Reflecting on Grapes and Wines: Any imminent disruption?

A couple of weeks ago, I had the opportunity to spend a day in Sacramento at the Unified Wine & Grape Symposium (Jan 23-25th 2018). It was a fascinating experience. I have participated in dozens, and possibly hundreds of, conferences and industry trade shows around the world. However, this conference was different in almost every respect.

For starters, all other gatherings I had participated in related to IT — i.e., some emerging technology in telecommunications, information processing — or related applications. Historically, most of the gatherings I have attended reviewed wholly disruptive products or services that rendered prior offerings obsolete. Furthermore, the products or services at these gatherings were almost always “man-made” sans the direct, explicit participation of mother nature. In most cases, the climate at these gatherings was showy––with multiple languages often overheard in the hallways and Wall Street suits visibly present. Most products or services detailed were only a few years old, and anything beyond 5 to 10 years old was definitively a “museum piece”.

Wine, often, gets better and more expensive with age. The industry is only a few thousand years old. Furthermore, the grape and wine business is an important part of the economy, particularly here in Northern California. The wine industry is an important component of the economy. In the US, it is about a $60B per year, and here in California, represents 60 percent, and several hundred billion dollars worldwide. Wine consumption worldwide is growing at a faster clip than the global economy, and the average unit bottle price is shifting to premium brands (over $15-20 dollars per bottle).

Furthermore, while the United States (US) leads in the rankings of wine consumption, other countries lead in production. The table below highlights the top 10 largest producers and consumers of wine[1].

Wine Table
The US leads in wine consumption but not in production

The wine industry is also unique in that, while the US dominates most IT (information technology) sectors, European countries (Italy, France, Spain, etc.) not only are the leaders of wine production, but historically have brought forth and advanced the industry’s leading technologies. They have exported their know-how, mostly via emigration[2], to the US and to most of non-European countries, with the exception of China. Wine consumption (and production) in China is a recent phenomenon in part facilitated by globalization and the continued expansion of the country’s middle class. Other emerging countries exhibit the same trend, showcasing a high correlation between middle class enlargement and demand for wine consumption.

Nature dictates the tempo of the industry. Grapes are harvested once a year and wine production is followed by an aging process which may last from a few months to a few years. Tradition and experience dominate this process, while science and technology has played an increasing role in adding value, reducing costs, and increasing quality and efficiencies across the value chain in the last century, particularly in the last several decades, post WWII.

Incremental innovations[3] galore was my first broad impression perusing the booths of the Unified Wine & Grape Symposium trade show. The range of products on display was mind-boggling, from disparate fertilizers and agriculture machines to advanced tools and bottling labeling equipment. Suppliers for every step of the value chain and every imaginable service was on display. My own professional formation (or deformation) was to look for those disruptive forces3 that would have an impact xN (multiples of N>1), and I really had to look much harder to find those.

Identifying these critical emerging disruptive forces, in general, was not a different task from identifying the disruptive forces of any other industries. I have highlighted these below for your review:

Disruptive Vectors (final)

15 Disruptive Forces Pounding on the Incumbents A larger version of this table is available at: https://carlosbaradello.files.wordpress.com/2018/02/disruptive-vectors-final.jpg

My observations at the Unified Wine & Grape Trade Show elicited the following disruptive insights:

  1. IoT is slowly penetrating different elements of the value chain making possible to start talking of a “connected” vineyard or winery:
    • Precision agriculture is enabling 2, 3, 4 and 6, among others. First examples of managing water, fertilizers, growth rates, etc. are becoming available.
    • Various key building blocks of the wine-making process (such as pumps, sensors, flow meters, et al) are becoming wirelessly “connected,” enabling dashboards and automation; enabling 3, 6, 8 and 11.
  2. Software platforms are emerging to enable end-to-end management from the vineyard through production, distribution, and logistics. This is enabling 2, 4, 6, 9 and 10.
  3. Direct-to-Consumer (DtC) software and Apps, enabling disintermediation (1), connecting with the consumer directly. Furthermore, this new distribution channel enables a steadfast gathering of information about consumer tastes and preferences (4) to anticipate (8) and personalize (9) the experience, enabling increases in loyalty and revenue. Tasting rooms, wine clubs, apps, et al all play a role here.
  4. Work-in-process efficiencies and monitoring. For example, improving the aging process as it becomes dramatically reduced by using new oxygenation technologies,

CBInsights has developed the map shown below. The map identifies a list of Tech companies entering the space targeting one or more areas of disruption. While it is easy to dismiss very traditional millennia-old wine industry, it seem it cannot escape the lure of technological innovations. Examples range from wine subscription services to rating apps, startups in the space are innovating more than ever before. Connected corks and bottles are starting to emerge, as well as algorithm-based recommendation features to better match personal tastes to wine.

wine-tech-map.jpg

CbInsight Wine Tech Market Disruptors

Comparing the Wine Tech market map constructed by CBInsights with the list of exhibitors at the 2018 Unified Wine & Grape Symposium, none of the 50+ companies could be found. This is intriguing… Could it be that they are in the waiting list of floor space for future Unified Wine & Grape Symposium trade-shows?, as an executive in one of the incumbent companies responded; or is it just possible that they are showing their wares at new trade-show where the disruptors and the early market adopters attend? Provocative as it sounds, I lived through a very real experience in my professional journey, as data communications and eventually the internet created their own venues and conversations away from the traditional, and century old telecommunications industry trade shows, which were centered on voice communications. This is a remote far-fetched analogy, but, could it be true?

While we are still a while away from dial-a-wine, nutraceutical[4] wines or a complete synthetic wine home production[5], there is no room from complacency. I say this not because of my expertise on the wine & spirit industry, but because of my conviction that the digital transformation is creating the perfect storm for each incumbent, in each industry. Each one individually or as part of a tectonic shift in its industry, and at its own time will be unable to scape and will likely face its own deconstruction and re-construction over the next decade. Disruptive forces will pound on the incumbents, and it will be compounded due to global competitive pressures, all vying to get hold of their revenues and profits.

Until my next post – Carlos B.

[1] www.wineinstitute.org

[2] Italian, French and Spanish catholic missionaries were often the technology transfer agents binging the know-how of growing vineyards and wine-making to new lands across all continents, beginning in the 1600s through the early 1900s.

