Bass Ackward

I

There is a phrase that rings out across the meeting rooms of Silicon Valley so frequently it has an almost comic quality. Comic, because all replies to this phrase are lies, damned lies, and spreadsheets. Yet this phrase has become the axis mundi, around which orbits the enormous influence of California’s venture capital community.

“What’s your business model?”

It seems an innocent question. Businesses, after all, must have some mechanism in place to earn money. Manufacturers make things. Retailers sell things. Creatives license things. All very neat, straightforward, and – through the clarity of hindsight – absolutely simple. Yet radio had no business model for almost 20 years after its invention. Commercial radio did not emerge until the mid-1920s, when advertising and sponsorship drove the development of an industry. The personal computer, born in 1975, had no real business model behind it until VisiCalc was released in 1979. Commodore, Apple and Tandy sold tens of thousands of computers to hobbyists, but the spreadsheet created an industry.

This story can be told again and again. There’s that famous line from the founder of IBM, Thomas J. Watson, who predicted the market for computers in the “few tens of units, worldwide.” Or HP’s executives knocking back Steve Wozniak’s suggestion that HP manufacture a personal computer – they didn’t see the market for it. (HP is now the second largest producer of personal computers, worldwide.) We could blame these ridiculous miscalculations on a lack of foresight, the peculiar human ability to imagine an eternal present, where nothing ever changes. But time is change. Nothing remains the same. Novelty emerges continuously, often from the most unexpected quarters.

So why, then, when confronted with something new, does anyone ask, “What’s your business model?” How, with any confidence, could anyone know? Here’s the uncomfortable truth: no one knows. Instead, entrepreneurs lie, dissemble, and build spreadsheets which, like the fabric of the universe, emerge from random quantum noise, hoping that no one can see through to the reality of the situation – nothing truly novel has a business model.

This makes entrepreneurship less an exercise in creativity than salesmanship: it is up to the entrepreneur to convince venture capitalists that yes, this wholly novel invention is well-understood, and revenues from it can be calculated using a formula. While charismatic entrepreneurs can make that statement seem believable, they can not make it true.

This friction between novelty and predictability forms the essential feature of a “disruptive” technological innovation; novelty must emerge before its benefits can be forecast. An invention, in its earliest days, has not grown into its full properties. We do not ask of children, “What’s your business model?” Why, then, do we demand an answer when confronted by novelty?

II

We have just passed through an era of failed Internet business models. In the explosion of novelty which followed the advent of the Web in the mid-1990s, the charisma of the Web led many venture capitalists to behave irrationally, predicting too much upside for innovations which simply were not that novel. When – as was bound to happen – most of these businesses failed, the venture capitalists resolved to do better next time, and thus the mantra – “What’s your business model?” – began its steady echo throughout Silicon Valley.

In other cases, the causes for failure can be laid directly at the feet of these same venture capitalists, who forced immature innovations into “exit strategies” – either through acquisition or an initial public offering. But innovation, like human maturity, can not be hurried along. Grow up too quickly, and a lifetime of therapy follows. Push an innovation where it doesn’t belong, and it fails, catastrophically. Time is needed; time to nurture the innovation, and time for careful observation. That observation will tell the entrepreneur how the innovation is being used by the world. Before that happens – and it will normally take some years – any attempt to “guide” the innovation will thwart its true potential.

Novelty is a constructivist process. Like a child, intent on learning about the world by playing in the world, the novel innovation must be free to explore its own capabilities. It does this through the agency of many individuals and organizations who adopt the innovation for their own ends. The role for the entrepreneur (and the venture capitalist) during this phase of development is simply to keep the innovation in an enriched environment, constantly introducing new scenarios and communities who might benefit from the innovation. As William Gibson wrote, “The street finds its own use for things, uses its makers never intended.” Entrepreneurs must surrender an innovation to the world-at-large if they expect that innovation to come into its own. Innovations nurture their own language, coming into being hand-in-hand with the words that make them apprehensible, sensible, and predictable. Only after this has happened can any exploration of business models begin.

III

In recent months I’ve talked to individuals working to revitalize the film industry in Australia. Their approach? Think up ways to make filmmaking look like less of a gamble than it really – always – is. So they’ll bombard investors with spreadsheets, surveys, financial models, in an effort to answer the eternal question – “Will I make my money back?” Most films lose money in their theatrical release – here in Australia, and everywhere else – but that hasn’t kept the studios from earning lots of money; the money’s not in the films themselves, but in all the ancillary licensing and distribution deals enabled by the films. That’s not a business model that emerged overnight: the motion picture studios nearly collapsed in the 1970s, as they foraged around for a business model that could thrive in a world thoroughly colonized by television. Eventually, after the success of Star Wars and the VCR (which the studios fought, until it emerged that the VCR would make them more money than they’d ever earned in theatrical release), the business model became clear: make intellectual properties and license the hell out of them.

Why would the technology industry insist on a form of surety guaranteed to no other industry? Why would venture capitalists demand something they know, in their heart of hearts, is all smoke and mirrors? Why can’t they simply say, “We don’t care about business models. We’re looking for novel innovations with a capacity to emerge into successful businesses.” Part of it comes down to training: most venture capitalists have MBAs, and that education has made them painfully aware of the difference between successful and unsuccessful business models. Furthermore, having been so badly burned in the Web 1.0 bubble, venture capitalists are naturally suspicious of anything that doesn’t seem immediately substantial. Here we see the paradox: venture capitalists haven’t the discernment to know if, in the long term, any innovation has substance. No one does.

We need to enter an era where we simply do not care about business models. Entrepreneurs need to build something, get it out there, and let the street find its own use for it. They have to sit back, listen intently, and let things emerge on their own, in their own good time. That’s the lesson of Flickr, which started as a game, and ended as part of Yahoo! That’s the lesson of del.icio.us, which started as a project to allow individuals to share their ever-growing lists of bookmarks, before it, too, became part of Yahoo! And that’s the lesson of Wikipedia, which began as an alternative to a locked-up Encyclopedia Britannica, and matured to become the 16th most-visited site on the Internet. None of these, in their earliest incarnations, portrayed the potential of what they would become. The street had not yet found its own use for them. In hindsight, everything seems perfectly obvious. But an innovation, raw and new, can not be judged on its merits or its models: only the sunshine of time and the rain of the street can grow value from novelty.

3 thoughts on “Bass Ackward

  1. Good post – ‘business model’ can be a retrofit if you have your strange attractor element firing, aka skype, etc.

  2. Great post Mark! Do you mean to say that most VCs and MBAs are false prophets? Shame on you! As our good friend Alfred Korzybski use to say: “The map is not the territory”. And a good business model does not make a good business. Especially considering the emergent and non-linear nature of user-led innovation. Viva la swarm!

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