Paul Wallbank – Brilliant Communications

Category: entrepreneurs

When Venture Capital meets its own disruption
Tech industry veteran Paul Graham always offers challenging thoughts about the Silicon Valley business environment on his Y Combinator blog.

Last month’s post looks at investment trends and how the venture capital industry itself is being disrupted as startups become cheaper to fund. He also touches on a profound change in the modern business environment.

Graham’s point is Venture Capital firms are finding their equity stakes eroding as it becomes easier and cheaper for founders to fund their business, as a result VC terms are steadily becoming less demanding.

An interesting observation from Graham is how the attitude of graduates towards starting up businesses has changed.

When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there’s a third: start your own company. That’s a big change. In principle it was possible to start your own company in 1986 too, but it didn’t seem like a real possibility. It seemed possible to start a consulting company, or a niche product company, but it didn’t seem possible to start a company that would become big.

That isn’t true – people like Michael Dell, Bill Gates and Steve Jobs were creating companies that were already successes by 1986 – the difference was that startup companies in the 1980s were founded by college dropouts, not graduates of Cornell or Harvard.

In the current dot com mania, it’s now acceptable for graduates of mainstream universities to look at starting up business. For this we can probably thank Sergey Brin and Larry Page for showing how graduates can create a massive success with Google.

One wonders though how long this will last, for many of the twenty and early thirty somethings taking a punt on some start ups the option of going back to work for a consulting firm is always there. Get in your late 30s or early 40s and suddenly options start running out if you haven’t hit that big home run and found a greater fool.

There’s also the risk that the current startup mania will run out of steam, right now it’s sexy but stories like 25 million dollar investments in businesses that are barely past their concept phase do indicate the current dot com boom is approaching its peak, if it isn’t there already.

Where Graham is spot on though is that the 19th and 20th Century methods of industrial organisation are evolving into something else as technology breaks down silos and conglomerates. This is something that current executives, and those at university hoping to be the next generation of managers, should keep in mind.

Similar posts:
July 2, 2013
Australia’s startup challenge
While I’ve been using CNet’s story on Kansas City’s startup community to compare Google’s Fiber project with the Australian National Broadband Network, the US article touches on something far more fundamental about Australia’s ability to build new businesses and industries.

The fundamental problem is property prices.

In Kansas City, local entrepreneurs wanting to set up a startup house can afford to take a chance.

The house is the pet project of Web designer and Kansas City local Ben Barreth, who did the insane last fall and cashed in his savings and liquidated his retirement account to put a down payment on a $48,000 house in the city’s Startup Village. Why? Barreth, a husband and father of two small children, wanted to be among the first to buy a house in a Google Fiber neighborhood.

$48,000 for a house is unthinkable in Australia. Even if we disregard Sydney and Melbourne, regional centres are vastly more expensive than their US counterparts. Geelong in Victoria for instance has an average house value of $390,000 while in Wagga Wagga in the New South Wales Riverina district houses sell for a median of over $300,000.

This pattern is true across almost all of populated Australia – it is very, very difficult to find a property under $250,000 and there are few, if any, regions in the country where a house can be bought for less than five times the average local income.

Expensive property comes at a price, it discourages people from starting businesses as the risk of being left out of the property market is so high. Leith van Onselen, co-founder of the Macrobusiness blog, made a very good point about this effect on his decision to set up a business.

Indeed, the main reason why I took the risk of leaving Goldman Sachs to concentrate on MacroBusiness full-time (a start-up business) is that I had all but paid-off my house and was in the fortunate position not to be saddled with onerous mortgage repayments. Had I a large mortgage, like many Australians, there is no way that I would have left a high paying, relatively steady job, to work on a business where pay is much lower and irregular, and where the outcome is unknown.

Leith was commenting on an article in the Sydney Morning Herald reporting the risks to Australian business should property prices fall. In this respect, Australia has managed to paint itself into an economic corner.

The Sydney Morning Herald article illustrates Australia’s predicament – Michael Pascoe (the ‘Pascometer’) reported how Reserve Bank bureaucrat Chris Aylmer had warned of the dangers of falling property prices.

With most Australian businesses dependent on bank finance guaranteed by their proprietor’s home equity, falling property prices would see a nasty economic spiral as lines of credit were called in, forcing companies to slash expenses, including wages, which in turn would drive further real estate falls.

Property also makes up the bulk of Australians’ retirement savings, so a fall in property prices would smash consumer confidence.

It’s no surprise that in the face of a recession or economic shock the first thing Australian governments do is prop up the property market.

Another damaging effect of high property prices is that it turns the country conservative. This graph from Business Spectator’s Philip Soos does much to explain why Australians turned insular in the late 1990s.

Having a population locked into paying their mortgages guarantees a conservative, risk adverse culture and that’s exactly what Australia has achieved over the last fifteen years – much of the opening up from the 1970s through to 1990s has been undone as the country looks inward at protecting its housing prices and bank repayments.

That safe, insular society has its attractions. However if you want to build an entrepreneurial culture, it’s safe to say you can’t get there from here.

While it’s not impossible to build a startup nation in a society addicted to property speculation, it won’t be easy either.

Similar posts:
June 23, 2013
Michael Dell’s struggle to transform his business
Michael Dell continues to press on with his buy out bid for the computer manufacturing giant he created with a presentation to shareholders stating his case why Dell Computers would have a better future as a private company.