[3] Incremental innovations expected improvements are about N% while disruptive innovations provide xN improvements (5% versus 5 times better performance)

[4] While the health benefits of wine are widely known, the nutraceutical food and beverage industry is still nascent.

[5] Analog to the way 3-D printing has disrupted the manufacturing, logistics and retail industries.

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Reflecting on our journey building the first VC fund in Argentina’s interior

Nov 2017 -- 1 - CopyIn 2011, I was one of five general partners (GPs) who joined[1] forces to start Alaya Capital Partners in Córdoba, the capital city of Argentina’s interior (and my home city).  Just last Thursday (11/16/2017) at the Alaya Investor Day, we announced a new goal to have US$100MM dollars under management by 2022, capping a decade-long journey.

And what a bumpy ride it has been!  Given our unprecedented announcement a couple of weeks ago, I wanted to take the opportunity share with you the areas that I thought we got right, got wrong, and other areas where we clearly misjudged market and government signals.

What We Misjudged

Nov 2017 -- 2 - CopyAmong the most successful tools to stimulate entrepreneurial ecosystems are government programs that provide matching funds to facilitate venture capital (VC) formation (as has been the case in Israel and Chile, among others). As we launched our first fund (Alaya I) and formed Alaya in 2011, we expected to promptly receive matching funds from Córdoba’s provincial government that never materialized.  Unfortunately, we failed to appreciate that these promises made to us by Córdoba’s provincial government suffered a six year delay.

In retrospect, it’s hard to imagine a more challenging time to launch a VC fund in Argentina than 2011.  The years that followed Cristina Fernández de Kirchner’s second term landslide general election victory in 2011 were among Argentina’s worst ever in terms of sociopolitical isolation, rule of law, and economic malaise.

Nov 2017 -- 4Nonetheless, we persevered.  We were extremely fortunate since all of Alaya I’s limited partners (LPs) were from Cordoba, who were well aware of the difficult climate and stuck with us.  We also earned our LPs’ goodwill by investing alongside them[2] and by taking a meager (by market standards) management fee of 2.5% that wasn’t sufficient to cover our basic fund expenses. Alaya I ultimately invested in seven startups.  These difficult circumstances over the ensuing years tested our team, and, since we refused to quit, led us to redouble our commitment to the fund.

What we got Wrong

As we rushed to invest in Cordoba-based startups, it was inevitable that we would make mistakes despite our best intentions. Originally, our investment thesis was that local startups (from Cordoba) would scale well beyond Argentina and Latin America, into North America and other global markets. This actually never happened.  These companies’ value propositions, financials, and their founding teams’ skills were simply not optimized to grow beyond Argentina’s borders. Few attempts were made to reach beyond Argentina into Brazil, Chile, and other Southern Cone countries; for the most part our initial portfolio companies, remained local businesses. We naively thought that, given the right selection process (which focused on team and scalable value proposition), we would be funding scalable ventures.

We have learned many lessons since our first investment in Translation Back Office in 2012.  We were happy that none of our portfolio companies died (died fast/fail forward).  However, we now recognize that our selection process was far too conservative, and our co-founders too local.

What we got Right

We faced significant headwinds, but we did several things right.  Alaya was and remains investor-focused.  We have conducted Alaya from day one with uncompromising integrity and ethics. Also, since investment performance is key, we have concentrated on the development of our portfolio companies. However, the support that we provided to these portfolio companies was unbounded and our advice often came across as too paternalistic, disobeying the Darwinian first principle of entrepreneurial ventures (“survival of the fittest”).

Alaya CP, had a visible impact in the local Cordoba innovation and entrepreneurial ecosystem and many provinces of Argentina’s interior. We collaborated tirelessly with the local six universities, think tanks, Endeavor’s local chapter, other NGO’s and government agencies. Today, Cordoba the intellectual capital of the early 1900’s is regaining its position leading the startup revolution in Argentina.

In late 2015, Mauricio Macri won Argentina’s general election signaling a dramatic change in the country’s leadership after 12 years of the Kirchner’s.  While Macri started to implement his new economic agenda, we at Alaya were eager to take our lessons learned and launch a second fund (Alaya II).  At around that time, we crossed the Andes from Argentina into Chile to participate in Chile’s leveraged fund program (x3) for early stage companies. The qualification process was arduous and took a full year to meet the multiple demands of CORFO (the Chilean Government’s economic development agency).

Nov 2017 -- 5Finally, in late 2016 we received CORFO’s approval and Alaya II was funded with $4MM of private investment and $12MM of Chilean leveraged funds. Today, our $16MM fund is on its way to become first a $20MM, and eventually by the end of next year, as large as $25MM, with its potential x4 leverage, if certain performance conditions are met.

Alaya II, has, by all metrics, been a resounding success. Alaya opened its offices in Santiago and hired a team there, and eight investments (more than over Alaya I lifetime) will be realized by the end of this year (2017 – Alaya II first year of operations).

Alaya

Mariano Mayer, Secretary of Entrepreneurship and SMEs of the Production Ministry of the Republic of Argentina

Now that we’re two years into Macri’s term (and two years into Cordoba’s business friendly governor’s term), our national and provincial governments are now finally catching-up with the global startup revolution.  Our new leaders’ rational management style, the reduction of corruption and clientism, and Argentina’s brand new Entrepreneur’s Law have combined to create an unprecedented startup friendly environment. Alaya intends to participate in many of these programs. But something else is happening: after a decade of being compared in the same breath to Venezuela and Cuba, Argentina is now distinguished with optimism and anticipation of an epoch of growth with emphasis in innovation and opening to global markets. Recently, Alaya has launched a corporate acceleration program with an emphasis on developing an open innovation platform for the leading Argentinean companies based in Córdoba.

The Alaya team now extends from Córdoba to Buenos Aires, Argentina; Santiago, Chile; and Sausalito, California (San Francisco Bay Area). Our team is strong, diverse, and battle-tested.

We are confident in our ability to perform in periods and geographies of extreme uncertainty, deal with the ambiguity that characterize the emerging Latin American economies, and also called by innovative businesses embracing new technologies, or supporting the global growth of our portfolio companies. However, one key milestone remains elusive to definitively prove our team: its ability to exit its portfolio companies with high multiples. Alaya is at the mid-point of its first decade and, for some of our investments, “Exit Time” is rapidly approaching; when we do finally exit, and return multiples to our LPs, it will be among the happiest blog posts I’ve ever written!

