The death of enterprises is a certain reality by not: investing in a startup mentality, executing with agility and promoting exponential change.
The change stemming from the Second Machine Age (from MIT professors Brynjolfsson and McAfee) and The Fourth Industrial Revolution (by professor Klaus Schwab founding executive chairman of the World Economic Forum). As enterprises, a transformation of your business model is required. As an example, this is happening with GE and their new multi-modal factory where at one location, they service multiple industries at ten percent of the cost and with 3D printing producing jet engines with a jet fuel nozzle five times more durable and at lower weight. The nozzle used to be made of twenty different parts welded together.
Custom equipment breakdowns in the past could take months to fix however with continuous innovation in manufacturing, fixes and new processes are implemented in days. Enterprises are also creating investment funds and internal incubators as evidenced by Lenovo’s recent announcement of their $500 million USD investment fund. This is a hedge against external disruption coming from startups.
How do you learn from startups, make the proper investments for competitive advantage and what is the current and future investment landscape? Anand Sanwal provides these answers and more through CB Insights. I caught up with Anand for a chat to gain his advice.
I referenced their research in my keynote at the largest international conference on software engineering, ICSE, held late May in Austin Texas with principal funding by the National Science Foundation, the four largest international science organizations in software engineering (ACM, IEEE CS, SIGSOFT, TCSE) and by all the major vendors. Next week I am in Africa as keynote doing the same.
Who is Anand Sanwal?
Anand Sanwal is the CEO and Co-Founder of CB Insights, a National Science Foundation-backed data platform that provides predictive intelligence into the health of private companies, their investors and the emerging industries they compete in. Customers include Cisco, NEA, Gartner, Marketo, Redhat and Castrol to name a few.
Prior to founding CB Insights, Anand managed the $50 million Chairman’s Innovation Fund at American Express. And prior to that he worked at Kozmo.com; one of NYC’s most infamous dot com flameouts. He has degrees in Chemical Engineering from the University of Pennsylvania and in finance and accounting from the Wharton School of Business.
To listen to the interview, you can go to the non-profit ACM Learning Center podcasts or click on this MP3 file link in the learning centre
Here are extracts from the full interview:
Ibaraki:
Anand, you managed the $50 million Chairman’s Innovation Fund at American Express. What are some of the lessons that you can share from that time?
Sanwal:
I would say the biggest lesson from the Chairman’s Innovation Fund [besides getting access to some really interesting technologies, companies and things that were happening at the cutting edge of financial services], was this gem of an idea that eventually came – to see the insight that the private markets [which are massive], are incredibly opaque and there’s an opportunity to fix that.
Ibaraki:
What experiences shape your decisions today from your work at Kozmo.com?
Sanwal:
I learned a lot about business fundamentals. The very simplest one is that you can’t buy something for $2 and sell it for $1 and hope that eventually things will work out. There are certain economic rules that you cannot defy and ultimately I think Kozmo tried to defy them for longer than they had runway for and the company ended up failing.
Ibaraki:
What prompted you to create CB Insights?
Sanwal:
We saw this idea when managing the Innovation Fund that we were making these very big strategic decisions for the company about where we should go, markets to think about or what areas to innovate in and potentially where to invest, and we were doing it with really incomplete information, so part of it was we saw this market need…. The second part was always wanting to do my own thing…. So the combination of an idea with this desire to start something led me to leave relatively suddenly. A few folks on my team subsequently joined me after leaving and we became the founding team of CB Insights.
Ibaraki:
Where do you see CB Insights in five years and the predictive insights you can provide for start-ups, investors, established companies, governments, academia, and media?
Sanwal:
We think with machine learning and data we can help them make better decisions, so to some degree you can think of us like an algorithmic McKinsey. Over the next five years I think it’s realizing that vision and helping our clients generally in the global 5000 make these very important strategic decisions with data not with the traditional gut instinct and Google searches and guys with MBA’s that they are relying on today.
Ibaraki:
In order, what do you see as the five top emerging industries and why?
