Alasdair’s Blog

The last 6 months have been exciting times for us at Innosight Asia. As of last week, we received a significant infusion of cash (in return for a minority equity stake) which will allow us to shift our focus wholly towards ventures instead of a mix of consulting and venture work.

To reflect this change, we have changed the name from Innosight Asia to Innosight Ventures (check out the new logo above!)

The next six months will be very challenging indeed, with the goal to have one or more of our startups beginning initial operations in India by April. We’ll be performing our own (shortened) version of One Hundred days to Disruption for real over the next few months…

Time to put our $$$ where our mouth is.

TechCrunch profiled Tipjoy one of the newest batch of Y Combinator startups earlier today.

The company is building a simple network and widget to allow web-site visitors to donate to web-sites as they surf past. Two things make Tipjoy intriguing. Firstly, they don’t require any sort of complex signing-up process involving bank accounts (like paypal for example). Secondly, when you ‘click to donate’ - you’re actually making a pledge rather than a payment. At some later point in time, you can log in to fulfill on your pledges, by transferring money into your Tipjoy account via paypal etc.

Using the framework of Jobs theory to consider this innovative startup, this startup strikes me as potentially disruptive to more seasoned money-transfer players like paypal. At this time, their foothold customer, is someone who is ignored by Paypal, and so paypal won’t even notice as Tipjoy builds up a loyal following. Tipjoy is perfectly built around the ‘job to be done’ of the casual surfer - who in that instant decides to send a few cents (or dollars) to a worthy cause. Asking the surfer to start entering even passwords and usernames, let alone bank details might be sufficiently large a disincentive to prevent the donation from occurring at all.

If tipjoy can capture these non-consumers of donation, they can create a valid business out of microdonations.

More importantly, is the path that Tipjoy chooses to follow in order to grow. Should they stumble upon the radar screen of paypal too quickly by attempting to compete with them, they will likely loose the ensuing battle, given paypal’s superior resources and ability to recreate a competing and branded network quite quickly. However, if they can find the disruptive growth path, then they can reap the benefits in years to come.

So what is the disruptive growth path? The answer is that it’s the one which focuses on those customers who are either non-consumers or overshot consumers of the existing methods to make donations.

If I could influence strategy, my first step would be to target the non-consumers in the political donations space. Just imagine how effective this tool could be if posted to all the political blogs around the web. I’ve no doubt that this tool would enable increased donations through the ‘long tail’ in an even more significant way than the current donation mechanisms would allow.

A second possible option would be to focus on major charities such as GreenPeace, encouraging them to play the role of network partners, and help drive the growth of Tipjoy throughout their own network of content providers, bloggers, activists etc.

It should be interesting to see how this develops over the next 6 months.

As the popularity of Facebook grows - the same old industry patterns and trends are playing out in the background. To help better understand Facebook’s potential fate, we should ask ourselves the question, “Where is the value in Facebook?”

Is it in their Database?

Without the database there would be nothing, but disintermediation causes things like this to happen. Another example, which directly targets Facebook is the Flock browser, which pulls facebook information into a sidebar and presents real-time updates, newsfeeds and other relevant information about your friends.

Facebook hasn’t exactly figured out a working business model yet either, and these two examples are just pre-indications of a broader trend. So it seems therefore that just having the cool database and information isn’t enough….

Or the Presentation?

the consumer just wants the content and will take it in the form that is perfectly tailored to them. RSS and its sister technologies for spreading content around the web enable any number of startups to take the data and present it interesting, relevant ways. Furthermore, as consumer tastes and trends chance so quickly (Flock, twitter and Scott Adam’s sense of humor probably won’t be there in another ten years… ok – the first two are true anyway…) the right way to display content will be in constant flux – and so the it will always be the nimble startups with limited business model constraints that can take advantage of this by building a service centered around the flavor of the month.

So where is the value?

The answer is in both. It’s a symbiotic relationship, and only by cracking both – will anyone be able to extract value. Facebook’s advertisements will become useless if everybody collects their facebook information through their preferred lens (such as flock). Similarly, Flock isn’t going to make revenue directly from creating browser that simply provides a useful (currently at least and for me) way of viewing facebook data.

We can look to some other companies strategies for some answers. The key is to create revenue that isn’t affected by disintermediation strategies. Some of you might point out that Google derives revenue from advertising – but it does this in several ways – and some of which are not affected by disintermediation. If you use the Google search engine from your mobile device or if you use Google from some other web site, the search results always take you back to the Google search results page. Furthermore, even if you use adblock or some other advertisement blocking program – Google still includes sponsored listings in any search result.

LinkedIn is another good example, using a premium option for power-users who wish to get the most out of the site, and they do not allow third parties to access that information – so users must go to the LinkedIn site to access it.

