not have been the most successful platform publisher if it had stuck to the provisioning of a blogging platform only. Today, WordPress has developed into the largest ecosystem of bloggers, service providers and ventures that offer thousands of services helping us to develop a blog into a – all strings attached – media or e-commerce company. The third party services are provided through the WordPress (app-)store and range from hosting, advertising optimisation tools, design, site analytics to (micro) payment services.

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Key activities become available ‘… as a Service’ for micro-publishers

Successful platform publishers break down the key activities of media companies into parts and offer these ‘… as a service’ to micro-publishers, ventures, and increasingly large enterprises. As such platform publishing resembles much to the successful franchise model in retail developed in the eighties of the last century. Typical ‘… as a Service’ provided functionalities by platform publishers such as Zanox (affiliate marketing), Facebook, eBay and Amazon are managed hosting, social media tools, (micro) payments solutions, administration, content and editorial tools, reach (access to readers, users and potential clients), advertising, design and functional tools. For sure this list is not limitative as more services are provided day and night …PP3

Platform publishing is democratising venturing

Platform publishing is more than the provisioning of services to micro publishers. Platform publishing is enabling the lean start-up approach introduced by Eric Ries. In the past there was as high barrier to entry for start-ups due to large front-loaded investments in server capacity and software licenses. Today, platform publishers and cloud services are providing similar services much cheaper and based on usage (OPEX). Together with open source software, free content and open licenses (i.e. Creative Commons) hacking a minimal viable product (MVP) can be done in weeks rather than months. As a result, venturing no longer requires large investments (CAPEX) funded by venture capital.

With less money needed a new venture industry is emerging funded by serial entrepreneurs, informal investors and crowd funding platforms. It is only recently that globally the number of (micro) technology start-ups has skyrocketed. Thousands of new start-ups are building new layers of functionality and services based on smartphone sensor technology and existing publishing platforms, again adding new features and services in the field of mobile, social, video and gaming. Platform publishers and cloud services are making entrepreneurship accessible for everyone.

Yin & yang: together expanding the ecosystem

Platform publishers and mirco publishers have developed a ‘yin & yang’ relationship where collaboration has overtaken the zero-sum competition that used to be the default mode in media. Jointly they create a web of ventures and micro publishers that will further expand the ecosystem. The more platforms and ventures, the more new innovation and start-ups will arise. In a formula:

1+1 = 2 (+1) = 3 (+2) = 5 (+2) ….

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Platform publishing will guide media companies to explore new business  models

After years of declining volume and margin, the media industry still is in the first and second phase of transformation.

Traditional media companies have responded to the innovative start-up movement by starting to invest in start-ups through their corporate investment arms (second phase of transformation). Although I believe this a good step forward for media companies to embrace innovation, it does not make their core business such as newspapers, magazines and Internet part of the expanding and democratising platform publishing ecosystems. An active contribution to the emerging platform publishing ecosystems (third phase of transformation) is needed to let media companies create a new future.

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Media companies do not have to start from scratch; instead, the only thing media companies have to do is to make as many as possible internal yet value adding activities available to third parties. Activities that qualify for the platform-publishing model could be sales advertising, administration, content (first look etc.), journalists, editing, printing, profiling, promotion and hosting. It speaks for itself that these services need to be top quality and scalable benefiting both the third party clients and the own media titles.

A radical review of core and non-core activities is needed

Whereas I believe that platform publishing will teach media companies to explore new business models, most media companies consider the above-mentioned activities as non-core. Many activities such as printing, distribution and administration have already been outsourced. A radical review of core and non-core activities is needed for media companies to become a platform publisher. If media companies succeed to become a platform publisher, I expect that, with exception of the main titles and brands, the ‘slope of the tale’ titles will become micro companies (created through buy-outs) using the platform services provided by the media company. If successful the platform services will be noticed by new media ventures and – previously unheard of – competitors …

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For decades governments and business leaders are trying to understand the venturing ecosystem in Silicon Valley. With over 30,000 start-ups, a world leading venture capital industry and continuously emerging high growth technology companies, the Bay Area is the most admirable and innovative ecosystem in the world. Not surprisingly, the Silicon Valley is seen as a best practice for business regions around the world. Many attempts have been made to copy the Silicon Valley model into other places. Yet, despite these efforts, the Bay Area ecosystem remains the single unique place for talent and ideas to unfold. Notably, the valley has several times transformed its ecosystem entirely in the past 40 years. From silicon in the seventies, software in the eighties, internet in the nineties and social in the zeros, the Silicon Valley managed to quickly develop the winners in emerging industries. And again, the Bay Area is in the midst of a transformation refocusing on the maker industry, a movement that is expected to disrupt entire traditional product industries.

In this blog I will share my view on the main differences between the Silicon Valley ecosystem and those we see in the rest of the world. What is required for corporations to become successful in venturing? How to embed (corporate) venturing in the traditional, control based organizations? And how to engage ecosystems in a successful venturing strategy? Before addressing these questions, I will first shortly discuss a key distinguishing factor in the success of the Bay Area. This seldom-discussed factor is the operating model of most Bay Area companies.

