The 30% Internet Gorilla Tax

I’ve written before about powerful advantages Google, Apple, Amazon, and Facebook have in the software industry.  These four companies control major parts of the ecosystem, take out upstarts when they get too big, corner talent markets in key areas, and enjoy a ~30% “tax” (directly or indirectly) across most other software companies.

I first noted this nearly 5 years ago, but more recently, some of the Internet thought leaders have written about the theme.  For example, Fred Wilson wrote:

Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. …

And, Sam Altman wrote in the YC Annual Letter:

Companies like Amazon, Facebook, Google, Apple, and Microsoft have powerful advantages that are still not fully understood by most founders and investors. I expect that they will continue to do a lot of things well, have significant data and computation advantages, be able to attract a large percentage of the most talented engineers, and aggressively buy companies that get off to promising starts. This trend is unlikely to reverse without antitrust action, and I suggest people carefully consider its implications for startups. …

(Emphases added)

Now, Snap(chat) has revealed they’ve committed $3b to Google and Amazon over the next five years, or about $600m/year.  When we line that up with revenue estimates ($5.7b over the next three years), we find that the gorillas are getting….. ~30%!

Startups Should Revolve Around Their Founders if They Want to Succeed Big

I read a recent Harvard Business School blog post titled “Startups Can’t Revolve Around Their Founders If They want to Succeed“.  The authors make a general argument that founders are the biggest obstacles to long-term startup growth, citing a new research paper (paywall, sorry) that hypothesizes:

For a given startup, the value of the startup varies inversely with the degree of control retained by founders.

From a statistical analysis of over 6,000 startups, the paper (and article) argue (roughly) that founders with board control, the CEO position, or both, can “harm the firm’s prospects, reducing pre-money valuation by up to 22%.”

Really?

While “founder scale-up” problems are real management issues that can put significant stress and strain on any startup team (I’ve lived it), the argument has a significant flaw:  it’s based on an unweighted startup data set.  If Uber’s value creation (for all stakeholders) is considered equal to Fred’s Wrecking, Storage and App Development, I’m skeptical we can conclude anything really useful.

For example, a full half of the top ten US companies had or have founder leadership to significant significant scale:  Apple, Google, Microsoft, Facebook and Amazon.  These five alone companies represent $1.5 trillion of value — over 8% of the total value of all public US companies!  And all of the top US companies founded within ~30 years are/were founder led.

Furthermore, while I’m quite skeptical of private “unicorn” valuations, all but one at the top of that list have founder CEOs: Uber, Airbnb, Palantir, Snapchat, SpaceX, Pinterest, Dropbox, WeWork, Theranos, Lyft, and Stripe.

So, here’s a completely different hypothesis:

Most startup value creation, by a wide margin, accrues to founder-led companies. (esp. in technology) 

Stated differently: would you rather have a portfolio with 7 out of 10 companies successful, or a portfolio with Facebook?

Stratasys’s “Heated Build Enclosure” Patent

I gave a talk on patents at Bolt last month.  I covered the patent process and strategy for startups, but one of my key points was: don’t get too excited about a patent until you read the claims. The claims describe, very specifically, what the patent covers.

So it was interesting to hear several references to Stratasys’s 3D printer “heated build enclosure” patent recently.  (Background:  in certain 3D technologies, there’s less warping if printer chamber is toasty warm).  The 3D community refers to the “broad applicability” of this patent and is waiting for it to expire.

Intrigued, I studied the claims.  Here’s claim 1:

A three-dimensional modeling apparatus comprising a heated build chamber in which three-dimensional objects are built, a base located in the build chamber, a dispensing head for dispensing modeling material onto the base, the dispensing head having a modeling material dispensing outlet inside of the build chamber, and an x-y-z gantry coupled to the dispensing head and to the base for generating relative movement in three-dimensions between the dispensing head and the base, characterized in that:
the x-y-z gantry is located external to the build chamber and is separated from the chamber by a deformable thermal insulator.
(Emphasis added).  Note the gantry is external to the build chamber and all other claims specify this.  In fact, the specification highlights the disadvantages of putting the gantry inside:
Placing the extrusion head and the x-y-z gantry in this heated environment has many disadvantages. The x-y-z gantry is comprised of motion control components, such as motors, bearings, guide rods, belts and cables. Placing these motion control components inside the heated chamber minimizes the life of these components.
The implication is simple:  a chamber with the gantry inside or partially inside would not be “external” and would not infringe this patent.
Read the claims!

The Disrupted Fight Back With Lobbyists

Is it just me, or does it seem like an increasing number of successful technology startups are running into growing legal and regulatory issues?  Specifically, the incumbents getting disrupted aren’t always fighting back in the market; they’re fighting back with lobbyists.

