Some notes on WHY “STARTUP STUDIOS” or “company builders”. Betaworks and the return to internet’s basic insights.
In this video John Borthwick, CEO of Betaworks, makes a great point on why they adopted the “startup studio” or “company builder” model vs the regular VC/incubator model. Betaworks is one answer to what he defines as the current inability of the digital companies to scale innovation.
Innovation needs data to move, to be available and be distributed. That’s in fact the whole idea of the internet, right? But (historically) businesses tend to erect walls, barriers to entry that protect their business models and generate competitive advantages. In the digital context those walls also create data clusters in the ecosystem restraining therefore the ability to create value by connecting and learning (think about machine learning) from the connection of different sources of “big data”.
See Borthwick explaining why Betaworks’ “startup studio” model helps overcome some of this constraints by replacing the VC’s portfolio approach for the connected ecosystem of startups approach. Min. 21–26 aprox (my notes below).
“If you take the web and see it from underneath, you see this big clusters of data”, observes Betaworks’ CEO. That sounds as a problem if we assume that a big part of innovation today comes from the connection of distributed data. This connection is what generates context, learning and of course VALUE (big data and machine learning).
According to Borthwick this explains why many big companies fail to continue innovating in the long term (like Yahoo or Ebay) and need to start an acquisition rally and also why it was somehow expected to see the development of a few huge corporations dominating the digital business landscape (Google).
But this also shows that barriers to entry in the digital landscape are not limited to network effects (and this one is arguable, see for example MSN) but a new kind of economies of scale still prevails. Now it’s about broad access to large datasets and a culture of continuing innovation to exploit those resources. Who can get all the data that Google already owns? It’s not even only a matter of investment but also of time and historical data generated. Update: This recent article from Harvard Business Review explains why data monopolists may threaten the economy.
According to Borthwick, the idea behind Betaworks is to avoid the limiting clusters from the start and “promote this connections particularly at the data level”. For example, as he explains in this fireside chat, they created Bit.ly and then invested in Tweetdeck, two platforms that benefit from sharing this kind of data connections. The more one product gets used the more data, learning and value it generates for both of them. In this sense Betaworks becomes and is managed as an integrated “ecosystem of products” and not as a company with a portfolio and some shared resources. As he recently explained here, in-house startups or companies they invest in should all generate value for the same ecosystem:
“Our investments reflect what we are building at the studio and our thesis in regards to investing in and around a network of loosely coupled companies creates value for the companies in that network”.
In the digital networked landscape we can say this notion exceeds the concept of exploiting synergies. It’s about exploiting the network or “ecosystem effects”
The interesting thing is that to understand this concept of value creation we have to go back to the very inception of it all. And we should always go back to this simple Paul Baran’s illustration to think about future trends and innovation in the networked ecosystem.
Historically we have been pushing and innovating to free the flux of information, to avoid the “nodes” or intermediaries and communicate and trade directly between us for business, political or social purposes. That’s why the telegraph or the internet were invented. The telegraph was crucial to help us transition from a centralized model of information flow to a decentralized model (with all the social, political and economic consequences).
The internet was the final push from a decentralized model (think about mass media and any other commercial or social intermediary) to a distributed model. It means that we don't need the nodes to reach the whole network or a big part of it. Every point (not only nodes) has at least the chance to connect with all the other points. And that’s the whole explanation for the internet disruption. For example, we don't need mass media to advertise, sell or organize social or political movements. This book by David Ugarte explains this beautifully. How does the internet promote that? Chris Anderson puts it really simple in The Long Tail: democratizing tools for production and distribution and efficient mechanisms to connect supply and demand. See Ch. 4.
But with no barriers to entry there are no competitive advantages for businesses so we also tend to erect walls and barriers to this free flux of information (Facebook, Apple, Twitter… all basic examples of closed ecosystems). In this context the vision of Betaworks makes total sense. They create companies that connect and share data resources and this is what they hope will allow them to start with a shorter disadvantage to compete and with better chances to continue innovating and growing in the long term. They try to develop data-connected companies and not silos that will need to become “Google” or end up constrained by data and innovation scarcity.
For the new startup studios this is an interesting lesson. I think it also applies as an interesting point to take into account for Latin American countries promoting innovation through entrepreneurship programs (all the Startups Mexico, Chile, Brazil, Uruguay, etc). It’s not only about sharing space and human resources or finding the best ideas: probably that won't constitute a long term advantage against other portfolios with less institutional exposure to risk in every project. What are the real advantages we can promote? I think this is a really important one.
