Being Peter Thiel: Thoughts on Creation, Risk, Rapid Innovation, Future Investment & Entrepreneurialism — Part 2
The following is the second piece in a three-part series.
Takeaways from Part 1:
- Culture defines business (and the best business opportunities)
- Horizontal investments provide the most scale (and upside)
- "Co-Opetitive" approaches drive the most value into the market
Earlier this week, I had a chance to chat with Amir Banifatemi and Ray Chan, two of the partners at K5 Ventures, the group I referred to in the previous post. K5's model is literally about what I call "bootstrapping culture": A process in which cultural silos are broken down at the local level in order to identify change opportunities, and then through collaborative means, those respective insights culminate in new ideas and new business opportunities that can be replicated or reinvented at the global level.
Unlike many venture firms, K5 has a vision for the future and a network to reflect it and harness it. Borrowing some from the TEDx platform "Innovation Without Borders", the group has created its own platform for culturally-driven investment, starting with open explorations around innovation and collaborative culture that ask very fundamental questions about why we develop ideas to solve problems in science, poverty, education and other knowledge domains. The goal is to create an understanding and mutuality in local regions as to the impact and influence companies can have and why investments should be made in them. With this, K5 has identified a true accelerator model that plans to fund 20 companies in 10 cities as a start, and 1000 companies in the next 5 years.
K5 seeks to create wealth differently, by tying human capital to local culture so that innovation is truly co-created but also so that it becomes a part of the general mindset in that region. It's a form of re-education, if you will. The more we re-educate and empower, the more pervasive innovative ideas become.
MENTORSHIP AS REAL SOCIAL CURRENCY
Even more intriguing is how K5 actually engages a prospective investment.
The group starts by assessing every investment scenario through an environmental and cultural lens and by treating situations with behavioral markers. For example, losing your job doesn't necessarily make you the best entrepreneur; in other words, you shouldn't do it just to make money, or because you have to make money, you should do it because you are motivated by your idea and you really believe in it. Psychological levers like these may seem obvious to some, but they are also some of the leading indicators for why start-ups or middle-stage businesses succeed or fail.
K5 has taken the construct of mentorship to catalyze this; mentors are specialists or subject matter experts from different parts of the globe who are recruited into a situation to lead or help guide an ideation or discovery phase. Many venture firms do this, mind you — the caveat here is that the mentors K5 chooses actually invest their own money into the idea, and by allowing them to put skin in the game, they are also putting their best foot forward in getting that idea to succeed. But aside from monetary alignment, there is also a cultural match to be made between the mentor and the entrepreneur that is critical to the success of the business. A chemistry of sorts.
This chemistry creates a dynamic that is equitable, humble and based on intellectual curiosity. Think more on this: When building an idea becomes only about that idea and what that idea can do to change the world around it, progress happens in wildly unexpected ways. It becomes the currency that drives new ideas and new business opportunities forward with the best of collective intentions. It is also the foundation for what has come to be known as the "DIY" or "Do-It-Yourself" movement.
TAPPING INTO THE DIY MOVEMENT
Recent collaborations with Lance Weiler, Jorgen Van Der Sloot, Ele Jansen and Adipat Virdi on projects such as DIY Days and WSWP bring to light an encouraging prospect, which is that ideas really can manifest in viable market opportunities and sound business models. They can also result in steady deal flow. One of things we've discussed with local incubators was the concept of supporting those ideas in the discovery phases of their development (an oft neglected phase in the more traditional funding scenarios).
Discovery, simply put, is the process by which new ideas are vetted. This is something that K5 is doing along with a host of other "new wave" incubators and early stage firms. It is also something that the first wave of incubators like IdeaLab used to do… That is, before they were blighted by a corruptible system of non-convertible notes, bounced checks and asset imbalances, unfortunate bi-products of the first burst of the Internet bubble.
So why the discovery phase? Simple: This is where the true business and market propositions reveal themselves.
Think about the great business and social innovation platforms of today — Etsy, openIDEO, Zappos, TOMS, Amazon, Hypios, Zynga, etc; all started with distinct, mostly unproven models that evolved into new, emerging markets reaching across verticals in fashion, product design, enterprise commerce, gaming and IP development, just to name a few.
The caveat is not so simple: Discovery requires a new kind of risk.
Risk aversion has become an overhauling benchmark for venture capital investment and for investment in general, whether the capital and/or credit came from banks or other private sources. The not-so-ironic twist here is that all this aversion has stifled capital growth and made it difficult to actually build new products or create new content for people to consume or purchase. Add job losses to the equation and the fact that banks can no longer lend (who are they going to lend to?) and you quickly see where this all leads. Perhaps now we should change the paradigm to risk management, or better yet, risk optimization.
