Inside Porterland
There used to be a time (the late 1970s) when the strategy was way more about understanding competition, framed in terms of bargaining power and barriers to entry.
However, as digitalization took over, around the 1980s, and 1990s it became clear that the whole nature of the competition was changing.
While frameworks, like Porter’s Five Forces, might be still useful to map some business contexts.
The legendary Andy Grove, together with many other practitioners identified six forces shaping from the bottom entire industries.
Indeed the sixth force is about complementary products.
This force is subtle, hard to spot, and very very blurred.
In fact, complementary products, when it comes to the digital and tech world, are not easy to spot.
Competition might arise from unexpected places, as there is no direct overlap between these complementary products.
In short, there is a linear way to map the business context of complementary products, where you look at existing alternatives in the same market/industry.
Yet this might be effective in the short-term (3-5 years) but fail miserably in the long-term survival of the business.
Think of how, when AT&T created its Bell Labs, it prompted unpredictable innovation loops that led the way to compute.
From the phone business, there was the computing industry, which slowly, then suddenly took over the phone business of AT&T.
In fact, from Bell Labs, the first semiconductors came to life. Spurring the whole computer industry first, then the Internet.
When perhaps the same IBM decided to move from B2B computing to the consumer industry, it suddenly adopted an opposite strategy compared to what it had done so far.
IBM approached the development of a PC for consumers with an open approach, where it outsourced most components to other players (this in part also to antitrust concerns).
This strategy in the long-term generated a whole new set of markets, industries, and tech players (Microsoft, Intel, and Compaq to name a few).
From there, when the PC dominating players tried to enter the Internet (see Microsoft vs. Netscape) they also faced unpredictable market forces.
Coming from the bottom (consumer adoption) that completely reshaped entire industries, thus giving birth to the next wave of Internet players (see Google, Amazon, etc.).
Indeed, Andrew Grove, back in the late 1980s former Intel’s CEO and the father of the OKR Goal-Setting System, in his book “Only The Paranoid Survive” highlighted how the sixth force – complementary products – was one of the key forces that determined a complete reshaping of the way of doing business.
And therefore, one of the forces that most (especially in the tech industry traveling at a faster speed compared to other sectors) had the ability to change business models, leading to what Andrew Grove called a strategic inflection point.
A point from which the way of doing business would never be the same.
This could become both a big threat for existing players, and an opportunity for new entrants, but also a way for existing dominant players to redefine completely their business models.
That is why, it makes sense, especially for companies operating in the tech business world, to map and analyze the context by adding this sixth force.
Breaking the boundaries of the business world
With a much more fluid business world, the whole business playbook changed.
And while this had become already evident with players in the computer industry, things more rapidly changed with the adoption of the Internet.
As the Internet morphed into the Web, a bunch of companies that by the late 1990s were promising to revolutionize entire industries were still running with the old business playbook.
Most of these companies went bankrupt during the dot-com bubble of the early 2000s.
For the very few, great, and also lucky (you can see also how companies like Amazon managed to survive the dot-com bubble thanks to lucky timing) players who survived, the whole paradigm shifted.
They mostly turned into what today we call platform business models, leveraging network effects.
The lean startup is born
While practitioners building companies didn’t have a name for it.
Other practitioners turned academics/scholars built a terminology around that playbook.
From there Steve Blank and Eric Ries explained this whole phenomenon as lean startup.
Customer obsession as the North Star
In this increasingly complex business world, where the boundaries are much more blurred, rather than following a more complex business strategy, digital players tended to simplify it.
And companies like Amazon led the way, with their obsession with customers.
Customer obsession, therefore, is a simplification, which helps companies gain focus as they execute a business strategy.
Customer obsession also gave rise to business modeling as a key discipline!
Business modeling is intended as a bottom-up approach to business, where a company is way more focused on customer feedback, quick feedback loops, product-market fit, and demand generation than anything else!
What is a business model and why is it important?
A business model is a critical element for any startup’s success as it is what unlocks value in the long term. In a way, developing a business model isn’t only about monetization strategies.
Indeed, that is way more holistic. To develop a business model companies need to create value for several stakeholders.
Thus, a business model is about what makes users go back to your app, service, or product.
It is about how businesses can get value from your solution. It is about how suppliers grow their business through it.