Sanwal:
I think one of the hottest areas right now is artificial intelligence and deep learning…. Digital health continues to be a really hot space…. Other big areas are in what we call frontier tech [things like augmented reality, virtual reality and drones]….The other one that is sort of related is the area of robotics…. I think the fifth area that there is still a lot of room in and a lot of hype as well is the area of autonomous vehicles.
Ibaraki:
In order, what do you see as some of the top declining industries and why?
Sanwal:
I’m hesitant to say that these industries are declining. We tend to look at the data obviously, so when we look at where the money is flowing what we see are shifts in and out of industries…. e-commerce broadly and within e-commerce there’s areas like subscription commerce and flash sales that I think work. That sentiment four years ago was extremely hot but the exits haven’t been borne out…. Ed Tech is another big area where I think there is always a lot of chatter about the massive opportunity within education…. Cyber-security [which may be a little bit surprising], is a really big area but the challenge right now is it is basically over-funded and as a result I’m not sure that there’s a whole lot of opportunities.
Ibaraki:
What are some of the outlier innovations now that could be very disruptive in five years? In 15 years?
Sanwal:
I think this idea of artificial intelligence supplied to different industries is going to be incredibly disruptive…. Things like augmented reality, virtual reality and how that gets used [everything from training scenarios to entertainment and travel eventually], these are technology platforms that can re-invent how people interact and consume media and entire industries. I think those are big ones. Drones are another big one in terms of how many diverse applications they have.
Ibaraki:
What about FinTech – what will dominate beyond 5 years to 15 years?
Sanwal:
I think this idea of programmatic investing for the consumer to lower fees is one that’s going to take hold for a long time. There are going to be some casualties in these spaces, but there are going to be a lot of interesting companies that come out of that world…. Payments is a big area where I think there is a lot of room for disruption…. The other big one is insurance; a massive industry with billions or trillions of dollars kind of floating around and it really hasn’t been touched by technology in a big way.
Ibaraki:
What about AI – what will dominate in the future in this whole area of artificial intelligence?
Sanwal:
It’s hard to know all of the applications in the future…. People are trying to build platforms in technology that are good at enabling AI and I think those enabling technologies are going to be really important. Then there are these more functionally specific AI tools – so there are companies trying to be your personal assistant, or there are companies that are going to try to help you court Facebook, or what other folks are doing like ask a question and we’ll get you an answer. So I think there are going to be these very specific use cases and over time these use cases will get more sophisticated as the technology improves.
Ibaraki:
Can you profile the investment trends from 2015 and forecast into 2016 and 2017?
Sanwal:
2015 was a gargantuan year for funding into start-up companies…. The first 3 Quarters of the year were really up, Q4 was where we saw Sentiment really dip. It happened a bit early but it was driven by a few things…. What happened in Q4 we never called a bubble and I don’t think we are in a bubble. What we are looking at is probably a healthy correction that we are undergoing right now that’s going to persist for a while. That said in the first two months of this year there have been eight new unicorns that have joined the club…. If you are an early stage company it’s probably where you are going to be more challenged. It’s the ones that are a little bit more in the middle of the pack who a year ago would have gotten funding [when the environment was so robust]; they are going to have some challenges in this current environment. So we are going to have more of those companies fail or get acquired for talent or just shut down just because there is less money out there.
Ibaraki:
One of the things that you’ve been providing through your newsletter is tracking some of these companies’ start-ups with 1 Billion plus valuation. You talked about some of the trends already but can you get into more detail about them?
Sanwal:
We have 153 unicorns today worth I think 535 Billion dollars – that’s pretty significant value ascribed to these companies [all paper valuation, these aren’t realized valuations of course]. I think what we are seeing amongst these is pretty broad-based. You have enterprise companies, consumer companies and FinTech companies [cross-sector, it’s not just one sector that’s hot]…. You also see diversity in terms of geography. Obviously the Valley remains the epicenter for this type of innovation but there’s a lot happening globally as well.
Ibaraki:
You see in the news some of the write-downs that I guess the institutional investors or maybe Hedge funds are doing. What’s your take on that?