The Silicon Valley operating model – designed for growth

In a previous blog on the Future of Business Incubation and Venture Funding, I provided an overview of innovative venture platforms and methodologies that are being developed at the tail of the venture industry. More than ever, starting a start-up is accessible to everyone with a vision, team and drive. New ventures build upon a new breed of venture innovations such as the lean start-up model, cloud services, collaboration platforms, accelerators, crowd funding and micro venture capital. Yet, even though the scale of the venturing industry in the valley is a league of its own, this is not what sets the Silicon Valley apart. In my view – and in addition to the scale of the venturing industry – the secret of the success is to be found in the operating model of the leading tech companies in the Bay Area.

Traditional ecosystems are primarily ‘value chain’ driven where suppliers and knowledge institutions collaborate in the field of production and product development. These collaborations are driven from the ‘core’ of the business. In more advanced ecosystems, players apply an open innovation approach to collaborate on research & development. The value chain collaboration model exists in the Bay Area too, though the main technology players such as Google, Facebook, Twitter, Airbnb, Cisco and Apple follow a different operating model which is critical to the success of the valley. Rather than efficiency driven value chain optimization, the Bay Area operating model is designed to enable growth for both the leading tech players as well as the start-ups. A ‘what is good for you is good for us’ philosophy.

The Silicon Valley operating model consists op three building blocks:

  1. The first component in the operating model is ‘employee mobility’.
  2. The second building block is what I call ‘scaling the core through ‘moon shot’ thinking and living the brand’.
  3. The third component is the continuous focus in the valley on developing platforms and interfaces’.

I      Employee mobility

The number of start-ups in the Bay Area is overwhelming. According to Wired Magazine,  51 new tech companies are launched every month in the San Francisco Bay area.  The majority of these start-ups are struggling to survive and find it hard to raise capital or worse to find clients. While most start-ups fail or will be ‘team hired’ by a larger player, only a smallish percentage of start-ups manage to raise venture capital required to build a company at scale.

In traditional economies such a high failure rate could have serious social and economical side effects, but not so in the Valley. Due to a high employee turnover – in the Bay Area it is very common to change jobs every 2 years – and consequently high employee mobility between established companies and start-ups, the cost of failure is no more than the loss of income in a given time. Entrepreneurial attempts – success or failure – are very positively perceived during job interviews. It speaks for itself that a positive side effect of high employee mobility is the sharing of best practices and learning.

II    Scaling the core through ‘moon shot’ thinking and living the brand

Most tech companies in the valley set audacious goals and a global ambition with a mission to make the world better. At Google this is called ‘moonshot thinking’. Stretching your ambition ‘10x’ requires you to reconsider your underlying business assumptions. As a result new approaches and unexpected solutions may come along your path. Working on a good cause is naturally connected with moonshot thinking. It demands for a system approach rather than a product-only focus. Most tech companies apply design thinking to connect the higher purpose with product development.

On a day-to-day basis, all Silicon Valley companies follow an agile development approach. This in contrast to the ‘waterfall’ development method – in use by most traditional companies – requiring detailed business planning and tight control mechanisms. In this blog I will not describe in detail the agile development approach. The point I want to make is that agile companies have a different view on leadership, organization and empowerment. Traditional management skills and controls are not equipped to deal with instant decision making let alone a culture of experimentation through MVP’s (Minimum Viable Products) and A/B testing. How do Silicon Valley companies manage to align vision and growth with an agile development approach? How do employees and developers know what to do and how to handle issues as they arise? One of my observations during visits to the valley is that all tech companies, both start-up and established, pay a lot of attention to the ‘living of the brand’ in every detail and aspect of the business.

By ‘living the brand’, tech companies in the Bay Area set implicitly the direction for further development. Airbnb has dedicated almost an entire floor in its new office building in San Franco to showcase the brand evolution and the look and feel of rebuild lodges from most visited places across the world. ‘End-user focus’ and ‘details matter’ are the two most heard key messages that are amplified throughout the entire organization, best illustrated by the health food programs in place at all leading players.

‘Living the brand’ is a leadership philosophy that provides teams in high growth companies with guidance to do what they should do. It may seem a contradiction, but the more scalable the platform, the more soft leadership elements you will find in the Bay Area tech companies.

III   Platforms and interfaces

The third component of the Silicon Valley operating model is the ongoing focus of Bay Area tech companies on developing platforms and designing multi layer interfaces into their business model. Examples of platform companies are facebook, twitter, indiegogo, udemy and Android (Google). Examples of interfaces are API’s (Application Programming Interfaces) and App stores. Through developing platforms and API’s, big tech companies enable other companies – often new start-ups – to build new innovative services and product extensions on top the platform. This ‘plug & play’ approach makes it easier for other companies to collaborate. Often standardized governance and revenue share models are readily applicable. The objective of the platform & interface approach is without exception to increase customer value. Please note that this is a very different starting point to collaborate than the value chain oriented players focused on creating efficiencies through outsourcing and off shoring non-core activities.

Ecosystem strategies require corporations to change the operating model

In this blog, I shared a number of observations that I believe are fundamental to the success of the Silicon Valley ecosystem. Much effort has been put into establishing similar ecosystems elsewhere. Mostly, these attempts were focused on stimulating venture capital and entrepreneurship through incubators and entrepreneurship programs. However, with the emerging seed- and crowd funding and platforms – such as Angellist, Indiegogo, Y-combinator and 500 start-ups – seed capital is widely available. Furthermore, the lean start-up methodology advocated by Eric Ries provides a blue print for start-ups to develop an idea into a product, solution or company based on the same end-user orientation as common in Silicon Valley. The lean start-up approach can be applied anyplace and anywhere – not only by start-ups. The missing link in the development of venturing ecosystems is that leading aspirational ecosystem players need to change their operating model too.

