“The Business Model Of The Next 10,000 Startups”

With technology, it’s easy for investors to miss the important thing.

With technology, it’s easy for investors to miss the important thing.

One reason is that new tech comes thick and fast. Most of it isn’t even that important. Every year there’s someone touting this or that new widget, with the potential to change the world and make investors rich.

Of course, most of the time the story doesn’t pan out. As a result, investors get sceptical about any technology story.

Another reason is that important new technologies are hard to wrap your head around. State of the art new technologies are by definition complicated. So a business with huge potential is sometimes hiding in plain sight, because investors don’t understand what they do.

I’m thinking of companies like amazon.com or Tesla Motors here, which escaped investors’ attentions for years before they became giants.

Well, I’m here to tell you that a big story is happening right now. Let me tell you about it.

Twice A Century

The point is that it’s hard to see the wood for the trees when it comes to new technologies.

To understand what’s going on you need to know about the hot new trends. But you also need perspective.

Venkatesh Rao is someone who has perspective. He’s written a giant 20,000 word essay about how technology is changing society, called “Breaking Smart”. If you’ve a couple of hours to spare it’s a good read.

There’s a good part in the essay where he puts today’s technologies into historical context.

“After written language and money, software is only the third major soft technology to appear in human civilization. Fifteen years into the age of software, we are still struggling to understand exactly what has happened. Marc Andreessen’s now-familiar line, software is eating the world, hints at the significance, but we are only just beginning to figure out how to think about the world in which we find ourselves.

“Only a handful of general-purpose technologies – electricity, steam power, precision clocks, written language, token currencies, iron metallurgy and agriculture among them – have impacted our world in the sort of deeply transformative way that deserves the description eating. And only two of these, written language and money, were soft technologies: seemingly ephemeral, but capable of being embodied in a variety of specific physical forms. ”

That essay is a few years old now. But I’ve been thinking about it a lot recently as I learn about the technology of machine learning.

Machine learning is, of course, a type of software. But it’s not software in the way we’re accustomed to thinking about it. It’s qualitatively different. It’s better. It can do things that software has never been able to do. And it can be used in lots of things, from Google’s state of the art search engine to a tiny company based on an industrial estate just off the M4.

That’s what’s been reminding me about Venkatesh Rao’s essay. Machine learning is special not because it’s so complicated (though it is) or because it can do impressive things (though it can). It’s special because, as Rao put it, it’s general purpose.

You can use the technique for just about anything. And lots of companies are doing just that.

That’s why, as investors, you can’t afford not to understand this.

Machine learning isn’t just a chin-stroking ten minute read from the Science and Technology section of the newspaper. It’s starting to appear everywhere.

The writer Kevin Kelly puts it like this:

“The business plans of the next 10,000 start-ups are easy to forecast: take X and add AI”.

That’s a big deal.

AI is going to be the big story over the next decade…

Which is why it’s so interesting that, thanks to our world-class universities, Britain is fast becoming the world-leader for developing breakthrough technologies in the field.

[cfsp key=”daily-reckoning-signup”]

Why talented nerds are flocking to London

Take, for example, a nondescript warehouse on the Hackney Road, London.

I turned up one evening. Up the stairs and down the corridor, I came into a room full of people, tangled cables, lights, industrial machines, beer. Lots of activity.

Down in the basement, people were fiddling with radios, bending steel and carving wooden tables. Tools everywhere. Laptops on every table.

This place is called the London Hackspace…

It’s a voluntary organisation, and a place for hackers and nerds of all stripes get together and do their stuff. Members pay around £15 a month to keep it running.

It’s a place to solder metal, program a drone, teach a computer how to read, tinker with nerve cells, carve beautiful wooden joints, pick locks, compose glitchy electronic music, and do very hard sums.

This kind of stuff goes on a lot in London, under railway arches and in pubs’ upstairs function rooms.

According to Meetup, a social network for organising events among strangers, London had 160,000 technology-related meet ups last year. That’s by far the most in Europe – as much as the next four cities combined.

American techies head for the Bay Area, but in Europe, London is the place to be. It’s where the money is (five times as many angel investors as its nearest rival), where the success stories are (more billion dollar startups than anywhere else), and where the talent is (far more developers than anywhere else). That’s why talented nerds end up in London, in clubs like the London Hackspace.

That’s why I think this is the perfect time to be investing in what I call “Penny Tech”. This is an area of the UK technology scene that’s still not realised its full potential and could soon be set to rocket…

The Agglomeration Effect

You see, the technology industry is a bit like the finance industry…

It wants to be in one place. It makes sense to have lots of experts and lots of ideas close to each other, so they can learn from each other, and poach each other’s talent and spin off new businesses.

That’s why every medium sized city doesn’t have a technology industry. Lots of medium sized counties don’t even have one.

Economists call this the “agglomeration effect”.

So why did the tech industry settle in London instead of Berlin or Dublin? It’s impossible to say for certain. But it’s probably something to do with the diversity of London’s economy…

Whereas northern British cities were built around one big industry, London’s always done a bit of everything – manufacturing, finance, shipping, tourism, government, media, academia, healthcare, and now technology.

Speaking to the venture capitalist firm Andreessen Horowitz, here’s how London-based software engineer Nick Babaian described it:

“What’s interesting about London is… it’s the regional hub for a bunch of other industries. Especially industries which are being changed by technology – advertising, finance, the list is long. That’s a healthy thing for a [technology] ecosystem to have – a lot of other industries that are also powerful and important.”

That’s good for London because it means there’s a big range of skills and ideas nearby. But it means technology companies have to battle for the best talent.

Matt Clifford runs an “incubator” where startup technology companies get their start, and he says the best young workers are starting to choose to work in tech:

“What do the most ambitious people in society want to do with their lives? Historically in London the most ambitious people wanted to be bankers. [But] It is changing very quickly. Four years ago 65% of computer science grads wanted to become bankers. Now it’s 10%. And the delta is very much driven by tech, by startups.”

The vibrant London technology scene is getting attention. You’ll have seen the headlines recently: Google ploughing £1bn into a new London HQ, Apple moving into a giant space in Battersea power station, Facebook increasing its London headcount by 50%.

You might not have noticed smaller stories like Google and Twitter acquiring a London AI startups for £400m and £150m…

There is lots is going on behind the scenes.

That’s the thing about agglomeration effects. Once a place gets established as the tech / finance / insurance / media capital, it’s very hard to budge it.

The talent attracts more talent, which attracts more investors, which creates more success stories, which recycle their know-how and talent back into the system. That’s happening in London…

And the fire has been lit.

To find out more about the burgeoning tech scene happening on our shores – and, most importantly, how you can invest in it – click here.

Best wishes,

Sean Keyes
For The Daily Reckoning

You may like

In the news
Load More