My startup investment outlook for 2017

We are in times of transition. I never experienced it before, but I’m also young in this game.

I imagine it’s similar to the mid 1980ies when the personal computer wave faded. Or the early 2000s when the internet rush ended. Those too were times of transitions.

But history shows a new innovation will soon emerge and reach critical support. Certainty will return.

I experienced the latest of these waves. The mobile internet. I remember being absolutely certain about the future. The internet would go mobile.

Every website and application needed to be redesigned to the smartphone. I knew the change would be big enough for startups to battle the dot.com winners. At the same time, the mobile was cheap enough for new users to access the internet. Kids, teens and people in developing countries would want different applications. I knew it.

During the past year, it became increasingly clear to me that the mobile internet wave is fading. The big winners have been found. The pitches I see now are “the Uber of” some small segment.

Entering 2017, I don’t know anything for sure. There is no certain wave everyone is riding. But it’s exactly at times like this the biggest winners are made. Founders and investors who catch the next wave before it becomes obvious will make history.

Where we are going

My general belief about the future of the human race can be summed up in one word: Omnipotence. Humans have strived for the same ideal throughout history. The ideal has been called Zeus, Odin or modern superhero names. Their characteristics: They are all knowing, omnipresent, extremely powerful and immortal. Most telling of all, they look and behave as human beings. And this is where we are heading.

To a pre-modern human, we would already seem omnipotent. All knowing because we can seemingly access all of the world’s information though a screen in our pocket. Omnipresent because we are connected on social media and can move by car and airplane. Extremely powerful because can manage huge projects with software and turn of lights with our voice. Immortal because we can fix most diseases and live to be a hundred.

But modern humans know we still have far to go.

Approaching all knowing

The internet and mobilization of the internet basically made us all knowing. We managed to digitize information and transfer it via fiber and radio waves to everyone’s pockets. Sensors, cameras and peer generated content provided new sources of data. However, there is still a lot that we don’t know.

We don’t know what we are eating, the true state of our body or what a baby is thinking. We don’t know who would be our perfect spouse or how long we need to sleep.

What we need are new type of sensors and improved understanding of the existing data. I think those are big opportunities in the coming year.

Approaching omnipresence

Even though pre-modern humans would be amazed how quickly we can get around today, we are still far from true omnipresence. Food, medicine and people are still moved by relatively slow means of transportation.

In order to become truly omnipresent, we must turn physical objects instantly available. But because physical objects cannot be digitized, we only have three options. 1. Move them much more efficient, 2. Replicate them, 3. Substitute them with something else.

Drones and self-moving vehicles can move objects and people extremely efficiently. Alternatively, we could replicate the things we need. Aside from the potential dangers, having a medicine machine at home would make a lot of sense. In some cases, we could substitute people with humanoid robots, AI or avatars in VR.  I would bet on startups that did any of this.

Relatively powerful

In pre-modern times, almost everyone was farming or hunting. Today, only a few percent create food to the rest of us. Machines and software coursed leapfrogs in what a single human can accomplish. I feel it when Google Maps navigate me places I never been before

However, I don’t feel very powerful when I need a key to open my door or don’t understand what a book is trying to teach me. To be powerful is to be in control. But to be in control requires tools. What we need are more tools.

IoT will help turn objects into tools and interactive interfaces and virtual environments will help me learn new skills. In this field, there is a lot to be done for startups.

Far from immortality

We will not achieve immortality any time soon. In fact, I believe we still got basic plummeting to do. Like just monitoring the state of our health or actually understanding the brain.

In the short term, the obvious task is to get everyone to wear a tracker. But no one likes to strap something bulky on and off all the time. Trackers must be tiny and permanent. Also they need to measure things that really matter. Things you currently need blood samples to get.

When we actually understand our body and what goes on, it will unleash a world of applications. But right now I look for startups that will do the ground work.

Happy new year everyone.

Visit us at www.accelerace.dk.

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Why startups aren’t cool

Many people think startups are cool. This post will tell you they are not. It will tell you that being a startup is something to be avoided. In the process you will learn about nuclear research, the birth of the world wide web and meet the first cool tech founder. In the end, founders will know what to focus on. Focus is everything. Do it.