Once leading ecosystem players accept employee mobility to be a driver for change, adopt a platform approach and start embedding third party interfaces into their business model, we will start to see flourishing Bay Area alike ecosystems. Further, a strong purpose and a ‘living the brand’ approach will create an environment where full empowerment becomes the norm, replacing top-down management and controls.

As a result, the Silicon Valley operating model enables low barrier collaboration between the leading players and emerging start-ups. Aspirational ecosystem players that adopt this model will increasingly see more growth opportunities through collaboration, investments or acquisitions. A side effect is that entrepreneurs will become less concerned about failure as they now have a fall back scenario to give their start-up learnings a second chance.

Corporate venturing: developing the edge and changing the core

Developing the edge of your business is the most heard goal of corporate venturing. To cope with the need for innovation and new business opportunities, corporate venturing and partnership creation are high priority areas at corporations. Corporate venturing drives connectedness between the corporation and the ecosystem. However, successful ecosystem strategies require the core-operating model of your company to adapt to the three building blocks as described in this blog. Only then corporate venturing will enable the development of new business on the edges of the core activities of today. In other words, aspirational ecosystem players should not only use corporate venturing to develop the edges of the business, it demands the core business to adapt to the needs of an ecosystem as well.

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In the industrial age, the GDP growth in the Western world had been funded by constantly increasing debt levels. Governments, companies and families were able to take on more loans through sofisticated financial instruments. Countries year after year funded deficits with newly issued obligations. As long as the debt in percentage of GDP remained constant, more debt was not considered an issue in the high growth Western economies of the last decades.

Not only governments used debt insruments to fuel growth of the economy. We all took on mortgages, personal loans and car leases. The impact of this loan explosion was twofold. It made us asset rich (inflated though ..) and it boosted the economy through higher spending. While we became richer in terms of assets, the dark side became apparent after the 2008 credit crunch. Many families that bought into the real estate market found that their assets no longer were ‘in the money’ as the value of their properties declined below the mortgage obligations. Incurring debt changes the nature of (legal) ownership into economic ownership of options.

Also companies gradually introduced debt funding as a key instrument to value creation. Whereas 50 years ago loans were occasionally used to fund capital expenditure or working capital, the leveraged buy out market was until 2008, driven by financial leverage capacity of up to 10x EBITDA. The consequent high company valuations created the perception of a bright future and wealth. Again resulting in higher spending and fueling the economy. Yet, similar to the mortgage market, the option (on value creation) became part of the nature of equity ownership. The claim of the equity holders is limitted to value creation (or loss) as the claims of the debt holders come first (interests and repayments). According to the Miller & Modigliani theory, financial leverage creates value as it lowers the cost of capital. Not unlimmitted though. The credit crunch illustrated clearly that the pay off of to much leverage is an increased risk profile and credit default risk…

Debt and oil fueled the industrial economy. It created wellfare and GDP growth. It made many of us wealthy. However, the flipside of the debt fueled economy is the following: legal ownership is not the same as economic ownership and these two types of ownership diverted more and more. Too much debt makes us vulnerable to risk. It is obvious that more debt is not an option. This is even more true as continuous innovation & industry disruption result in shorter Product Life Cycles’s with a shorter forecast horizon and increased risk.

So what is next? How to develop a new democratized and mindful economy? Open Incubation is building upon social & open innovation and distributed entrepreneurship. In this blog I will explore the concept op Open Incubation, provide cases and develop a framework.

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On 28 November, Deloitte announced the EMEA Deloitte Technology Fast500 winners in London. The technology industry is renowned for its innovation and disruptive business models. Over the past years highly successful tech exits and IPO’s became trending topics. I mention the recent IPO of twitter and the recently announced acquisition of the Israeli start-up PrimeSense (Fast50 Rising Star in 2011) by Apple.

In this blog, I will share three initial M&A observations of the Fast50 companies over the period 2008-2012. The observations are based on Deloitte research of the Fast50 programs in Continental Europe, Israel and Canada.

Observation 1 – Technology has become a very M&A active industry

In Q1 2013, the TMT (Technology, Media & Telecommunications) share of all transactions globally reached a stunning percentage 20%. Within the TMT industry, 2/3 of the deal volume is technology and internet. Not surprisingly, the US is leading with a TMT share of almost 25%, meaning that 1 of every 4 transactions in the US is within the TMT industry. In Europe the TMT share is 17%. Yet, in 2012, MergerMarket recorded 900 TMT deals in Europe versus 1000 TMT deals in the US. To illustrate the M&A activity of Fast50 companies: in the Benelux, roughly a third of all Fast50 companies have involved in an M&A or fund raising event over a period of 5 years.

Continuous innovation, internet platforms and connectivity result in shorter product life cycles. More than ever, TMT companies need to consciously and constantly ride the path from innovation to scalability to efficiency. The window of opportunity is short. Not surprisingly, we see a variety of M&A strategies within the TMT industry, but also within companies. This makes TMT industry unique from an M&A perspective

Large corporations in the TMT industry pursue three types of M&A strategies simultaneously:

  1. International consolidation, currently taking place in Telco and Media and driven by scale and (network) synergies
  2. Cross industry acquisitions of innovative and fast growing Technology players, e.g. Technology Fast50 winners
  3. The rebirth of Corporate Venturing. Corporate Venturing used to be in the late nineties a popular approach to build ‘options’ through investments in innovative start-ups. These days corporate venturing is much more focused on developing adjacent business areas or applications.

