Tag Archives: M&A

Venture Backed vs Community Capital – Reading Thoughts

http://www.nickgrossman.is/2015/05/22/venture-capital-vs-community-capital/

Venture Capital vs Community Capital by Nick Grossman

Great read! Interesting analysis of a presentation during the Paris OuiShareFest about the power of technology and dynamics. Specifically, it’s another interesting way to look at the platforms of technology in a way of (typically) venture/finance backed firms (such as Microsoft and Facebook) and community backed protocols/technology/firms (such as Bitcoin, the HTTP standard, and Android—though not exactly community backed it’s an open system vs iOS’ closed system which would be in this case “venture backed”).

It seems that in Grossman’s analysis of the community type ventures, their primary motive is to disrupt the incumbent industry. Using Microsoft as an example, he mentions that they’ve survived two waves of community disruption: the OS and Office productivity suite. Well known competition includes Open Office, which as the name implies is “open” software available to the community. The community version attempted to disrupt Microsoft’s stranglehold on the productivity suite via it’s open capabilities but in the end Microsoft overcame the obstacle. While I agree that community backed ventures are commonly disruptive, I believe they have great potential to create something bigger.

Thinking about how credit cards make the bulk of their profits, they charge fees (both monthly and per transaction) to businesses when their card is swiped. One of the reasons why American Express (Amex) is not available to use everywhere is because they charge a higher per transaction fee, which they counter by offering better customer service. There are now TONS of competitors trying to break into this space by eliminating credit card margins, charging smaller or even no transaction fees to the consumer or business (such as Square). I assume some are open standards, available to use anywhere by anyone, but in the end success in this area will come down to two factors relating to volume: number of users (consumers using the platform) and number of transactions made. Software is free, the ability for software firms to scale is virtually unlimited (mainly constrained by data servers), so I imagine there is still HUGE potential for open platforms to disrupt the way most businesses interact with their customers and business “partners” (such as credit card providers)

By offering the “open” platform, community backed ventures in the industry of credit cards can grow the number of transactions (since nobody likes paying fees) but are severely limited by the number of users. It makes me wonder, if the open platforms are free (or significantly cheaper) and only limited by marketing (getting people to actually use it), what value does the large corporation give? The answer, I’m guessing, is service.

Which leads me to my final point: When community backed ventures can be an essentially free, more disruptive, version of an existing product, companies can profit by offering services. The United States is a service based economy, and the cycle between actual product (community backed) vs service (venture backed) can be a clearly paved path to mutual success.

Technology: Open, Free-For-All Monopolizer

Technology is a funny thing, specifically the internet. I remember being young during the early days of the internet boom, using it as a kid and being the only one in my family that understood how it worked. I grew frustrated trying (and failing, consistently) to teach my parents, brother, and sister how to use computers and do basic tasks on the internet. I tried to teach them how to do research, set-up and check email accounts, how to install programs, and how to play games on it.

The internet was, and still is, purported to be the door to infinite possibility. We can connect to people anywhere in the world, learn from them and teach them anything we want. The internet was supposed to bring about a new era of freedom and choice. Yet, more and more each day, I see it as a tool for consolidation, under the moniker of collaboration.

The big corporations that run this country can continue to get bigger, stronger, and hold more reach than ever before. Sure, there are more “start-ups” and small businesses leveraging the internet to make money, and there are several successful businesses built upon the idea of the internet. Google is the primary example of how a company can leverage the world wide web to endless possibilities. But I believe that more often than not (at a 98% ratio of more:not), these small businesses and start-ups are great R&D tools for the large corporations.

Consolidation and acquisitions are great ways for businesses to grow. Not only can they acquire large numbers of existing customers without putting in the work to do so, they can gain valuable technologies and grow an idea once it’s been proven. The product/market fit is a struggle for start-ups and leads many to fail. They can’t get the product (or idea) to sell in the market and eventually run out of funding. This is a great opportunity for a large company (like Microsoft) to buy a product that works in the market, has a recognizable name, large customer base, and cash on hand (like salesforce).

The irony here is that the technologies that were purported to be the next wave of freedom and marketing opening, have become the greatest tools for consolidation and risk tolerance. During times of booms (like our current moment), consolidations are likely to come in hard and fast. During times of busts (like our coming wave), consolidations are likely to come in hard and fast—and more importantly: cheap.