Why Today’s Most Disruptive Startups are Taking a Vertical Perspective
The most disruptive technologies today are horizontal platforms — computing, the Internet, CRM systems, databases, social media, mobile technology, the cloud revolution, payment gateways… Even in their incubatory stages, they became platforms that could be applied to just about any industry vertical — Retail, Manufacturing, Automotive, Financial Services, etc. Of course, Silicon Valley likes horizontal platforms — many of the giants fit the description — Google, Apple, Oracle, Facebook, Intel, and so forth. They can serve broad industry verticals, making the target market size larger and insulating the company against macroeconomic downturns in any one vertical.
But while technology companies continue to strive for incremental horizontal disruption by creating newer horizontal technology stacks, traditional industries are still mainly consumers of broader technology. They have adopted computing, internet, mobile, and cloud solutions, etc. to streamline their operations, increase productivity, reach their customers better … but many of these verticals have not been truly and deeply disrupted. That is, the fundamental nature of how the industry operates has remained largely unchanged.
But once in a while, something fascinating happens. Startups create vertical solutions by combining several horizontal platforms and taking advantage of emerging technology stacks to put together a novel vertical platform. And these aren’t just enabling technologies in the traditional sense — that an industry can take and adopt. These are Tsunamis that knock over an entire industry and force it to re imagine and reinvent itself. What comes out on the other side is a completely new industry with new stakeholders, new customer experiences, different economic scale and highly efficient productivity curve.
What happened in retail over the last 20 years is a perfect example. Retail has been around for several centuries and has pretty much stayed the same. Of course, they adopted technologies to drive efficiencies but never to the extent to reinvent itself in a fundamental sense. Startups combined a variety of technology elements — internet, digital payments, computing, databases and added retail specific tools like logistics-tech, collaborative filtering, and personalization to deliver an end to end experience that was fundamentally different from the retail ecosystem of the past. The resulting end to end stacks progressively revolutionized retail to create Digital Commerce — with new customer experience, supply chains, stakeholders and winners — creating multi-Billion dollar asset classes around the world.
Some of the best opportunities for value creation now exist at the intersections between existing broad horizontal technological platforms and specific industry verticals– particularly in some of the traditional industry verticals. Just like retail, there are similar inflection points for several other industry verticals (for example, the medical industry about to experience exponential AI driven growth). Today, there is a critical mass of disruptive technologies available, and the potential to create value and disrupt an industry is at an all time high.
One of the main drivers for this inflection point is the evolution of the smartphone ecosystem of the last decade. With a volume of 1.5B smartphones a year, every hardware element has become cheaper, faster, and better. Computing elements, connectivity, cameras, memory, and sensors are better than ever and far cheaper. Software platforms and the application ecosystem are now extensive and robust. Today, between Android and ioS, there are millions of apps that solve most of the problems that can be imagined.
Putting together a full stack product using the hardware and software elements from a smartphone has a lower barrier to entry than ever before. Benedict Evans of Andreessen Horowitz compares smartphone components to a container full of lego blocks. With the lego blocks of hardware components, software platforms and the apps, entrepreneurs can put together full stack solutions that produce massive ROI and are incredibly fast to market. This enables disruption of industry verticals where disruption was not previously economically viable.
Using this perspective, even apparently advanced technologies can be seen as composites of made from building blocks that are now commonplace. Drones become nothing more than flying smartphones. Robots are nothing but screen-less smartphones with a mechanical arm. In short, when you take all the aspects of the mobile hardware and software — and you add in the emerging disruptive technology stacks of AI and Machine Learning, AR and VR, and additive manufacturing–highly robust, cost effective, and quick-to-market solutions emerge that can disrupt an entire vertical.
At MFV Partners, we exclusively focus and invest in startups that are driving such industry vertical disruption. We believe industry verticals like Automotive and Transportation, Manufacturing and Industrial, and Knowledge Services will go through significant transformation over the next 2 decades. For example, with electrification, connectivity, Driver Assistance Technology, autonomous vehicles and Shared Mobility, the Automotive and Transportation industry is going through significant changes — in 10 years it will look very different from what it is today. Similarly, industries like Agriculture, Manufacturing, Industrial will be fundamentally transformed– creating opportunity for new startups (and investors).
We look forward to discovering, engaging, and backing the entrepreneurs who will be pushing the envelope in these industry verticals. Their ability to combine horizontal advances in technology and apply them to industry specific contexts will disrupt entire verticals, driving exponential value creation and providing unmatched return on investment for investors savvy enough to recognize the opportunities for vertical disruption.
Pattern recognition using Neural Networks has come a long way – When I first got exposed to it almost 25 years ago, a 500 node Neural Network would take days to train and would perform pathetically compared to a standard Bayesian classifier. The explosion of computing power, especially the parallel processing power in the GPU’s, has made training of large, deep neural networks possible. Given the computing power and the advent of various flavors of Neural Networks, many of the pattern recognition problems are well solved today. Image Recognition and Speech recognition have reached near 100% accuracy because of these deep models.
As a fund, we were looking at pattern recognition problems using AI, especially as applied to industry verticals. Our thesis was that to create significant value, technology needs to go beyond images and understand higher level context – actions, sequence of actions … If a system can recognize a complex context, spanning arbitrary time frame, that would be powerful and can be applied across variety of settings and industries. However, as you go towards understanding of complex contextual situations, the problem gets exponentially harder and requires lot more than just computing power. We were looking for companies that would tackle this problem. We didn’t find very many companies.
About a year ago, Nagraj Kashyap and Samir Kumar from M12.vc introduced us to Roland, Moritz and the TwentyBN team. Right off the bat, in the very first meeting, we were impressed with their technology and vision. The team came with a great pedigree as Roland himself was one of Geoff Hinton’s students. TwentyBN had spent a lot of time at the problem of understanding actions and context and built a solution from the ground up. If recognizing context and actions itself is a hard-enough problem, they were taking it one step further and solving it in real time and at the Edge. To say that we were hooked, would be an understatement.
As we started working with TwentyBN, we got to know the team better. Every company is a journey. I have rarely seen a startup go in a straight line in terms of direction, focus, milestones or scale. There is constant evolution and course-corrections and setbacks and adjustments – learning from the market, customers, investors and team members. It is a fine balance though – management team should be willing to take feedback and course-correct, but not so fickle that they are flip flopping on focus every day. They need to have strong conviction on the value they bring to the market but not too stubborn to listen to what the market is saying. In my experience, the companies that reach greatness are the ones that manage this fine balance. Working with the TwentyBN team through the last 12+ months, we were impressed with the team’s willingness to take critical feedback while being steadfast on their conviction and execution. We watched the team launch the Digital Avatar product, Millie, based on their underlying technology with a focus on Retail. The company in turn, has been recognized by CB Insights as a Top 100 AI company and Top 5 Retail AI company.
One aspect we look carefully when investing is the composition of the board – it is often underestimated. Having investors around the table that help with the company’s journey and can make decisions quickly and decisively is essential. Between Peter, Samir, Christian, Alex and Lior, we are very excited to have a great set of investors and people on the board.
It is fair to say we are very bullish on TwentyBN and the value that they bring to different industry segments. We believe that they are creating a new category with their technology. I am sure there will be lots of excitement, learning, setbacks and wins along the way and we are excited to be part of the journey ahead with TwentyBN!