The maverick investor and Skype founder, Marc Andreesen, sees a different landscape in this regard, one that is fueled by the great Internet companies of today. Mr. Andreesen — like Mr. Thiel — always offers up juicy provocations and sage words on why his investments will carry the risk of business innovation. However, in my humble opinion, he seems to overlook the one thing that matters most (and the thing his early investments like Skype and Netscape touched upon): Greater access to the edges; the ideas that represent cultural anomalies, not just macro or micro business solutions.
Another way to look at it is this: The best ideas and the greatest minds are those right in your own backyard.
And so we find ourselves with a strong imperative, which is to literally bootstrap innovations around the shifts we see in culture; in other words, the areas of perceived risk — consumer culture, art culture, science culture, civic culture, health culture, learning culture, what have you. And again, if the needs of people (you know, consumers) are identified and met, we have an inordinate amount of market opportunity. The reality is that we have the tools and the thinking to identify market movements, often in real-time, and so there are no excuses not to create products and services that adapt to rapid shifts in the marketplace.
And as they say, there's a lot we don't know that we don't know. Which means there's a ton of money we're collectively leaving on the table.
FUNDING PLATFORMS, NOT JUST PROJECTS
A pervasive challenge – and an even tougher question – keeps brimming at the surface: Are we building or developing things of true, potential scale?
The film, TV and web content worlds provide numerous examples of elevated risk. Talk to any content creator and he or she will likely tell you about a great new whizbang idea, a story with amazing tentacles that will "shape the way people think about themselves and each other". Most often, the one thing that is imminently important is the one thing that isn't addressed: How this idea will actually make money and scale.
It's that annoying little thing called ROI, or "Return On Investment".
The movie studios - to be more specific around why ROI is so formidable - have little if any discretionary capital to bankroll projects. In fact, they can't even draw bank loans as collateral for their own tentpole films (Yes, even Disney has this problem). To boot, independent producers are commonly left with the responsibility to carry the risk, even though they themselves don't typically own the distribution channels nor do they broker the associated media deals (sponsorships, exhibitor relations, print & advertising budgets, ad placements, etc.). One of the ways studios have tried to spread their own risk is in the support of film slates or franchises... But again, the indicators for success are tied to outdated business drivers, for the most part. Hence, the phenomenon that is elevated risk.
The web space suffers from a related but distinctly different kind of problem: What to do with audiences once they've been "engaged". If you look at YouTube's $100M effort to create new vertical channels leveraging Hollywood talent, you see the same paradigm — an old model, a more traditional way of creating content, and mostly outdated methods for distribution, yet all are shoehorned into a newer distribution platform (I'm using the word "platform" loosely here). Basically, top-shelf talent attracts the media buy, what amounts to rolling eyeballs for AdSense dollars (i.e. views or "impressions" for placement).
I'm not at all suggesting that this won't succeed relative to YouTube's benchmarks, but who does this actually benefit — advertisers or consumers? This shouldn't be a rhetorical question.
The brand space has provided some highly valuable lessons in this regard; with owned media properties (Nike, Red Bull, P&G, Pepsi, Gucci et al), for example, you can cultivate audiences by engaging in conversations with them, build ideas, develop new products and to a large extent, effectively allow those folks to do your marketing for you. You can even manage and scale your own media markets, if you're smart enough to wait out out the lulls tied to the more traditional media buying and planning practices. In other words, you can mitigate your own risk through the use of scalable platforms. You can even tell stories – gasp – on those platforms that can flourish across channels and in ways that are unique to each audience and channel type (or, in a manner whereby each channel plays a unique role in that narrative arc).
So what constitutes a "platform"? It comprises some or all of these elements (or more):
- A captive audience or an interested cohort group;
- A specific market need;
- An application to satisfy that need;
- A mechanism for an ongoing relationship w/ the audience to improve that application;
- Lateral integration with other markets or vertical industries;
- Flexibility & extensibility to parse out "pieces" of the application for various market uses.
So, if you are an independent filmmaker who doesn't wield a big name or a big funding stick, for example, you'd better have at least some of these pieces figured out if you really want to fund your idea. Arguably, many of the big names have been forced into this position as well.
Let's be dead clear: No one in the creative community, on any level, is immune to the realities of our economic landscape, nor are folks in the tech development community or any other area of innovation for that matter. The onus is literally on us — the people generating and developing ideas — to figure out the chess moves for the markets we play in, or those we wish to create.
So are stories platforms? (The transmedia movement has vowed to showcase this possibility…)
Are applications more than just widgets or digital assets? (Entire businesses are spawned from them…)
Can media really be adaptable? (Look at all the remixed content out there…)
Are markets that easy to identify? (We already use social media for market intelligence…)
Can new curricula be co-developed with "the masses"? (Collective intelligence says so…)
If they're not, well, they'd better be.
The next piece will address how the rapid prototype is a catalyst for a more active form of convergence culture.