Corporate Innovation - TIE Atlanta report

2012 Startup Weather Report

where will future success live

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Special report for TiE Atlanta chapter

TiE AtlantaFostering Entrepreneurship Globally

most initiatives reflect a

retrospective analysis

Background: flickr.com

Background: flickr.com

If creating systems, we need to be

The next business model opportunities – by Konstantyn Spsokukotskiy, Atlanta 2009

1981

Source: Peter Stella, International Monetary Fund, The Federal Reserve System Balance Sheet What Happened and Why It Matters, 2009

Last time the general business model was forced to modify thirty years ago. An access to easy-to-get consumer-grade credit was granted. The volume of liquid funds nearly doubled. Consumers could easily afford whatever they wanted thanks to that excess money.

The model of the past

2008

x GDP US credit market assets

1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

2

3

4

1

how wealth creation worked

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America’s New Beginning: A Program for Economic Recovery, Feb 18,

since

USA 71%Canada 60%

Germany 54%South Korea 48%

China 37%

Private domestic consumption, % of GDP, 2008

Source: Janamitra Devan, Micah Rowland, and Jonathan Woetzel McKinsey Global Institute

Consumermajor market force

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Both big volume cash flow and the effect “it’s easy to part with the money that you get easily” created opportunities to do lucrative business if selling to consumers.

Grown Bigconsumer-centered businesses

Businesses that put consumers and small businesses in the center of their interests have grown faster and stronger than the rest of the pack. 1990

millions Microsoft’s revenue in 2009 prices

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1989

1000

1500

2000

500

2500

1987 1988

All thinking started and ended here. Consumers do small ticket purchases. Massive sales is required for startup success.

SELL TO CONSUMERSwas the primary concern of startups

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Massive sales requires mass production.

MANUFACTURINGin mass production facilities

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Big manufacturing facilities or even materials for big production batches weren’t affordable without a financial help

INVESTMENTgot form a third party

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Raise enough money was a paramount of successful entre-preneurship. Even if a product didn’t work there was still enough room to learn on the go, given one has positive bank account balance

Step 1. Borrow money

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Step 2. Produce

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In the most cases the production infrastruc-ture was build anew. Multiple “parallel universes” have been created. Some of them busted (.com), some have been acquired and dissolved in big corpo-rations as redundant. In any way, it is a signi-ficant waste.

Step 3. Marketing

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Big sales is also about big marketing expenditures. Many thanks to credit card cargo-cult. The financial system and globalization paid for it for a while.

Game over

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the business modelof the last three decadesis stale-mated

Watch presentation “The next business”to understand triggersbehind the scene

growth redefined

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For the next couple of years

Financial System

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has changed. The startups have to change too

Let’s explain on the next couple of slides.

Simple model

The economy is complex. Though, a simple model can describe, help to under-stand and predict economic development. Simple models comprising of a few players and their interactions enable strategic business planning.

a few players

bank

FRS

bank

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BANKSare first in the row

bank loans

business

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BUSINESSESproduce goods and services

paycheck

consumer

savi

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spending

CONSUMERSare equally employees

consumer spending

goods

transaction overhead& delayed consumption

prices

revenue (back into business)

GOODSand services

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Strictly speaking this isn’t a player. It’s a “warehouse” that stores significant value. Startup economy is about value creation. The warehouse is an important entity in value creation analysis.

business consumer goods

The last three entities constitute the real economy cycle. It could be self-sufficient in a steady market. But if economy grows, it means at least one of the following:1. Better products and

consumption choice2. More savings for a

rainy day3. More sophisticated

production facilitiesThen the resources are diverted for storage of value. There is less and less liquidity, economy starves and stops performing.

Real Economythe main concern

bank business consumer goods

Banking system was introduced to provide stability and nurturing ground for economic growth. Essentially itsupplies and regulates the amount of funds (monetary incentives) available in the system.

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Control Mechanismincludes banking system

bank business consumer goods

Initially the amount of bank reserves was low. A significant amount of funds was deployed in the real sector

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Initial Setupa humble beginning

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business consumer

There is -though-something there that creates an unequal distribution of created value between businesses an consumers. As a result businesses possess more power to produce than consumers are being able to buy. All economic schools have recognized the problem. The difference between them is only in the perception of causes. Whatever the reason, it leads to an over-supply and under-consumption. Then business slows down and a crisis begins>

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Systemic issueproduction/consumption misbalance

1960 1970 1980 1990 2000 2008

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bank business consumer

FRS

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goods

The law change in 1981 dealt with such crisis. It created an encouraging environment to provide loans for consumers. The intention was to level up the consumers and business. The consumer-grade credit provided excess funds. 1) Spending increased.2) Goods could be procured on-demand. It eliminated the need to collect money and resulted in less saving. Larger portion of wages was spent.

Overall: spending increases significantly.

personal saving as a percentage of disposable income

Empowered consumerimmediate gratification

bank business consumer goods

It increased both:a) pricesb) delayed

consumption

The opportunity for high prices created positive business incentives. A higher delayed consumption improved the standard of living.

+

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Higher spendingdue to wealth stimulation

bank business consumer goods

Some businesses further tried to increase revenue by biting off consumer privileges, i.e. reducing consumer’s choice to delay consumption. Throw-away, use-once products were introduced en masse. A fact is that such products have high costs per utility unit. They are economically viable only if the level of spending is high.

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First echorecoiling

business consumer

It turned out that this business model wasn’t sustainable. There stillwas a tarnished inequality. As soon as market saturated and the opportunity for short-term profits was eaten up, the same old problem occurred. Consumers can’t pay for goods that business produces in a long run. The inability to pur-chase day-to-day goods turned into inability to purchase investment goods, i.e. housing etc.>

Systemic issuethe misbalance didn’t disappear

2011201020092008

10

50

30

Businesses that had been underwriting long-term consumer-financing were hit first in 2008. They had large stakes in long invest-ments and couldn’t quickly react on sudden revelations.

But other businesses aren’t immune. To survive volatility every business wants to increase assets to liabilities ratio. When it comes to finance the process is called deleveraging.business

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the few years of feast

1x

10x

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20101970 2000199019801960

bank business consumer goods

FRSAll business entities (banks as well as goods and services producers) do deleverage as of 2011. To speed up the process businessentities cut expenses (risky loan processing, wages, production-means investment, etc.) To aid the process FRS provides liquidity in huge volumes (Quantitative Easing, Backing governmental programs.)

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Second echowhat is happening right now

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Total corporateliquid assets

50

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consumer goods

A de-facto return to the pre-1981 version of the system will result in:1) lower standard of living2) decreased life expect-ancy and entitlements3) loss of many product specimens4) permanent loss of many jobs and skills

Conclusion: Consumer is ceasing be the power driving (paying ramp-up costs for) innovation

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Coming nexta no-brain scenario

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business

Step 1. Marketing

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Big sales will now mean fewer sales transactions, big checks passing hands. Businesses that have financial resources will be preferred cus-tomer. Costs cutting will be their main theme. Startups can help with more efficient machine-ry, manage asset opti-mization, etc.

bank business

There is plenty of funds in big banks. The backed by industrial contracts entrepreneurs can tap it cheaply.

Step 2. Borrow money

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Step 3. Produce

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The no waste policy means that a creation of “parallel universes” will not be rewarded. New production capacities should be complimen-tary to existing facilities and improve their pro-ductivity significantly. An integration of the inno-vation process with cor-porations is inevitable.

TiE AtlantaFostering Entrepreneurship Globally

WELCOMECorporate Innovation

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