Until my next posting – Carlos B.

[1] Mario Barra, Oscar Guardianelli, Omar Vega, and I were the initial GPs and Luis Bermejo (Managing Partner)

[2] The GP’s commit to invest 20% of the total fund capital.

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Reflecting on the Giga-Unicorn Opportunities Offered by the Health Care Business

I often engage in light hallway conversations with my students in between classes. Recently, while discussing the wealth accumulated by some tech entrepreneurs, I said half-jokingly that we didn’t have any trillionaires yet…

Actually, since the heydays of the modern-day pioneers of the Silicon Valley, it has produced hundreds of billionaires, a selective group of several dozen actually have accumulated tens of billions, and probably a few are pushing the 100-billion-dollar mark…but no trillionaires yet.

This reductive measure of success — the financial metric — will likely add a new trillionaire benchmark in the coming decade, but this coveted space will, in my estimation, be reserved for those select entrepreneurs able to finally disrupt the health care industry in the United States first, and then globally.

For starters, Americans are getting a rotten deal in health care. While American citizens spend over twice as much in health care (about $10K dollars per every American) than their French, Italian, Canadian or Australian counterparts, Americans are not living twice as long; in fact, they are living less[1]. By all measures of the market economy, this is the perfect definition of a rotten deal. More often than not we are prepared to spend more to get more, but not to get less. Presently, the debate over health care reform occupies a central place in our public discourse, yet three critical issues remain silent:

  1. About the services that should be provided to every American, the answer seems simple: why not provide to everyone the same health care services that our congressmen and senators enjoy? I have never heard them voice concerns about pre-existing conditions, premium hikes, lifetime limits, or the services they enjoy for themselves and their families. So the benefits question seems settled. If they are our representatives from the people, by the people, and for the people, what is good for them should be good enough for the rest of us, as well, right?
  2. While most industries have enjoyed huge productivity increases during the last 4 decades as a result of the introduction of new technologies across all segments of their value chains, health care costs have continue to rise higher than inflation. More alarmingly, this industry has not produced any consumer surplus, as has been in the case in other industries — in part due to regulation, in part due to the massive size of the health care industry and the power of its lobbying effort. The latest statistics put health care expenditures in the US at pushing close to 20% of GDP, or about $3.4 Trillion in 2016, growing at a pace close to 6% annually[1]. In other words, the US health care economy, if a nation, would comfortably have a seat as a member of the G7, and it certainly would have been part of the G20 meeting last week in Hamburg, Germany.
  3. I often wonder when price lists for the most common services will be published and visibly displayed in our medical waiting rooms or on the web sites of our health care providers of choice. Or when we will be able to enjoy comprehensive rankings of disparate medical specialties in much the same way we are able to enjoy rankings of restaurants, or auto mechanics. Obviously, those providers in my neighborhood offering best-in-class services (5 stars) at the least expensive prices (single $ sign) with over 500+ reviews (quality assurance) will suddenly enjoy a competitive edge!

Presently, most medical treatments are marketed as kinds of art forms, rather than     as routine, often technologically-driven processes. Why? Because, to justify high costs, medical practitioners need to emphasize the uniqueness of individual anatomies and circumstances, and de-emphasize the inconvenient fact that 90% of bone fractures, mole removals, and dental cavities are treated in the exact same way. This marketing dynamic is further facilitated by a widely shared natural fear of death, or at least our aversion to pain and suffering. In other words, we allay our qualms about overpaying with the justification that ‘it’s our unique life’.

At a time where disruptive technologies mimicking human knowledge[3] are applied to disparate domains, such as self-driving vehicles or human tissue/organ image diagnoses (radiography/ pathology), we should rightfully wonder how many ‘low hanging fruit’ in the health care are ready for disruption.

Every day, millions of tissue samples, biopsies, x-rays, CAT/MRI/PET scans, et al are diagnosed by highly paid professionals throughout the world. I deeply believe that all that human talent should be liberated from the boring and repetitive task of diagnosis so that they can make higher value added contributions to medical science and in consequence to society. It is my hope that this will both (a) significantly improve our health care space at a superior price-performance point, and (b) empower medical professionals to migrate to new frontiers of health care, thereby enabling higher contributions to health care and to society.

Along these lines, I am calling for the world’s first trillionaries[4] to search for interesting market entry points and compelling value propositions, supported by innovative business models to disrupt specific sectors of the health care industry. Myriad innovations that break information and knowledge asymmetries will finally bring the democratization that has disrupted many other industries to health care. A global market of 8 Billions consumers by 2026 and 9 Billions for 2042 — all with the same bones, organs, and for the most part the same health care needs – are awaiting your irreverent disruption of the health care status quo.

Who wants to be a trillionaire?

Until my next posting – Carlos B.

[1] According to the OECD, the life expectancies at birth in Australia, France, Italy, and 22 other OECD countries all score over 80 years, while the US just scores 78.9 years. https://data.oecd.org/healthstat/life-expectancy-at-birth.htm.

[2] https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2017-Press-releases-items/2017-02-15-2.html.

[3] Artificial intelligence (AI), Big Data and Machine Learning are just a few of those emerging technologies.

[4] A reductive benchmark, to be clear, because not all contributions to society can be measured monetarily or in terms of accumulated wealth.

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Innovation and upward mobility across the socioeconomic pyramid: A reason for optimism or pessimism?

This past week, I woke-up on November 9th to learn the election results of the nasty 2016 US presidential election. The results prompted me to finish this post that was already in the making for some time. While for many this election was about issues like race, gender or even immigration or other factors, I believe this election was ultimately decided by voters who felt massive economic insecurity. Last Tuesday (November 8, 2016), the election provided a channel for Americans, particularly those living throughout the so-called Rust Belt, to voice their collective economic resentment as they are increasingly left behind in an era of globalization and accelerated technology changes. In today’s post-election post, I will make an attempt to discern the impact of the accelerated pace of technological innovations on upward or downward socioeconomic mobility.

