Section 1: How to Think about Disruption:
Bill Gurley, Benchmark: The Innovator’s Dilemma in Practice
Bill Gurley, Benchmark6
What are the common threads of industries under disruption?
I’m not sure there is a common thread because disruption can come from different directions. Let’s take a moment to highlight my complete admiration for the Innovator’s Dilemma. That book has been critical to how I think about venture capital, and it’s just such a remarkable, seminal piece of work. Industries get disrupted for different reasons. Technology can disrupt an industry; take movies and music, for example. My oldest son is 13 years old and recently said, “Remember DVDs and CDs?” To be 13 and have already seen such a transition is pretty interesting. Bandwidth got to the point where movies could be sent over the air. That was a threshold that had to be crossed and, once it was, there was no going back. Some things are seminal like that. Other disruptions happen through what the Innovator’s Dilemma calls “feature bloat”, where a company just completely over-features a product to the point that it’s unusable, and competitors can release something with 80% of the features at a fraction of the cost.
Today, the smartphone creates the ability to put an information network on top of existing industries. Ending information disparity that previously existed presents a remarkably different reality. For example, we worked with OpenTable for over 10 years to put a reservation network on top of the restaurant industry, which is very fragmented and diverse. Suddenly, users were able to search live across thousands of restaurants simultaneously. That was previously impossible. Uber is a similar case, where the ability to have complete knowledge of every car in the system is remarkably powerful.
But not all industries are set up for that information layer to experience such a lift. I don’t think we can say, “Well, every industry is going to be disrupted this way”. I would also add that I believe regulatory capture makes certain industries much more difficult to disrupt. Healthcare, telecommunications and finance should have been way more disrupted than they have been in the US, and the current regulatory construct favours incumbents in a dramatic way. It has become a protective layer, almost a shield. Often, it’s impossible to get around that. Healthcare, for example, is very difficult to disrupt, not because we don’t have the tools, but because it’s just not possible to establish the disruption, regardless of being better for society.
An exception that everyone points to is laser surgery. Laser eye surgery, both in terms of time and pricing, has evolved very much like a Silicon Valley cost curve. Pricing today is about 1/100th of what it used to be, and that’s exactly how you want healthcare to evolve. This has happened because it’s outside of insurance coverage, it’s highly competitive, it’s purchased by the consumer, it’s in a free market and technology plays a role in the actual process. That is an example in healthcare of a competitive dynamic leading the product-price performance, but that doesn’t exist in most of healthcare.
Without that protective layer, what’s the key indicator for the need for disruption?
Where does technology have the opportunity to materially change the user proposition or the user experience? There is so much venture capital available today that you’ll see “Uber for this, Uber for that”, but I’m not a believer that every industry needs disruption. There’s a real question of whether technology adds value in a way that materially changes the user experience, and that’s what we should look for.
Speaking of “Ubers for everything”, what are your general views on the sharing economy?
Assets that are wasted are simply not in the best interest of society, because if you can use available assets then that’s a better use of scarce resources and won’t impact the usability for anyone. To a certain extent, even something like Uber is starting to see a large number of people in San Francisco either abandoning their extra car or their only car, and that’s freeing up parking spaces and represents a better use of resources.
We invested in a company called DogVacay, which is a kennel alternative that uses people’s backyards. There’s infinite backyard space in which you could take care of pet dogs and there’s no reason to use commercial facilities with cages. There are many opportunities to be more productive with existing assets, and while Airbnb and Uber are obviously the two big breakouts, there are probably more.
What’s your view of cyclicality in the tech start-up industry?
There are boisterous venture capitalists who will say the 2001 crash was OK because we attracted venture capital and other growth capital dollars to build out the internet infrastructure in an uneconomic way, and we now get to reap the rewards. They would say, “We fooled the financial industry into funding infrastructure and that’s wonderful.” I think that might be an ex-post rationalization of the situation.
The way venture is structured today is highly cyclical. The way that people forget about risk lies in human nature. When people see other people succeeding, there is a certain percentage of the population that will be drawn to that like a bug to light. That’s a cause of these cyclical waves, and it’s not just the entrepreneurs – it’s the people who are financing them and the bankers, etc. I’ve been practicing venture for 15 years and I’ve watched the top major banks build infrastructure in Silicon Valley, tear it down and build it back again. I’ve watched the press fall in love with Silicon Valley, fall out of love and then fall back again. If a whole national economic system ran that way, it would be pretty devastating.
What do you look for in founders?
They need to be ambitious, intelligent and competitive, and have a sense of humility. They don’t need “manners” humility, but “ideas” humility. In other words, they can’t think they know everything, but they should be open-minded. In terms of ambition, there is a notion that, for disruptors, “how high is up?” is much higher than normal, and that was true of Larry Page, Mark Zuckerberg and Travis Kalanick, but it’s not true of everyone. How much are you willing to commit your life to this endeavour? At what point do you start becoming less unsatisfied? Are you still as unsatisfied after you’ve reached a billion dollars in revenue as you were when you just got off the ground? For most people, there’s a decay in that thinking, but not for everyone.
What would you say to governments that don’t understand disruptive entrepreneurs?
I think that there are fundamental ways in which new technologies can have really powerful impacts on society. For example, I fundamentally believe that by creating 20,000 jobs a month around the globe, increasing the standard of living for drivers by making more money and improving safety, and reducing drunk driving, Uber is changing the shape of cities in very powerful ways. The interest that is being disrupted, in this case taxi owners, will try to preserve the status quo.
I came up with this phrase, that capitalism and democracy are bad for each other if they spend enough time together. In our current form of democracy in the US, big industries spend a considerable amount of time with the government establishment. Some of the most senior people at Comcast or AT&T or the big banks work in policy. When a competitive threat comes in, they don’t call the marketing department, they don’t call the product department, they don’t say “we better innovate”, but instead, they call the legal and policy department and try to block the competitive threat by calling the government.
When you have a system that is broken in this way, there is less opportunity for innovation. This may require some reform; for example, more transparency in donations. We could use technology like the blockchain to say that, if you donate to any politician, you have to put it in the public registry immediately. Reforms are required to get major breakthroughs, and this requires a fundamental awareness that certain industries are at the point where regulation protects incumbents and not consumers. Regulation should be re-evaluated to see whether it helps the incumbents more than the consumer, which is perhaps limiting what we can do for our society.