Observation 2 – ‘Buy & build’ is the dominant M&A strategy in the EMEA Deloitte Technology Fast500

As for the large TMT corporations, Deloitte research indicates the same variety of M&A strategies among the Fast50 companies in Continental Europe, Israel and Cananda. Clearly, venture capital is important with a share of 33% of all Fast50 transactions. Yet, exits only represent 10% the transactions and quite surprisingly, buy & build is the largest M&A strategy with a share of 39%. This means that Fast50 companies start doing ‘smart’ acquisitions early in its career.

The data shows a new perspective on venturing in Continental Europe. Fast50 companies actively pursue ‘smart’ acquisitions to realize growth and to develop new compentencies. Building companies to last is the mantra. My experience with Fast50 entrepreneurs is that an exit is not the primary objective unless the business opportunity requires so. The Continental European model clearly differs from the ‘blockbuster’ venture capital model renowned for Silicon Valley and Israel.

Observation 3 – M&A strategies vary significantly per country. This reflects the different nature of the technology ecosystems in Continental Europe

In our research, we have noticed significant differences in M&A strategies for Fast50 companies per country. In the Netherlands, with Amsterdam as the hub for internet & cloud start-ups and Eindhoven, Delft and Enschede focussed on technology and nano technology, all transaction types such as venture capital, growth capital, buy & build, MBO and exit are more or less evenly spread. In the CEE countries 50% of all Fast50 transactions are buy & build. The second largest category in the CEE countries is growth capital. Growth capital and buy & build strategies often go hand in hand. In Turkey buy & build accounts for 75% and Portugal leads with 82%.

The outliers are France and Israel. 2/3 of all Fast50 transactions in France were exits. In Israel 93% of all Fast50 transactions were venture capital. Clearly, the venture ecosystem in Israel shares the most characteristics with the Silicon Valley blockbuster start-up model.

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Innovation and entrepreneurship are hughly important to transform our economies. Not an easy undertaking these days. Yet, despite the financial crisis and increasing unemployment rates, I like to mention two disruptive developments that, in addition to crowd funding (see blog ‘OpenIncubation goes mainstream though crowd funding’) will boost exponential innovation and entrepreneurship to unprecedented levels. These developments are mobile payments and online collaboration platforms.

Mobile payments & micro businesses

The first disruptive development takes place in Africa where telecom operators provide mobile payment services to millions of people who previously had no banking account but did have a mobile phone. The widespread acceptance of mobile payments in Africa is spurring entrepreneurship, exponential innovation and business opportunities. Safaricom, the Kenyan mobile-phone operator who successfully introduced the mobile payments service M-PESA, now widens its mobile payments services to savings and loans. This way, micro-business financing becomes available to anyone with a mobile phone. M-PESA is already being used by almost 15 million people out of a population of 19 million adults.

 Safaricom

Open collaboration platforms

The second disruptive development to transform our economies comes from open innovation and collaboration platforms such as Odesk.com (collaboration platform for freelancers), Githup.com (open collaboration platform for coders), Kaggle.com (collaboration platform for data analytics) and Innocentive.com (collaboration platform for problem solvers). An increasing number of freelancers, entrepreneurs, students and corporate institutions participate on these distributed collaboration platforms to create unseen opportunities on a scale that was previously only achievable by multinational corporations.

Github

Entrance to the global economy

The combination of mobile payments and online collaboration platforms are the seeding ground for further exponential innovation in Africa. It provides the African workforce a non-barrier, very competitive entrance to the global economy. Not surprisingly, Kenya is seen as one of the most innovative regions in the world. In Europe, I expect that platform enabled entrepreneurship will become soon the alternative route to stimulate and transform our weak economies. Welcome to the Venture economy.

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Daan Witteveen is industry leader Technology Media & Telecom (TMT) at Deloitte with a passion for technology enabled business models, innovation and venturing. When asked what human nature is to him in his field, Daan replies: “Human nature is to initiate what’s important at any time while taking ownership and responsibility over the execution of the idea: also called ‘distributed entrepreneurship’. Entrepreneurship that is accessible to everyone.” According to Daan technology developments enables this, spreading innovation quickly.

The future of innovation and entrepreneurship

In the industrial economy, small companies were mainly active on a local scale while the global market place was for large multinationals. In the last decade however, new technology is rapidly changing the business landscape enabling innovation and boosting entrepreneurship in both multinationals as well as through thousands of start-ups.

IT systems such as ERP and CRM are supporting the primary activities of a company. Yet, in the digital age these primary activities are becoming digitized as well. Digital companies create competitive advantage through real time (big) data analytics resulting in continuous improvement of the primary activities. “Large data will have a huge impact on innovation, venturing and collaboration”, according to Daan. “Or to put it in other words, the way we run our business, we collaborate and how we organize ourselves will be thrown in the coming years.” Daan sees three emerging trends:

Cloud as a platform for business, innovation and venturing

As traditional enterprise applications are moving to the cloud and software is provided ‘as a service’, it is the business owner and no longer the IT department that decides on which software to deploy. Ever more of these applications truly focus on enabling innovative and adaptive business models. Not only multinationals and large institutions benefit from cloud solutions, Daan says. Due to sharp declining IT development costs through cloud solutions and open source software, new venture models arise such as lean ventures and start-up boot camps. “In the near future I expect the emergence of a few highly successful technology driven business platforms in the likes of Amazon, Facebook, Salesforce.com, Innocentive and eBay.”