The bombing of Hiroshima and Nagasaki started a war. A war that is still being fought today.

The instant cremation of thousands of people from only 64 kg of uranium highlighted the power of science and technology.

Europe was quick to respond. In 1954, twelve European states met and formed “Conseil Européen pour la Recherche Nucléaire”. Or more commonly known as CERN.

CERN was created to make Europe leading in nuclear research. To win the war of science and technology. But fate had another plan for CERN. It would make tech startups cool.

The first of the cool

Ten years before startups became cool, a CERN employee made history. Tim Berners-Lee invented the world wide web.

Tim was proud of his invention. He described it in detail, but only few people took notice. Among the few was a young American. His name: Marc Andreessen.

Marc was a geek. The opposite of cool. But that was about to change. Because Marc would do something no one had done before.

Marc took Tim’s invention and created the world’s fist popular web browser. Mosaic. But equally important, he became the first young tech startup billionaire. In 1996, Time Magazine had him on the cover. Marc Andreessen was 25 years old.

And so it happened. Tech startups became cool thanks to CERN and Mark Andreessen. Today, Silicon Valley is a hit series on HBO, Snapchat founder Evan Spiegel is dating Hollywood star Miranda Kerr and fashion model Tyra Banks invests in startups. But startups were never supposed to be cool. In fact, they are as uncool as can be.

Startups are Marky Mark

Steve Blank has the following definition of startups: A startup is a temporary organization used to search for a repeatable and scalable business model.

The key word here is temporary. A startup is temporary because it doesn’t generate enough revenue to sustain itself. This situation only has two end-games. 1) the startup closes down 2) the startup begins to make money.

Either outcome is actually good. If the startup cannot find product market fit, the best thing is to close down as quickly as possible. If the startup finds product market fit and make money, it morphs into a business.

The startup phase should be as short as possible. But the recent hype around startups creates the opposite incentive. To embrace the startup identity.

The startup identity lures founders into a dangerous reality. A world where it’s okay not to have revenue. Where failure is accepted. Where burning cash is natural. But where press, cool conferences and C-level titles are abundant.

The startup reality is deceptive. Like teenage life. No responsibilities and many parties. It feels cool, but adult people know it’s not. Its a phase that you need to go through. Mark Wahlberg (in the picture) would agree.

Instead of embracing the startup identity, excellent founders do the opposite. They shun PR, conferences and fancy titles. They know it’s a dangerous waste of time.

Excellent founders do the uncool. They do cold calls, suffer tons of rejections, sacrifice friends and family, assemble Ikea furniture in the middle of the night. They forget about saving for pension and delay buying a house. They hustle and barter. But most of all they worry.

They worry about being startup. They want to grow up. Like Marky Mark.

Conclusions made:

  • The startup identity has become cool.
  • The startup reality lures founders into embracing the startup identity.
  • Excellent founders focus on becoming a business.

Check out Accelerace. We invest in tech startups.

The insane arrogance of startup investors

Most startup investors feel special. This post will tell you they are not. It will tell you that most investors evaluate startups using simple arrogance. In the process you will meet two groups of super humans, learn about one of the longest wars in history and get inside NASA. In the end startups will understand investors better. Hopefully investors will get inspiration on how to refine their selection. Improving is everything. Do it.

The world was at a war. And the president of the free world was losing it. But he was working on a secret project that would turn the tide. He called it Project Mercury.

He asked the military to find seven super humans. They should spearhead a new battle front. The elite group was found and became known as: The Original Seven.

The year was 1959, the president was Dwight D. Eisenhower and the new battle front was space. The Original Seven was the first team of NASA astronauts.

Since the Original Seven, NASA has graduated a total of 338 astronauts. However, this is a tiny amount compared to the large number of applicants. For 2017, NASA has received 18,300 candidate applications.

The thing is that only few people make world class astronauts. But you are about to learn something else. Even fewer people make world class startup founders.

The hunt for super human entrepreneurs

About the same time as Eisenhower was fighting the cold war in space. A man named Arthur Rock was fighting an equally important battle.