Consider these current examples:

Aereo.  This company receives free over-the-air signals (using mini antennas, one per subscriber) and streams them on-line.  The networks aren’t happy because they’re not getting paid the way cable companies have to pay.  This case is pending at the Supreme Court, and the press is comparing it to the 1984 Betamax ruling that made it legal to record TV shows at home.

Uber. There are so many lawsuits from taxi companies and associations, I don’t even know where to start.

Airbnb.  Cities want the hospitality tax (Airbnb is moving to collect taxes in New York, San Francisco, and Portland) and the hospitality industry doesn’t want the competition.

Tesla.  Can you name any other industry where a manufacturer can’t sell their own product?  Laws designed to protect auto dealerships from anti-competitive moves by their current manufacturers are now being used by dealers to prevent new manufacturers.

Google Fiber.  The ISP lobby has gotten limits on municipal broadband in 20 states, and a fairly extreme (restrictive) bill was proposed in Kansas (but doesn’t seem to be going anywhere).  ISPs don’t think it’s fair to compete with municipalities who take matters into their own hands to get competitive broadband service.

Every Bitcoin startup.  This one is so early, most folks don’t even know where to start lobbying.  That didn’t stop my home state senator, Joe Manchin to call for a complete ban. It was embarrassing (he’s since backed off, a little).

What’s most interesting:  in every single case (except Bitcoin, too early), the consumers are very happy (often extremely so).  They’re enjoying the fruits of innovation and competition — exactly the way things are supposed to work.

By virtually any test of our fundamental policies regarding free markets, anti-competitive practices, and restraint of trade, these innovators should not have so much regulatory headwind!

Boy, Was I Wrong About Dropbox

A few years ago, I was bearish on Dropbox.  I thought they would be an OS feature in time and that turning down a (rumored) $800m from Apple was a bad move. On Quora, I wrote:

I think “slow fade” is another probable outcome.

I’m reminded of FTP Software, which went like gang-busters selling a TCP/IP stack for Windows. Their revenues fell very quickly after Microsoft started shipping TCP/IP as part of the OS.  (The same thing happened with all of the disk-compression companies).

Wow, was I off base!  I think it’s good to evaluate big entrepreneurial and investment misses and I missed several things (at least).

First, a great product goes a long way.  Dropbox has absolutely nailed the product design and user experience in virtually every aspect.

Second, the service is inherently viral.  I routinely create new Dropbox users by sharing files with them.

Third, they covered every platform equally well.  iCloud works well on OS X, and OneDrive is great on Windows, but Dropbox surfed the whitespace between all of the platforms.  They did an excellent job on everything:  the iPad version isn’t just the iPhone version running 2X and they even support Linux.

I can’t wait to see their IPO.

Why You Can’t Find Any Mobile Developers

In case you haven’t noticed, it’s impossible to find mobile developers. People ask me all the time if I “know anyone”, and I’ve all but given up helping with referrals.

The reason is “self-publishing” is now a reasonable option.  The app store ecosystem has removed most friction from the system, provided a clean and easy business model (70/30 revenue split), and eliminated almost all barriers to entry.  If you have talent, a laptop, and a coffee shop wifi connection, you have a chance at writing the next great app hit.

As a result, many good developers have (or believe they have) a better chance at doing their own thing vs working for someone else for salary or an hourly rate.

It’s Not the Wild West Anymore

A recent Facebook post by David Sacks is worth reading.  He said:

I think silicon valley as we know it may be coming to an end. In order to create a successful new company, you have to find an idea that (1) has escaped the attention of the major Internet companies, which are better run than ever before; (2) is capable of being launched and proven out for ~$5M, the typical seed plus series A investment; and (3) is protectable from the onslaught of those big companies once they figure out what you’re onto. How many ideas like that are left?

As you might expect, his note sparked a fierce debate in the comments (and a TechCrunch article).

I think he’s more right than not:  the unbounded “wild west” days of the Internet are winding down.   I’ve written before about the GAAF ecosystem, and how much of the Internet is now controlled by Google, Apple, Amazon and Facebook.  Those gorilla incumbents have taken a lot of friction out of the system, but they also tax, manipulate, control, and limit success at the upper-bound.  You’re not going to build the next Facebook on Facebook.

(The incumbents will get replaced, but it will be a LONG timeframe — they’re too deeply entrenched.)

However, the Facebook discussion suggests a nice framework for evaluating opportunities.  Ideas within the incumbent ecosystem (especially pure Internet software ideas) will be limited.  But stepping outside that ecosystem makes things much, much more interesting.  Uber (mentioned in one comment) is a great example:  they solve a messy, real-world problem — they’re a lot more than just a app.

