The 7 Mutant Rules of Digital Economy
World’s economy is completely transforming: each industrial value chain is being reshaped at a quick pace. Amazon is worth 3 times as much as Target. Tesla’s market price is soaring. Expedia, Booking, Tripadvisor and AirBnB have totally changed the tourism industry.
Now, if you take a closer look, you will see that the winners follow the same rules, coming from digital startups : the 7 rules of mutants.
1. Da Mutant Rule #1 — International is the new normal
Criteo, the French digital performance advertising company, listed on the NASDAQ in 2013, based its success on its rapid internationalization. Once it found its business model, Criteo opened 12 countries in 12 months, reaching critical mass in the shortest possible time. This was the only way for the company to reach its growth potential and benefit from scale effects..For European startups, given the small size of their local markets, they have no alternative if they want to become a sustainable category leader than to think and act global from day one, and be competitive at the international level.
2. Da Mutant Rule #2 — Constant innovation, a matter of life & death
To stay competitive at the international level, companies need to innovate constantly. When they fail to do so, new comers, showing greater innovation skills, capture market shares. As an example, the music industry value creation chain was reshaped by new listening channels, such as Spotify, Deezer, Pandora or iTunes. Major record companies, which used to harness a big part of the value chain, have failed to grasp the opportunity of digital content, accelerating their own weakening instead of taking advantage of their market power.
Startups innovate continuously and do not hesitate to engage in intense risk-taking phases, both in human capital and financial investment. Innovations question the balance of industrial sectors and spread either by the growth of startups, or by a set of acquisitions of technologies or businesses, throughout the entire industry, redistributing value between the new players and those who have adapted to the new rules of play in the sector. It is interesting to note that most of the most successful startups like Facebook or Google have developed real takeover strategies, and they themselves state that as an established business, it is very difficult to generate disruptive innovations from the inside, but it is possible to integrate them. For example, Google took over 70 companies during the last 18 months -one per week!- : many strategic steps such as the introduction of advertising (DoubleClick), the integration of video (YouTube), a switchover to mobiles (Android) and the home (Nest) come from purchases of startups.
3. Da Mutant Rule #3 — Horizontal Organization
To be able to maintain constant innovation within an organization, agility & rapidity are key.
Jeff Bezos invented the “two pizza rule”: never invite to a meeting more people than you could feed with two pizzas. This is how Samurais work: small multi-skilled team with high autonomy, and decision power. But this is not only a question of flat hierarchy. Digital startups also create communities and multiple alliances with all their stakeholders: customers, fans, media, platforms, employees, investors, etc. Motto, mission, crusade…they know that leading a tribe is a huge generator of power and eventually business. And don’t get me wrong, Samurais have good manners. They share both values & the value created, allocating free shares and options to their staff.
4. Da Mutant Rule #4 — User Centric
Digital economy is an economy of usage. New products & services are reaching out directly to the people in their professional or private life, targeting them as prosumers or customers, or more generally, as users. Soundclouds is a social platform designed for music and audio creators. It enables its 200 million users to easily and freely discover and share original music and audio. It is truly user centric in the way that value directly comes from creators on one side and from listeners who share and give feedbacks on the other side.
The main focus of the startups is primarily on exploring the real needs of consumers as well as the rapid development of their offer by a set of successive iterations and market tests. By focusing on the users, startups thoroughly meet the new market needs; something which major groups that are less agile, less oriented to the end users of their products and services, and less likely to take important strategic risks, struggle to reproduce.
5. Da Mutant Rule #5 — Seek Scalability
Since products & services are directly targeting users, as customers or prosumers, business models like technical infrastructures need to be scalable. Startups prefer online stores to tangible businesses, and marketplaces to online stores, so they don’t need to manage inventories and can apply long tail strategies. Samurais are constantly looking for scalability, network effects and low marginal costs. Ad growth is not an option: digital-era business models need to reach a critical mass on their market to ultimately control prices and stifle competition.
6. Da Mutant Rule #6 — Open platforms
“Marriott wants to offer 30,000 more rooms this year. We will add them in two weeks”. This tweet, written by the CEO of AirBnB, compellingly reveals the ability of startups to explore established business models, in an entirely new way, notably through open platforms.
Indeed, to maintain their user base happy and loyal, companies increase their value proposition continuously, often at a pace where internal innovation is not sufficient. Becoming a platform by opening access to their users to third parties services, content or products is a scalable way of doing so.
On one side the providers (content (music, videos, .etc.), services (freelancers, taxi drivers, etc.) or products (apartments, second hand goods, etc.) and on the other side the users. Each side of the platform contributes to the overall value. Thus, the more the platforms grow, the more their value proposition increases, hence the need to think in an open ecosystem.
These transformations are a continual source of disruptions and of opportunities to create and capture value for new players. This is an extremely favourable environment for investment in digital startups which, by their nature, have a better understanding of the uses than the incumbent players, they are more agile and they can move fast and think big, funding permitting.
7. Da Mutant Rule #7 — Massive Investment
To build and sustain a company that is user centric & competitive at the international level, investment is key. Startups choose growth first, instead of short-term profitability. Most of these digital startups would not be able to monetize their product or service before reaching a critical size, because it’s their size and their capacity to exploit data which enable them to build economic value. Mutants perfectly know they are engaged in a race where winner takes all. This race to growth is very capital intensive, debt can’t be the main source of energy: this is a job for VCs. Good news is: this is an extremely favourable environment for disruption and therefore for investing in digital startups which, by nature, have a better understanding of usages than the incumbent players, are more agile, innovate constantly, think & act global, funding permitting.
Since these 7 rules are completely remodeling our economy, we’ve asked yourself: “are they also applicable to the VC industry itself?”. And we’ve concluded that they did. So we decided to build another VC model, following these rules. But this is another story: the story of our own mutation.