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Disruptive Innovation

(via a post at )

by Venkatesh Rao, it's all going to collapse!!

Modern basic science tends to take far longer to reach markets than it used to (~20-30 years at least), so if you are focusing on the next decade, basic science is not the place to look. You want to look at market pull based around known problems and opportunities and validated disruption patterns rather than disruption potential of basic science innovations.

Here are some of my favorite things to bet on. I'd bet on them if I had anything to bet.

  1. Anything that makes urban infrastructure smarter: early examples of the pattern include zipcar and shared bikes, dynamic city entry tolls in cities for auto traffic, highly efficient drip irrigation…the potential gains are huge. In Vegas where I live, they managed to cut water consumption by 1/3 while growing during the last boom.
  2. Anything that utilizes underutilized capacity: early examples of the pattern: Airbnb, freecycle. Obvious examples of underutilized things: west-to-east container shipping, empty car seats (already being attacked by a few startups), non-peak public transportation use…
  3. Leapfroggers: anything that allows developing and poor countries to leapfrog the development paths of the West and Japan. So… cellphone based banking in Africa, private sector rail and road building in India…
  4. Trust-for-money trade: anything that supports substitution of a dollar economy activity with a relationship economy or gift economy activity, mediated by low-friction trust development environments. Examples: freecycle, couchsurfing.
  5. Deprofessionalization/democratization: if you thought blogging taking down professional writing, and amateur photography threatening professional photography were big, you ain't seen nothing yet. Tons of problems that previously required professional expertise to solve can now be re-engineered so that amateurs can solve them. Movies and education are next. Any technology that turns amateurs into professionals by providing the right set of tools is a biggie. Think of any kind of professional expert. Now think about what set of tools could make a self-taught amateur (or set of amateurs) replace that expert. Look around. If the tools don't exist, but the high-margin professionals and eager amateurs do, try and invent them. A big opportunity here is for amateur animated video shows. There are some primitive things that get animated characters speak out scripts, but we've barely scratched the surface.
  6. Standardization and “commonization”: for the last 20 years, the tech sector has been evolving about 1000x faster than the political and legal sectors. This means tons of stuff that are really better set up as public standards or “commons” are now in the hands of private entities. Like the Facebook “Like” button. That's like late 19th century America when all sorts of banks were issuing currencies. Whoever can trigger standardization or commonsization can win big in collateral activities. That's one reason WordPress won over other early blogging platforms. They realized it is fundamentally a commons type public good, and Matt Mullenweg smartly stepped aside and made Automattic the steward rather than owner. Ditto Jimmy Wales and Wikipedia.
  7. Local, Slow Technology: This stuff is emerging as a backlash to the illegibility of big systems and a desire for more comprehensible local dynamics. It may have its fundamental delusions about how “local” the world can get, but that doesn't mean there is no opportunity here. The world IS far too centralized around large-scale thinking. There is a lot of opportunity for what some people are calling the “Whole Foods-ization” of the market. But the existing “local tech” is either naive or inadequate. Farmers' markets for example, have seen declining margins in recent years because there are now too many of them. A great example of how to do local right is fishing in India. Fishermen now use cellphones to get real-time updates about going prices for fish in different coastal markets, and sail right to the best markets to maximize their earnings. In the US, tweeting food trucks are sort of starting to get the idea, but there's a lot more potential in smart local technology. Not hippie-ideological local technology.
  8. Globalization technology: There was a lot of talk about “Government 2.0” a few years back, and yes, that's an important sector that has a lot of potential in the next decade. BUT, the more important sector is the international one. The Web fundamentally weakens states at the expense of international organizations. Technologies that enable or amplify international cooperation at both the institutional and informal/public level have a big opportunity in the next decade. Imagine what a UN that deeply understood Twitter type technologies could have done during Arab Spring. In economics, Pankaj Ghemawat (author of “World 3.0”) estimates that we've barely scratched the surface of the potential for benefit from global economic integration. He estimates globalization is between 10-30% of its “full” potential, so 70-90% is up for grabs for those who help enable it or participate in it. On the military front, consider the ideas of Thomas Barnett on the opportunity for international models of post regime-change nation building:
  9. Infrastructure lifespan increase: If leapfrogging is the opportunity for the the developing world, extending the life/lowering the costs of dying infrastructure is the opportunity in the developed world. Our cities, states and nations are teetering on the edge of bankruptcy or extreme over-leverage. In such a situation, what are you to to do with a small city that has a collapsing sewer system? If you can figure out a cheap way to do something, you're in a good game. The big opportunity here is “Internet of things” technology: autonomous distributed sensing/actuation technology.
  10. Resource management: large parts of the world are going to run out of basic resources if they continue traditional consumption patterns. Water is the most basic of these. Find a way to deliver cheap, local watershed management technology to the at-risk regions in the world. In the North Indian plains for instance, there is a potential for going from a 66% shortfall to a 66% surplus.
  11. Technologies that Fix Chimerica: The world revolves around Chimerica, for better or worse. Each has its terrible problems. In China, figure out a way to get the intelligence and talent of individuals to turn the dumb stuff being pulled by the government into smart stuff (what to do with vast empty cities, lots full of cars bought up by the government to stimulate production…individual smarts unleashed on the effects of statist stupidity can probably do miracles). In America, you really only need to do one big thing: fix healthcare. Get effective universal healthcare in place, and every other problem will take care of itself. These are political problems, but perhaps the right technologies to empower the right political actors is what entrepreneurs can provide, and get rich off of.
  12. Junk technology: Our world is awash in garbage and junk. Much of it is actually worth something. Plastic water bottles can be turned into clothing. Unfortunately, collection is so poor that a manufacturer in the Northeast has to import used water bottles because the US doesn't recycle efficiently enough. Plug the leaks in this sort of junk infrastructure, and you can make a ton of money.