Markets are smart:  Silicon Valley will figure it out, but it might take a while.

The CPU Free Lunch is Over

Back in the late 70s, my dad ordered a Heathkit H-89 computer.  It had a 2 Mhz 8-bit Z-80 processor, took months to arrive, cost $1600 (in 1980 dollars!) and we had to put it together.  Now, you can go to the nearest Best Buy and walk out with a ~3Ghz system for a few hundred dollars.  While that’s a staggering increase in price performance, you may not have noticed:  we haven’t seen anything much faster than 3-4 Ghz for a few years.

That’s because we’ve “hit the wall” for single-processor CPU performance, and we’re at the limit for CMOS processes, circuit performance, and instruction level parallelism (ILP).  New processors from Intel and AMD are “spreading sideways”, implementing multiple CPU cores (2, 4 or even 8 processors).  Future processors will have even more cores, and you can “rent” as many additional processors as you need, in the cloud, on the fly.

This is a fundamental change in CPU performance architecture, and it’s forcing software developers to think differently.  For decades, you could speed up your software by just waiting for the next (faster) CPU.  Now, that’s no longer the case.

This leaves us with many large, complicated legacy code bases (e.g. database engines, solid modeling kernels, etc.) that need to be completely redesigned to take full advantage of multiple cores.  That, in turn, will create new opportunities — someone will step in to build multi-core scalable implementations of this stuff.

It’s the Software, Stupid!

I recently got Kellie a new all-in-one printer/scanner/copier for her office.  After years of buying HP printers, I got tired of their crappy software.  I have no idea why they insist on a multi-hundred megabyte distribution just to support a printer:  they install a bunch of stuff I don’t want/need, and the software I do need isn’t that good.

This time, we bought an Epson (WorkForce 635), and it’s a refreshing difference.  The build quality seems comparable to HP, but the software is much, much more streamlined.

The whole experience underscores something interesting:  the overall usability, quality, and capability of many hardware devices is increasingly defined by software.  Yet many hardware companies fail to prioritize their software design.

Consider this thought experiment:  would you rather have an Android phone running iOS, or an Apple phone running Android?

The Coming Bits and Atoms Disruption

I’ve written recently about the entrepreneurial lottery, and the long odds for many pure-software Internet/consumer/mobile projects.  For the reasons outlined, I’ve been shifting my entrepreneurial energy away from these projects.

Instead, I’ve been working on “bits and atoms”, or as I think about it:  the intersection of mechanical design/fabrication with the Internet ecosystem and Moore’s Law advances. The space includes:  CNC, digital fabrication, the “maker” culture, 3D printing, robotics, sensing, and automation.

I think we’re on the cusp (e.g. next 2-5 years) of some major disruption happening in the mechanical & electromechanical worlds, driven by the convergence of three things:

Internet-enabled collaboration.  Growing up in West Virginia, my technology sources were Popular Electronics and Digi-Key mail-order.  It took forever to build anything, and if someone else did an  interesting project, I was lucky to hear about it years after the fact.  Now, I can surf videos of cool CNC shop projects, and easily contact other makers to share project information.

It’s amazing how fast things can advance when information flows quickly and freely, and when it is easy to build on the work of others.  Consider how, in the span of only about a dozen years, we’ve transitioned from an expensive & proprietary software stack (OS, database, dev tools, etc.), to one that’s completely free, open, higher quality, and much more capable.  That only happened because of the collaboration the Internet enables.

Now, the tools & techniques pioneered by the software community are spilling into the mechanical world:  “open source” designs, version control and configuration management, and collaborative projects.  GrabCAD is one example of a company working in this area. (Disclaimer:  I am an investor).

Moore’s Law advances in computing, storage, and sensors.  The aluminum and screws in a robot arm haven’t changed much in 10 years, but the control computer sure has.  At the top end, a modern Intel/AMD processor has a lot of horsepower for real time image processing, geometry modeling, and control and planning.  At the low end, a Roomba has more CPU capacity than the first desktop computers.  The same advances are happening with storage and sensors:  1TB now costs only $60, and video sensors are getting very cheap.

Many things that were “computationally hard” 10 years ago are now possible.

Modern 3D design tools.   I recently helped a friend rebuild his computing infrastructure after a flood:  $1,200 today buys a very powerful CAD workstation.   Add some parametric 3D design software like SolidWorks, and it’s absolutely amazing what you can prototype, design, test, refine, and stress entirely at your desktop.  When you mix in collaboration:  the ability to take someone else’s model, make your own improvements, and contribute it back, things really start to take off.

I don’t know where it all leads, but it certainly feels like something’s brewing.