It is increasingly difficult to follow traditional vertical industry thinking because today’s technology enable ‘tech’ companies to span many verticals and geographies. Harvard Business Review article “Why are we still classifying companies by industry?” (HBR 18 Aug 2016) argues that it is better to categorise companies according to business model:
Asset Builders - make one, sell one, high marginal cost. Companies that build, develop, and lease physical assets to make, market, distribute, and sell physical things (Ford, Wal-Mart, FedEx)
Service Providers - hire one, sell one, medium marginal cost. Use people to offer services (Accenture, JP Morgan, PwC)
Technology Creators - make one, sell many, low marginal cost. Generate and deliver intellectual property, SW, data, biotech, etc. (Microsoft, Oracle)
Network Orchestrators - make many, sell many, ~zero marginal cost. Facilitate transactions and interactions within a network, and share in the value creation (eBay, Visa, Uber, Alibaba)
Because of the increasing challenge in having an industry focus we have chosen to rather specialise in the the Network Orchestrator business model - because; a) the most value is created here, b) it is greatly enabled by technology and data, c) our skill set bring value to today's founders, and d) create greater returns for our investors
The product or service is built together with your users. What would Facebook be without user generated content?
Primary Network Effect
Self reinforcing product improvements fuelled by user generated data. Statistical and ML models get better the more data is put through.
Secondary Network Effects
The data generated can often lead to opportunities for new products or services that no-one else can offer w/o doing the same user and data acquisition.
Share Value Created
To fuel the co-creation and network effects it is important to give back to those contributing and be balanced when charging for the product.
A study of S&P 500 companies over more than 40 years (1972 to 2014) published in a Harvard Business Review article (HBR article) show that network orchestrators outperform the other business models, with:
lower marginal cost
These companies also have market valuations, a greater multiple of 2-4 times on average above the other business models. Our own experience tells us that the network orchestrators:
become profitable quicker
have more scalable products
have more M&A activities - gives relatively easier and quicker path to exit