His battle field was Silicon Valley. The fight was over one of the most important inventions in history. The transistor.

Arthur Rock was gathering his own team of super humans. They became known as The Traitorous Eight.

The Traitorous Eight became the founding team at one of the most influential companies ever built. Fairchild Semiconductor. Together, they ignited the modern technology age and helped make Silicon Valley the world’s superpower of innovation hubs.

Like NASA, Arthur Rock continued to find more amazing people. When he did, he would fund their businesses. In the process he invented what we today know as venture capital.

Today venture capital is a global industry. There are thousands firms. Lately, accelerators and angels have joined the party. And they are all looking for the same rare teams of super humans.

But they are a rare breed indeed. It’s estimated that 150 million startups are attempted every year by 300 million people. The number of startups that gets venture funding is limited to couple of thousands. And out of those, only a fraction actually succeeds. Suddenly, becoming an astronaut looks easy peasy.

Overserving and understanding what to look for

Going with the numbers, identifying the outliars among startup teams is much harder than identifying the outliars among astronaut candidates. But that’s not reflected in the selection process.

NASA spends two years in rigorous and intense interaction with candidates before selecting who to send into space.

Comparably, many startup investors just spend a few hours in meetings with the startups before throwing a term sheet. The following due diligence process is mostly legal work. To outsiders this seems insane. And it is.

The problem is that investors are incredibly arrogant. Most of us believe we have developed a special gift. That our unique backgrounds enable us to spot winners on eye sight. Like Mike Markkula meeting Jobs and Wozniak in a garage and just knowing they will become a huge success. Obviously, it’s a delusion.

This delusion fools investors into believing that we just need a pitch. Then our gut will accurately predict the fate of the startup. But the facts disagree.

95% of all venture returns comes from only 20% of the firms. Most investors cannot pick the winners. Of course not. No space agency would ever pick astronauts from pitches and coffee meetings. Sure, they would develop a gut feel about the candidate, but they wouldn’t be arrogant enough to actually follow their intuition.

Instead, space agencies acknowledge that some of the skills and traits that make up excellent astronauts cannot be accurately evaluated in applications and during interviews. Only observing candidates under certain conditions will provide an accurate assessment.

Could the same be true for startups. That you actually need to observe the founder team in action to actually assess their chance of success? I suspect so.

In my work with startups I participate in team meetings, participate in customer meetings and listen in on investor pitches. I see how they make decisions, how they solve problems and how they interact. It’s like NASA observing astronaut candidates operate tools in a vacuum tube or docking in a simulator.

This gives me insights that I couldn’t have gotten otherwise. Insights so important that I often find myself correcting my initial gut feel about the startup.

Startups are built in real life. During prioritization meetings, customer meetings, cold calls and strategic pivots. Participating in real work with the founders provide a true picture of the startup.

At Accelerace we have institutionalized this in our selection and acceleration process. Our application form is minimal. We engage instead. We take in a bigger batch than we graduate. We work closely with the founder team. We reasses and challenge our inituition..

We know what we are looking for and we assign scores. It might not be the right parameters, but we are on our way of proving them. Most importantly, it reminds us to leave (most) arrogance behind.

(The scoreboard used under observation is developed together with my great colleagues at Accelerace. If you think you can help us refine it or make use of it, contact us)

Conclusions made:

  • World class startup founders are rarer than astronauts
  • Most startup investors believe they have a special gift because of their unique background
  • The delusion of a special gift makes investors do extremely shallow assessments of startups
  • Investor can learn from NASA and do more real life observation
  • Accelerace have institutionalized observation and have developed a specific scoreboard

 

Why feasts are essential to startup success

Management literature is filled with long books about company culture. This post will tell you that winning culture is actually really simple. It will give founders an easy way to 10X the performance of their team. Simplicity is power. Use it.

A group of men armed with spears had cornered their prey. They felt excitement and relief. Soon they would return victorious to wild cheers from the tribe. The women had prepared for a feast. Tonight they would be eating, dancing and singing. It was the greatest part of being alive.