A business model is all those things together. In short, when those pieces come together, that is when you can say to have a business model.
A quick history of business models
“business model” and “business models” in millions of books according to Google Ngram
While the Internet worked as a catalyzer for business model innovation, the term itself was born way before that.
Indeed, business modeling started to become a key component to explain long-term strategic advantages, by the early 1990s.
For instance, an article from 1993, from HBR, entitled “Strategy And The Art of Reinventing Value” explained IKEA’s success as a business model advantage:
IKEA has performed well with a not-terribly-original business model that, in less skillful hands, may well have failed.
Yet, as we get close to the mid, end of the 1990s business modeling starts to take a connotation tied to the Internet ecosystem.
In a research done in the Strategic Management Journal, in 2001, the authors explain:
Our findings suggest that no single entrepreneurship or strategic management theory can fully explain the value creation potential of e-business. Rather, an integration of the received theoretical perspectives on value creation is needed. To enable such an integration, we offer the business model construct as a unit of analysis for future research on value creation in e-business. A business model depicts the design of transaction content, structure, and governance so as to create value through the exploitation of business opportunities. We propose that a firm’s business model is an important locus of innovation and a crucial source of value creation for the firm and its suppliers, partners, and customers.
Therefore, at that time, in the early 2000s, business modeling becomes also a way to analyze and explain the competitive advantage that companies had built in the marketplace.
The peak of this movement – I argue – came, when in 2019, Fred Wilson, from AVC, in a piece entitled “Business Model Innovation” explained:
I believe business model innovation is more disruptive than technical innovation.
In short, Fred Wilson, went on to articulate the reason why business model innovation matters more than technical innovation.
A good example of this was moving from web apps to mobile apps, which was largely a technical innovation. While the move to mobile certainly created some new companies, it largely strengthened the market position of the big Internet companies because there was little to no business model innovation.
And referring to the rise of blockchain-based business models he explained:
I am excited about the move to crypto based business models supporting decentralized apps for this very reason. I think it opens up the possibility that some very large new companies will be created that innovate largely on entirely new business models.
To take a step back, when the Internet proved commercially viable, indeed, business model innovation took off.
Indeed, the dot-com burst proved to the best enhanced for the next wave of digital companies, which would leverage business model innovation as a key ingredient to their success:
Source: internethistorypodcast.com
Indeed, many companies were born during the dot-com era.
Those companies used the Internet as a new distribution channel but they still played with an old business playbook.
When the dot-com bubble burst.
That left the room for a few companies which not only would prove commercially viable. They would also become among the tech giants that dominated the web.
Companies like Amazon, Google, and eBay built, tweaked, and consolidated their business playbook during that era.
A business model is not a business plan
When you click on the Google suggested result for “How to write a business model,” you get “how to write a business plan.”
A common misunderstanding is to think of business modeling as a one-page business plan.
However, a business plan is a document with a specific aim. It contains a bunch of assumptions about your business.
It also contains financial projections about the business for the next 3-5 years.
However, those assumptions can be hardly tested. The business plan thus remains a document that lives in the imaginary world.
Drafted beautifully to impress banks and potential investors; hardly of any use for business model innovation. Instead, as we will see business modeling is primarily about experimentation.
As reported by Google Ngram, by 2008, the business model was picked up as a key concept, compared to a business plan. This shows how in the last decade business modeling has become a key concept in the business world.
A business model is not a revenue generation strategy
An example of how Airbnb “confused” its business model for its monetization strategy (Slideshare)
How WeWork described its business model in the report before the IPO. You might notice that what they’re talking about is their revenue generation strategy.
Another misconception about business models is to confuse them with the monetization strategy or the revenue model of a company.
While this is an essential piece of the puzzle, it is just one of the components of a successful business model.
In this blog, we’ve discussed at great length how companies make money as a way to start the discussion of a business model.
However, a business model implies the understanding of operations, customer acquisition, retention, supply chain management, besides monetization.
According to the business model you designed over the years for your organization there will be a piece that plays a more critical role compared to others.
For instance, a vital component of the Coca-Cola business model is its distribution strategy.
For other companies like McDonald’s, the key to its business model success is the heavily franchised restaurants that helped the company scale up all over the world.