The company ‘as a service’ fostering distributed entrepreneurship

Think of the world consisting of platforms available ‘as a service’. Governments make rules and regulations to create frameworks for collaboration. Roads, railways, power and data networks are available as a utility or ‘infrastructure as a service’. Note that it was not long ago that many of these services were considered proprietary for the happy few.  However, once available for everybody these platforms, provided ‘as a service’, boosted our economic growth and welfare. The importance of the railways in the 19th century on the US economy is in essence not different from the tremendous impact the 2G and 3G mobile networks had on the European economy.

Daan asks us to imagine that ultimately everything will become available ‘as a service’, i.e. proprietary ownership is no longer relevant. “Would it be possible for entrepreneurs to start a venture? A venture whereby the key building blocks of the required corporation become available ‘as a service’?” Daan believes that ultimately cloud computing, technology enabled services and open source software applications will take away all barriers to start an organization of any kind. Collaboration tools support systems for bookkeeping and invoicing and whatever you can think of will sooner or later become available as a service. Mostly available for free or pay as you go, no upfront costs. The company as a utility or ‘as a service’ may turn every idea, plan or dream into a venture. In this new world entrepreneurship is not only possible within the walls of the corporation. Distributed entrepreneurship is just a few clicks away …

Technology platforms and applications ‘as a service’ will replace outsourcing

Traditional outsourcing is about taking over entire business processes by third parties. While business process outsourcing made companies more efficient and cost effective, the benefits are mainly achieved on a macro level. On a micro level the opposite is happening. Due to strict service level agreements (SLA’s), innovation and entrepreneurship were only allowed within the existing SLA frameworks and objectives. No surprise that insourcing is in the rebound. This is not only because innovation is limited by the principal-agent relationship formalities, but also because more and more traditionally outsourced solutions become available ‘as a service’. It puts the principal back in control over the entire process, realizing the same efficiency in a more adaptive manner. Good examples are found in the banking, insurance and mortgage industry in the field of claim handling, fraud detection and online banking. What is your core business in the future?

POSTED BY LIEKE VOERMANS ON NOV 15, 2011 on http://www.tedxamsterdam.com/2011/human-nature-forecast-daan-witteveen-on-innovation/

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Open Incubation builds upon open innovation and distributed entrepreneurship. Open Incubation is a game changing development in innovation and venturing. It captures concepts such as lean, agile, collaboration, openness, social and sharing. Open Incubation is an invitation to participate in the creation of a new democratized and mindful economy.

OpenIncubation.com will explore the concept of Open Incubation, provide case material and develop a framework. The quadrant in this post will be used in an article on Open Incubation which will be published in a few weeks. We welcome comments and suggestions.

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For decades governments and business leaders are trying to understand the venturing ecosystem in Silicon Valley. With over 30,000 start-ups, a world leading venture capital industry and continuously emerging high growth technology companies, the Bay Area is the most admirable and innovative ecosystem in the world. Not surprisingly, the Silicon Valley is seen as a best practice for business regions around the world. Many attempts have been made to copy the Silicon Valley model into other places. Yet, despite these efforts, the Bay Area ecosystem remains the single unique place for talent and ideas to unfold. Notably, the valley has several times transformed its ecosystem entirely in the past 40 years. From silicon in the seventies, software in the eighties, internet in the nineties and social in the zeros, the Silicon Valley managed to quickly develop the winners in emerging industries. And again, the Bay Area is in the midst of a transformation refocusing on the maker industry, a movement that is expected to disrupt entire traditional product industries.

More than ever, starting a start-up is accessible to everyone with a vision, team and drive. New ventures build upon a new breed of venture innovations such as the lean start-up model, cloud services, collaboration platforms, accelerators, crowd funding and micro venture capital. Yet, even though the scale of the venturing industry in the valley is a league of its own, this is not what sets the Silicon Valley apart. In my view – and in addition to the scale of the venturing industry – the secret of the success is to be found in the venturing operating model of the leading tech companies in the Bay Area.

Traditional ecosystems are primarily ‘value chain’ driven where suppliers and knowledge institutions collaborate in the field of production and product development. These collaborations are driven from the ‘core’ of the business. In more advanced ecosystems, players apply an open innovation approach to collaborate on research & development. The value chain collaboration model exists in the Bay Area too, though the main technology players such as Google, Facebook, Twitter, Airbnb, Cisco and Apple follow a different operating model which is critical to the success of the valley. Rather than efficiency driven value chain optimization, the Bay Area operating model is designed to enable growth for both the leading tech players as well as the start-ups. A ‘what is good for you is good for us’ philosophy.

The venturing operating model in the Bay Area consists op three building blocks:

  1. Employee mobility
  2. Scaling the core through moon shot thinking and living the purpose
  3. Developing platforms and interfaces

Building block 1          Employee mobility

The number of start-ups in the Bay Area is overwhelming. According to Wired Magazine, it is estimated that over 30,000 start-ups are working on some kind product, solutions or feature. The majority of these start-ups are struggling to survive and find it hard to raise capital or worse to find clients. While most start-ups fail or will be ‘team hired’ by a larger player, only a smallish percentage of start-ups manage to raise venture capital required to build a company at scale.