For more than 20,000 years, humans were hunters living in tribes. Life was harsh and brutal. Among the few pleasures was the feast. To get a feast required collaboration of the whole tribe. The adult men hunted. The boys assisted. The women prepared fire, fruits and water. Everyone contributed to their common goal. The feast.

Today our lives have changed. But our brains haven’t. Humans still get immense pleasure from collaborating to reach a successful outcome and then celebrate the victory together. When athletes win Olympic medals even the assistants and masseuses go bananas. And this fact is of great importance to startup founders.

The really simple way to build a winning culture

I coach startups on many different things. One of them is how to build a winning startup culture. And that is actually quite simple.

Founders must leverage the hunting tribe mentality. They must break down their journey into small milestones and turn these milestones into hunts. They must assign every team member a role in the hunt and provide a feast when it ends in success.

In practice it means this:

  • Have team meetings Monday morning.
  • Set one overall goal for the entire team to reach by Friday. Hang it on the wall.
  • Place desirable rewards on a table. Like champagne, dinner reservations or concert tickets.
  • When you reach the goal, celebrate hard and congratulate every single member of the team. Even the interns and advisors.

You now have a team that pulls in one direction. Now everyone knows their priorities. Now everyone is motivated and feels important and appreciated. And because of human history, you will develop a true winning culture in the process.

 

The essential questions founders should ask investors

Most founders do investor meetings like a job interview. They look their best and hope to be picked. Most founders know it’s a mistake but don’t know what else to do. This post will teach you to turn the table and interview the investor. It will provide you with a set of essential questions to ask. The answers are more important than you can imagine. Use them.  

I made a huge mistake. And I want you to learn from it.

When I was a founder, I thought VC money was the same.

Because of this delusion, I didn’t care who the investor was. So I approached all investors in the same way.

I showed off and hoped the VC would throw a term sheet. It was a show on my part. I thought I did good. I was mistaken.

In fact, I did terrible. My pitch was good. But I forgot the most important part of the meeting. To learn who I was talking to.

Why does it matter? Because the VC demands your time and attention. And that’s your most valuable asset.

You want the time and attention he demands to be beneficial for you. And that’s a function of three things:

1) The experience of the firm 2) his personal experience 3) his view of your startup.

I didn’t know. So I didn’t ask. You shouldn’t make the same mistake. So here is a list of questions I wish someone had given me:

Essential questions about his firm

  • How many funds have you managed?
    • Because experience is important. First funds tend to give bad returns.
  • Who are the Limited Partners of the fund?
    • Because in the end, the investor serves the interests of the Limited Partners.
  • How big is the fund?
    • Because fund size determines how little and how much they can invest. And how much follow-up funding they can provide in the future.
  • When did the active investment period start and when does it end?
    • Because the lifespan of the fund determines the urgency to invest and to exit again.
  • How is the management of the fund structured and how do you make decisions
    • Because it matters greatly how decisions are being made and who have decision power.
  • What is your investment thesis?
    • Because a clear thesis is an indicator of professional intellect. In other words, they know what they are doing.
  • What are the limitations of your investments?
    • Because it’s nice to know if the investment can be turned down because of technicalities.
  • Which companies in the portfolio have given you learnings and expertise to help us?
    • Because expertise matters. And real expertise comes from experience.
  • How do you do due diligence?
    • Because due diligence can be very long and costly. And you will pay.

 

Essential questions about the investment manager (the one to join your board)

  • What is your thesis about startup success?
    • Because a clear thesis is an indicator of professional intellect.
  • Which other companies in the portfolio are you managing?
    • Because he gets most of his learning and network through his own portfolio.
  • How do you approach the role of being board member?
    • Because you want to know if his style is compatible.
  • How can you add value to our company?
    • Because the answer reveals if he fundamentally sees himself as a controlling mechanism or someone who is there to help build the business.
  • How are you incentivized?
    • Because he will focus on what makes him rich.