Last September, I published Innovation: Impetus for Global Resentment?, in which I argued that for most of the last century, the professional re-invention process happened naturally as a part of generational improvement as parents sought better futures for their children. At that time, the variables of the time constant of innovation and lifetime expectancy were somewhat aligned, enabling a rather natural process for successive generations to capture the opportunities presented by new technologies.  Each new generation could potentially aspire to a better lifestyle, afforded by higher paying jobs with higher value added, by embracing businesses enabled by technologies unavailable to prior generations. For the most part, education was the great enabler[1].

Today, and over the next decade, global innovations facilitated by exponential technologies, will be deconstructing and reconstructing every industry and business, as we have known them.  Each industry will have its own “Kodak moment” as digitalization, demonetization, dematerialization, democratization or for short massive disruptions target established incumbent businesses. As they continue to operate under old paradigms supported by old technologies, they fall prey to new business models and technologies embraced by agile new firms. This deconstruction and reconstruction of industries and their associated businesses will challenge the disrupted workforce to either: (a) resign to accept lower paying jobs at the base of the job pyramid, or (b) re-invent by gaining new skills in new areas with the hope of maintaining or improving the income level they enjoyed before the disruption happened.

In this post, we explore how this deconstruction and reconstruction process will become a threat to those jobs in the mid-income range, polarizing society and increasing income inequality between the commodity jobs at the base vs. the high value added jobs at the top (see below, Figure 1, Job Compensation Pyramid). Each one of these transformations will impact firms (and their employees) on the winning and on the losing side of the battle lines. However, all these transformations will have in common, and as ultimate winner the consumer, as each disruption will bring what economists call “consumer surplus”, benefiting them by increased convenience and productivity, adding predictability to their lives at a lower cost. The consumer adoption of these new technologies will become irreversible, and once embraced, it will spread virally and get installed in our lives until the next new technological disruption. Obvious examples include digital photography and e-mail, since it is highly unlikely we would ever return to celluloid photography or post office (or fax) delivered letters.

The disruptors “uberize”[2] existing industries in few years, creating new customer value by introducing new products and services at lower cost (or no cost) and offering higher productivity and convenience. In fact, it is this new customer value that fuel the viralization and massive adoption by end-consumers or business customers, catapulting the disruptors as dreadful competitors of established companies now under threat.  Whether is the taxi coop, a hotel chain or a photo parlor, they are all assaulted by the new entrants. Likely, these disruptors have limited or no prior experience in the industries targeted, however, they master the digitalization of businesses, new technological paradigms, and business model innovations; while enjoying access to capital from well-connected VC, Super Angels and other strategic investors.

The investors’ motivation is dominated by FOMO (Fear Of Missing Out). They participate in a XXI century version of wealth transfer from the incumbents to the few global disruptors they fund. They place their bets by funding what they hope will become the future Amazon’s, Google’s or Facebook’s. The odds are tiny but the multiples enticing. Hence, money flows in the form of investments to these entrepreneurial teams seeking to build the next Uber by targeting the incumbents in the established industry to be disrupted.

The disruptors are typically bright and energetic entrepreneurs often in their 20s and 30s with some or limited experience, unencumbered by the responsibilities of family or children. In many ways they have little to lose, not because they are irresponsible playing with others people’s money, but rather share the view that the challenge of becoming a disruptor is a worthy endeavor. A few years of their lives committed to a high risk moonshot, can provide and extraordinary learning experience, which if successful could make enough money for a lifetime. The hall of fame proves it is feasible, with new names being added periodically to those like Steve (Jobs), Larry (Page), Michael (Dell), Bill (Gates), etc.

The incumbent companies are at large passive bystanders. Actually, most of the firms knew of possible threats beforehand, however, their response were lukewarm as they were tangled in their own internal processes, and management energy’s misplaced in internal politics and preoccupied in their own personal future while serving often dying customers. The incumbent firm focus was highly optimized in the established (old) technology and serving traditional customers, leaving its flanks open to the disruptors targeting emerging technologies and/or new customers.

By the time the new reality defined by the disruptors emerges, is often too late and by then, their tepid actions are unable to reverse their fate, which by now is a painful decline and an irreversible death. In other words the firm faces its own “Kodak moment”. While management bears most responsibility, employees and supply chain stakeholders will suffer the most, affecting potentially hundreds of thousands/millions of jobs. In the absence of a well-defined action plan, many will be consigned to jobs with lower earning capacities and risk being jobless all together.

For most individuals, their position in the socioeconomic pyramid is determined by their compensation. Figure 1 below identifies three areas of the socioeconomic pyramid as defined by the job compensation.

At the base of the pyramid are commodity jobs typically compensated in the US under $20/hr.[3] They tend to be workers performing highly standardized activities with little differentiation generally prescribed by simple rules or algorithms. They often require limited amounts of training and the individuals holding those jobs for the most part are easily replaceable. Examples of these jobs are janitorial service providers, painters, customer service representatives, fast food workers, etc.

At the top of the pyramid are the highly compensated jobs (>$100/hr.). These tend to be professions requiring skills difficult to standardize. They often require knowledge and experiences that the market values highly, and are likely in limited supply. Therefore, these positions are generously rewarded. Examples of these jobs are plastic surgeons, board members, physicists, mental health professionals, most engineering fields, etc.

The middle income jobs (between $20 and $100/hr.) are those most challenged. These are the positions susceptible to disruption by emerging technologies (i.e. digitalization, machine learning, 3D printing, AI and big data, etc.). These workers perform activities able to be targeted by blue and white collar robots, and are sufficiently paid to justify the ROI (return on investment) by applying these new technologies. In other words these are the jobs that large sections of society holds, often referred as middle class jobs. Examples of these jobs include traditional manufacturing jobs across many industries, first/second level supervisor and administrative roles, logistical operators, financial analysts, etc.

As new technologies disrupt many jobs, it is worth mentioning two important dynamics:

  1. New technologies, as they become established, create new jobs, requiring new skills along the three ranges of the job compensation pyramid,
  2. Technological innovations do not know of “sacred cows”. Once considered “high value jobs”, at some point their protection erodes as new technologies are able to perform their functions better and more cheaply. The health care and legal professions have long been considered untouchable, but these too will feel a downward pressure from their positions of privilege.

Furthermore, the average lifespan of each technology is shortening, often to less than a decade to complete its life cycle, instead of multiple decades, which was the life cycle of technologies for most of the prior century. Therefore, “Kodak moments” are becoming increasingly likely, with the unfortunate consequences of the destruction of shareholder value and employment.