I'll call out the 13th opportunity separately because it is a meta-opportunity with respect to the others.

Technology to reinvent capital markets and investment: A meta-problem is that the capital markets are simply obsolete. They suck at spotting such opportunities, entrepreneurs who can attack them, and putting money in the right places. The government would do worse, so that's not a solution. So a big meta opportunity is just technology that allocates money and other resources far more efficiently to these opportunities. The current VC/entrepreneurship worlds are in a mess, and to their credit, the players are doing some serious introspection. But mostly, it is still business as usual.

I have nothing against VCs and angels. Most are extremely smart people. But the world of problems and opportunities is now so complex and fragmented that any system that relies on “bottleneck star-spotting talent” (i.e. the sagacity of a small active investor class or inbred entrepreneur-turned-investor class) is doomed to hits its limits in short order. Peer investing, crowdfunding, the transparent processes of AngelList, and bootstrapping are the beginnings of alternate models, but they simply don't move enough money around yet. This is the reason Silicon Valley seems like such a messed up place to outsiders: the world's highest concentration of extraordinary talent is being funneled towards some of its most unimportant problems (and in fact, towards work that exacerbates rather than improves things).

People in the Valley, I find, believe in the myth that theirs is an efficient free market economy of investment and that attempting to “direct” the entrepreneurial energy will kill it. This is laughable. The system is explicitly set up to direct entrepreneurial attention in extremely non-free ways. The entire region is wired to the capricious opinions of a few key people, who drive not only their own investments, but via imitation, the money of lazier thinkers. Even if these people were 1000x geniuses with wonderful intentions for the world and preternatural ability to direct money in the right ways, there would still be a huge shortfall in the diversity of intelligence needed to make the money they control truly “smart” money. The money may be smarter than average investor wall-street money, but it is nowhere near as smart as it could be.

Example: A very simple measure of this is simply the high degree of localization of investment. Ghemawat in World 3.0 tracks liquidity and global flow of venture capital and estimates that the lion's share of investment happens within 20 miles or so of the investor. This happens because the investors mitigate the risks of their own limited knowledge by only investing in companies that set up shop locally, down the street. To get the money, entrepreneurs flood to the location of the money rather than the location of the markets/problems to be solved. Some justify this by pointing to the advantages of high concentrations of talent. While this is certainly valuable, there is a very high cost paid in not being close to the problems and market opportunities. People who have the market intelligence to solve water management problems are not going to emerge out of water-rich Northern California. They are going to emerge in Southern California, Nevada and Arizona. If you try to put out a call for “water management ideas” in Silicon Valley because all the 10x engineers and serial entrepreneurs are located there, you will get brilliant ideas for social networks where water-technologists can interrupt each others' attention, rather than ideas that actually help manage water better. So simply creating a technology that lowers the geographic distance risks of investment would be a huge plus. If a Valley VC firm could invest in an Africa-based entrepreneur with only 10x the risk of investing in a University Ave. firm, instead of 1000x, money flows would change DRASTICALLY.

The mis-utilization of talent is so extreme, that if I had money, I'd rather invest in an average hustler and a non 10-x engineer team who are near an actual important market/problem than in a 10x super-star team in Palo Alto. Sure the latter would execute far more brilliantly and with all the latest technical tricks. But they are at a far higher risk of solving the wrong problem and then struggling to find a market. We are reaching diminishing returns from investing in the right team in the wrong place. Investing in even mediocre teams in the right place should provide good returns by comparison, on problems that actually matter and map to interesting markets.

There is a just-so excuse I've heard in the Valley lately, that you can't figure out a market before hand, and that a startup is an organization designed to “search for a business model.” True, but in a way, we've had to invent this whole Lean Startup process to efficiently “hunt” for markets primarily because startups are in the wrong place.

In a way the Lean Startup is a Californian solution to a problem created by trying to do everything in California in the first place. Steve Blank said at some point that you should get out of the building to be an entrepreneur. I think that's WAY too weak. You have to get out of California. If you've ever tried literally “walking out of a building” in SoMA or University Ave., you know that you've basically not left the building at all.

Much less efficient models may end up working well if you simply made the “hunt” part easier by NOT trying to solve every damn problem while sitting in Coupa Cafe in University Ave. It seems idiotic that I actually have to explicitly argue that a startup focusing on making money by delivering mobile banking services in Africa should, err… be located IN Africa. No amount of screaming that “all the 10x engineers are here!” will convince me that Silicon Valley is the right place to solve that particular problem. By extrapolation, I refuse to believe that most of the important business opportunities are somehow magically accessible to people sitting in California. 90% of the opportunities require you to leave the building…err… California I mean.

Better geographical distribution of entrepreneurial talent and money near markets and problems is merely one way to make the capital markets “smarter.” There's tons of others.

future_fabulators/disruptive_innovation.txt · Last modified: 2014/07/07 07:31 by nik