In traditional economies such a high failure rate could have serious social and economical side effects, but not so in the Valley. Due to a high employee turnover – in the Bay Area it is very common to change jobs every 2 years – and consequently high employee mobility between established companies and start-ups, the cost of failure is no more than the loss of income in a given time. Entrepreneurial attempts – success or failure – are very positively perceived during job interviews. It speaks for itself that a positive side effect of high employee mobility is the sharing of best practices and learning.

Building block 2          Scaling the core through ‘moon shot’ thinking and ‘living the purpose’

Most tech companies in the valley set audacious goals and a global ambition with a mission to make the world better. At Google this is called ‘ moonshot thinking’. Stretching your ambition ‘10x’ requires you to reconsider your underlying business assumptions. As a result new approaches and unexpected solutions may come along your path. Working on a good cause is naturally connected with moonshot thinking. It demands for a system approach rather than a product-only focus. Most tech companies apply design thinking to connect the higher purpose with product development.

On a day-to-day basis, all Silicon Valley companies follow an agile development approach. This in contrast to the ‘waterfall’ development method – in use by most traditional companies – requiring detailed business planning and tight control mechanisms. Agile companies have a different view on leadership, organization and empowerment. Traditional management skills and controls are not equipped to deal with instant decision making let alone a culture of experimentation through MVP’s (Minimum Viable Products) and A/B testing. How do Silicon Valley companies manage to align vision and growth with an agile development approach? How do employees and developers know what to do and how to handle issues as they arise? One of my observations during visits to the valley is that all tech companies, both start-up and established, pay a lot of attention to the ‘living of the purpose’ in every detail and aspect of the business.

By ‘living the purpose’, tech companies in the Bay Area set implicitly the direction for further development. Airbnb has dedicated almost an entire floor in its new office building in San Franco to showcase the brand evolution and the look and feel of rebuild lodges from most visited places across the world. ‘End-user focus’ and ‘details matter’ are the two most heard key messages that are amplified throughout the entire organization, best illustrated by the health food programs in place at all leading players.

‘Living the purpose’ is a leadership philosophy that provides teams in high growth companies with guidance to do what they should do. It may seem a contradiction, but the more scalable the platform, the more soft leadership elements you will find in the Bay Area tech companies.

Building block 3          Platforms and interfaces

The third component of the Silicon Valley operating model is the ongoing focus of Bay Area tech companies on developing platforms and designing multi layer interfaces into their business model. Examples of platform companies are facebook, twitter, indiegogo, udemy and Android (Google). Examples of interfaces are API’s (Application Programming Interfaces) and App stores. Through developing platforms and API’s, big tech companies enable other companies – often new start-ups – to build new innovative services and product extensions on top of the platform. This ‘plug & play’ approach makes it easier for other companies to collaborate. Often standardized governance and revenue share models are readily applicable. The objective of the platform & interface approach is without exception to increase customer value. Please note that this is a very different starting point to collaborate than the value chain oriented players focused on creating efficiencies through outsourcing and off shoring non-core activities.

Continue Reading →

Much effort has been put into establishing venturing ecosystems. Mostly, these attempts were focused on stimulating venture capital and entrepreneurship through incubators and entrepreneurship programs. However, with the emerging seed- and crowdfunding platforms – such as Angellist, Indiegogo, Y-combinator and 500 start-ups – seed capital is widely available. Furthermore, the lean start-up methodology advocated by Eric Ries provides a blue print for start-ups to develop an idea into a product, solution or company based on the same end-user orientation as common in Silicon Valley. The lean start-up approach can be applied anyplace and anywhere – not only by start-ups. The missing link in the development of venturing ecosystems is that leading aspirational ecosystem players need to change their operating model too.

Once leading ecosystem players accept employee mobility to be a driver for change, adopt a platform approach and start embedding third party interfaces into their business model, we will start to see flourishing Bay Area alike ecosystems. Further, a strong purpose and a ‘living the purpose’ approach will create an environment where full empowerment becomes the norm, replacing top-down management and controls.

As a result, the Silicon Valley operating model enables low barrier collaboration between the leading players and emerging start-ups. Aspirational ecosystem players that adopt this model will increasingly see more growth opportunities through collaboration, investments or acquisitions. A side effect is that entrepreneurs will become less concerned about failure as they now have a fall back scenario to give their start-up learnings a second chance.

Continue Reading →

Ask yourself: “Are we in business to create or do we cultivate a culture of protecting market share, revenue, profit or headcount … ?“

For a long time corporations and start-ups had not much in common when it comes to culture, risk appetite, values and economics. The start-up is innovative and entrepreneurial whereas the corporation has to manage (read: protect) its competitive advantage based on intellectual property and a (global) infrastructure for production and distribution.

Notwithstanding the differences, both corporations and start-ups realise the need to enter into a symbiotic relationship. Product Life Cycles (PLCs) are shortening and the rules of business are changing. Corporations start to realize that competitive advantage is no longer a guarantee for sustainable profit. Yet, start-ups are facing the downside of the shortening PLCs too. If a new product or service gets traction, a new venture needs to scale up quickly as the window of opportunity is short. Sooner than ever the newly launched products or services will hit the maturity phase. In the maturity phase products and services are no longer unique, resulting in fierce competition and margin erosion.

