We encourage our portfolio companies to make sure they take time out from the operational demands of their business to think about the bigger strategic picture. We do the same for USV and a couple of weeks ago took a day off to discuss how we think the web itself is changing, how the web is changing industries and society, and as a result how opportunities for startups are changing. One of the best ways we have found to think about change is to identify those principles that appear to drive the change and that themselves can provide a bit of a constant. In other words to understand what’s changing, you need to understand what is staying the same.
To that end we first looked at the characteristics of opportunities that we had set out as far back as 2004: technology leverage, disruption of markets, no gatekeepers, capital efficiency, data asset/network effect defensibility. We believe that all of these still apply and they are all still things that we look for in opportunities. But these also point to important changes. It used to be that mobile was a walled garden environment with the carriers as gatekeepers. Apple’s AppStore and the response to this by other device manufacturers has forced the carriers to reevaluate their role as strict gatekeepers and give more choice to consumers and more opportunity to developers. If Google's Android succeeds it will take that shift toward developers a big step further (in Android the phone applications, such as the dialer, are completely accessible and can even be replaced).
To us, this appears to be one of the great constants of the web. It is taking power away from existing large institutions and pushing it out to smaller entities and often all the way to individuals. In the process it is building up new institutions (such as Google), but the net result appears to be a distinct shift of “power to the people.” We see this at work in many of our existing investments: Etsy’s marketplace for handmade goods lets artists connect directly with buyers; Covestor enables investors to share their track records and discover each other; Wesabe puts folks in control of their finances; Tumblr facilitates sharing oneself; BugLabs lets anyone create a custom network-connected device. In each case, individuals are empowered in ways that simply were not possible prior to the web.
We believe that the same shift will become increasingly important in other areas of life that have longer standing and slower changing institutions. Take education, for example. For hundreds of years education has essentially been organized around schools and universities. To date, this has even been largely true in distance/online education (e.g., University of Phoenix). It may be difficult for us to conceive of alternatives because we are so used to the existing structures, but these are in no small part based on historical difficulties in disseminating information. Books at one point were super expensive and even the Sorbonne (the oldest still operating university) had only a few hundred in their library. With book digitization proceeding at a rapid pace and most new research publications available electronically, having a library will soon no longer be a reason to have a university. Lectures could historically only be heard at the time and place of the lecture. Now we can watch a video recording of a lecture over the web. A tutor had to be in the same place to look at the work of a student and provide feedback. All of this is of course slightly overstating the restrictions on the flow of information, as there were correspondence based courses even in the age of snail mail, but they accounted for a vanishing fraction of education. In recent years, however, we have seen a significant upswing in home schooling. While other social factors are at work, a key enabler for homeschooling has been the web. With access to course materials, ability to watch lectures and even tutor at a distance, we believe that we are only at the ning of the web’s impact on the fundamental structure of education. We expect much of that change to be away from the existing educational institutions and towards empowering individuals and newly-formed groups.
The environment is another area where the web can enable the kind of structural change that shifts power to individuals. Again much of this is due to the vastly reduced cost of moving information around and acting on it. For instance, the cost of producing electricity depends a lot on the load in the system and on the availability of various sources (e.g. if the wind is blowing). Prior to the web it was difficult, albeit not impossible, to disseminate a fluctuating electricity price to households and give them the ability to act on it. The web makes this almost trivial and can thus enable individuals to adjust their demand. With the web it is even possible for individuals to do this when they are not at home (this being an almost literal example of “power to the people”!). Similarly, it used to be difficult to gather and analyze all the data necessary to understand the environmental impact of a particular activity. The web allows for this to happen in a seamless manner. You book a flight online, the reservation site can query a database and tell you about the carbon footprint. The same could happen for any online purchase. Imagine going to Amazon and comparing two products and seeing not just their price and features, but also their lifecycle environmental impact in an easily comparable fashion.
The shift away from existing institutions in education, the environment and other areas up for change will not be brought about magically by the web alone, but by companies that use the web to create the right kind of platform. We believe that these represent tremendous startup opportunities over years to come and look forward to meeting with entrepreneurs and teams working to give "power to the people."