The Takeaways

If Facebook wants to even get halfway close to the valuation it currently has – it’s going to have to earn some revenue
That revenue, while in part, will have to come from advertising (as most users currently go to facebook itself)
BUT, as users migrate to other platforms from which to view their facebook data, Facebook needs a new source of revenue
They need to develop a premium service (and charge for it) which satisfies a meaningful consumer job. They need to put up a wall around only this subsection of the site and prevent third-parties from taking the content (and value) from LinkedIn.

The day of the advertisement supported content provider is here, but its disruption is already growing.

This morning, Fred posted just his thoughts on Playing Your Hand With your Cards Turned Up.

In an industry known for the proprietary nature of its deal flow, the ability of General Partners to source deals was a distinct source of competitive advantage for VC firms.

Top quartile firms generally had access to the hottest deals in part because of success of their previous funds, but also because the General Partners at those firms were the rock-stars of the industry, the big names with the golden rolodexes, who with a few well-placed calls could make things happen.

We’ve all heard of the increasing capital overhang in the industry and the viewpoint that we may be entering into another bubble, complete with soaring valuations and a scramble to find deal flow. However, this bubble, if it is indeed a bubble (yes - I’m hedging…), is different. Rather than a moderate number of VC firms investing heavily in a narrow band of web startups, it strikes me that we have a large number of VC firms investing moderately in a narrow band of web startups.

In short - VC’s are fast becoming commoditized…

The result of this is that there is an enhanced level of competition as any given VC firm is feeling the squeeze. Fred’s post highlights the fact that Union Square is competing not only through its strong past performance, but along a new dimension of performance, one which will many other VC’s (aside from a few other California-based front-runners…) cannot match.

By opening up his deal flow, twittering his latest thoughts and perspectives and sharing his ideas, Fred creates a uniquely attractive proposition to entrepreneurs and limited partners alike. His deal-flow actually increases as firms which might not have considered USV reach out to him, and other VC’s consider club deals, syndication or simply co-investing alongside USV.

Last month the European Union authorized the German government to award a grant of $165 million to a conglomerate of companies including SAP and Bertelsmann for the purpose of researching and developing a European based competitor to Google.

Wow.

$165 million of funding to build a company (from scratch). I can’t think of a quicker way to waste $165 million dollars - especially given the way I imagine the money will be spent.

Firstly, I applaud the EU’s goal of helping the Europe develop a competitor to Google. At this point in time, Google’s power does represent a growing threat to many businesses around the world. However, I think this power is starting to plateau given the inevitable political and consumer reactions to such power concentrated in one place.

That said, I don’t believe it is the government’s place to interfere in free market activities - certainly not in such a case where I believe that taxpayer dollars are simply being thrown away.

Why thrown away? - Research from Vijay Govindarajan and Chris Trimble of the Tuck School of Business at Dartmouth shows that throwing money at such a problem is a recipe for disaster, especially when that money is thrown at a joint venture with competing interests.

The size of the grant will put immense pressure on the venture, Quaero or Theseus (depending on whether you are French or German) to perform. This pressure will almost certainly create internal pressures within the venture which run counter to successful startup activities such as creativity and flexibility. Managers will be under pressure to show results which in the world of building Google-Killers are likely to be hard to come by. Managers will almost certainly be drawn from the participating conglomerates, SAP and Bertelsmann, who will supply their all-star general managers with gilded track records from managing $100 million business units - exactly the wrong people to be running startup activities which require a totally different suite of skills.

So - What about a solution?

If I were in the position to be petitioning the EU for funding to build a Google Killer (which perhaps I should do…..) I would propose a disruptive approach based on the jobs-to-be-done approach.

My approach would be to apply for significantly less funding (frankly I would prefer to go without a grant and use my own seed capital or venture funding should it be necessary). The funding would then be channeled into the creation of hundreds of different potential disruptive search offerings - none of which would be significant enough to attract much media attention, all of which would be small enough to be tested and refined in stealth mode.

Each offering would have to solve a consumer job such as “Help me find out where my friends are at this instant in time” or “Help me decide what to do this weekend”. The jobs should be important to the consumer, occur frequently in the consumer’s lives and be difficult or inconvenient to solve using current solutions (i.e. google).

None of the jobs need be as audacious as “help me organize the world’s information……” but should be smaller, less threatening jobs as far as Google is concerned, that way we take advantage of the asymmetry of motivation created by the disruptive offering.

Only those jobs which are immediately profitable or show rapid growth should be allowed to continue - failing offerings should be closed down, or have their business model and value proposition significantly altered.

In this way, we can create a pipeline of potential disruptive ideas and a series of filters through which potential Google-Killers can pass.

By using a strategy like this, we can avoid the pressure of expectations created around efforts like Quaero and Theseus, avoid the likelihood that the incorrect type of management is selected, avoid a negative reaction from Google who might see Quaero’s efforts as sustaining innovations and simply use their great size and access to capital to incorporate any new technology of consumer solutions into their own business model.

Furthermore, this strategy allows us to pursue multiple different ideas simultaneously while spending far less money.