For the affected workers holding mid-income jobs, three possible outcomes are expected:

  1. Accept lower paying jobs and suffer income decreases at lower levels in the job compensation pyramid,
  2. Work longer hours or take second/third jobs to protect income levels,
  3. Re-invent by gaining new skills in new areas often borne out of one of the aforementioned disrupting technologies.

Options (1) and (2) are self-explanatory and represent suboptimal solutions since they require accepting in perpetuity lower income levels, or working longer and longer hours to retain prior income levels. Option (3) brings some hope, yet requires the non-trivial decision of applying the time, effort and resources required to embrace the personal/professional re-invention process. However, the selection of the area of re-invention or what new skills to acquire cannot be left completely to individual choice; rather, this decision will require guidance emanating out of a concerted collaboration between government and the technology and educational sectors.

Until my next post amigos – Carlos B.

[1] My own life experience is a perfect example. My immigrant father had only a 3rd grade elementary school education and my mother only completed 6th grade, yet their two children went on to college and completed graduate studies overseas.

[2] UBER disrupted the taxi and limo industries around the world in just few years (<5 years)

[3] Fully loaded salaries, in other words, the gross salary plus the cost of the benefits paid by the employer.

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Innovation: Impetus for Global Resentment?

Seismic global events such as Brexit, the rise of nationalistic movements, or Trump’s nomination as the Republican presidential candidate here in the United States, are not isolated phenomena, but actually have something in common: both appeals to citizen fears. Over time these accumulated fears lead to collective resentment across broad sectors of society motivated by income stagnation, job losses, increased socioeconomic inequality, etc. Daily headlines in the global media identify simplistic targets, when they are actually pointing to visible consequences, rather than identifying root causes or, even more rarely, possible solutions.

In this blogpost, I would like to connect the accelerated pace of global innovation as one of the root causes of today’s painful societal structural cracks, which are exacerbated by a longer life expectancy of the population. Citizens feel increasingly disconcerted by the speed of the disruptions they experience, feeding individual fears into collective resentment.

We can commence our thought experiment by considering the introduction of the Ford Model T in 1908, which sought to replace the horse-pulled buggy, the prevailing mode of transport in society. This disruption was as big as any of today’s eminent disruptions. However, its impact was felt over decades since society was slow to adopt this new technology. Hence, individuals who made a living moving goods or people via the incumbent technology (the horse-pulled-buggy) were slowly phased out over a period of time. Not only was the adoption much slower (the automobile took about 5 decades to reach approximately 60% of US households), but the average life expectancy of those affected, or disrupted, by the advent of the motorized buggy, was relatively much shorter.

Transition Time Frame Incumbent Technology New Technology Number of years to penetrate  60% of US households
1900 – 1950 Transportation technologies:

Horse-buggies, or other animals or humans used as power source

Motorized vehicle 48.7 years
US Life Expectancy in 1911 (Caucasian) at Birth M= 50.2,   F= 53.6

at 30 years old       M= 64.8, F= 66.9

1990 – 2005 Information transport technologies: Dial-up modems, Fax machines, Postal Service Internet 15 years
US Life Expectancy in 2000 (Caucasian) at Birth M= 74.5,   F= 79.9

at 30 years old       M= 76.4, F= 80.9

2003 – 2010 Celluloid Photography Digital Photography 7 years
US Life Expectancy in 2004 (Caucasian) at Birth                   M= 75.7, F= 80.8

at 30 years old       M= 77.3, F= 81.8

Table 1: Key disruptive technologies, adoption rates and the life expectancy (M= male and F= female)

Following the same example, a Caucasian male conductor of a horse buggy in 1911 of age 30 would be expected to live to age 63.8. Assuming he would be able to work until age 55, he would likely have another 25 years in his occupation without disruptions. Given that the threat of being replaced by the new technology took decades, it is likely he would be able to retire in his mid-fifties without being significantly disrupted by this new technology[1].

Let’s envision now a more current scenario: a Caucasian male 30-year-old photographer/dark-room developer of film (or celluloid) photography in the year 2004. Here, the likelihood of his being disrupted before age 35 is extraordinary (2004 is approximately 5 years after the market introduction of digital photography), since digital photography took only 7 years to be embraced by 60% of US households. Our hypothetical photographer would be left with about 30 years of productive life before retiring. Clearly, he will need to reinvent himself, not once, but possibly multiple times throughout the rest of his professional journey.

Our hypothetical photographer is not alone in his drama. The transition from film to digital was so rapid (only 7 years to penetrate 60% of the US households)[2] that it would have been very difficult for him to reasonably foresee the severity of its impact. First, this disruption democratized ownership of a camera by dematerializing it: each smart phone included a digital camera, as well as a myriad of apps whose effects would be profoundly felt by the entire photography equipment sector. But the damage did not stop there, since that same disruption demonetized many of the revenue streams of the photography industry, e.g., the copy and print photography sub-industry. Hence, our hypothetical photographer had abundant company. The disruption of the entire film photography industry was devastating, indeed.

Our hypothetical photographer’s challenges, unfortunately, do not end there. The living wages he was able to earn as a photographer have quickly eroded as many of the tools of his trade have been dematerialized, demonetized, and in consequence democratized. This example is thus far different from our example of the horse buggy conductor, who could possibly have continued in his profession into retirement or death. But our photographer has seen his livelihood and living wages at best quickly eroding and at worst completely disappearing.

A quick summary of our discussion can be captured as follows:

  • The pace of innovations is accelerating at an exponential pace;
  • Willingness of society to adopt innovations to alleviate perceived market pains is also increasing at an exponentially faster pace;
  • If successful, each innovation wave disrupts incumbent technologies, reducing them to obsolete status and destroying the jobs of those involved;
  • Professionals of ALL ages need to re-invent themselves by acquiring new skills and training;
  • As innovation and adoption patterns accelerate, the need to re-skill and re-train may occur several times in the lifetime of an individual, requiring a constant process of professional reinvention.

Every aspect of our human activities has been, is being, or will be disrupted over the next decade. The way the incumbents created economic value has changed or is in the process of changing. While incumbent technologies and their operators fight with tooth–and–nail to preserve the status quo[3], most of the time the allure of the benefits resulting from demonetization, dematerialization, and democratization offered to the consumer become too attractive to pass up, rendering disruption inevitable and irreversible. However, a fraction of those very same consumers would become disrupted as a result of their behavior.

