November 11, 2016 –
From Driving to Shaving / From Digitization to Transformation
Tech is moving from being a subsector of the economy to becoming the economy. Every industry is somewhere along the continuum of this transition. At Mayfield Fund, we think this is where we will build lasting companies: amid industries for which the move toward tech is proving truly transformative.
Transportation serves as a useful example. I see it as having unfolded in four stages, from Digitization (up through 1995), to Connect (1995 to 2005), to Community & Collaboration (2005-2015), to Transformation & Disruption (2015 onward). To sum it up concisely: Digitization occurred with the arrival of Unix and the personal computer, which turned paperwork into information managed within software. The rise of the consumer Internet, beginning in 1995, allowed for networked connection. Community and collaboration followed, due to the ubiquity of smartphones, and related developments of social media, big data analytics, and cloud computing. Today we’re at the start of the true transformative period in transportation, when disparate technologies — from machine learning to new battery technology to computer vision — are utterly changing how we move people and things, most notably in the realm of driverless cars.
Transportation is in no way alone in this transition, and in fact serves as a model of a continuum that can be observed in other industries. Wal-Mart provides a useful case study: In the digitization phase, Wal-Mart was able to scale its physical retail operations. In the connect phase it established walmart.com in Silicon Valley to prepare for the world with cloud and analytics, and then it acquired Kosmix Data in 2011. Now, as it prepares to be ready for the transformation/disruption phase, it has acquired Jet.com for $3.3 billion.
What Wal-Mart has experienced as a company maps to retail in general: Digitization enabled retailers to scale their business operations. In the connect phase, we saw the rise of ecommerce, which allowed companies to connect directly with millions of customers across geographies, Amazon being the gorilla in that space. The community and collaboration phase increased the number of participants by an order of magnitude by bringing millions of small sellers online and enabling these small sellers to easily deliver differentiated experiences. Etsy (ETSY:$1.6B) enabled the arts and craft market by bringing millions of sellers online, while the Dollar Shave Club was able to reinvent personal grooming with a differentiated customer experience. In the future of commerce, AI (and along with it machine learning and computer vision) will deliver this differentiated experience for millions of products for billions or users while simultaneously optimizing the logistics costs.
Those are just a few examples. This continuum to tech applies as well in real estate and hospitality, industrials, personlized medicine/digital health (a particular interest of mine), and financial services. Incumbents in traditional industries will either acquire startups and transform, or they will be disrupted and get acquired. This chart shows how transportation and hospitality have changed. Now ask yourself: Where is your industry along the tech continuum?
What Vertical Integration Means for Core Tech Innovation
Core tech has long been my passion as a product manager, entrepreneur, and investor: chips, systems, networking, storage, security, and distributed software. Thease are the core technologies enabling the cloud and mobile. There is an active conversation in the industry right now: Are some of the other technologies enabling the cloud going the way of semiconductors, which is to say is it becoming the domain solely of very large incumbent tech companies?
The simple fact is that as the total computing market continues to expand, subsegments of the market emerge where business customers want simple, integrated, optimized solutions for their specific needs.
Why do enterprise customers want an integrated solution? Your customers no longer believe they should be doing the systems-integration work themselves or getting a sub-optimal solution. Numerous segments of numerous industries are becoming large enough that they can turn sector-specific solutions into billion-dollar businesses. While Cisco was offering one common operating system for all of its switches, Arista (ANET:$5.6B) build a new switch OS focused for cloud networking. While IBM, HP, EMC, Dell, etc. were trying to sell servers and storage for all workloads, Nutanix (NTNX$3.9B) built a solution converging servers and storage for virtual desktop and VMWare environments. While Qualcomm and Samsung were focused on mobile processors to power all types of connected devices, MobileEye (MBLY:$8.1B) built an optimized silicon solution for autonomous driving. We see startup opportunities for new verticals and workload-oriented core technology products and cloud services that are focused on driving delight for their target buyer.
The successful companies in core tech will be the user-centric companies. User-centric always beats technology-centric, and this is even more so in enterprise than in consumer. In enterprise, especially core tech, the marrying of organizational dynamics with technology is essential. Tech used to be the hammer to solve a nail problem. Then it was “Here’s some cool tech; let’s find a market for it.” Now it’s much more detailed: “Who is my customer in a given horizontal or vertical, and how do I integrate with them, building the best solution that addresses their top needs.” That’s the user-centric approach.
Essential Traits for Entrepreneurs in This Newly Vertical Environment
Where industries are transformed, so too are people. We’re seeing this among the founders who are best suited to the next generation of startups. It used to be that expertise didn’t really matter: you were on the frontier and you did things fast. The old way was just building a product and finding a business-development person later to go sell it. That model doesn’t work anymore: Who you’re going to sell to is as important as what you’re going to sell.
Today you need multi-disciplinary expertise: you need the business knowledge in the specific domain, you need the product experience, and you need the engineering expertise — and you need all of that among the founding team from the start.
The transformation to tech is about a monumental change. It’s about altering industries for which change has been a long time coming. Managing that change requires a combination of vision and action. Great founders see where things are headed, and they’re building something toward that horizon — it’s something everyone wants to be part of: colleagues, investors, employees, customers, and the given industry as a whole. At Mayfield, as we look at the industries likely to give birth to billion-dollar businesses, that’s the kind of founder we bet on.