Over the last few months I’ve discussed the evolution of the valley’s innovation profile, mocking the term Full Stack, and bemoaning the collapse of investment in true hard core technology . And at times, I wondered if I was engaging in a form of #gamergate… I felt like I was whining that my club was being invaded and throwing an inappropriate hissy fit.
Yesterday I went for a walk with a brilliant friend of my wife’s and as often happens when you talk to someone who is effortlessly smarter than you, things that were unclear become clear.
Let me start with what the world used to look like to my grandfather. But … First let me talk a little bit about my grandfather Kostas Roussos.
Kostas worked at NCR in Greece from about the early 30’s to the late 70’s. He was personally responsible for transforming the back office’s of hundreds of large enterprises across the Eastern Mediterranean and North Africa. In what could only be described as bizarre, IT and tech, in many ways, is a family business …
In his world, there were businesses that produced products that moved the product to middle men that sold the product to consumers. Those businesses had three basic layers, a sales/channel team that sold the product to middlemen, a product development arm that built the product, and a back office that supported both with things like billing and legal support etc.
The problem a lot of those companies had was how to make their back-offices more efficient and reliable. At the time they relied on human beings to tabulate figures and close the books. And errors, and theft, and inefficiency were rampant. Enter NCR with it’s automation systems and all of a sudden back-offices became more efficient freeing up dollars to spend in product development and sales/channel activities.
The entire business IT/Tech industry emerged as the way to fix back-office systems across the world.
The folks at IBM/NCR understood this world very clearly and understood how to sell to that world.
To my grandfather, each of those companies were ‘full stack companies’. Where the stack, in his mind was all three layers: sales, product development and back-office.
When building a company you had to build all three layers. And one of the hardest layers to go build was the sales channel because the incumbents owned that channel. You had to go basically flip one sales guy at a time, one day at a time.
But in 1993 the world changed.
What the web did was that it allowed you to reach customers without building a sales channel through advertising. Essentially you could build a company that looked like this:
The theory was that you could directly reach customers who would find you because of how you spent advertising dollars. And as a result, you could more efficiently scale your business because the painful and slow process of sales channel creation could be bypassed entirely. And the other theory is you could capture more value because you could avoid paying the middleman.
Who can forget the phrase “disintermediation”…
What happened was that real companies tried to re-engineer their back-offices to be able to directly sell to their customers bypassing sales channels and middle men. Who can forget the whole ‘what is your web strategy’ and ‘e-business’ ads from that era?
Most of the investment from a tech perspective in that era was technology to improve the back-offices or to create middlemen (web-portals!) that would be where people bought advertising dollars to reach customers.
What is ironic of course is that it turns out that the scale and volume of the businesses that were trying to advertise was so gargantuan that a middle man did emerge, possibly the most powerful and rich middleman of all time:
Basically Google became the middleman of the new era.
And so the world looked a lot like what my grandfather remembered:
Once fortunes become titanic, then of course competition emerges. As entrepreneurs saw the staggering value available in being Google, competition emerged to try and take a piece of the action. And so companies like Facebook and Twitter and Yelp and God knows who else have been trying to own a piece of the middle man action ever since.
Except of course the sales and channel still remained super critical for most people because you don’t buy things from the web unless it’s a pure commodity…
In the modern era, then the Valley has either funded companies that tried to improve your back-office infrastructure or tried to be a better middleman for the electronic era. And those were ridiculously profitable areas of investment. Because a small amount of capital could produce very quick returns. And ultimately, VC’s are just middlemen between owners of capital and entrepreneurs and rate of return is important to their customers.
As an aside, what’s astonishing about SaaS is that we are able to achieve the same rates of quick returns that middleman companies used to enjoy in selling to the back-office. The idea that you can grow that fast into the enterprise back-office is nothing short of astounding and mind-blowing.
Returning to our original story… if you think about it, the valley has never really made its specialty investing in building companies that built products that didn’t fit into back-office or middleman kind of areas.
Although it is inevitable that we would eventually build full companies. As we became middle-men, we would see opportunities for products and eventually some of us would want to build the product.
And this is a new thing. Tesla, for example, is a full stack company in that the core of the business is building a car. Alt-School is another example, the business is building a school, IT is just back-office stuff that makes it better.