Each company will develop a unique model among the many types of business models which is what makes your company robust in the long run!
The importance of business model design
The primary aim of a business model is to create a sustainable chain, able to unlock value for several players in a market, industry or niche.
Therefore, this value chain will start from a value proposition, a promise you make to the key players and partners in that market, industry or niche depending on where you start.
For instance, when PayPal started it didn’t look to dominate the whole market. It started from a niche.
As Pether Thiel put it in his book, Zero to One:
The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.
Indeed, PayPal began identifying its most valuable partner, what at the time they called “power user.”
That was a choice driven by its business model design.
Therefore, instead of focusing on generically offering a service for everyone, PayPal focused on acquiring and attracting as many power users as possible.
Those power users were mostly on another platform that had already scaled up: eBay.
Thus, PayPal focused all its effort on acquiring those power users from eBay, fast!
Only after PayPal had drafted, tested, and validated a clear value proposition for a small, yet critical group of power users, it could move on to take larger and larger segments of that market.
Business modeling is about experimentation
Where scientists have labs where they can manufacture and run experiments.
Entrepreneurs have the real world as a way to measure their assumptions.
Designing and executing business models for an entrepreneur is like designing and running experiments for scientists.
However, where a scientist might be looking for lasting truth, an entrepreneur searches for a business model that will work in the marketplace at that particular point in time.
Indeed, one of the common beliefs is that business models can be sketched on a piece of paper and they will work in the real world.
That (almost) never happens.
Before a business model does work in the real world that will require a lot of strategic and deliberate thinking, experimentation, and tinkering.
Thus, a successful business model is usually the fruit of this process.
In fact, while the vision of a business model might remain intact, the way it gets impelmented in the marketplace might need to be readjusted several times, to succeed.
Take the case of the Tesla business model. The whole story is very compelling because when Elon Musk first started to invest in Tesla, back in 2004, he was involved primarily as an active investor.
Yet, as the company started to execute its business plan, it became clear that it wasn’t going to work.
In fact, Tesla’s original founders, Martin Eberhard and Marc Tarpenning were trying to build an electric vehicle, by outsourcing most of the parts.
The idea to outsource most parts, which seemed viable, from a business planning standpoint, proved non-viable, as it became harder and harder for Tesla to find the proper components to assemble its first prototype.
The situation got so bad, that the initial estimates for making a prototype skyrocketed, as time went by.
This created a power struggle into the company, the oust of the initial founders, and Musk taking over as CEO.
By August 2006, Musk shared his masterplan for Tesla, summarized as:
So, in short, the master plan was:
- Build sports car
- Use that money to build an affordable car
- Use that money to build an even more affordable car
- While doing above, also provide zero emission electric power generation options
That was it!
A business plan made of a few lines, and yet it would take fiteen years to execute!
As Tesla went through various struggles and near-death experiences.
Musk admitted that the Tesla’s ride has been so ridicously wild, that the compamny was a few days away from bankruptcy several times, in a decade, and Musk had his whole fortune at stake.
Thus, even though Musk’s vision for Tesla was clear since the onset, the company’s business model had to change multiple times over the years, to test, thousands of small to big assumptions.
That is how Tesla evolved into the company we know today!
That implies that often an entrepreneur has to design multiple variations of the same business model and test those in the marketplace.
For instance, if you’ve built a company that offers software but you positioned yourself with a freemium model.
You might realize that the model won’t work in your case, so you will need to move the revenue generation back to a premium model, where your target customers are willing to pay more and you move the needle from B2C to B2B.
Thus, cutting yourself space within a specific niche. That will, of course, limit the number of customers you might be able to reach; at the same time, it will enable you to find product/market fit.
Technological innovation vs. business model innovation
The misconception starts from the fact that nowadays, technological advancement is pushing toward new ways of doing business.
The Internet is still enabling new, untested models to pick up.
For instance, the business models of companies like Netflix would not be possible if the Internet didn’t allow new ways of content delivery, and so also of how those same companies make money.
However, technological innovation is wholly different from business innovation.
That’s because technological innovation often happens in labs or research centers (take the internet) rather than just companies, or in a business context.
In short, technological innovation requires a massive amount of resources upfront and researchers, which might not follow business objectives, but rather experiment freely with ideas that take time to work out.