While it is easy to intellectualize a constant process of reinvention whereby society continually harvests ever increasing rewards from the market by increasing the amount of economic value added, the implementation of that process is far more challenging. For one, re-invention takes resources, time and dedicated effort. Even if these three conditions are simultaneously met for any given individual, it remains unsolved, the identification of the area of re-invention. Distinguishing technology fads from real strong and durable trends is often hard to distinguish, especially in its early stages, even for the trained eye. All together re-invention is often a fearful and distressing proposition, transforming the sum of individual fears into collective resentment.

Furthermore, governments and policy makers are ill-prepared to guide our hypothetical “film photographer” for his journey of periodic reinventions, because their policies are often predicated on antiquated economic models, e.g., industrial societies. Actually, government employees, due to the protected nature of their jobs, are often incapable of understanding the realities of these market disruptions, augmenting the resentment of the affected private citizens.

Lastly, the globalization of innovation adds to incumbents’ accumulating fears as new unheard players from remote geographies threaten the incumbent firms and the jobs of all those they employ. Those that lobbied hard for free trade a few decades ago, now lobby even harder to return to protectionism with the hope of avoiding the blows of disruption. The often pronounced statements of politicians to bring back old manufacturing jobs is misguided and counter-productive. If China or Vietnam wants to continue assembling combustion engine vehicles we should let them do it, while we lead in the development of electric self-driven vehicles…. But, wait a minute… did I just say electric self-driven vehicles? Then, we will need to address the fears of all the Uber and Lyft drives, gasoline station operators, etc., etc…. as they will all be massively disrupted.

My hope is that I have provided in this post a context for the unsettling reality that many today are experiencing in their professional careers. In my next post, I will explore possible opportunities for solutions. No doubt that in the meantime, we should be prepared to think carefully about the reasons for growing global resentment and challenge our politicians with hard questions that consider the complexity of the issues. Let’s not allow them to get away with the often overly simplistic solutions of the soundbites they propose.

Until my next post – Carlos B.

[1] Keep in mind that in the ensuing years many older colleagues left the profession due to retirement of death, delaying any possible effect to our hypothetical Caucasian male horse buggy conductor.

[2] Taking many casualties in the process. Kodak, the undisputed leader of film photography and, counter-intuitively, the inventor of digital photography.

[3] Performing incremental improvements, which in retrospect often result in too little––too late changes.

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My New Year Salute!

Dear Amigo, this a time of the year is to reflect, acknowledge and appreciate friendships amidst the ups and downs of our hurried lives. During these uncertain times YOUR friendship is a bedrock of confidence and optimism to continue our battles and re-double our bets!

Thank you for bringing perspective and depth,
Thank you for being the best medicine for the pessimism and negativity that seems to be omnipresent in our world,
Thank you for sharing your “joie-de-vivre” with all those who surround you, and most important,
Thank you for being you.

This is my way to recognize your friendship and express my gratitude,
extend my invitation to share many more adventures together in 2016, and wish you a Happy New Year!

Carlos S. Baradello, PhD
Managing Partner of Sausalito Ventures, and
Professor of Innovation & Entrepreneurship at HULT International Business School

Cell: +1 (415) 342 6663
Blog: www.carlosbaradello.com
Firm: www.sausalitoventures.com
LinkedIn: www.linkedin.com/in/baradello
Skype: baradello

424 Johnson St., Unit “A”
Sausalito, CA 94965
USA

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Constructing an Entrepreneurial Ecosystem

Para la versión en Español ver abajo.

Constructing an Entrepreneurial Ecosystem

I returned last week to the Bay Area after participating in an event in Buenos Aires organized by Banco Ciudad and the IAE Business School. The theme of the event was “Innovation and the entrepreneurial spirit: Developing an engine for economic development, entrepreneurship and citizenship in Latin America”. Which such ambitious goal, the event was held last July 8th. This posting is a summary of my notes resulting from the interview the day before the most listened radio talk show in Buenos Aires (Lanata) conducted the prior day to the event.

Carlos Baradello during his conference titled:  “Constructing an Entrepreneurial Ecosystem”

Carlos Baradello during his conference titled:
“Constructing an Entrepreneurial Ecosystem”

Throughout the world, government leaders, businesses, educators, entrepreneurs, thought leaders, non-governmental organizations (NGOs), and other members of civil society — including young and so not young people — are attempting to co-create environments where human flourishing prosper. In this enterprise, they seek not only economic development, but seek to strengthen of all aspects of human society in particular its creativity and ability to change for the benefit of all its citizens.

I have observed this nascent trend most acutely in Silicon Valley and the broader San Francisco Bay Area, where visitors from the four corners of the globe come to visit, explore, learn, and share experiences. These are the proverbial techno–tourists, whom I have also dubbed the twenty–first century alchemists. The alchemists seek clear and simple formulas that allow them to replicate Silicon Valley on their respective continents, in disparate cities and regions including forgotten corners of the world. These alchemists, as you will recall, like to turn sand (silicon) into gold (wealth).

The reality is that Silicon Valley would not be able to re-create itself today even if it wanted to, because its development has not followed a single formula or prescription. As a result, the master blueprint for Silicon Valley that everyone seems to be chasing doesn’t exist. The lingering assumption that such a formula exists (with accompanying easy and fast solutions for its implementation) has given way to economic policies that sometimes have had the opposite effect inhibiting its economic progress as well as in some extreme cases to abort the gestation of entrepreneurial ecosystems.

