The Alfred P. Sloan Era of the Internet Era

The following is a partial transcript of the Techmeme Ride Home Podcast.

Everybody’s talking about John Luttig’s When Tailwinds Vanish piece this weekend. I should have put it in the weekend longreads suggestions section of Friday’s episode, but I hadn’t read it yet.

Well, now I’ve read it, and frankly, I couldn’t help myself. That essay really scratched my history itch. So, let me spew a whole bunch of reactions-through-a-history-lens at you that I just sat down and punched up this afternoon.

First, here, to my mind, are the most relevant grafs from John’s piece:

The vast majority of the country spends 6+ hours per day online, frequents social media, uses a smartphone, and shops online. This usage will undoubtedly continue to grow: e-commerce will continue taking over physical retail, and SaaS spend will continue replacing manual business processes.

But people can’t spend more than 100% of their time or money on the Internet. As we approach full online penetration, new companies will need to steal revenue and users from Internet incumbents to grow.

Like any mature industry, Silicon Valley must battle to maintain growth in the face of immense economic gravity. For the first time in Internet history, startup growth will require a push from the company and not a pull from the market. Unlike the organic pull that drove many of the dotcom-era successes, today’s Internet startups need to fight for growth by investing more heavily into sales, marketing, and operations.

John’s ideas tie into Alex Danco’s piece Debt is Coming, which we mentioned on a recent weekend bonus episode:

As the ROI of SG&A spend becomes more predictable, a non-VC financial layer will emerge within Silicon Valley, similarly helping to fuel its growth. This capital layer can help partially compensate for the slowing market-based growth tailwinds. This suite of services will benefit from a tech-specific approach: real-time debt offerings based on operating KPIs, securitization of software ARR, and retail investor-facing SaaS bonds.

But that’s a layer above the structural ideas that I think John is getting at. More importantly, is this:

There certainly will be $10 billion dollar companies started within segments slow to adopt technology: legal tech, construction, agriculture, and mining are all prime candidates for massive new technology entrants. But new $100 billion dollar outcomes are less likely to come from pure Internet companies.

Obviously you should read the whole thing, but I think you can see why this called me to put on the History Hat. The History Hat doesn’t have any superpower other than pattern matching, but sometimes, pattern matching is too satisfying to resist. :)

I said toward the tail end of my talk at Google a few years ago that the next generation of internet startups would inevitably be more interesting than anything we saw in the most recent two decades of tech. “Interesting” does not necessarily mean “better.” Interesting, just means interesting. More… sophisticated.

The idea, as I said then, was that the days of simply being first to a market, the days of simply showing up and planting your flag and claiming unclaimed virgin territory was probably over. The days of a handful of people coding up an app and getting a billion users overnight—for the most part, with huge glaring exceptions—are largely behind us. As John says, such things can, and will, still happen. Just not as often. The low hanging fruit has been picked, in the Tyler Cowen sense.

The bit that John’s essay hit on that really resonated with me was the idea that we’re out of a big bang period and this moment in tech. That paradigm shifts as fundamental as the one we just lived through (and continue to live through) don’t come every lifetime or even every century. I’m talking about clear the chessboard, Cambrian explosion type paradigm shifts. We may want them to come regularly, every decade or generation. But they usually don’t.

In an economic sense, there have really only been three, fundamental, truly foundational paradigm shifts in the history of capitalism.

1. The Age of Exploration: let’s find all the natural resources in the world and exploit them.
2. The Industrial Revolution: let’s take all the natural resources in the world and turn them into products.
3. The Digital Revolution: let’s take all the resources and products in the world and digitize/virtualize them, and distribute them at zero marginal cost.

Epoch defining paradigm shifts are sexy and addictive because they create great fortunes and new power dynamics. And as the “clear the chessboard” and “Cambrian explosion” analogies suggest, they slaughter incumbents, often en masse, thereby clearing the way for those new fortunes and powers. Even smaller, echo-like paradigm shifts can unleash unbelievable creativity and value. See: the shift from the desktop to the mobile web.

But they key point about paradigm shifts are that they happen as big bangs, and they happen irregularly. As astroid-hitting-the-earth events. They’re short and sharp, but then there are longer epochs left in their wake that is where the changes to society really settle in. And the winners in these longer eras are more interesting to me, if I’m being honest.

After all, if you’re a conquistador and you discover a new continent, then, yeah, there are vast fortunes to be made by planting your flag and claiming all the resources you’ve found. A lot of the winners of both the early and late stages of the industrial revolution were called robber barons because they just happened to be at the right place at the right time when steel, oil, the combustion engine, what-have-you… turned out to be ascendant. Similarly, the first people to successfully find the right mechanisms to connect all of humanity together via computers had some element of timing and luck to their fortunes.

This is not to say that was only luck. Far from it. Inventing industries out of whole cloth does necessarily require deep levels of genius. Bill Gates made the software industry a thing when no one thought there was any value to it. Creating trillions of dollars of value in social networking when everyone thought it was a fad requires unparalleled vision. And you have to be wicked smart to make actual industries out of historical trends. Rockefeller wasn’t the only one to realize oil would power the modern world, but he was the keenest at taking advantage of that fact. With a big enough lens, the steam engine was probably a historical inevitability. But creating the railroad industry was not.