In addition, even when a specific technology becomes commercially viable that might also be soon commoditized.
Thus, technology itself hardly becomes a competitive advantage. Technology coupled with new ways of serving customers, a powerful distribution strategy, and creative monetization strategies might create lasting competitive advantages.
That is when the business model innovation kicks in.
Why business model innovation matters so much
As we saw, in 2019, Fred Wilson, in a post, highlighted something that many are still missing today:
I believe business model innovation is more disruptive than technical innovation.
When new, revolutionary technology finally is widely adopted, that is when a massive phase of business model innovation happens.
For instance, we’re still looking at how the Internet-enabled digital economy is still an ongoing explosion.
We might be looking at a similar change and blossoming of new business models with the advent of the Blockchain and crypto-based business models.
That connects to another key point.
Competitive moats are generated around business model innovation
What should you be doing in running your business? Just what you always do: Widen the moat, build enduring competitive advantage, delight your customers, and relentlessly fight costs. With the exception of insurance pricing and coverages, almost all operating decisions that made sense a month ago make sense today
In a memo dated September 26th, 2001 Warren Buffet highlighted the importance of building moat.
For financiers, a moat is a lasting competitive advantage. There was a time when you could build those moats by following Porter’s five forces.
However, the digital era, dominated by platform business models, taught us that competitive advantages sit outside the company’s boundaries.
And the ability of digital businesses to take advantage of those external resources, also wrecked those barriers, making competition way more fluid, unpredictable, and hard to build with the old business playbook.
Therefore, companies like Amazon have learned to take advantage of network effects, and rather than follow a linear logic, designed business models with built-in flywheels focused on customer obsession:
The point here though is not that you have to build a tech giant like Amazon.
Instead, you need to realize that the Internet and the digital era enabled new ways of doing business.
Thus, they are not just new distribution platforms, but they require a new business playbook altogether.
This business playbook revolves around business model innovation.
Business model innovation as a traction model
During the dot-com bubble, Amazon was a company that aggressively invested in growth.
While the company advocated for free cash flows; before the year the 2000s, Amazon was quickly burning cash.
Until it realized it needed to change its business playbook.
Companies that didn’t make it to the fall of the dot-com, had an aggressive playbook, focused on reckless growth and grandiose business plans.
Instead, Amazon started to focus its efforts on building a platform that would have helped third-party sellers to host their own products and services. And at the same time, it started to follow a leaner playbook.
With that in mind, Amazon found its business-model market fit.
When that happens, traction becomes wired to the company’s DNA for a while.
Business modeling as the foundation of Business Engineering
In the last decade, I’ve been looking at thousands of companies, I’ve been building from scratch a few tech business models, and in the process, I have developed my own way to look at the business world.
What I named Business Engineering:
The business engineering manifesto moves along a few key principles, which I outline below:
- A business engineer borrows the customer-centered approach from design thinking but it brings it to another level with customer obsession. Indeed, customer obsession is a bottom-up, non-linear force, able to shape industries in unpredictable ways. The business engineer knows that to go beyond completion, you got to simplify your execution strategy, by obsessing over customers.
- A business engineer borrows experimentation from business modeling, to execute a business strategy, and test the underlying assumptions of a business. Once defined the boundaries of your business (things that go against its mission and vision) everything else needs to be tested.
- A business engineer starts by following the money, but it moves through the layers of a business to find its core asset. In short, understanding the financial side of a business is an avenue into the subtleties to find its core asset.
- A business engineer understands the intricacies of a complex system, where figuring out the problem is the real problem! Indeed, I argue that the main scope of being in business is about figuring out problems for our customers. That is what businesses exist for.
- A business engineer knows that competition in the short term is linear, while it becomes non-linear in the long run. Thus, the business engineer keeps an eye on the long-term landscape, while executing fast, in the short term. Today’s niches are tomorrow’s new industries. The business engineer is aware of that.
- A business engineer knows when to use an incremental approach, and when a breakthrough approach is needed, instead. Indeed, a business engineer might rely on the same tools and frameworks for years, until she/he realizes the business landscape has changed. And in that context, the business engineer will look for, or build new frameworks, based on a new mindset.
What are the primary components of a business model?