Along these lines, I have outlined here ten observations guiding the development of an entrepreneurial ecosystem:

  1. Economic growth is necessary to create successful Startup environments. Not the opposite as it is often believed! In other words, you need to be already successful to aspire to become a stronger ecosystem. Some countries and regions mistakenly associate economic growth and development with an ascendance of a Startup culture.
  1. Entrepreneurial ecosystems to become self-sustaining must benefit many disparate actors of civil society, including:Government benefits as a result of an increase in employment and tax base.
  • Entrepreneurs benefit from the successes of their innovations.
  • Investors benefit from the investment returns.
  • Businesses benefit from innovations, new products, new talent, and improvements in the value chains, etc.
  • Universities benefit because of greater knowledge and increased donations.
  • Civil society benefits because of quality jobs created and higher employment. Some of the new wealth created spills over to foundations and NGOs, benefitting the arts and other cultural activities, as well as social welfare projects.
  1. Co-working spaces, leveraged funds for angels and venture capitalists (VCs), incubators, accelerators, development programs in innovation and technology, etc., are all part of the solution and facilitate the development of the ecosystem. But these “fads” do not constitute the secret formula the alchemists are chasing.
  1. Recognition of the distinction between subsidies and incentives. Subsidies are harmful and undermine entrepreneurial environments, while incentives are temporary tools that can remedy economic/social situation while stimulating new patterns of behavior.
  1. Entrepreneurship is essentially a Darwinian activity. As a result we need to liberate entrepreneurship from all forms of benevolent paternalism. Because of this dynamic, death is an integral component of an entrepreneurial ecosystem, and the lessons emanating from these deaths benefit broadly the flora and fauna of the entrepreneurial community, which comprise other entrepreneurs, investors, stakeholders, etc. Another important corollary of the Darwinian principle is that greater diversity in the ecosystem strengthens the quality of the ecosystem population. Diversity in thinking, perspectives, and problem-solving approaches, strengthen the entrepreneurial ecosystems and the quality of its inhabitants.
  1. Entrepreneurship is and should remain an inherently challenging human endeavor. Going to extremes seeking to minimize these adversities with government or other agencies subsidies, will prove to be counter-productive and harmful. A competent entrepreneur proactively jumps bureaucratic hurdles, understands that entrepreneurship requires great effort and sacrifices, and is steadfastly aware that the probability of his failure is greater than the probability of his success. He also knows that finding talent is difficult, finding the first client more, and financing his Start­up in its embryonic stages is even more difficult still.
  1. No one manages, governs, or administers an entrepreneurial ecosystem: an entrepreneurial environment is dynamic in nature and self–regulates its disparate actors: obviously there are various connectors and agents who influence one another. Some examples include:
  • Professors and thought leaders,
  • Investment bankers, venture capitalists (VCs), and angel investors.
  • La catalytic support infrastructure for innovation and entrepreneurship: non-governmental organizations (NGOs), foundations, consultants, and other participants.
  1. Companies (independent of their capital structure[1]) are important actors in the development of an ecosystem, because:
  • They could become partners of Startups (open innovation platforms/corporate incubators/accelerators, etc.), distributors, integrators, technology partners, etc.
  • They could become clients of Startups.
  • Their executives, with the right talent, can be good mentors/advisors to Startups.
  1. Focusing on strategic areas to leverage existing knowledge, competencies, and other local prevailing skills will facilitate ecosystem development. Furthermore, if the ecosystem optimizes the creation of products/services that meet the demands of global markets, the startups produced by this ecosystem will grow in both quality and quantity.
  1. Dream big, dream on an international scale with big global markets, and remember that the difficult things take great effort and sacrifice, and the impossible ones only take a little bit more additional effort. One must be impatiently patient, because the development of a successful company takes 10/15 years, and the development of a successful entrepreneurial ecosystem takes even longer.

Successful ecosystems foster innovation and entrepreneurship create multiple economic and social benefits in their communities and generating positive spillover effects that impact broadly society. Successful ecosystems create role models of success and generate new conversations driven by a positive attitude and the ethos that anything is possible.

In order to compare and contrast the 10 observations that facilitate the development of an entrepreneurial ecosystem development (see above), I am including below 10 enabling characteristics that facilitate of creation of Startups (quantity and quality) in Silicon Valley:

Silicon Valley Enabling Characteristics -- English

You can read more about the Banco Ciudad/IAE Event at:
1. http://www.apertura.com/economia/Innovacion-y-espiritu-emprededor-en-la- agenda-del-Banco-Ciudad--20150702-0005.html
2. http://www.infobae.com/2015/07/07/1740236-los-10-mandamientos-que-debe-cumplir-un-emprendedor
3. http://www.infobae.com/2015/07/06/1739974-emprendedor-se-nace-o-se-hace
4. http://www.minutouno.com/notas/1276332-el-estado-debe-acompanar-el-desarrollo-los-emprendedores
5. http://www.sinmordaza.com/noticia/311842-emprendedor-se-nace-o-se-hace.html

[1] Public, private, family owned, etc.

Como se Construye un Ecosistema Emprendedor?

Reflexionando sobre el evento que acabo de participar en Buenos Aires, organizado por el Banco Ciudad y la Escuela de Negocios del IAE, sobre el tema “El espíritu emprendedor y la innovación: motor de desarrollo económico, emprendedor y ciudadano en LATAM“, llevado a cabo el 8 de Julio pasado en Buenos Aires. Este posting es el resumen de mi entrevista con Lanata el lunes 7 de julio para su programa por Radio Mitre en Buenos Aires.

Carlos Baradello durante su presentación titulada:  “Construyendo un Ecosistema Emprendedor”

Carlos Baradello durante su presentación titulada:
“Construyendo un Ecosistema Emprendedor”

La construcción de un ecosistema emprendedor, esfuerzo amplio y mancomunado de la sociedad civil, líderes de gobierno, empresas, educadores, emprendedores, líderes de pensamiento, ONG’s, etc., a quienes les interesa crear un ambiente donde los jóvenes[1] (y no tan jóvenes) puedan co-crear un ambiente donde prospere el desarrollo humano. En otras palabras no busca solamente el desarrollo económico, sino que también potencia todos los aspectos del comportamiento humano.

Observo semanalmente a los visitantes que llegan de los cuatro rincones del planeta a visitarme en mi oficina en Sausalito y explorar el Silicon Valley/El Área de la Bahía de San Francisco. Ellos son tecno-turistas, a los que yo los llamo: “los alquimistas del siglo XXI”. Ellos buscan fórmulas fáciles y precisas, que les permitan replicar Silicon Valley en países/regiones, en su deseo iluso de transformar la arena (Silicio) en oro (riqueza).

La realidad es que Silicon Valley NO podría re-crearse hoy a sí mismo, aunque si quisiera, dado a que su desarrollo NO siguió una formula prescripta. Por lo tanto NO existe un blue-print o plan maestro que haga posible su re-creación. Esto crea constante confusión y ha dado lugar a la aparición de una mitología que propone soluciones sencillas e instantáneas y veces lleva a intervenciones equivocadas que son dañinas y retrasan o incluso hacen abortar el desarrollo de un ecosistema en gestación.

