I have been discussing a concept called “The Velocity of Obsolescence” periodically over the last year in our partner meetings and with venture colleagues and was asked to share it for discussion. Essentially the concept speaks to the rate of speed that an innovation and/or the competitive advantage of an innovation will lose its value. Innovations may be in technology, product, sales, marketing, and so on. Ventures typically have many innovations they rely on at any one given time and each has a “shelf life” from its inception.
I believe the Velocity of Obsolescence has been accelerating dramatically in early stage ventures of web enabled services and this has significant ramifications for venture funds and portfolio companies.
Obsolescence is accelerating for a variety of reasons. Web infrastructure “plumbing” is now stable, enabling companies to launch with greater capital efficiency. Underlying business models have been proven so that we now see exciting new versions or extensions of them. Data has never been more easily available, especially with the growth of APIs, to leverage for value. The web has become ubiquitous, thanks in large part to broadband, wireless and the current shift to mobile. Time to market has accelerated greatly and large companies are willing to be beta-test customers for start-ups. It has never been faster and cheaper to start a web services company. There are a multitude of professional funding sources for start-ups. Start-ups can become large companies in a very short period of time. And so on.
In a very real sense, due in great part to the factors above, the velocity of innovation has increased dramatically which is itself a key variable in the velocity of obsolescence. Moore’s Law states that the number of transistors that can be placed on an integrated circuit will double every 24 months. Stein’s Law states that if something cannot go on forever, it will stop. What is the law for The Velocity of Obsolescence and are we in an acceleration mode?
An early stage web services company has a set amount of time to execute on its innovations (build, go to market and start to scale to gain defensible market share) before forces such as competition, market developments, technology advances, etc. render some portion or all of the initial innovations obsolete. The venture must continually innovate upon their initial innovations to stay ahead of the incessant waves of obsolescence approaching from all sides.
Web enabled services only really got going about fifteen years ago. In my experiences as an entrepreneur and a VC across that time, I think fifteen years ago a venture with innovations had about forty-eight months. That means if a good venture did not innovate upon its good initial innovations, on average after forty-eight months the venture and/or its innovation(s) would be obsolete. I think ten years ago it was probably thirty-six months. I think five years ago it was probably twenty-four months. I think today we are at about eighteen months. Interestingly time-to-obsolescence has probably been occurring faster as time itself progresses. This is the Velocity of Obsolescence and it has been accelerating. Time-to-obsolescence for a good innovation can never achieve zero and eventually the curve should flatten out, but we are not there yet in early stage web enabled services.
This affects our fund strategy and probably other funds in a number of ways. Entrepreneurs will require greater experience in the sector to be able to build quickly and innovate constantly. Venture funds are better being focused so they can add-value and help accelerate their companies as opposed to being generalists who police them. Valuations are best set to keep options open for future financings and/or exits so the venture can make fast choices and not be hamstrung into a forced binary path of success or failure. These are just some of the strategies to deal with a market in which the Velocity of Obsolescence is accelerating.
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