In his new book ‘Unscaled’, venture capitalist Hemant Taneja reveals how since 2007 a wave of AI-fuelled tech has allowed innovators and startups to effectively compete against economies of scale and why being a big beast has become a liability. But what can that tell us about how to run our own startups?
The Economies Of Unscale
‘Throughout the twentieth century, technology and economies drove a dominant logic: bigger was almost always better,’ says Hemant Taneja in his new book Unscaled. Until around 2007 companies had to build everything themselves, often investing millions of dollars in creating a single product, which was only feasible if you then sold to millions of customers. But over the past decade things have changed, and Taneja says that change will accelerate through the next 20 years. ‘The relationship between scale and success is flipping… the winners will be those who exploit the economies of unscale.’
‘Small companies can compete against mass-market entities because they can rent scale’
Don’t Build – Just Rent
For Taneja, we are now witnessing the birth of the AI century, which he says is the primary driver of change, along with genomics, robotics and 3D printing. ‘In an economy driven by AI and digital technology, small, focussed and nimble companies can leverage technology platforms to effectively compete against big, mass-market entities.’ He says that they can do this because startups no longer have to build everything from scratch. ‘The small can do this because they can rent scale… the small can rent commuting in the cloud, rent access to consumers on social media, rent production from contract manufacturers all over the world and they can use artificial intelligence to automate many tasks.’
AI: The Change Machine
Since 2007 – when the pioneering mobile, social and cloud platforms (of Apple iPhone, Facebook and Amazon Web Services) really took off – for the first time in mass markets it has become possible to narrow the focus onto individual customers. Startups built on rentable tech platforms can use AI as learning software to find out about individual customers, allowing them to: ‘easily and profitably make products that address very narrow, passionate markets – even markets of one.’ Taneja gives the example of the health company Livongo, which he co-founded, as an example of unscaling bringing costs down. This March the American Diabetes Association put the cost of diabetes to the US at $327 billion per year (for 2017) partly because of problems caused by diabetics having to monitor their own blood sugar levels and manage the disease themselves.
Livongo’s service sends customers a mobile device that acts as a glucose meter and pedometer, which communicates through the cloud back to the company’s AI software, which learns the individual patient and can send alerts or even get a health professional to call with urgent advice. ‘The technology allows Livigno to nimbly compete against the diabetes-related offerings of giants such as Johnson & Johnson and United Health Group,’ says Taneja who thinks that AI will be as important to change as electricity was.
Unscaling To Fight Climate Change
If there’s one industry that took scaling up to the extreme, it’s energy: harvesting, transporting and burning fossil fuels doesn’t work on a small business scale because it costs too much to deliver small batches to market. So, to get to the biggest possible scale in electric energy, Taneja says that regional monopolies were intentionally created, then regulated to provide 100% of the demand. But this fixed-rate-of-return model incentivises waste, while providing no economic incentive for energy companies to look for alternatives to burning fossil fuels, in order to fight climate change.
With solar power, it’s now possible for individuals to install panels and build their own power plants. It’s down to unscaled energy entrepreneurs, like Trine’s Sam Manaberi, to step in. ‘A more entrepreneurial, distributed model of power production and transmission could encourage entrepreneurs to set up solar or wind production wherever it’s needed, sell excess back into the grid, or pull power from the grid when demand spikes,’ says Taneja.
Blockchain Is Automating Trust
One of the crucial advantages of being a scaled business is trust: people know they can rely on a big name not to rip them off, if only to maintain their reputation. But blockchain has emerged as a system that can basically automate authentication, and trust with it, says Taneja, who points out that even old-world units of value, like diamonds, are being given a digital fingerprint and put into the blockchain to give an unalterable record of their history. ‘The software does what offices full of people and traditional institutions used to do. Entrepreneurs can tap into the technology instead of building these capabilities themselves – another way to rent scale.’
How Stuff Unscales
The consumer product market is vast: we spend worldwide around $43 trillion in goods and services, which is about 60% of Earth’s GDP. But, as Taneja points out, before ecommerce the scaled retail model of driving out to Walmart is organised to suit it, not its customers. ‘The mass-market consumer companies made each of us conform to the experience that was best for them, not us.’
He gives the example of Warby Parker, an ecommerce upstart that took on the entrenched, scaled might of Luxottica, which by 2000 was King of the $65 billion glasses industry. Now, rather than a weeks-long process of multiple trips to a Luxottica brand store, you can order online, try frames at home and pick what you want. ‘You what might have been $700 glasses for $100.’ And Warby Parker did it all by renting scale, by building online stores, reaching customers through social media and then collecting data on those customers when they shopped online.
Scaled Company Survival Strategy
For Taneja, even the strategy that traditional companies will need to take in an unscaled world will be a benefit for consumers, because they will have to be ‘radically’ focused on product. Rather than the top-heavy structures that tend to get bogged down and offer compromise products designed to appeal to the maximum amount of people, they will need to transform: ‘Big companies in the unscaled era will look more like a network of small entities, each absolutely committed to making a product that’s perfect for its slice of the market. Everything else that a corporation does will end up being rented.’
He gives the example of Steve Job’s Apple. ‘Apple historically wasn’t an unscaled kind of company – it was very much a mass-market, ‘you’ll like what we say you will like’ company. But Jobs-era Apple became a company that created platforms, especially the iPhone, App Store and iTunes. So that type of a shift at a big company can be done.’
‘The key is to live what I call an entrepreneurial life’
Life As A Personal Enterprise
Just as the entire business world has been disrupted by unscaling, so our own lives and careers are becoming radically different. ‘The idea that we go to school for twenty or so years and then work for the rest of our lives will seem silly. Instead, we’ll learn and work throughout our lives – we’ll start working earlier in life and keep learning new brand-new things much later in life… The key is to live what I call an entrepreneurial life. The concept of a fulltime job is only a couple of hundred years old and its time is up, says Taneja, as we ‘rent out’ our skills and assets. ‘Life is likely to be a constantly changing swizzle of jobs of various intensities, entrepreneurial ventures, freelance work and side gigs. Instead of one career you’ll likely have many micro-careers.’
This offers freedom as well as challenge: ‘As work unscales, each of us will have more choice about what to work on and when. The idea is to double down on your passions. Find the things you really want to do – the things you are especially good at – and market them to all comers. Unscaling offers us the opportunity to do what we really love.’
WHAT NEXT? Watch Hemant Taneja discuss the ideas in his book, Unscaled.
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