We believe we are entering an unprecedented, highly disruptive period in the history of the world. It will last for decades and is driven by the application of information technology to every industry in the presence of a global standards based network that is both a platform for new services, and a delivery mechanism for those services. The web as we know it was just the opening act. We are moving to a world where everything with a power supply will directly or indirectly connect to the network. This new world will fundamentally be comprised of sensors and actuators, producing and consuming structured data – with sensors able to be deployed everywhere and actuators able to operate anywhere.
The impact will be profound. Done right an estimated $7 trillion of GDP growth will be added globally over the next 20 years and many of societies most important macro issues will be addressed, including a reduced reliance on fossil fuels, decrease in poverty levels, and more productive longer lives across the board and across borders. The next 20 years will also be a period of enormous wealth creation. With a strong point of view of how this disruption will impact traditionally conservative industries, Borondi Group is capitalizing by creating a valuable portfolio of enduring companies, across industries. We are leaders not followers, creating the future by leveraging the combined impact of the 5 trends below – all of which will continue to evolve over the next 20 years:
1. Exponential Technology Advancement
The following exponential technology trends are accelerating at an accelerating pace. We believe that society will generally underestimate the impact of these trends over the medium term because at the core we are wired to think in a linear way and not exponentially. We tend to rely heavily on past frames of reference and extrapolate forwards.
The five exponential trends we are leveraging are as follows:
- Pervasive computing aka. Internet of things + mobility
- Compute power and storage trending towards free
- Pervasive cloud access
- Proliferation of structured data
- Machine learning
Because these trends also have a further compounding effect when taken together, rates of impact will accelerate not just in a compound way, but in a logarithmic way resulting in far reaching intended and unintended global consequences. Industry boundaries will blur and be redefined, value chains will be reformed with value migrating to new places, and entirely new industries will be created. Every sector of the economy will be affected.
2. Global Confusion Around the Business Impact of Pervasive Computing
This current period is analogous to 1995 with respect to eCommerce. There is a general understanding in business circles that pervasive computing will have a major impact on corporations. However the specifics are not understood at all. New groups are being formed within enterprises to investigate and research business implications but few people deeply understand the domain. Evidence of this was a recent study prepared by ARM and published in the Economist. It highlights the disparity between perceived economic impact and importance of mobility and IoT within the enterprise and (lack of) progress made to understand and exploit these disruptions. In that report 96% of respondents expect their business to be using the IoT in some respect three years from now. Despite this, investment in the domain is still relatively low, with only 30% of organisations seeing double-digit investment growth in the domain, from what would have been a low base to begin with. A lack of IoT skills and knowledge among employees and management was viewed as the biggest obstacle to using the IoT more extensively.
3. Redefinition of Corporate Structures
Corporate structures are going through gut wrenching change. As technology matures providing new connected solutions for business process automation and vendor management, the capabilities previously only available to the most heavily capitalized corporations are now widely available to all ventures, increasingly on a pay per use basis. Organizational structures are also evolving from hierarchical to being distributed. The corporation is being atomized, relying increasingly on external specialists, becoming structurally more like a Hollywood movie studio than the conglomerates of the past. This shift has wide reaching implications across every corporate function.
At the same time the very definition of products is changing. Product economics will be replaced with platform economics. Networked products and services will be reliant on third party ecosystems for their success leading to some profound implications. Not least of which is that the data associated with products will be more valuable than the products themselves. There will also be a concentration of extreme value within each industry to a smaller number of participants because of the inherent network effects of these new platforms.
4. Lower Capital Needs to Form and Prove New Ventures
It is cheaper now to form and prove out a new venture than has ever been the case. This is a function of being able to outsource many corporate functions, being able to buy underlying systems on a pay per use basis and the presence of a standards based, global network that is both a platform for creating new services and a delivery mechanism for those services to billions of people. Because the best new ventures exhibit platform economics in this networked world, they can scale exponentially meaning that once the venture is proven at a micro level, valuations also rapidly scale.
There will be macro economic cycles that make fundraising more or less difficult for new ventures in the coming decades, but it is our belief that because the stakes are so high during this disruptive time, with winner take all dynamics and because incumbents will not be able to respond organically, significant amounts of capital will always be available to ventures that are scaling once they are proven. What constitutes being ‘proven’ will not always directly equate to historical revenue growth. Some new ventures that exhibit platform economics early on will necessarily make conscious decisions to forego maximizing near term revenue in order to achieve scale. Recent examples include Facebook, Twitter and Pinterest in the consumer market.
5. Large Reserves of Non-Traditional Capital
We believe that the traditional venture model is broken. It’s hard to argue against this position given the financial returns across the entire venture industry. For the 10 years ending June 30, 2013 US venture capital scored a 7.8% return, according the index compiled by Cambridge Associates LLC, which the National Venture Capital Association uses as its performance standard. This marginally trailed the Dow Jones Industrial Average, which was 7.9% for the period, and was well behind the Dow Jones U.S. Small Cap Index, which was 10.6%. There are a small number of venture firms that provide outstanding returns, but they are the minority. These firms are able to attract the best venture partners with operating backgrounds, and consequently access the best deals because of the demonstrable value they bring to the ventures and its team over the long run. It’s a virtuous cycle. They also tend to operate more like traditional Private Equity firms in that they are either hands on operationally with early ventures, or else they enter at a later growth stage when the venture has been significantly de-risked.
Another challenge that the venture industry has faced in the past is that on average it takes seven years for a new venture to achieve a liquidity event. Being an illiquid asset class that on average provides lower returns than alternatives has meant many venture capital firms have found it difficult to raise funds from Limited Partners. Many corporations who have historically invested as Limited Partners in venture funds are now taking more direct control an investing directly as well, forming their own corporate venture funds. They have done this recognizing that participation in a venture fund does not give them the preferences they need to gain information rights, or notification rights in the event an interesting portfolio company is about to be acquired. It only helps that corporations are sitting on historically high levels of cash right now. We expect that corporate venture funds will continue to proliferate in the future.
There are two other significant shifts in the new venture financing markets. The first is the organization of angel networks and online fundraising marketplaces like Kickstarter. The result is the democratization of angel investing. There is more transparency and more access for investors to invest in new ventures. At the other end of the venture life, there is also an increasing amount of growth capital at premium valuations for ventures that are scaling. This is buoyed by recent Twitter and Facebook IPO activity and private placements with a collection of new ventures now valued at north of $1 billion. Related to this is the emergence of secondary stock marketplaces for common shareholders, providing team with liquidity and incentive to take some money off the table along the way, while building for the longer term.
Taken collectively, these shifts mean there is an abundance of seed capital for good new venture ideas, challenges in raising capital if there is not clear evidence of progress and scaling and an abundance of capital at very attractive valuations for companies that are scaling. This will translate to more, large scale winners and more losers who cannot get funded beyond their seed financing. Enormous amounts of wealth will be created and funding will increasingly come from non-traditional sources.