Boston Globe tech columnist Scott Kirsner is organizing an event here in Boston next month where the theme will be technology innovation in New England.
A few weeks ago when I was talking with Scott about the event he asked what I thought was "next in technology." I think one of the biggest new opportunities is going to be a new class of companies that are now viable investments because of improvements in capital efficiency over the past few years. Until relatively recently, the capital requirements of technology businesses were quite large. You would have to spend millions of dollars hiring software developers, renting real estate, buying hardware, etc. just to build a product which you could then start selling (and in reality test whether there was a market at all). Rarely did you get it right the first time so you would have to repeat the cycle until you had a complete solution the market wanted.
An entire entrepreneurial ecosystem was built up around this model including venture capitalists who would fund the big investments provided there was a big market, entrepreneurs who would start the companies and seasoned executives who would take over once the business outgrew the founders.
The "old" model is represented in the blue curve above: lots of money in and (hopefully) lots of money out. What's happened (#1 in the chart) is that improvements in capital efficiency have "bent the curve" so that less money is required to get to positive cash flow. In some cases dramatically less money is required. What this means for entrepreneurs and investors is that you can now pursue opportunities that have smaller potential outcomes (#2 in the chart) and get the same (or better) return on investment.
What has caused this improvement in capital efficiency?
Many folks,
including me, have written about the trends that are driving down costs. Some of the big ones are
open source,
cloud computing and virtual office infrastructure. In some cases costs today are 1/10 that of even 5 years ago.
AWS is a great example. The virtual office tools today are so impressive that you can source talent globally and simultaneously improve productivity while cutting costs--unthinkable 10 years ago.
It is important to remember that this doesn't mean the big market opportunities meriting large investments have gone away. I fully expect the market for big ideas to continue to grow. Rather, what it means is that there is a *new* opportunity to invest in companies pursuing smaller opportunities but the manner in which you pursue them (as an entrepreneur or investor) needs to change. On the investment side, it means putting in less money, being more on-par with management in terms of rights and preferences, having less control. The investment won't work if you spend $80K on legal fees preparing investment documents that include things like registration rights and all those other terms that will never get used. As an entrepreneur it means bootstrap, bootstrap, bootstrap. Spend nickels like they were manhole covers. In some ways it reminds me of that Michael Lewis book
Money Ball and how the Oakland A's found ways to win with a small payroll.
Anyway, so that's my crack at "what's next in tech." What do you think Scott? And, oh, by the way, come to the
event on June 25.