Sanwal:
I think some of the markdowns will make sense, but looking at them on a month-to-month basis it’s hard to know how valuable they are until we know what the basis is for making those markdowns.
Ibaraki:
There are these investors out there and there are start-ups and a number of criteria that go into if they are going to do the investments. Where do you see machine learning [as a tool] in all of this ability to fund start-ups?
Sanwal:
My honest reaction when I hear about most of the things machine learning applied to start-ups and venture capital is, to be very frank, most of it is vapour. I haven’t seen anybody really do it super thoughtfully. I think it’s good for PR.
Ibaraki:
What things continue to excite you?
Sanwal:
We have some really amazing things we are working on and I’m excited about what we have going on here…. The other thing that continues to excite me – there’s a lot of chatter about a bubble every time some banal app gets funded. People say that people aren’t working on hard problems but the reality is that for every one of those there’s also somebody who is trying to do something that is pretty impactful. I’m excited that we get to be at the forefront of tracking that and hopefully advising people using our data on how they can do it better as well…. As the organization grows, I’m excited to see who steps up and becomes a leader within the organization, and there’s a lot of things culturally at CB Insights that I’m excited about and maybe a bit anxious to see how they evolve.
Ibaraki:
What makes an entrepreneur?
Sanwal:
I guess somebody who has got enough confidence and the desire to want to try something and leave the safety net of employment, college or wherever they might be to try something out. I think that’s probably the core requirement of an entrepreneur.
Ibaraki:
What do you look for when highlighting investments?
Sanwal:
Referring to our research blog and things that we put out…. I think we are trying to help people understand where the world is going. It’s almost less about the investment and more about the underlying trend. I think if we can help shine a light on them that’s part of our job, using data and within that we try to find interesting companies. We start with trying to understand the spaces that we think are interesting and the companies sort of come out of that as a consequence.
Ibaraki:
What makes a great executive?
Sanwal:
To be honest, I’m still figuring it out. I think the thing that I’m starting to realize is resource allocation is probably the number one skill that you need to have. I think a lot of people want to hear that term when they think of money, but I think resource allocation is time and attention; these are all things that are finite when figuring out where you are going to be.
Ibaraki:
Agility is key today whether with a start-up or launching a new product or service within a larger enterprise. The start-up mentality is required. What are the key steps for successful start-ups or for enterprises when producing innovations to keep them competitive?
Sanwal:
I think with big companies there are two parts: developing a product or technology or a service, and then there is the ‘nail it and the scale it’ part. Fundamentally big companies have to realize they aren’t necessarily good at the nail it part…. When I look at big corporations I think how do they play to their strengths which are in scaling and distribution and marketing and other things? How do they work well with start-ups to bring things to market that will make them more competitive, and how do they track industries and things that are happening that could be disruptive to their business and have that open mindset? I think it’s easy for big companies to dismiss start-ups. I think the big challenge for corporations [besides the structural ones] is really the mindset one. Are they really open to these things or are they going to talk about all the reasons they are better than the start-ups? We hear that a lot. That they have a bigger balance sheet, understand risk management better, have a better brand and all these things, but those are not etched in stone. A lot of companies have had those things and failed so that is something that I think corporations have to be mindful of.
Ibaraki:
What are the key attributes in individual and teams that produce winning products and services?
Sanwal:
As a start-up, are you listening to customers? I think there is explicit feedback that customers give you and there is the implicit feedback they give you when they ask questions or when they are using your product. Are you learning from that and building solutions that help solve those problems? I think what is really important is talking to customers about those pain points, versus trying to cook up something in your head that you think they want…. I think it is really important to have access to and have conversations with customers, and ensuring those conversations are happening across different parts of your organization. It’s not just the founders but hopefully the engineers and biz/dev and customer success and collectively getting what I think is a really good perspective of what the customers want.
Ibaraki:
I know that you have a lot of analysis on start-ups that have failed. Can you talk about that more and some of the attributes of failing start-ups?
Sanwal:
We analyzed about 150 post-mortems written by founders…. When we surveyed all these post-mortems, interestingly, the number one reason that the founders cited was that they built something the market didn’t want.