 

Essential questions about his/their view of your startup

  • What do you think are main opportunities of the business?
    • Because the answer reveals if he has valid growth thesis.
  • What do you see as the main risks of the business and how would you mitigate those risks?
    • Because the answer reveal if he has experience with your type of business model.
  • What do you see as the main priorities the next 6 months?
    • Because the answer reveal if he is aligned on the short-term strategy.
  • How do you see the exit path of the company?
    • Because VCs are driven by exits and you want to know if they are aligned on the long-term strategy.

If you ask these question, you will get a conversation instead of an interview. It will be a conversation with between parties evaluating each other. And most investors will respect you for this.

Good luck in your next meeting.

 

Why all founders should know their scale down rate

Most founders think they know their metrics. This post will tell you they don’t. It will reveal the most overlooked metric among startups. A metric so important that many startups fail because they don’t track it. This post will help you not make that mistake. Use it.

One of the biggest disasters in human history was unfolding. Panic spread like wild-fire as people realized they were doomed. When it ended, more than 1500 people had suffered a gruesome death.

Two hours and forty minutes earlier, First Officer William Murdoch had taken over command. He couldn’t believe how lucky he was. He was steering the largest and most prestigious ship in human history. The RMS Titanic.

The water was calm as glass. The air was so clear that the lookouts didn’t even need binoculars. In such conditions threats could be spotted on eye sight. And the crew would have plenty of time to steer around any problem ahead. During the next 30 seconds, First Officer William Murdoch would learn he was mistaken.

At 23:39, the lookouts spotted the iceberg. William Murdoch didn’t panic. He knew exactly what to do. He ordered the engines reversed. It would reduce the speed enough to steer the ship around the iceberg. He knew because he had been sailing for 12 years.

But William Murdoch was about to learn a new lesson. The RMS Titanic was different. And he didn’t have enough time. Half a minute later the iceberg ripped the ship open and unleashed a true Armageddon.

The lesson: Knowing the stopping distance of your ship is rather important.

Startups sail in dangerous waters

Early startups differ from established companies. And the difference can conveniently be illustrated using ships as the analogy.

A company is like a cargo ship carrying goods from one port to another. It sails a fixed route in a well-known environment. It’s low risk and the reward is predictable.

But a startup is like a treasure ship in unknown water. It often changes direction and must avoid all the icebergs floating around. It’s extremely risky but the reward can be massive.

In the world of startups, the most common iceberg is this: Premature scaling.

Premature scaling is so common that is basically synonymous with failure. Premature scaling happens when the founders decide to employ more people and increase marketing spend too early. Too early is before they have found product-market fit.

The result of premature scale is this: Cost increases more than revenue. The bank account sinks until there is nothing left. The empty bank account is the iceberg. And the engines must be reverse early enough to change course. First Officer William Murdoch of the RMS Titanic would agree.

The importance of the scale down rate

All startups meet icebergs. Like an online game called Glitch. The team raised angel funding. Then series A. Then series B. For every round they hired more people. The costs exploded. The revenue didn’t. The iceberg was approaching rapidly.

The team decided to reverse the engines and change direction. They survived, succeeded and eventually found gold. Today we know them as Slack.

But the story of Slack isn’t unique. In fact, most startups experience the following in some form: The founders have a vision. Investors fund them. Founders take salary. Costs increases. Revenue is lacking. Founders raise more money. The team grows. Costs increases even more. But the revenue is not picking up.

The founders try to raise more money, but investors are becomingly increasingly unwilling to fund them. The iceberg is approaching. And at this point, founders need to know their most important metric. The scale down rate.

A good scale down rate

All founders should track their scale down rate. It must give an updated and accurate measure of the stopping distance. How fast can you eliminate costs to a sustainable level? Most founders don’t know.

The scale down rate is a function of the structure of your agreements and liabilities. Such as, employment terms, loan terms, payment terms to suppliers, access to credit lines, etc. Ideally founders must seek to structure these agreements with respect to their stopping distance. The stopping distance is how long it takes to eliminate costs to operating breakeven levels.

Founders must optimize for flexibility in all agreements. Have the option to delay payment against penalty. Hire people on flexible terms. Decrease monthly salary and replace with end of the year bonuses. Avoid lengthy office rentals. Get a credit line. Keep savings so you can defer salary for a period of time.