For decades successful start-ups were acquired by corporates as an extension to the product or service portfolio. To fully exploit the synergy potential, acquired companies were integrated into the new parent. Albeit good for efficiency, you will have a hard time trying to find what is left over of the once admired entrepreneurship and innovative culture at the acquired start-up. Not surprisingly, some statistics tell us that 80% of those acquisitions fail. Not a good start, now corporates need to innovate more than ever. It is therefore that we take a closer look at the Bay Area ecosystem and its venturing operating model.

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The ability to pivot – changing direction – is one of the core assets of an early stage venture team. Collaboration and (crowd) funding platforms enable millions of entrepreneurs, hackers, specialists, investors, backers and visionaries to collaborate and to eliminate high up-front funding requirements allowing a start-up to stay lean, to pivot when needed and to search for an innovative technology and business model

Crowdfunding

Crowd funding enables potential customers, participants, friends & family, supporters or stakeholders to financially support an initiative such as a project, charity or start-up. Well-known international players are Causes, Kickstarter, Indiegogo and Ulule. In addition, numerous niche or local crowd funding initiatives have been started such as Sonicangel, Appbackr, Crowdaboutnow, Symbid and Seeds.

Crowd funding portals can be divided in four categories: consumer lending, reward based, donation based and venture capital. Mostly, the individual contributions are small, less than $1000. However, it is these small amounts that make crowd funding a unique value proposition: dozens of small amounts collected through the ‘crowd’ can make the once impossible, possible today. Crowd funding will become a great enabler of social innovation building upon the network effects of social media and the ease of use of online payment services.

Crowd funding portals are emerging as ‘customer/stakeholder engagement platforms’. It is not only another funding approach. Crowd funding platforms help individuals, groups and start-ups to develop products and to realize dreams with the (financial) support of backers. These backers can be individuals, potential customers, employees, supporters, jobbers, companies, partners or stakeholders. In addition to backing these projects financially this group is more than happy to help, collaborate and to provide valuable feedback on early product releases. Moreover, these groups are likely to promote your proposition into their networks. Crowd funding is therefore more than a funding alternative. It is a platform to raise ‘smart money’, organize the ecosystem and to catalyze ‘word of mouth’ … all very important building blocks for start-ups to launch successfully.

Collaboration platforms

Collaboration between groups of people with a shared interest or passion has never been easier. A large number of – very different – collaboration platforms exist to enable groups to work together. In this section, I have highlighted 5 collaboration platforms that I find useful:

  1. Github – This open source software platform enables to coders to collaborate, review code and to manage code. It is evolving to a platform where makers team-up and create
  2. Assembly – platform to bring together teams to work on new projects and ventures
  3. Whatsapp – very easy to use messenger, especially for early stage venture teams
  4. Alterdesk – great messenger to ensure more efficient and effective business communication
  5. HipChat – another great messenger to communicate and share within venture teams

A more extensive list of online collaboration tools is available on ZEEF.com

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A new venturing model is being developed at the tail of the venture industry. It is based on innovations in venturing such as the lean start-up[1] methodology, cloud services, collaboration platforms, accelerators, crowd funding and micro venture capital platforms. These developments are the building blocks of an emerging venture economy in which start-ups, institutions as well as corporates participate. Yet, before we explore the main drivers towards the venture economy, we first have to deal with the limitations of the venturing practices of today.

I see five key challenges to make the venture economy happen. These challenges[2] are: the exclusivity of VC blockbuster model; poor performance of seed capital funds, rigid focus on the execution of the business plan; the corporate performance trap and the dna gap: corporate vs start-up.

The exclusivity of the blockbuster VC model

The blockbuster VC model is only applicable for a very small number of potentially ultra successful start-ups. For the entrepreneur this is a high-risk, though potentially high rewarding trajectory. What are the funding models for the very large group of remaining start-ups that do not fit into the blockbuster VC model?

Poor performance of seed capital funds

On average seed capital funds generate poor returns. Only a small group of top quartile performing seed capital and multi-stage VCs is attracting the most sought after start-ups. Moreover, most seed capital providers provide additional services such as business development, access to networks and talent recruitment, making the balance between effort, investment and return even worse …

Rigid focus on the execution of the business plan

In the traditional start-up model, entrepreneurs build a team to develop proprietary IP based on a business plan. Funding will be attracted based on the realisation of the milestones outlined in the business plan. The reality is that every entrepreneur knows that initial business ideas never come to life according to plan. Most entrepreneurs need to pivot their plans several times before the business gets traction. Yet, pivoting your business into new directions is difficult to explain to investors and building a business without a team is even a greater challenge.

The corporate performance trap

Imagine, that any good idea would find an entrepreneurial team with the right mix of capabilities, experience and stamina. It would certainly cause an explosion of breakthrough innovations improving our life, health and welfare. Unfortunately, most people are stuck in day filling jobs experiencing on-going performance pressure. No room is left for experimentation, not to mention venturing activities.

The dna gap: corporate vs start-up

Entrepreneurship is pivotal for the economy. As product life cycles (PLCs) are rapidly shrinking and businesses become mature sooner than ever, innovation and entrepreneurship should be in the soul of any corporation. A sharp contrast to the corporate dna focussed on planning & control and developing proprietary IP, not to mention the ‘not invented here syndrome’. Start-ups can fill in the gap and help corporates and institutions to innovate. They even might need corporates to leverage on their scale as the window of opportunity for start-ups is shrinking as well (the same shrinking PLCs ..)