Although there is not a single way to define a business model, there is a standard called “business model canvas” which is a good way to start understanding what are the pieces and moving parts of a company’s value creation chain.
Then we’ll look at the FourWeekMBA method of classifying a business model.
The business model canvas perspective
As highlighted in the business model canvas there are seven key ingredients for any business model to succeed:
- Key partners
- Key activities
- Value proposition
- Customer relationship
- Customer segment
- Key resource
- Distribution channel
- Cost structure
- Revenue stream
However, in a world where information technology has become predominant, being agile becomes critical.
In that context, an evolution of the business model canvas, the lean startup canvas has become more accurate to design a business model for a startup.
The lean startup canvas started from the lean startup movement launched by Steve Blank in 2013.
In short, large companies relied and still rely primarily on elaborate planning, with business plans hundreds of pages long, and full of assumptions. Startups primarily rely on experimentations.
Where large corporations invest large resources upfront to design or build up a product or service; Startups use the process of iterative design and agile development, where users help the startup get from MVP to product/market fit.
Whether you decide to use the business model canvas, the lean startup canvas, or develop your own methodology, it is critical to gain a holistic understanding of your business.
Thinking in terms of business modeling is the key to reaching that kind of understanding.
In other cases, a framework like the Blitzscaling might be more suited to assess whether your business or the company’s business model you’ve designed has all the ingredients to scale up, quickly:
In that scenario, you might want to assess whether your business model has been engineered to encompass four key growth factors (market size, distribution, gross margins, and network effects) and avoid major growth limiters (lack of product/market fit and operational scalability).
The FourWeekMBA perspective on business model components for startups
The key components of any business model according to the FourWeekMBA analysis are:
- A compelling value proposition: How do you want your people to think about your brand?
- A unique brand positioning: What do you offer to your people that make them want more?
- A 10x goal setting: Can you offer a 10X better product or service? (compared to existing solutions)
- Customer segments: Who is your customer? (to notice here we’re not talking anymore about people but customers, those willing to pay for your product or service)
- Distribution channels: How do you get your product or service to your customers?
- Profit formula: Is the business financially sustainable?
This business model framework by FourWeekMBA has four aims:
- Simplicity: heuristics-based rather than complex models.
- Noise reduction: choosing a few key data points, rather than looking at a massive amount of data that only adds noise and paralyze decision-making processes.
- Branding and distribution: looking at a business model as a systematic way to build a strong distribution network and a strong brand. The two things walk hand in hand.
- And profitability: the financial viability of a business model is a key element for its success.
In short, according to this framework, there are two dimensions of a business:
- The people dimension.
- The financial dimension.
These two dimensions walk hand in hand.
Yet the people side is also what makes the business thick from the economic standpoint.
The people side comprises the following elements:
- A compelling value proposition: How do you want your people to think about your brand?
- A unique brand positioning: What do you offer to your people that make them want more?
- A 10x goal setting: Can you offer a 10X better product or service? (compared to existing solutions).
This people dimension will help you build a solid brand. A solid brand builds up a tribe, a group of people that can follow you anywhere.
Once you have a solid brand, you can focus on the second dimension: the financial dimension.
The three elements of the financial dimensions are:
- Customer segments: Who is your customer? (to notice here we’re not talking anymore about people but customers, those willing to pay for your product or service).
- Distribution channels: How do you get your product or service to your customers?
- Profit formula: Is the business financially sustainable?
The FourWeekMBA VTDF Framework to dissect tech companies
The VTDF framework breaks down tech business models into four main components:
- Value model (value propositions, mission, vision),
- Technological model (R&D management),
- Distribution model (sales and marketing organizational structure),
- And financial model (revenue modeling, cost structure, profitability, and cash generation/management).
Those elements coming together can serve as the basis to build a solid tech business model.
How many types of business models exist?
We can classify business models in several ways.
For instance, based on how companies and startups monetize their business, how they deal with their suppliers, customers, and the value proposition those companies can offer to several stakeholders.
Some business models have always existed, some others are new, others yet innovate by bringing old business models to a new industry (take the Netflix business model case study as an example).
In this guide, we’ll see several business models based on successful companies, tech startups, and also more traditional organizations.