What is a good scale down rate? It depends on the icebergs in your water. Delayed funding rounds are relatively predictable. But founder breakups, Google ranking penalties and bankrupting key customers can come sudden. Assess your unique environment.

A rule of thumb would be 1% per day. If you can slash 50% of your costs in 50 days, that should give you enough time avoid most icebergs. And every time you do, you get another chance of finding gold.

Conclusions made:

  • Most founders don’t track their scale down rate.
  • Most startups will experience the need for rapid scale down.
  • Most successful startups have succeeding scaling down and pivoting to something else.
  • If startups don’t know their scale down rate, the risk of losing everything when critical problems arise is very big.
  • A good scale down rate is different for each startups.
  • A rule of thumb is 50% of the costs in 50 days (1% per day).

Check out Accelerace. We invest in tech startups.

Why central banks hate startups

This is a useless blog post. It won’t help you succeed with a startup. Neither will it help you invest in startups. Instead it will make a connection most people haven’t seen. It will expose who really rules the world and how startups are changing everything we know about economics. In the end, you might see the world differently.

Nine years ago the world changed. We got a new ruler.

Regime changes happen when existing power structures break down. Like the French revolution and Arab Spring.

In 2008, the financial sector broke down. In the chaos following, the new ruler came to power. The central banks. And their leaders became household names. Today, most people know of Janet Yellen and Mario Draghi.

Like any new regime, the new rulers portrait themselves as saviors. And they were.

The world was headed for a 1930s like depression. Banks would freeze our accounts. Pensions would evaporate. Governments would have broken down.

Central banks emerged from obscurity. They stepped onto the world stage to shield us from chaos and anarchy. To restore order and confidence.

People embraced the new ruler. In return, central banks quickly and decisively saved banks, companies and governments. They did so by printing money at an unprecedented scale.

So far the ECB and the FED has printed more than $4 trillion in new money. Yes, that’s a lot.

Money printing is not bad in itself. It did save us. The problem is knowing when to stop. And if history has taught us anything, it’s that regimes never step back down. Central banks are no different.

The power of central banks

Central banks have stayed in power since 2008. They have declared state of emergency and taken control of our economy. The free market has been suspended. Prices of stocks and bonds are now under central bank control.

The price of stocks and houses are at historic highs. Not because the economy is better than ever. But because Janet Yellen and Mario Draghi keep printing money.

The reason why they keep printing so much money is because their instrument tells them so.

The instrument is a thermometer. It sits in every central bank. And it measures the temperature of the economy. Or so it’s believed.

The thermometer looks like this: high inflation – moderate inflation – deflation. High inflation is bad. Moderate inflation is good. Deflation is the really bad.

The thermometer tells central banks to aim for moderate inflation (around 2%). If the thermometer falls below their target, they print money.

And money printing always works. Except for the past eight years, it hasn’t.

Instead of inflation, we see clear signs of deflation. And Mario Draghi and Janet Yellen don’t know why. So they keep printing even more money. Sadly, it’s a futile act.

But to understand why, I will take you back in time to see when the misconception started.

Classic entrepreneurs made new products

In the late 1890s, there was a farmer named Henry. The thing about Henry was that he hated farm work. So he started dreaming about building a machine that could do his job.

Henry started to materialize his dream. After a long day of farm work, he would go to his small shed to work on his machine.

Then one day it was ready. He turned it on, and it worked. Henry had built a vehicle running on a gasoline engine. It marked the beginning of his later company. The Ford Motor Company.

But Henry Ford was just one of many entrepreneurs inventing new consumer products. In fact, the following decades would see a flood of new products. Like sewing machines, washing machines, personal computers and smartphones.

The new products provided vastly better solutions to our problems than the existing products did. Cars outperformed horses. Sewing machines outperformed handheld needle and thread. And the personal computer outperformed typewriters and calculators. The inventions created entirely new product categories that consumers were willing to pay premium prices for.

A car was more expensive than a horse. A sewing machine more expensive than needle and threat. And a personal computer was more expensive than a typewriter and calculator combined. But that didn’t matter, because new categories have no existing price anchors. The inventor is free to set a high price.