One of the paths to innovation frequently cited in so-called innovation handbooks is to Break all the Rules. This can be challenging, but it can be a very interesting exercise to play out - so in the spirit of breaking all the rules, I thought I’d start a series of posts under the ‘What if’ banner.

For the first post, I thought I’d consider the oft-maligned airlines industry. For anyone who has ever flown, you’ll know that this is an industry which is close to saturation with rules and regulations ranging from the volume of liquid that can be transported in hand luggage to cancellation policies.

My inspiration for this rule-breaker came from two recent back to back experiences. The first was a marathon session with several airlines as I tried to alter various flights due to a death in the family, followed by a hassle-free ride experience on the (almost) always beautiful and efficient DC metro.

So……What if an airline was to offer a ticketing system and policies similar to that of the metro: Specifically, I want the ability to

1) Purchase a booklet of tickets (say in 500 mile increments)
2) Use those tickets whenever I want without providing notice
3) Give those tickets to whomever I wish for their own use

Anyone in the airline industry is going to look at this list and shake their heads in disbelief. Why? - because these break all the rules!

This innovation gives the consumer exactly what they want, but represents exactly what most airlines can’t give them. Simply put, to make a change like this would paralyze any existing airline as it fundamentally changes the business model.

Switching from the existing system of tickets for explicitly named passengers on specific days on specific flights to this new system will accomplish two key goals.

1) The new service targets non-consumers - creating an offering which is attractive to people who do not currently fly. By making the whole process of booking/flying significantly easier you are removing a barrier to consumption. Just as SouthWest did with its business model, a strategy like this will cause people who previously considered using the car or train to consider flying.

2) You’re disrupting the existing airline market. A service with this set of features targets overshot customers who are likely to be the least profitable for the major airlines. They make all their profit on long-haul flights (as evidenced by the fact that they have already out-sourced most of the short-haul flights to ‘contract local operators’ who focus on regional market). They will be more than happy to lose the low margin customers and refocus their limited capacity and attention on the highest margin customers who are the most demanding.

In addition, the folks in finance will be happy as the revenue stream will arrive a little earlier, providing (in essence) an interest free loan from the consumer.

In order to do this however, you would need either a startup airline or an existing airline willing to disrupt itself. No half measures will work (think Delta’s Song experiment…) as the company would have to be started as an entirely separate business operation - new staff, new systems, new thinking etc. Failure to keep a startup operation like this completely separate from the sponsoring parent organization would violate the basic principle of the ‘Forget/Borrow/Learn’ theory. Here’s hoping

I love these videos that Microsoft Research studios puts out. A future that borrows from Minority Report seems closer than ever before. An example of art leading science?

Techcrunch highlighted Vyew, one of the many competitors in the web-conferencing space, in a post yesterday. The thing that stood out to me was the comparison table, reproduced below.

Vyew looks like a potential low-end disruptor in the web-conferencing space, with pricing well below its competitors, and reduced functionality in what many people would regard as critical areas..

For example, application sharing is believed to be a critical app for ’serious’ web-conference participants (power users), but the reality is that it is a tool that can be done without. Vyew eliminates this tool (presumably a big cost saver them) and instead offers unique new simplifying functionality which enables the entire system to run within the browser. As such, Vyew is also a new-market disruptor, opening up web-conferencing to current non-consumers of web-conferencing products.

Wouldn’t this make a powerful addition to the Google Office Suite….?

I found this clip on the D5 website. Steve Jobs and Bill Gates in a joint interview with Walt Mossberg and Kara Swisher. Two luminaries of the industry sparring, laughing and reminiscing together. Great stuff.

There is an ‘elite’ list of companies known to Business School professors across the land - The list of Catastrophic Failures, from which a great wealth of anecdotes and ‘lessons learned’ have sprung. I polled a few friends and colleagues to determine a shortlist of the top 3 most frequently mentioned:

Webvan
Enron
Iridum

However, it turns out that this list is need up updating (or at the very least, refining), for Iridium is alive, kicking and profitable…

The company was resurrected in 2001 by private investors, and in 2006 generated $212 in revenues and $54 in profits - not bad for a catastrophic failure.

My point is not to counter the charge that Iridium should still be considered a huge management failure on the part of Motorola who sank nearly $600 million into Iridium, but to consider the idea of Second-Phase Innovation.

The concept behind Second-Phase Innovation is very similar to that behind Emergent Strategy - that an entrepreneur (or Intrapreneur) is very unlikely to be able to see the end-game of their strategy or implementation. As such, costs should be minimized until profitability can be (almost) guaranteed. This same concept also underlies the Cash-Curve, extensively discussed in Payback.

However, for emergent strategy, we’re talking about one individual or organization and the method in which they should seek to learn/invest/grow their business, while constantly re-vectoring their business model. For Second-Phase Innovation - this is the realm of speculators, VC’s, private investors - Knowing when to invest in a failing idea that has potential to be re-vectored…If you do it right, the assets will be available cheaply

So, While Iridium may be a great case study on how to fail at the First-Phase of Innovation, it’s a model example of success in the Second-Phase