Startup tsunamis and how corporates face them

Most corporates think of startups as small businesses. Everyone knows that small businesses don’t matter. But startups move in waves. Sometimes waves are so big, we call them tsunamis. And tsunamis matter. This post will explain the nature of tsunamis. It will tell the story of a single earthquake that triggered two very different tsunamis. In the end, corporates know how to handle startup innovation. Do it.

In 2011, the most powerful earthquake in Japanese history triggered two devastating tsunamis.

The first tsunami hit the Japanese coast an hour later. A 40m tall mountain of water traveled 10 km inland demolishing everything in its path.

The second tsunami hit the global telco industry five years later. A cohort of chat apps reached maturity and shattered the future of telcos.

What happened was this: After the earthquake people wanted to call their loved ones, but the phone lines failed. Instead, people sought internet access and a group of developers developed a solution. They called it Line.

Line inspired entrepreneurs everywhere to build chat apps. Among these were: WeChat, Viber and Snapchat. All of them launched in 2011. A startup tsunami was in motion.

At this point, the telcos should have reacted. Today, we know they didn’t. The reason is the nature of tsunamis.

The nature of tsunamis

Tsunamis are always proceeded by an earthquake. Earthquakes are easy to read. The ground shakes and our needles move.

In contrast, tsunamis are hard to read. Only a fraction of earthquakes triggers one. When it happens, the tsunami is practically invisible. It travels underwater with the speed of a commercial jet. Just before the coast, it suddenly rises and darkens the horizon. At that point running is pointless.

The same happens in technology. Some big breakthrough occurs. Like an earthquake, the event is easy to read. Academics, research papers, and popular science media cover it in full.

In some cases, the technological breakthrough is practical enough for entrepreneurs to take advantage. In these cases, hordes of ambitious people found startups. The event has triggered a startup tsunami.

Like a normal tsunami, startups tsunamis also travel below eyesight. It moves through garages, co-working spaces, accelerators and obscure online forums. Places that are mostly invisible to corporates. But it moves fast, gain momentum and suddenly rises. At that point, innovation projects are meaningless.

Why corporates are paralyzed in face of startup tsunamis

Startups tsunamis travel for about 7 years before reaching shore. That means we get a rough picture about the future seven years in advance. If telcos had noticed the large cohort of chat apps launched in 2011, they could have saved themselves.

The problem is that most corporates don’t have proper sensors placed to detect these motions. And when they do, they don’t know what to do about the information.

Most corporates have no method to handle startups. Corporates normally have two defenses against competitors. They buy them or compete with them. But none of that works with startups.

Most M&A professionals would never consider buying a startup. It is simply too small. Why go through all the hassle to buy something small, when you can buy something big with the same amount of work.

Competing with startups seem equally silly. They have no market share.

The thing is this: startups are not competitors. In most cases, startups do not compete with the incumbents. Instead, they build a parallel industry that will eventually outperform the old industry.

Corporates have no answer to parallel industries. It’s not part of a standard MBA course. But there is a way.

Corporates must respond to startups by helping them build the parallel industry. Few founders want to disrupt. Most founders want to build. And when asked, an overwhelming majority of startups actually wants to collaborate with corporates.

If corporates help startups to build a new industry, the corporates will be a part of it. Luckily, new tools are available.

How to ride a startup tsunami

Corporates must take part in the startup tsunami. To do this, corporates need a dedicated interface towards startups. The interface can be an accelerator, incubator, VC arm or some other open innovation initiative. The most important thing is that the initiative follows these rules:

  1. It must scout startups globally. Innovation can arise anywhere.
  2. It must engage enough startups. The more exposure to the tsunami, the better you can react.
  3. It must have a value proposition that is attractive to startups. Startups don’t need you, so make them want to collaborate.
  4. It must include and incentivize all the relevant business units. To utilize synergies the startups must get access to operational decision makers.
  5. It must be rebranded. Even though your brand is a hundred years old and worth billions, startups don’t think it’s cool.

And most importantly….

  1. It must be run by people who know how to talk and deal with startup founders. Founders differ from the rest of humanity and disdain people who don’t get them.

Follow the rules above, and certain calamity becomes a possible future.

At Accelerace we help both startups and corporates.

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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.

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.