In the age of product innovation, rising prices became synonymous with economic health. A healthy economic environment had rising prices. In large part due to the many new and better products being introduced on the market. In other words, the age of product innovation was a world of inflation.

New entrepreneurs disrupt industries

The evolution of entrepreneurship can roughly be summed up like this: The first generation of entrepreneurs created new products. The second generation created digital tools. But the third and current generation does something no generation of entrepreneurs have attempted before. They redefine established industries. And the change of focus matters greatly.

The highest valuated startups are currently Uber (2009) and Airbnb (2008). Both were founded in the aftermath of the great recession. And they have inspired and defined the new age of entrepreneurship.

These startups showed aspiring founders that startups can do more than just make tools. They can disrupt and redefine the very pillars of our society. Such as: transportation, housing, banking, legal processing, energy and even space exploration. These industries are so important that their institutions have (almost) become political establishments. Disrupting them is the most daunting task ever taking on by startup founders. And it’s also the most important.

But disrupting industries has a very different economic impact than creating new product categories and creating digital tools. New categories are inflationary. Digital tools increase productivity. But redefining existing industries have a very different effect. One that Janet Yellen and Mario Draghi fear the most. Deflation.

The age of deflation

When startups disrupt and redefine existing industries they are not inventing new product categories. They are reinventing the way existing product and services are being produced.

Uber fundamentally delivers the same service as taxi companies. But they have redefined the underlying infrastructure behind the service. They have applied technology and utilized excess car capacity. The result is transportation that costs half of a taxi.

Airbnb fundamentally delivers the same service as hotels. But they have also applied technology and utilized excess capacity. The result is overnight stays that costs half of hotels.

But these companies are merely the front runners of a seismic wave of startups attacking the very pillars of our economy. Startups like Impossible Foods is redefining the way we produce meat. The result will be high quality meat at a fraction of the current price. Robinhood is attacking the financial service industry and eliminating fees for trading stocks. All of these startups have one thing in common. They lower the price on things we already spend money on. And that has a name. It’s called deflation.

It’s the thing central banks fear the most. And they will fight it with everything they got. But what they fail to understand is that not all deflation is created equal.

Why deflation from disruption is different

Economic theory stipulates that deflation leads to deferred spending. If apples are cheaper tomorrow, we will wait buying them. That’s obviously bad for economic activity. But this theory builds on a critical assumption. The assumption is this: we can anticipate the price decline.

If we know that apples will be cheaper tomorrow, we will surely wait buying them. But deflation from disruption is fundamentally unpredictable.

No one saw Uber or Airbnb coming before they were actually here. No consumer thought: I will wait booking my vacation until some startup emerges that will utilize spare bedrooms to offer cheap stays.

This means that deflation from innovation won’t lead to deferred spending. And this also means that Janet Yellen and Mario Draghi are looking at an obsolete thermometer. In other words, they are dead wrong.

Disruptive startups will define our future

Central banks have pledged to keep printing money till they reach their inflation targets. But they are fighting the force of human innovation. A force consisting of entrepreneurs from across the globe hell-bent on disrupting the establishment. Janet Yellen and Mario Draghi have brought a knife to a gun fight. And they will lose.

What central banks will get instead is something worse than deflation. They will get bubbles. All the money flows into stocks and cheap housing loans. Prices on stocks and houses will detach from the true state of the economy. They will bubble up to levels so high, that central banks will have no choice but to keep them high.

Janet Yellen and Mario Draghi will find themselves in situation they cannot get out of. All of it because they don’t understand that the world has changed. That they actually aren’t in control. But that disruptive startups will define the future economy. And it will be deflationary.

Conclusion made:

  • Central banks rule the current economy by intervening with printed money
  • Central banks want inflation because inflation used to show economic health
  • The new generation of startups creates deflation
  • Deflation created by disrupting startups doesn’t lead to deferred spending
  • Money printing will only lead to bubbles
  • Startups will succeed disrupting industries and thus create deflation

 

Check out Accelerace. We invest in tech startups.