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Blinded by VC tinted goggles, we missed the birth of a new corporate archetype

21 Jun 2011

Oceans of Kool Aid

If like myself you enjoy reading a bucket full of venture capitalist blogs, then you're apt to develop a distorted view of the world. The blogs I explore capture a mix of experiential wisdom, sharp perspectives, and an impeccable sense of critical value1.

Yet there are only a handful of business archetypes that interest professional investors, and they all share the trait of massive scalability. The investor bloggers I tune into don't conceal this fact, in fact they go out of their way to educate readers about the nuances of the types of business that they invest in.

For VC fueled rocket ships features aren't crafted to satisfy specific customers, they require strategic integration to attract the largest possible market. VC grade companies espouse their superior customer service, yet investors and entrepreneurs both know that talking to millions of customers on the phone doesn't scale for a lean operation.

Complex analytics systems iteratively guide synthesis of the simplest interfaces possible. The sole goal of design is to yield maximum positive emotional impact with the smallest amount of development time and service required2.

There are human elements in UI/UX design, but you can confidently wager that any element which raises even a moderate amount of uncertainty for users will be remorselessly culled. This machine like design philosophy of matching the product to the broadest market results in millions of marginally satisfied clients, and that's good enough for VC backed companies racing to own a space.

Markets: Scale vs Specialization

Let's quickly review service and VC backed product businesses, afterwards I'll leave you with an open question about another type of company, the tool specialist.

Product BigCo

These businesses may start small but somewhere along their journey they realized and focused on massive growth. Venture Capital enables explosive growth before sufficient revenue streams are in place. Littered among the feet of titanic successes like Amazon and Google are hundreds of companies that reached for the stars and fell short. Large market product plays are a darling target of investors.

Service Companies

Clearly service based operations cater to client needs. These organizations subsist by charging a premium on labor, and may only grow revenue as fast as they can add and train more employees

For example, the company I work for can't replicate my work a hundred let alone a million times. I may spend months writing software that only a few people will ever use to create a solitary chart, in a single presentation! Each project is a highly specialized custom job, yet there are a few products that took hold in my industry:

These utilities hint at the third big opportunity business type I perceive.

The Tool Specialist

The consensus I picked up among professional investors and entrepreneurs at numerous blogs, is that a business can either be a service or a product based company.

The rationale is that if a company allows product decisions to be guided by the changing needs of a handful of customers, that it will miss the opportunity to satisfy a much larger market. These types of businesses inevitably spin towards service companies or close down altogether.

Yet the above polar business archetypes left me wondering whether there is room for a new type of high value, scalable organization, the tool specialist. As tool builders and utility providers, software companies can craft solutions for diverse industries by leveraging a rich common library, development kit, framework, or language.

I've witnessed and developed with brilliant platforms like Rails that were extracted out of a custom web server. I've experienced the liberation of developing in CoffeeScript after a couple years of struggling to read through complicated JavaScript object context3. It's possible to create high impact technologies while not strictly adhering to a product or service approach.

The supreme challenge of the specialist is to build such magnificent tools, that people will trip over themselves to use them no matter what type of work they do. The tools must be cheap or better yet free on their own. The utilities must also be generally applicable to broad markets. Monetization of ground breaking tools can come in a number of forms such as technical documentation, professional (expensive) training, subscrition based support contracts, etc. For examples explore the industry surrounding Linux or on a smaller scale discover what 37 signals is doing in a post Rails world.

Notes:

  1. Fred Wilson's AVC
  2. Mark Suster
  3. Charlie O'Donnell
  4. Brad Feld
  5. Bijan Sabet

  6. I refer to the Von Neumann minimax shuffle once again. This maximum gains for minimum energy or Pareto's 80/20 rule is getting monotonous. I'll take the sunrise anytime.
  7. JavaScript code can quickly converge on a labyrinth of implicit scope, clojures, function callbacks, and JSON structures. CoffeeScript helps me read through existing code faster, and focus on data and algorithm flow, instead of the syntax