For years, investors and market analysts looking for the next big technological innovation kept a laser-sharp focus on what’s happening in Silicon Valley.
As America’s dominant technology hub, Silicon Valley seemed to offer ideal conditions for creating the next great tech company. The region attracted the world’s best-trained engineers, the billions of dollars necessary to support big ideas, and the willingness to invest huge amounts of time and money to get a business off the ground. “Success” typically meant building the next layer of the tech stack, increasing connectivity or creating a faster piece of hardware.
Charlie Munger on Discount Rates and Opportunity Cost
Discounting future cash flows is one of the most frequently used methods of business valuation. It's also the preferred method of Warren Buffett and Charlie Munger. If you’re looking for value stocks, and exclusive access to value-focused hedge fund managers, check out Hidden Value Stocks. While he's never laid out his exact valuation process, Buffett Read More
Those investments in new development paid off. You could say that the technology industry has arrived and perhaps reached a plateau. Technology has become smaller, faster, more connected and easier to deploy.
For entrepreneurs, that makes life both easier and more difficult. Moving forward, success will take more than creating a startup and growing your user base. Here’s what entrepreneurs need to know about how to succeed during the next phase of the tech revolution.
1. Anyone Can Be A Technology Entrepreneur - Even If You're Not An Expert
Thanks to the commodification of technology, it’s no longer as difficult to take good ideas and turn them into reality. Where you used to need dozens of engineers, piles of money and years to prove-out your idea, you can now literally get a new business up and running in a matter of days with a few hundred dollars.
The reduction in required technical horsepower means that you don’t need to be a computer engineer to imagine technological solutions that make people’s jobs or lives easier. The low overhead of starting a business also means that you can try your hand at actually building out new products without risking fortunes or wasting years of time.
With this in mind, we should expect to see the typical profile of a tech founder begin to change. The new competitive advantage isn’t tech or coding skills. Rather, it is big-picture thinking and real-world experience in a specific niche--industry expertise about which the typical technologist might lack awareness.
The primary contributing factor to your success won’t be the fact that your system is ten times faster than the prior generation or one-tenth of the price. Rather, innovative products and strong business models will win the day. Deep business and domain expertise are now just as important as having talented engineers.
2. Success Knows No Geographic Bounds. (Hello, World!)
The changing profile of a tech entrepreneur may have smart investors zooming out of Silicon Valley and viewing the market with a wider lens — or as coders might prefer to put it, saying “hello, world!” to the rest of the country.
A whole new world of entrepreneurship is open to mid-career industry experts who may have ideas on how to innovate, but didn’t picture themselves leading a tech company just a decade or two ago. Anyone can start a business in any geographic location. Early-stage companies now only need a few engineers to get a company off the ground, instead of the typical army of engineers we’ve come to expect.
For those with an entrepreneurial streak, the best way to get started is to take a deep dive into industry problems and pain points. The resulting products won’t be those that will change the tech industry. The entrepreneurs of tomorrow will change their own industries, whether that’s healthcare, insurance, agriculture, or any other areas that require a depth of industry knowledge to come up with practical solutions.
3. Consider Using Connected Assets To Create A Secondary "Moat" Around Your Business
A decade ago, the company that was first to market with useful software had a substantial amount of time to collect profits and build a reputation before having to worry about competitors. Now that it’s neither as expensive or difficult to build software, lower barriers to entry allow competitors to close in quickly.
In order to maintain profitability over the long term, successful entrepreneurs must devise a strategy to create a secondary "moat" around their product. One of the best ways to do so is to couple software with some sort of a connected asset.
For example, consider connecting software with a proprietary data pool, a piece of hardware or analytics that give your company a unique capability to provide a full-package service to your customers. That allows your company to have more pricing power, fend off big competitors and continue to grow over a long period of time.
To see how this works, consider Understory (full disclosure: this is one of our investments). The Wisconsin-based company combines software with weather-sensing hardware to gather ground-truth weather data. Customers think: “I’m buying the Understory platform” – but they’re also buying the data within the platform that comes through the hardware. A competitor would be hard-pressed to beat out Understory on all three fronts, allowing Understory the time to build out its core business.
Understory is a great example of how CEOs are using sophisticated and cost-effective technology to solve hard problems in large, existing industries. Many of these companies will be started by people with deep domain expertise and in geographies historically overlooked by entrepreneurs.
About 4490 Ventures
Partnering with entrepreneurs to build billion-dollar businesses in underserved markets.
As investors, we have the advantage of having learned the craft of early-stage technology venture capital investing at firms on the West Coast and the East Coast. We brought our knowledge, networks and experiences to 4490 Ventures where we apply those learnings to the unique opportunities available in underserved markets. Underserved markets contain the majority of the inputs into America’s innovation economy, yet receives a disproportionately small amount of all venture capital. We’re committed to changing that ratio.