Beyond 2001: Investing in Internet and Early Stage Technology Companies

Chris Rollyson

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The Framework

The framework’s lenses are organized in three subgroups, which are arranged from the broadest strategic viewpoint and get progressively more focused on the company. The Industry and Industry Segment views create the context for the company-specific lenses.

Transformation

Largely forgotten during 1996-2000 was the fact that a bricks and mortar world had existed before the idea of widespread digitization gained prominence—and it still does. With few exceptions, e-business does not introduce a new world or a "new economy": companies produce value by serving humans who need to get human things done as well and as expeditiously as possible. Rather, e-business enables us to do things in new ways that can have a huge impact on how much we can do and how well we can do it.

Therefore, a key concept to understand when contemplating Internet and ESTC investments is that e-business offers people tools and methods for doing something that they probably already do—in another way. Virtually all e-business strategies, processes and technologies carry this trait; it comes included with e-business investments.

To take action on the transformation element, research the bricks and mortar process and focus on supply and demand sides of the equation of the good or service. Where is the pain in the transaction between the supplier and customer? Who feels it, and how are they incented to bear it anyway (what is holding the situation in homeostasis)? What exogenous factors influence the context of the transaction in question? How many elements must act in concert in order for the e-business solution to produce value? Having a firm grasp of the situation that the e-business transformation proposes to change is key to understanding the value of the e-business proposition.

Discontinuous Change

In the Middle Ages in Europe, castles and armor were the chief means of physical protection from intruders, and warfare was defined by the limited possibilities that these technologies provided. Technological innovation was continuous during the period—e.g. better means of shaping and connecting stone and metal—which took place slowly over the centuries. Although known in Europe much earlier, around the 14^th Century gunpowder and metallurgy combined to challenge the impregnability of castle walls; projectile weapons changed the immovable landholding castle paradigm and radically changed the rules of warfare. This is an example of a discontinuous change within the context of technology: a new capability is introduced that renders existing rules null and void.

Discontinuous change is a particular challenge due to human nature. Throughout history, humans have been rewarded for remembering things, not "reinventing the wheel." Therefore, we develop assumptions, customs and processes to which we adhere until we learn through painful lessons that they do not work anymore.

Discontinuous change unleashes a learning process by which we reexamine and relearn something that we used to not think about very much. It is important to note that not all rules are changed. If they were, that would be a much easier proposition in many ways. Discontinuous change requires selective delearning; e.g. it is necessary to tinker and figure out what is still valid and what has changed, and how all aspects of the situation work together under the new rules.

The challenge embedded in discontinuous change is that it requires a creative leap to apply the technology to a purpose that is aligned with a market need. Many records suggest that gunpowder was invented in China, where it was chiefly used for fireworks. At some point, someone looked at its effect and made the creative leap to try to move something with it; even then, it had a minimal impact on warfare until advances in metallurgy enabled appropriate cannon making. In another example, the Internet had existed in the United States throughout the 70s and 80s, when it was chiefly used by early adopter scientists, engineers and students.⁸ With the advent of the World Wide Web system, http, the graphically rich "browser" and others, it crossed the chasm and went into the tornado. Note that the WWW, http and the browser would probably not have had their effect had personal computer adoption not been at its current level in 1995.

To evaluate investments through the discontinuous change lens, go back to the pain points you identified during the transformation lens. Who feels the pain? Within the context of the e-business solution, who must make the creative leaps? What can you learn about these parties’ characteristics? Have they worked in industries or functions that have experienced significant change in the recent past? If so, was the change continuous, incremental or discontinuous? Have they been proactive in participating in industry or function changes? There will probably be several parties to which you will have to apply this lens.

Adoption

The concept of adoption is very useful for considering transformation and discontinuous change because it is a metaphor that describes how an innovation involving discontinuous change is accepted over time.⁹ Almost all innovations that achieve pervasive adoption exist for a surprisingly long time (relatively) before they come into widespread use. The adoption process describes what happens during that time lag. Some time after its invention, the innovation is discovered by enthusiasts and early adopters who tinker with it and apply it to technology problems with (usually) business implications. In the early market, people get involved with the innovation often out of love for the technology itself; however, the early market cannot sustain innovations with designs on achieving widespread commercial adoption. In order for the innovation to enter the mainstream market, it must "cross the chasm"¹⁰ and shift its proposition away from technology tinkerers to business customers who want to use it to solve a business problem. Then it’s a matter of managing the growth of a successful innovation whose proposition matches market demand, as it spreads from one business market to the next in "the tornado." An extreme minority of innovations experience tornados, which are not at all required to commercialize an innovation successfully.

