For Europe, strategy lessons from internetworked Switzerland
[ a p e r t u r e | Newsletter #22] — May 2019
The below has been sent to the email subscribers on the 30th of May 2019.
Over the past two weeks, here in the a p e r t u r e community we have been thinking about Europe’s struggle to build successful tech companies. While it unquestionably needs internet age giants, we question whether China or the US represent the right models to imitate. In fact, we increasingly see Switzerland as offering the right recipe for digital age success.
In this article published last week by Ben Robinson, The Internetworked Nation, he dispels a few common misconceptions about Switzerland — one such myth being that it’s not an attractive place for tech companies, and yet Facebook just registered a fintech company dubbed Libra Networks in Geneva. Instead, he makes the case that Switzerland is a complex adaptive system — layering a distributed yet strong political system with an inclusive culture, cutting-edge technology with a robust industrial set-up; international connections with a powerful brand; and, innovation alongside progress and prosperity. In short, Switzerland could be a better model for Europe — one that aligns to our values and produces fewer negative externalities.
But both Switzerland and Europe are faced with the strategic imperative to re-frame the debate on what tech innovation should look like, controlling therefore the narrative particularly around sustainable growth vs. blitz-scaling and also around which model is more relevant between networked small units vs. centralized giants. Another observation is that as we are observing the return of craftsmanship and of artisanal goods and services, it is becoming clearer that the current VC-pumped Silicon Valley model does not work because the new world is a world of niched, specialized and internetworked businesses targeting a global audience. A world where tech is invisible and intangible. And probably the financing model for this type of network does not exist yet, since executing the Swiss model is a long-term commitment without an obvious exit strategy.
The fundamental problem with Silicon Valley’s favourite growth strategy — Following the topic of sustainable growth models, sharing this great article from Tim O’Reilly where he argues that the exclusive pursuit of monopolies has brought toxicity to the Silicon Valley ecosystem, and a better mechanism for financing-scaling companies is needed. Relying exclusively on blitz-scaling for monopoly is not necessarily a good growth strategy, and it is good neither for the society, nor for the overall health of the ecosystem.
We echoed the same argument in our a p e r t u r e article about Switzerland being a model for a more successful tech ecosystem. While there is a valid case for the need of blitz-scaling, which Tim does not deny, he makes the case that it does not apply to all markets and companies, despite the Silicon Valley narrative. In some cases, blitz-scaling isn’t really a recipe for success but rather survivorship bias masquerading as a strategy.
Can you bootstrap your way to scale? Here’s how Mailchimp did it (with a lot of luck on their side) — Reid Hoffman, who coined the blitz-scaling growth mentality, gives to Caesar what is Caesar’s and acknowledges that it is possible to bootstrap a company to scale, even in the blitz-scaling era. In the latest episode of Masters of Scale podcast, Hoffman discusses with Mailchimp’s CEO, Ben Chestnut, about the secret sauce that made Mailchimp a $600m annual revenue company, with no VC money at all. Full transcript also available.
The China Story: How Not to Build European Tech Giants — For Europe, therefore, copying Silicon Valley’s model is not desirable, but neither should the Chinese model be, writes Emilie Maret. Yes, the Chinese ecosystem develops much faster, and that poses a threat for Europe, but we should probably not worry ourselves as much as to try to mimic it. Building startups in the Chinese way would most probably kill the continent’s tech scene, because of value misalignment. For Europeans, the sacrifices required to achieve the hyper-growth model are too big to be made. Emilie is therefore underlining the importance of building the right kind of tech giants. Our idea here at a p e r t u r e is that maybe that giant takes the form of a network of interdependent smaller units, and if so, it probably already exists.
How Ocado is beating Amazon and plans to take over the world — Maija Palmer, of Sifted (which is, to quote Nicolas Colin, “the best thing that has happened to the European tech scene lately”), writes that Europe’s giant might actually come from a grocery supermarket. Ocado’s technology for grocery warehouse automation, mainly robots and software for its online grocery delivery business, has surpassed Amazon’s in quality, and the company is now ready to invest in testing moonshot projects where it can apply the tech to other 10x initiatives in other industries. And the strategy to achieve this is to create these projects in separate, ring-fenced companies, in order to avoid the natural tendency where the immune system of a large organisation kills innovation (cc John Hagel).
Strategies for competitive moats
Three Enduring Trends Inform Strategic Planning Efforts — Jason Girzadas of Deloitte writes that today’s corporate strategic planning efforts are being subjected to fundamental shifts (rapid change, technology, societal upheaval etc.) which may make strategists feel paralyzed. And yet, he proposes to look at some of the main trends impacting the enterprise today by acknowledging their historical precedents: a) new tools to augment human work, but this time non-routine cognitive tasks; b) decomposition and virtualization of the enterprise, i.e. from owning all elements in the value chain to fostering the right type of ecosystems; c) customer-centricity but understood through the prism of the broader’s societal purpose of a businesses.
The new business cycle embracing uncertainty — I think that Esko Kilpi has described the paradigm shift more eloquently and accurately. The industrial approach to management — which places an emphasis on the formulation of plans and intentions and communicating them as actions to be executed by the organization, hoping that the assumptions will be proven correct — is obsolete. Instead, writes Esko, the new strategic approach is one where the new business cycle is a learning process designed to prove assumptions wrong, not right! And the best moat in order to future-proof yourself is to be more responsively present today.