Dell’s assertion is the company has to move from being a PC manufacturer to a Enterprise Solutions and Services business (ESS) as computer manufacturing margins collapse in the face of a changing market and more nimble, low cost, competitors.

What’s telling in Dell’s presentation is just how fast these changes have happened, here’s some key bullet points from the slide deck.
- Dell’s transformation from a PC-focused business to an Enterprise Solutions and Services (ESS) -focused business is critical to its future success, especially as the PC market is changing faster than anticipated.
- The transition to the “New Dell” is highly dependent on challenged “Core Dell”performance.
- The speed of transformation is critical, yet “Core Dell” operating income is declining faster than the growth of “New Dell” operating income.
- Dell’s rate of transformation is being outpaced by the rapid market shift to cloud.
The market is shifting quickly against Dell’s core PC manufacturing and sales business and the company’s founder is under no illusions just how serious the problem is.

Should Michael Dell succeed, the challenge in transforming his business is going to be immense – Dell Computing was one of the 1990s businesses that reinvented both the PC industry and the vast, precise logistics chain that supports it.

It was PC companies like Dell and Gateway who showed the dot com industry how to deliver goods quickly and profitably to customers around the world. Businesses like Amazon built their models upon the sophisticated logistics systems and relationships the computer manufacturers created.

A lesson though for all of those companies that followed Dell and Gateway is that those supply chains may turn around and bite you in the future, as Michael says in his presentation;

Within the PC market, Dell faces increasingly aggressive competition from low cost competitors around the world and shifts in product demand to segments where Dell has historically been weaker.

Those low cost competitors were many of Dell’s suppliers as over time the company’s Chinese manufacturers, Filipino call centres and Malaysian assemblers have developed the management skills to compete with the US retailers rather than just be their contractors.

Something that’s being missed in the debate about globalisation at present is that its not just low value work that can be done offshore – increasingly sales, marketing and legal are moving offshore along with programmers and engineers. Now the same thing is happening with management.

The same thing is also happening with corporations as Asian giants like Samsung, Huawei, Wipro and others displace US and European incumbents.

Dell Computing has been a much a victim of that move as it has been of the decline in the PC market which means its more than one battle Michael Dell has to fight.

It may well be that Dell can survive, but we shouldn’t underestimate just how great the challenge is as the company faces major changes to its markets and the global economy.

Similar posts:
June 22, 2013
Who will fill the online advertising opportunity?
It’s been a big week of reports with three major sets of findings being published; Cisco’s Visual Networking Index, IBM’s Retail Therapy and, the biggest one of all, Mary Meeker’s annual State Of The Internet.

With a PowerPoint overview weighing in a 117 slides, this year’s state of the internet is a meaty tome with some fascinating observations that compliment Cisco and IBM’s findings which hopefully I’ll have time to write about on the weekend.

On slide five of the State Of The Internet is what hasn’t changed Meeker describes the $20 billion internet opportunity being missed.

Basically online advertising is not keeping up with the audience, the time spent on media versus advertising spend is lagging.

What’s notable is that this is the third year that Meeker has flagged this disconnect, yet advertisers still aren’t moving onto the web in the way audiences are.

The print media industry though seems to be dodging a bullet with a disproportionate amount of advertising continuing to spent on traditional advertising – 23% for only a 6% share of consumers’ time which implies there’s still a lot of pain ahead for newspapers and magazines.

For the online media, it shows there’s a great opportunity for those who can get the model right.

What that one graph shows is that the disruption to the mass media publishing model is a long way from being over.

Similar posts:
May 31, 2013
Does closed government hurt business and the economy?
Earlier this week I interviewed Vivek Kundra, the former US Chief Information Officer and now Salesforce executive, on innovation, technology and government with some of the Australian business perspectives run as a story in Business Spectator.

Something that stood out for me from the interview were Vivek’s views on the effects of governments making both innovations and information freely available.

“Two policy decisions that transformed the future of civilisation – GPS opening and human genome project through the Bermuda Principles.”

While it’s probably too early to draw conclusions on how the opening of the human genome data will change business, it’s certainly true the Global Positioning System has allowed whole new industries to evolve and it’s an important lesson on making technology available to the masses.

The Global Positioning System was, like the internet, a US military technology developed during the Cold War with the Soviet Union.

After Korean Airlines flight 007 was shot down by Soviet fighters in 1983, President Reagan approved civilian use of the GPS – then named Navstar – to prevent similar tragedies.

Such a decision was controversial, this was military technology being given over to the general population which could be used by enemy forces as well as airlines and truck drivers.

No doubt if the GPS technology was developed in the UK or Australia, there would have been demands to monetize the service. It almost certainly would have been sold off to a merchant bank that would have charged for the service and stunted its adoption.

By making GPS freely available, the US gained a competitive advantage which maintains the nation’s technological and economic lead over the rest of the world.

This openness isn’t just an advantage for technology companies. While US governments are no means perfect, the relatively open nature of local, state and Federal administrations is an advantage for the United States economy and society. As Vivek says,

Making data available provides three concrete functions; it allows citizens to fight corruption, it allows you to build the next billion dollar companies and it transforms government functions by breaking down silos.

When the default position of government is to classify everything as secret or ‘commercial-in-confidence’, there’s little chance of an entrepreneurial culture growing in that society – instead you have a business culture that favours connected insiders who can trade off their privileged contacts within government.

A culture of closed government reflects the business culture of a society and the reluctance of both the private and public sectors to openly share knowledge is why countries like Britain and Australia will struggle to emulate the United States.

Similar posts:
May 29, 2013