The aim is to give you an overview of all the different moving parts that comprise a business model.
In some cases – take Microsoft or Amazon – there isn’t a single way to describe a business model, as some companies have been able to diversify so much their operations to be able to generate value propositions across several stakeholders across many industries.
For instance, Microsoft isn’t just the company selling Microsoft Office products.
True, that is still an essential part of the business, as of 2022. Yet, Microsoft has many other segments, that are independent of others, and some others that are complementary.
From a quick look at Microsoft revenue breakdown from 2016-to 2018, you can appreciate the changes the company has gone through and the complexity of its business model.
Indeed, while Microsoft Office is still the core of the business, other products, such as Xbox, might seem at first sight completely separate segments.
However, when you understand that Microsoft’s involvement in the gaming industry has proved as a perfect ground for AI systems; you can appreciate how the Xbox becomes the perfect “playground” for innovation in the other company’s segments!
Take also LinkedIn, a social media network for professionals. If you look at it merely as a social network, you don’t realize the importance of LinkedIn on Microsoft’s overall business model.
In fact, LinkedIn, which is powered by a knowledge graph might be playing a critical role in Microsoft’s search engine, Bing.
Or take how Amazon back in 2000 was trying to figure out a way to allow other stores to build their e-commerce on top of Amazon, yet it was impossible to do that with its infrastructure at the time.
That is why Amazon started to develop that infrastructure, which has now become Amazon AWS:
In 2017, Amazon AWS represented the fastest-growing segment of the company, and it generated over $17 billion in revenues!
Why am I telling you that? As highlighted so far, a business model can be designed.
Yet, most of it is about tinkering and experimentation. Thus, the business model design is a tool to accelerate the process of building up a sustainable machine that captures value in the long run. The key though is to leave that machine unleashed.
How do you understand the way the business model moving parts come together? What is the glue that keeps them together?
Vision vs. Mission: why understanding the difference between them is important
There is one key ingredient of any company’s business model that seldom changes, that is the company’s vision.
While the company’s mission statement might change over time, the vision sticks.
The main difference between mission and vision is about the present and future. The mission is the way the company wants to achieve its objectives now and its purpose in the present.
Take the Google mission statement:
In other words, the vision is the map, that influences the company directions and decisions for the future.
The mission is about how the company wants to achieve its objectives, thus getting closer to its future vision, in the moving present.
That is a tool aligning the key players of an organization (employees, suppliers, customers, and more), while it allows the forming of a culture within the organization.
The mission statement instead might have two functions, one is internal, and one is external. Internally, the vision aligns with people around the same map.
Externally, the vision allows outside observers to understand why an organization might be looking in a certain direction.
Therefore, the vision is “organizational DNA.” Once the vision is clear, you might not even need a mission statement to succeed.
Even though the mission statement is a critical propeller that helps companies focus on short-term success.
Going back to Google’s mission statement “to organize the world’s information and make it universally accessible and useful,” that allows Google to focus its efforts to achieve its future vision.
For instance, when Google announced its transition from mobile to AI-first that hasn’t changed its mission.
That only represented the means to achieve its mission.
The New Era of AI Business Models
In the fall of 1999, one of the most respected venture capitalists of Silicon Valley, John Doerr, arrived at the two-story L-Shaped building on the 101 freeway, in Palo Alto, California.
There, he was about to meet the founders of a company that was growing so quickly, which just two months before had moved from a small office in downtown Palo Alto to this new building on the 101 freeway.
As John Doerr explained in his book, Measure What Matters, he had placed the biggest bet in his nineteen years career as a venture capitalist, $11.8 million (which Doerr called a wager) for 12% of that startup, which had outgrown its Stanford dormitory, just a year before.
The two founders of this startup, which was just a research paper and a prototype just a year before, convinced Doerr to place such a bet by presenting him with 17 slides in PowerPoint, which represented their whole pitch.
That small startup was tackling a market – that of search – which was already crowded (they entered as the 18th search engine on the market); it seemed irrelevant (most players at the time were walled gardens like AOL, which believed that search was a minor feature of the growing Internet); and a good chunk of search players mainly featured advertising as results to users’ queries, which made search even less interesting.
The two founders had created a new algorithm for search, which they promised, would turn search engines into more exciting tools able to keep up with the exponential growth of web pages.