However, once any big paradigm shift matures, it becomes less and less likely that new fortunes will be made simply by being first. It takes genius to recognize the tidal wave of history and stand in front of it. It takes another type of genius to organize the currents of history in such a way to create a lasting business or industry.

In the big bang era, its winner take all and the field is so virgin and vast, there can be a lot of winners. But as John writes in his piece, after the big bang, it’s a zero sum game. The winners mostly win by taking share from others on the field.

Another way to say this is: in a post big bang period, you have to win by being better. Cleverer. More interesting. This is what I was hinting at in my talk at Google. Being first, making the right bet in front of a historical paradigm shift can hide a lot of sins. It can paper over the bluntness of a good idea. The new startups and the new products we’ll see in this decade will likely be more interesting, more sophisticated, because they’ll have to be.

Henry Ford was an entrepreneur of a big bang paradigm shift. But Alfred P. Sloan, who turned General Motors into the axiomatic company of its time, was an entrepreneur of a post-big bang era.

On a basic level, Henry Ford invented the idea of “the car” but Alfred Sloan invented the automobile industry. Inventing the car as we understand it, not only as a product of mass consumption but also on the level of inventing THE THING (ie: it has these types of wheels, it starts up using this sort of mechanism, the steering wheel goes there… heck, settling on the idea of the steering wheel as the standard user interface)—that takes a certain type of genius! But as the story of Henry Ford and Ford (the company) through the 1950s and 60s shows, it will only take you so far beyond a big bang era.

In a post big bang era, you need an Alfred Sloan to come along and introduce concepts like brand architecture, industrial engineering, automotive design and styling, even planned obsolescence—to create a mature automotive industry. Henry Ford could famously offer his cars only in one color (black) because he was first. But in the mature era, he lost out to Alfred Sloan and his annual model changes, and, you know… tail fins.

Now, you could argue that such things are only window-dressing, refinement instead of invention. And yes, that is true to an extent. The 1920s and 30s saw an explosion of consumer products and consumer electronics and entire industries, that pretty much stayed the same for the better part of the 20th century. I said in my book that before the Internet Era took off, entrepreneurialism hadn’t been cool in decades. That’s because we were in between big bangs. If my grandfather saw indoor plumbing, air conditioning, the washing machine, the dishwasher, the television etc. enter his household in the first decades of his life, really the only new thing in the second decade of his life was the microwave oven. He was in between big bangs. The majority of his adult life as an age of refinement and consolidation.

But that doesn’t mean the post world war two decades of the twentieth century were without entrepreneurial geniuses and great companies and innovations and efficiencies. They were just different sorts of geniuses and companies and innovations and efficiencies. Big bangs are one thing, but the aftermath, the era of consolidation and ubiquity requires different skill sets and strategies.

And that is what John’s essay crystalizes. We’re leaving a big bang era in internet tech, and we’re settling into a consolidating and refining era. I’m not arguing whether or not this is good or bad, and I don’t think John is either. I’m just pointing out: you need a certain sort of entrepreneur for the left side of an s curve, but you need a different kind of entrepreneur for the right side of an s curve. You need a different sort of entrepreneur, more of an Alfred Sloan than a Henry Ford. That is what John is talking about when he says this:

The blitzscaling playbook is more fitting as a reflection on the past two decades than as a prescription for the 2020s. When the ecosystem-level diseconomies rival the company-level economies of scale — “first to scale” may become “first to fail”. Unit economics matter more than ever. Carefully measured growth will win.

The idea of William Whyte’s Organization Man might have taken on a pejorative connotation from the moment of its publication. But that doesn’t mean it didn’t describe a playbook for success for a very specific era. An era that was—and let’s not forget this—the most economically successful period in human history: the mid-to-late 20th century.

I’ll say what I said at the beginning: I think the startups we get this decade will be more interesting because they’ll have to be in order to be successful. They’ll have to be more sophisticated, more refined, more mature, more nimble, more enlightened. Being first, being blunt, can’t win by default anymore.

Everyone in the valley might still want to chase the next paradigm shift, waiting desperately for something, for anything (crypto? AR/VR? AI?) to be the new big bang, the new opportunity to clear the chess board. But history says that doesn’t come along as often as we might want, certainly not every time you need a new thesis on which to raise a new VC fund.

That is what John is suggesting when he writes:

The Silicon Valley of tomorrow will not look like that of today — success stories rarely repeat themselves — but new Internet opportunities certainly aren’t going away. Quite the opposite: recognizing where we are in the Internet adoption curve clarifies the opportunities in front of us.

If you’re an entrepreneur looking to start the next great company, or a VC looking to invest in one, don’t fight the last war, or draw from a stale playbook. History stands still for no one. Just because this decade won’t be exactly like the last doesn’t mean it won’t be interesting. It will just be interesting in a different way, and the winners will be the folks who recognize that first.