[1] I recommend to read The Lean Start-up of Eric Ries

[2] Please note that for the sake of the argument, I have simplified the challenges

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While corporates and ventures need each other more than ever, M&A is no longer the exclusive recipe for success. A smart approach is needed to preserve the venture culture on the one hand and to optimally benefit from corporate infrastructure and platforms. This is why we see the return of corporate venturing.

In the late nineties, corporate venturing came into existence as corporate leaders realized that technology bets became too risky. Through corporate venturing, business leaders created an instrument to hedge their technology choices. The consequence of investing pockets of venture capital in early stage start-ups was that corporate venturing stood at a far distance from the core business …

In the last decade, a new corporate venturing approach is emerging. Rather than hedging technology choices, corporate venturing has returned to facilitate innovation and business development in the core business itself and its adjacencies. Establishing a ‘business partnership’ is the main priority of corporate venturing. The equity investment is no more than an instrument to strengthen the partnership and to capture the value creation as a result of that.

Developing the edges of your business is the most heard goal of corporate venturing. To cope with the need for innovation and new business opportunities, corporate venturing and partnership creation are high priority areas at corporations. Corporate venturing drives connectedness between the corporation and the ecosystem. However, successful ecosystem strategies require the core-operating model of your company to adapt to the three building blocks: ‘Employee mobility’; ‘Scaling the core through moon shot thinking and living the purpose’; and ‘Developing platforms and interfaces’. Only then corporate venturing will enable the development of new business on the edges of the core activities of today. In other words, aspirational ecosystem players should not only use corporate venturing to develop the edges of the business, it demands the core business to adapt to the needs of an ecosystem as well.

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Needless to say that it is hard to predict the future of business incubation and venture funding. Nonetheless, we see a number of trends of breakthrough methodologies and innovations that are changing the venturing landscape dramatically. Interestingly, these innovations are taking place at the tail of the investment curve – the area of incubation and seed funding. Like, the in my blog ‘the five challenges of the venture economy’, I have summarised the main emerging innovations in venturing into five building blocks: democratised entrepreneurship, a broader definition of contribution & reward, explore the opportunity, building upon a vision, transparency and empowerment, and the corporation revised (platforms enabling venture ecosystems). These trends address to a large degree ‘the challenges of the venture economy’ described in the previous paragraph.

The challenges of the venture economy and the corresponding observations of the developments in the venturing practise today give us direction on how the future of business incubation and funding models will develop. Together, they might become the foundation for the development of the venture economy consisting of ecosystems of innovative microbusiness and platform driven corporations and institutions.

Democratised entrepreneurship

Whilst the VC blockbuster model is only suitable for a small number of potentially ultra successful start-ups, a number of venturing developments enable entrepreneurship for a much wider audience. I am very hopeful about the potential impact of dozens of successful micro-finance initiatives, micro-venture capital funds and crowd funding platforms. Moreover, most cloud services and (mobile) collaboration platforms are making entrepreneurship much more accessible and scalable than ever before. Cloud services reduce the up-front investments for start-ups and through API’s, ventures can integrate those cloud services into their own offering.

A broader definition of contribution & reward

A broader definition of the contribution and reward of the participants of a venture is entering the ‘cap tables’. This definition should go further than ‘exit driven’ return on investment (for the investors) or salary and stock options of the venture employees. In an open incubation model where participants collaborate to develop a product or solution, a transparent governance framework is needed to agree on the contribution and reward structure for all participants. Clearly, the contribution may vary not only in nature but also in time. Similarly, the reward structure may vary as well and could comprise of for example shares, cash compensation, salary, free products or access to IP (i.e. open source).

Explore the opportunity, building upon a vision

Eric Ries describes in his bestseller book ‘The Lean Start-up’ a radical different venture methodology. Instead of developing a detailed business plan, Eric Ries advocates short development sprints of the MVP (Minimum Viable Product) followed by the execution of a thorough testing plan focussed on obtaining customer feedback early in the development process.

Transparency and empowerment

Ventures that work remotely together in a network of partners and open-source development teams experienced that the traditional command & control management model does no longer work. Instead, new organisational models are emerging based in full transparency and empowerment of the venture teams.

The corporation revised: platforms: platforms enabling venture ecosystems

Over the last decades corporations and institutions have reinvented themselves several times. Vertically integrated industries transformed into supply chain driven networks driving efficiency whilst benefitting from flexible scalability. The next challenge for large corporations is to find an answer to shrinking PLC’s of their offerings, making products and solutions obsolete sooner than ever. Current thinking is that corporations and institutions need to adapt an agile organisational structure with an increased focus on innovation, partnerships and corporate venturing. I expect that corporations and institutions will transform into ecosystems of (cloud based) platform providers and innovative, customer focussed micro businesses operating through API’s on those platforms. Whilst this may sound futuristic, most large corporates have already established corporate venturing teams to invest in new business opportunities and to explore partnerships.

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It’s through the blockbuster VC model that the venture capital industry became renowned for fuelling innovation and entrepreneurship. In the next decade this model will no longer be the exclusive venturing approach. Venturing will become accessible to any one with an idea and deep desire to establish change.

The vision of the Open Incubation model is that venturing will become the default mode for students, entrepreneurs, employees, their companies or anyone looking for a sidekick. Thanks to developments in social- and open innovation, lean venturing, collaboration portals and last but not least crowd funding, we expect open incubation to become mainstream soon.

Welcome to the venture economy!

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