The New Non-Traditional Industry Disruptors
There are new non-traditional competitors emerging for various industries, and most of them don’t exist yet. Finance and other industry incumbents will need to adjust their strategies to anticipate this new round of non-traditional competitors and consider new ways of partnership.
What follows is an overview of how distributed ledger technology (broadly known as “blockchain”) is lowering the usual barriers that new competitors face, followed by advice on what incumbents should be doing.
What Happened to FAMGA?
It was about 2012 when I started hearing the acronyms FAANG / FAMGA used to describe the non-traditional competitors in established markets. Facebook, Amazon, Apple, Netflix, Alphabet (Google), Uber, AirBnB, and others have developed new markets and user experiences that have had CEOs and boards in multiple industries paying attention. This trend has clearly continued unabated. Just last week, Bloomberg reported that just 10 companies have been responsible for over 46% of the entire S&P’s rally year to date. Of those 10 companies, 6 of them are technology companies with Apple, Alphabet, Facebook, Amazon leading the top 4 positions.
The reality is that most of the new non-traditional disruptors don’t exist yet, but the underlying technologies that will enable them are here today and developing at an unprecedented pace. In the far corners of Europe and Scandinavia, new ways of pooling together capital and resources are emerging that threaten to further disrupt established industries.
Last March, I wrote a short article describing the opportunities and challenges for distributed ledger technology and it’s application to the insurance industry. Since then, only two months later, significant progress has been made that I believe will allow new types of organizations and value chains to emerge. Quite different from from the prior FAMGA disruptors, these new disruptors will nimble and decentralized. The technologies and solutions now emerging will allow the next round of innovators to overcome what I see as the three major moats that often protect incumbents from this type disruption: scale, capital, and governance.
Removing the Scale Barrier
As evidenced in many Asian markets where the interface to business is nearly completely mobile, new digital experiences are driving enormous value creation.
The rise of WeChat in China has shown one approach where a dominant communication and payment network come together as a platform for commerce and social interaction. The rise of insurance darlings such as Lemonade shows the power of strong digital experiences paired with philanthropy to reinvent a lagging industry. But something is still missing.
What is often overlooked and still not easily achieved is providing a ubiquitous access point for anyone with an Internet connection to participate in your value network. Moving downmarket efficiently, especially to emerging markets where the transaction costs are often too high for existing firms to offer their existing products or services, can be both difficult and risky. Businesses built upon the blockchain have resilience and scale that cannot be matched by a single entity without high initial costs.
Even with ubiquitous access, what has and is often still missing is the digital experience to the blockchain. Interacting directly with a blockchain is reminiscent of late 1990s era peer-to-peer networks combined with a bit of cryptography know how. This is fine for the technically inclined, but simply does not work for a sweet potato farmer in Kenya looking to buy crop insurance.
Inspired by platforms like WeChat or PayTM, new solutions like Token and Uport are beginning to define new interaction and identity layers which could provide the fundamental building blocks for new distributed business models. If we take a quick look to compare Token and Lemonade in the figure above, one can see we are only a few small steps away from Lemonade’s interaction model and the ubiquitous nature of blockchain interaction platforms like Token.
Barriers to Raising Capital
Capital is king, especially in highly regulated financial services where capital backs many of the liabilities that power profitability. But raising capital takes time and, well, often capital itself. This is a daunting barrier for entrepreneurs who have a good idea but do not necessarily have the VC connections to get initial seed funding or the backing of a major partner to fund the riskiest phases of initial operations.
However, the recent explosion of ICOs (Initial Coin Offerings) to raise capital is now challenging the standard ways of attracting capital to good ideas. For the unfamiliar, there are many good introductions regarding ICOs. Certainly, ICOs can be complex and risky and my intent is not to cover the structure of ICOs, but rather to point out the recent ease of raising capital by utilizing cryptocurrencies. Recently successful ICOs have shown that not only can they raise capital efficiently, but have been doing do by learning from the failures of past ICOs.