The Empty Promise of Data Moats — Data, and in particular data network effects, has been lauded a lot recently as a competitive moat for companies, but so far there is little practical evidence that data moats are in any way effective, particularly in the enterprise tech space, write from a contrarian standpoint Martin Casado and Peter Lauten. The risk they identify is that treating data as a magical moat can misdirect founders from focusing on what is really needed to increase the defensibility of the business long term (verticalization, go-to-market dominance, brand, account management etc.). As well, there generally isn’t an inherent network effect that comes from merely having more data — in practice, most data network effects are really scale effects. Which means that they are subject to diminishing returns: after a certain point, the cost of acquiring and adding unique new data to a product may actually go up (unlike in network effects where customer acquisition costs go down in time), while the value derived from adding that incremental data goes down.
The Value Chain Constraint — Going back to this post from Ben Thompson from a few months ago, he covers the competitive moat that stems from the ability to offer sustainably lower prices for customers, driven by purchasing power over suppliers. And this is achieved by successfully integrating different component pieces and capabilities of the value chain. Therefore, it is not the technological innovation that truly matters, but understanding value chains and the point of integration on which a company’s sustainable differentiation is built. It is why, Ben writes, Google Cloud is struggling, because they are betting on “technological superiority” in a value chain that they do not understand. They are assuming the enterprise software world is a self-serve world, but it is not (maybe with few exceptions e.g. Slack), but in reality “what is necessary is an intermediary layer to interact with relatively centralized buyers with completely different expectations from consumers when it comes to product roadmap visibility, customer support, and pricing etc.” If technological superiority has created tech giants that control their core value chain, it has also created a limitation for companies trying to expand horizontally into new businesses and new value chains, because what is required is a) forward and backwards integrations into the value chain and b) acquisitions. It would be interesting to follow this argument with the Ocado example mentioned above.
Top tips for indirect sales success — Another interesting example of misunderstanding how the enterprise software market works is with start-ups that plug into indirect sales channels, let’s say an incumbent vendor’s marketplace, and expect sales to function almost in a self-serve way, so that they can go back to focus on “technological innovation”. But as Marc Baumgartner wrote, in reality there is a lot of cultivation required, intense sales efforts to treat the channel like a client, and, of course, strategic thinking and positioning. Which means, understanding the value chain.
The European Way is the best hope for the digital age
LinkedIn is the New Craigslist — At the beginning of this digest, I was touching the idea that the internetworked nature of economy today is making possible the existence of both generic businesses that look like they might have monopolized the market, but in the same time there is also room for a plethora of niched, specialized smaller companies that target global audiences (niched at scale). In the labour marketplaces space, that is definitely the case, writes Jeff Fluhr, as LinkedIn cannot properly cope with the changing nature of work, and also it doesn’t have the industry-specific functionality that makes possible better matching of work with specialized (teams of) talent. And because there is a clear gap in the market, he believes that more and more hyper-vertical service marketplaces will appear (see our article on The Rise of The Growth Platform), and his advice is: a) the more verticalized, the better; b) verticals must have frequent repeat usage; c) defending against disintermediation is critical; d) data moats are to be considered — on this last point, I should probably send him the data-moat article shared above :).
Thriving in the New Work-Life World — We’ve established that anticipating the future nature of work and what employees truly want from their professional life is key to successful strategic planning and building the next-gen companies. Most industrial-age companies have armies of HR people and consultants trying to come up with complicated incentive structures and perks for employees — but most of these are irrelevant, almost like the airlines loyalty-points schemes. In reality, if I sum up this study, what employees/workers/freelances want, is simple: higher fixed incomes with upside potential, a safety net, fewer hours with more flexible terms and more meaningful projects.
Matt Clifford’s in his newsletter wrote about the idea that long working hours have negative societal externalities and the benefit to employers might be limited anyway. And there seems to be a massive opportunity for platforms that can create high-performance jobs that do not require 60 (or even 40) hours per week, but which pays above the line. Attracting the best talent — that currently is either underpaid, overworked or demotivated — is a massive opportunity: having best in class supply attracts meaningful client work and enough to achieve platform liquidity.
Renewing Worker Cooperatives for the Digital Age — So maybe the key to building sustainable platform businesses in the labour market is to take a European approach: look after the supply-side (offer higher fixed incomes with upside potential, a safety net, less working hours, more flexible terms, meaning), and then demand will follow.Steven Hill identifies this trend as platform cooperativism, which is basically bringing cooperative structures and philosophy to the digital era platforms. Even more so if we think that more and more employees now sit outside traditional organizations, as freelancers or self-employed — which create challenges, and hence opportunities for building tools to solve them.
Long-term strategy is the only way
A stock exchange for a new generation of public companies — The importance of this simply cannot be underestimated, as I think it could maybe give Europe the chance to scale its model, while also saving Silicon Valley from self-destruction. Eric Ries has hit another milestone with the Long-Term Stock Exchange (LTSE) — as it was just recently approved for registration by the SEC. Eric’s mission is to create a market”where companies are rewarded for choosing to innovate, to invest in their employees, and to seed future growth and where they can run their businesses with the stewardship that similarly aligned shareholders, stakeholders and society demand”. John Detrixhe has a very good coverage of LTSE’s history and what it means.
I shall wrap up this edition with a quote from Tim O’Reilly. He has long been advocating for a move to more patient investing (this underlies his critique of blitz-scaling above). On shareholder value maximization, he says,
“The design of the system determines the outcomes. The robots did not force a human-hostile future on us, we chose it for ourselves.”
And thus, if we are starting to change course, this bodes extremely well for all
My name is Dan Colceriu, head of research at Pangea, and I hope you enjoyed this read.
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