To make a final call on his investment, venture capitalist John Doerr asked the two founders how big they thought their market could be.
This is a typical question for venture capitalists as they place bets since it enables them to guess the size of the new market they are investing in.
Doerr had already been thinking about that, and in his mind, a market cap of $1 billion would have been an incredible achievement for that startup and a great payoff for his investment.
Yet, one of the two founders, Larry, replied to Doerr with “Ten billion dollars.”
A bit confused, Doerr made sure he got it right, thus further asking Larry, “You mean market cap, right?”
And Larry replied swiftly, “No, I don’t mean market cap. I mean revenues.”
That implied a potential market cap of $100 billion, which at the time was the capitalization of Microsoft.
By 2006, as that startup had figured out a scalable business model for its search engine, it had passed $10 billion in revenues. And today, that company, Alphabet, which controls Google, is a trillion-dollar company.
That $11.8 million investment for 12% of Google, which John Doerr bought back in 1998, would be worth more than a hundred billion dollars today!
Google was a breakthrough product.
Indeed, in 1998, its founders, Page and Brin, created an algorithm called PageRank, explained in a paper entitled, The Anatomy of a Large-Scale Hypertextual Web Search Engine.
That was the birth of Google!
Yet the paradigm shift came when Google combined its search engine with an incredible advertising machine, which by 2021 generated over $148 billion.
This new architecture of crawling, indexing, and ranking gave Google the ability to scale. Thanks to the Page Rank algorithm, users’ searches and intents could be ranked and easily found on the web, which was growing exponentially.
Back then, both Brin and Page were quite skeptical about the advertising model for search.
As they explained at the time to, “we expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.”
Thus, as usual, when a new technology comes out, even if a breakthrough, it’s not enough to become a paradigm shift.
We see a paradigm shift when a technology finds a scalable business model and a scalable (built-in) distribution model.
That generates a seismic shift of the business landscape, which doesn’t just change things; it flips them upside down, shaking entire industries and creating whole new ones able to swallow the existing ones.
This, I like to call the “Reverse Kronos Effect!”
Credit: Francisco de Goya, Saturno devorando a su hijo
Indeed, as I explained, in Business Engineering the Kronos Effect happens when the incumbent player in an industry tries to maintain its dominant position by swallowing early entrants in a market (a perfect example is the Facebook acquisition of Instagram).
Yet, the “Reverse Kronos Effect” happens when the insurgent startup, is able to move so fast, thanks to a radically new technology, and yet iterate even faster, in building a scalable business model and distribution, which shifts the business landscape quickly, thus leaving the dominant player off-balance, in a position of weakness.
And the momentum gets so strong for the insurgent, that the dominant player can hardly keep up, let alone, regain the lost ground.
That is a paradigm shift. When the old playbook won’t work anymore. And not only that, the old paradigm might actually be limiting, and play in favor of the disruptor.
When ChatGPT came out in November 2022, this was a breakthrough.
The interesting part of it?
A good chunk, of what made ChatGPT incredibly effective is a kind of architecture, called “Transformer” which was developed by a bunch of Google scholars!
Thus, this, potential “Reverse Kronos Effect” is even more powerful when you think about the fact, that Google, might have had the technology to launch something similar to ChatGPT, probably already by 2021.
And yet it didn’t (here there are various considerations to make, from risk assessment of deploying AI at scale, but also risk aversion of Google, and fear to cannibalize its own core product, Google’s search engine, which to these days is a cash printing machine for the company).
Just like Google represented a breakthrough in the Internet paradigm back in 1998, ChatGPT represents a breakthrough in the current web paradigm.
A search engine experience is made of a user searching for an answer thanks to a crawling, indexing, and ranking system, which Google maintains at scale.
With a generative interface like ChatGPT, that paradigm is threatened as answers can be given on the fly without having to (necessarily) rely on a crawling, indexing, and ranking system.
Instead, OpenAI’s architecture relies on pre-training, fine-tuning and in-context learning.
Once this architecture finds its business model and built-in, scalable distribution, you get a paradigm shift!
Thus, this is what we’re looking at—a breakthrough product looking for its paradigm shift.
How did we get there?
Below you find the architecture that brought us here.