One interesting recent case to study is Aragon One, an idea launched by Luis Cuende and Jorge Izquierdo with the stated goal of empowering decentralized organizations in order to tackle the worlds worst problems. In support of this mission, they’ve embarked on creating a digital jurisdiction for entrepreneurs to launch organizations powered by the Ethereum blockchain. After building a prototype, a small team with a few advisors had raised over $25 million USD equivalent with a distributed and engaged set of stakeholders in less than 30 minutes with no investment bank or intermediary. They did so from investors who wanted to participate directly as future stakeholders of this digital jurisdiction.
Let’s let that sink in: $25 million, 26 minutes, 2,403 engaged stakeholders, executed with blockchain contracts and no intermediaries.
Of course, this type of fundraising is not without risk. As I mentioned in March, many will point to the failure of The DAO as the poster child of ICO risk. For those that are interested, I highly recommend the following white paper to dispel some of the myths and lessons learned surrounding this event:
I believe such risks and recent experiences are but a temporary barrier as innovation will continue to aggregate around friendly sources of capital. In addition, as evidenced by many of the precautions built into the Aragon ICO, the community seems to be learning its lessons as each new ICO attempts to solve the problems of prior ICOs by strengthening their approach.
Legal and Governance Issues
Many large businesses have the resources to be able to cover the multi-jurisdictional issues that arise when working between borders. Admittedly, the utilization of blockchain technology across borders, especially with respect to money flows, is a significant legal grey zone at present. However, recent developments indicate that both businesses and regulators in are now shifting their view on distributed ledger technologies, taking a collaborative approach with the industry which is resulting in a more reflective narrative of social good, empowerment, and ability to power the next revolution of innovation.
In addition, industry heavyweights are becoming increasingly involved and will certainly bring to bear the expertise of their legal teams as they begin interacting more deeply with the community of pioneers. This week the Enterprise Ethereum Alliance nearly tripled its membership recently growing to 86 members after only being formed this past February. The EEA now includes such names as Accenture, DTCC, ING, J.P. Morgan, Samsung, Sony, and UBS.
Shifting our focus back to Aragon One for a moment, we can also see evidence that the distributed ledger community itself innovating in the legal and governance space. Aragon One has its sights set squarely on the problems of transnational governance which emerge from decentralized autonomous organizations including arbitration, services, and conflict resolution. Those 2,403 token holders from across the world that funded Aragon will have a say in how the ecosystem for DAO arbitration works in the future and which services it will provide.
I am certainly not expert in trans-national legal affairs but it seems clear: Though the legal frameworks have not been set yet, the attention to these issues is increasing while the community is innovating from within. It will certainly be interesting to see if legal clarity comes from existing bodies or emerges organically out of the new distributed communities.
Advice for Incumbents
So what might this mean for existing companies who are struggling with the pressures of digitalization, the prior FAMGA disruptors, and now this new pack of potential disruptors?
I believe there are three actions worth considering:
- Revise the scope of your firm’s strategic analysis to include these types of new distributed organization disruptors: Entrepreneurs planting flags in this space are proving to be quite nimble and can marshal the resources necessary for innovation far more quickly. To survive, established institutions need to include these activities of these pioneers in the scope of their potential future disruptors.
- Look for unique ways to participate in, partner with, or influence these emerging networks of value: It may take unique structures to allow this to happen in existing regulatory regimes. Sharp companies will experiment with new structures, like investing in startups who fund with ICOs, to gain understanding and stake in new ventures. If done correctly and in line with a firms competitive capabilities, such approaches can allow industries to have a set of eyes at the bleeding edge of value creation value while preparing for this disruption with information and gained experience.
- Begin hiring for these skills necessary to understanding blockchain and DAO structures: Blockchain smart contracts require knowledge of new languages and programming paradigms like Solidity, arcane issues such as ensuring safe math, and foresight to include bug bounties as part of strong ICO roadmaps. In addition, next generation business analysts will need to understand these structures well to be able to design the business models of the future. Incumbents should begin thinking now how they will procure and retain the skills needed to create value in a world when value can be created just as efficiently in a decentralized world.
Strategic analysis that focuses purely on the non-traditional disruptors from 5 years ago needs to be revised and quickly. Without these considerations, incumbents risk being outpaced by nimble, decentralized organizations with good ideas armed with the ability to quickly raise capital and efficiently create value.
About the Author: Christopher Scheidel is an Asia-based Chief Information Officer. The views expressed in this article are his own and do not necessarily reflect the views of his employer.
