See… the secret >The new way to create a billion-dollar company

The way to build a successful company is to adopt a hardware-and-software combination, as the success of companies like Tesla and Nest shows.

At the recent consumer electronics show in Las Vegas, a defining feature underscored the most sophisticated creators of new devices: the platform. The car, the home and the person all linked together in an ecosystem that gives customers a holistic vision of their worlds. We know that the ship, the space rocket, the airplane and the train are all becoming platforms. These industries are looking for entrepreneurs who can take a system-level approach to the total customer experience, building ecosystems around platforms.

What defines an ecosystem or a platform? Well, in a multi-stakeholder world, an industry is an ecosystem. It’s a system with a sense of order and natural allies or camps, but not an inherent hierarchy. Those who organise the economics for those ecosystems are the winners. I call those companies “platforms.”

Vertical integration

Take Harry’s, an Internet shaving start-up backed by hedge fund Tiger Global. It’s not even a year old, but it recently acquired a 93-year-old razor factory near Nuremberg, Germany. They have done this in order to control the entire customer experience, while allowing the company to change its products quickly. There are hints of Zara’s model in their approach.

Nest, the so-called thermostat company, which set out to turn unloved items in your home into objects of desire, recently was acquired by Google for $3 billion. Nest deals with the guts of houses and their pipes, as well as with customer design and user behaviour.

Andreas Raptopoulous, founder of Matternet, is creating a vertically integrated drone company that hopes to be the most loved and inspiring unmanned-aerial-vehicle business in an industry which is feared more often than loved. He aims to create a total customer experience with drones, reimagining the delivery of necessary consumer goods.

What do all of these examples have in common? They are all defined by vertical integration. They are moving to control the entire customer experience and to build an ecosystem for their customers. Raptopoulous is an expert in robotics as well as customer design. This system-level approach, combining hardware and software, is giving his company huge momentum.

There was a time when horizontal tech start-ups, as opposed to vertical ones, were the darling of Silicon Valley’s venture capitalists. Once upon a time the world was centred on personal computers and Wintel, the Windows-Intel alliance, ruled the PC platform. Software was the greatest invention to make people wealthy, because the margins were massive once you sold the stuff. Niches had to be found in the horizontal layers above the operating systems. Nobody dethroned Microsoft until the world started to move beyond the PC.

Infrastructure is a tough place to be, even now. That’s why the technology-platform companies are winning: iPhone & iOS are in the ascendancy, not Vodafone or Telefonica. They leverage the investment that other people are making and organise the economics for the ecosystem. They get the upside without the pain.

The challenge for the CEO of a larger, traditional enterprise, whatever the sector, is to re-imagine the company’s industry as an ecosystem, identify their natural allies and ask what they can do to make their interests work collaboratively and to open themselves to consumer-orientated applications to run over them.

British Gas could have created Nest. British Telecom could have created Skype. Volkswagen or General Motors could have created Tesla. They didn’t, though. They failed to re-imagine their industries as ecosystems, so entrepreneurs did it instead.

The transportation sector is no different. Amazon’s announcement that it was testing drone delivery forced the CFO of every D.H.L., Fedex, U.P.S. and T.N.T. to do two things before Christmas: reforecast their revenue downward from Amazon and look for a dance partner in the drone sector.

Goliath doesn’t anticipate change, much less embrace change. That gives the David the opportunity. In 2003, when I started advising Skype, the CEO of a major incumbent telecommunications company told me that I would lose my shirt with Skype and that it would go bust.

“How fascinating,” I responded. “You’ve decided to underestimate the entrepreneur who disrupted the entire music industry with Kazaa. Let me tell you, he is so glad you are underestimating him right now. You are buying him the time to change the world.”

If you want to build a billion-dollar company, a hardware-and-software combination is the winning formula. The Harrys, Teslas, Nests and Matternets of this world show the way.

Julie Meyer is the founder of Entrepreneur Country Global and Ariadne Capital.

© The New York, Times 2014, © 2014 Insead



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