Investors worldwide are seeking to find the next Facebook and Google while venture capitalists are pouring capital into companies that they predict will disrupt industries and fundamentally alter the way we live. The ability to identify the next digital juggernaut is the most sought-after skill among firms focused on finding companies with the prospect for rapid growth. Retail investors searching for the next high flier, however, do not always possess a sophisticated analytical framework usually needed to support this ability.
Meet Harry Weller. A general partner of the venture capital firm NEA, Weller has created a blueprint for understanding the emerging forces driving disruptive technologies. Speaking at the NOW conference, he focused on how fundamental changes in computing during recent decades have led to the emergence of "Four Cs" driving innovation—computing, connectivity, componentization and consumption. Every year, advances in technology roughly cut in half the cost of the devices that feature the Four Cs, Weller said.
Computing power is so robust today that it is common for multiple applications to run on a single server. Also, in recent years, connectivity among computers leaped forward, with sophisticated networks of computers that are now ubiquitous, cheap and interwoven with daily life, Weller said.
Rapid progress in computing and connectivity has led to a boom in cloud computing, or the sale of computing power and data storage through the Internet. By using the cloud, companies can save money and boost efficiency by shutting down their own data centers and calibrating their use of computing power based on their immediate needs. The cloud has encompassed millions of applications, from massive data processing to sharing photos with friends and family. "I call it the server coming out of the closet," Weller said. "You're no longer running your own server—you're renting someone else's server."
Cloud Titans
Amazon.com, Microsoft and Google have emerged as the clear leaders in the business of renting out computing power via the Internet and will thrive from the migration to the cloud, Weller predicted. "In 2006, there were more virtual servers than there were physical servers, meaning this process has already occurred and it's violent, it's happening extraordinarily quickly," Weller said. (Please see the related story in the June edition of The Advisory.)
"Componentization"—the third C driving innovation—makes easier the scaling up of myriad component products and processes to millions of users in one application, Weller said. The simultaneous release of a new movie title worldwide by Netflix or HBO GO is one example of the profound impact from componentization.
This rising trend explains the disruption occurring in the software industry, which is automating front office systems, according to Weller. Companies such as banks, airlines and movie rental services that have relied on branches or storefronts are increasingly becoming automated through application software: one huge application running on many servers made up of multiple components. Complex examples of componentization, such as the automated driverless car, will become commonplace, Weller predicted.
Consumption is the final C driving innovation, according to Weller. Technology today is "injected" into everyday life through devices—Apple Watch, a digitally connected thermostat or a Tesla car. These systems advise us where to park or adjust the temperature of our homes without requiring us to log on to a computer. Consumers will also increasingly find "immersive" technology at hand, through the virtual reality of threedimensional games or augmented reality, which casts three-dimensional images on the world around us. Computer "screens will be gone," Weller said.
Customer First
Thanks to the Four Cs, all companies are becoming "customer-facing," Weller said. For example, Caterpillar no longer makes only tractors. To remain competitive, its software must be equipped to relay real-time performance data to customers, he said.
The restructuring of companies to be more customer-facing will drive trillions of dollars in market capitalization and value, according to Weller. The companies that reap the majority of these benefits, he predicted, will be those which harness three factors: anti-friction, or the seamless execution of processes from the conception of a business to the satisfaction of customer demand; virality, the ability to gain appeal among millions of customers within a short period at minimal cost; and judgment, the use of neural networks and quantum computing to mimic human decision-making.
The spread of innovation and the rise of unprecedented efficiency and superior business models bring tremendous opportunities for investors, according to Weller. For businesses today, "economies of scale are actually in the network; they’re in computing," he said. "Innovation can happen anywhere. You don’t have to be in Silicon Valley anymore. The components are in the cloud—anyone can innovate," he said.
At the same time, a disproportionate amount of wealth today is flowing to a company's founders and shareholders, not distributed along its supply chain, raising "implications for income inequality." A public policy challenge, Weller said, lies in the fact that the revenues generated by the Four Cs may not be widely shared.
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