Las 10 observaciones para facilitar el desarrollo de un Ecosistema Emprendedor son:

  1. El Crecimiento Económico es el elemento necesario para crear un ambiento propicio para los Startups. No lo opuesto!, como algunos países/regiones que asocian erróneamente el crecimiento/desarrollo económico con un aumento en el número de Startups.
  1. Requiere que participen un amplio espectro de la sociedad y muchos se beneficien, como condición para que sea auto-sustentable, incluyendo:
  • El gobierno se beneficia debido a la generación de empleo y aumento de los impuestos
  • Los emprendedores toman riesgos mayores y hay una minoría importante que tiene éxito,
  • Los inversionistas se benefician de la riqueza creada,
  • Las empresas se benefician de las innovaciones, nuevos productos, nuevo talento, mejoras en la cadena de abastecimiento/valor, etc.
  • Las universidades se benefician debido a una mayor creación de conocimientos y donaciones,
  • Y la sociedad civil[2] se beneficia con buenos puestos de trabajo creados. Parte de la nueva riqueza creada tiene derrames en
  • Fundaciones y ONG que estimulan las artes, actividades culturales y también se promueven emprendimientos de beneficio social.
  1. Co-workings, fondos de apalancamiento para Ángeles y VC’s, incubadoras, aceleradoras, programas de formación en Innovación & Emprendimiento, etc.; son parte de la solución y facilitan el desarrollo del ecosistema. Pero NO son la fórmula secreta para el éxito de los alquimistas!
  1. Tener muy clara la diferencia entre subsidios y incentivos. El subsidio es perverso y deforma la cultura emprendedora, mientras que el incentivo es una herramienta temporaria que facilita/estimula a cambiar un comportamiento o adquirir uno nuevo.
  1. Emprender es una actividad esencialmente Darwiniana. Por lo tanto hay que liberarla de todo paternalismo. Como tal produce mortalidad, excrementos y descartes que fertilizan el ecosistema, producen aprendizajes que mejoran la raza (flora y fauna) de sus habitantes (los emprendedores, inversionistas, etc.). Como corolario importante al principio Darwiniano, es que una mayor diversidad del ecosistema ayuda a mejorar la raza. Es por ello que la diversidad de pensamiento, perspectivas y modos de resolver problemas ayudan a fortalecer un ecosistema emprendedor.
  1. Emprender es y debe ser difícil y por lo tanto facilitarla con docenas de subsidios es nocivo y contraproducente. Un buen emprendedor salta burocracias, sabe que requiere grandes esfuerzos y sacrificios, y es consciente que las probabilidades de fracaso son mucho más grandes que las de éxito! También sabe que conseguir talento es difícil y que el financiamiento durante las etapas tempranas más difícil aún!
  1. Nadie maneja, gerencia o administra un Ecosistema Emprendedor: un Ecosistema Emprendedor es dinámico y auto-regula a sus actores. Obviamente hay múltiple conectores y agentes que lo influencian. Algunos ejemplos incluyen:
  • Profesores y líderes de pensamiento en esta área,
  • Banqueros de Inversión, Venture Capitalist e inversionistas ángeles,
  • La malla catalítica de apoyo a la innovación y el emprendimiento: ONGs, Fundaciones, Consultores and otros participantes.
  1. Las empresas constituidas (independiente de su estructura de capital[3]) son actores importantes en el desarrollo del ecosistema, porque ellas:
  • Pueden ser socios de los Startups (Open Innovation Platforms/Corporate Incubators/Accelerators, etc.), distribuidores, integradores, partners tecnológicos, etc.
  • Pueden ser clientes de los Startups,
  • Sus ejecutivos con el talento apropiado pueden ser buenos mentores/ asesores de los Startups.
  1. Focalización en áreas estratégicas que apalanquen conocimientos, competencias y otras riquezas locales existentes facilitará el desarrollo del ecosistema. Si sus productos/servicios satisfacen grandes necesidades de los mercados globales esto facilitará más aun, la creación de Startups en cantidad y calidad,
  1. Soñar en grande, soñar grandes sueños y soñar con mercados globales, recordar que lo difícil es lo que cuesta mucho trabajo y lo imposible solamente un poquito más de esfuerzo. Y ser impacientemente paciente, dado que el desarrollo de un ecosistema basado en la innovación lleva décadas y puede llevar 10 años o más para empezar a generar emprendimientos exitosos.

Los ecosistemas exitosos que potencian la Innovación & Emprendimiento crean múltiples beneficios económicos y sociales en las comunidades de interés que participen; y una variedad de derrames positivos que impactan toda la sociedad en general. Crea roles de modelos éxitosos y nuevos temas de conversación donde permea una actitud positiva y llena de mensajes “que se puede hacer y lograr”!

Para comparar y contrastar estas 10 observaciones de como facilitar el desarrollo de un ecosistema emprendedor, copio abajo las características del ecosistema emprendedor más desarrollado del planeta. Estas son las 10 características que facilitan la creación de Startups (en calidad y cantidad) en Silicon Valley:

 Silicon Valley Enabling Characteristics -- Spanish

You can read more about the Banco Ciudad/IAE Event at:
1. http://www.apertura.com/economia/Innovacion-y-espiritu-emprededor-en-la- agenda-del-Banco-Ciudad--20150702-0005.html
2. http://www.infobae.com/2015/07/07/1740236-los-10-mandamientos-que-debe-cumplir-un-emprendedor
3. http://www.infobae.com/2015/07/06/1739974-emprendedor-se-nace-o-se-hace
4. http://www.minutouno.com/notas/1276332-el-estado-debe-acompanar-el-desarrollo-los-emprendedores
5. http://www.sinmordaza.com/noticia/311842-emprendedor-se-nace-o-se-hace.html

Notas de pie de página:
[1] Emprender es altamente riesgoso y por lo tanto los jóvenes son los que menos tienen que perder.
[2] Las familias pueden ser emprendedoras como así también las organizaciones a las cuales pertenecen (i.e. clubes, escuelas, iglesias, etc.) dado que ellas abrazan la innovación en sus actividades.[3] ya sea que sean públicas, privadas, familiares, Co-operativas, etc.
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