Adoption takes a process view of how an innovation spreads over time, almost like the ripples that result from a pebble thrown in an ocean. Seen from a more individual point of view, it describes the result of numerous "creative leaps" that individuals in various user groups take to understand the discontinuous change and its implications before they begin to apply the innovation to a (first) technology purpose and, subsequently, a business purpose.

To use adoption as a strategic tool to help to evaluate an e-business investment, study the origin of the company’s product or service and its market (if there is a defined market yet), including competitors and substitutes. Note the core competencies of the founders as well as advisors. Try to pinpoint where the company’s innovation is in the adoption curve. Is the innovation in question well known? How many and what kind of hits to you get on major search engines? Read all you can about the company’s strategy for itself or the product/service. Pay close attention to the vision for how the innovation will "change the world." Understanding the vision is the key to formulating a picture of the innovation’s endgame: what would the market look like if the innovation were the market leader? This will flesh out the adoption curve and provide a context within which to understand the economic value that the innovation brings to market. For more examples of how to apply adoption to e-business, see E-Business Market Development: the Rise of the Extended Enterprise.¹¹

Network Vision¹²

Network vision closely resembles peripheral vision, and it refers to the fact that all companies are increasingly networked entities and should not be seen as self-standing. In fact, as e-business strategies and processes gain prominence, companies will become more "virtual," that is, they will outsource key functions to strategic alliances and adopt a more networked model. Taking the automotive industry as an example, it is easy to foresee that the current business model is untenable in the long term because manufacturing/production is a far different competency than brand management. Since the 70s, U.S. automakers have been progressively farming out their manufacturing processes to vendors and alliances to the point where they have become master assemblers rather than manufacturers. As globalization increases competition, it forces the hand of most companies to decide what their core competencies are because they can no longer do everything.

Therefore, network vision is the discipline and art of considering a company and its network of alliances, partners, vendors and customers as a web of relationships. In the automotive example, it means not only studying GM but the UAW, key suppliers, its dealer network and alliances because each has an impact on the value that the company delivers to the market.

Although a simple example, GM represents the point of view of a bricks and mortar company that is transforming itself. Looking from the perspective of an ESTC or product that involves discontinuous change, virtuality is different and much more challenging to recognize because the market is often undefined, and the network must be built. Creating a network around an early stage company involves looking at its adoption curve because its needs for alliances are different at each stage of adoption. For example, in the beginning, the innovation must consider where and how it fits into the existing technology landscape for various customer groups (how do potential customers execute this business function today?). Alliances with a market presence can play a major role in the early stage company’s market entry by cooperating on interoperability with the former’s technology. Later, when the company is trying to cross the chasm, having alliances with market power will be of paramount importance.

Network vision also implies that alliances are independent entities that have a negotiated agreement to cooperate. However, they often have active or passive relationships with competitors, and since most technology companies have high levels of risk and reward, the landscape changes rapidly. Imagine a galaxy that exists in Internet time where supernovas are popping constantly and existing stars decay into white dwarfs and red giants very quickly. The rapid growth and demise of technology companies makes for a dynamic market, and a technology company’s ability to manage its relationships will always have a direct bearing on how much value it can deliver.

The unique value of a company boils down to two things, each of which is hard-wired to network vision. First, the company uses its core resources to create hard-to-reproduce, unique value. Second, the company must use the network to deliver the value (via strategic alliances and customers). Executives must have a strong sense of what business they are in so that they can build their company quickly, and on solid ground.¹³

Network vision is peripheral vision. Because no one delivers the entire solution¹⁴, the executives must be hyperaware of their business’s "network configuration." It is a strength and a weakness to depend on strategic alliances to deliver the solution to the customer: alliances will enable the business to get the solution to market more quickly, yet if one of the alliances blows out of the network for some reason, the executives must have a contingency plan. That often means observing alliances as if they are a part of the core business, which means looking at their networks and success with their own customers, their own efforts at getting funding, etc. It is like driving too fast on a busy freeway; peripheral vision is absolutely vital to success.