Almost a decade ago in 2011, Marc Andreesen published his seminal essay on Wall Street Journal, “Why Software is Eating the World.” With the dominant tech companies and latest developments in Internet technology at that time, he illustrated a world where industries are powered and dominated by software companies. It was also an invitation for investors to look beyond market valuations — and the “bubble” pundits feared — towards what Marc considered the real value of the best technology companies.
Software continued to eat the world, in new forms and new regions
And over the past decade, the appetite of software companies hardly ever slowed down. Software companies have become capable of influencing social and political norms (eg social media platforms), bridging the internet and the physical world (eg Internet of Things), and capturing the entire alphabet of ubiquity (eg cloud computing and services).
The voracious appetite of software has not only rapidly grown in terms of capability but also scale. The digitalisation rush reached regions like Southeast Asia and Africa and countries like India saw more homegrown tech entrepreneurs setting up shop locally.
Last year, this business of eating the world had begun to show signs of wearing out with a slew of high profile hiccups and disasters, from misreported finances to overblown speculation on companies. The value of growth for many market leaders landed scrutiny from the public markets. Even without a novel coronavirus wreaking havoc on the world, investors were already expecting a correction. As 2019 closed, investor sentiments were already shifting from unbridled to measured growth with the headline WeWork/Softbank debacle.
With the impact of the coronavirus, the narrative of the software company is at a crossroads. On one hand, software is being served more to consume as consumers and businesses undergo forced adoption of internet products and services. At the same time, the economic shock to business is also whittling down the appetite of software’s consumption from the supply end.
Software will continue to eat the world, faster than ever before. Recent events have sealed its trajectory in that regard, as more people use online and digital tools. Recent events also present an opportunity and even an onus to change how it eats the world.
The messy affair of moving fast and breaking things
Disruption and digitalisation is a creative endeavour. It is also a messy affair. It requires navigating consumer expectations, regulations, and physical supply chains, among other things depending on the kind of industry the company is in.
These barriers have created friction against the Silicon Valley early-stage startup ethos of moving fast, more so in regions where the barriers to digitalisation run deep, like unbanked communities.
Under pressure to speedily overcome these barriers and feed the software wolf, many companies have ended up making disastrous trade-offs — trading in transparency for efficiency, data for speculation, focus for fanfare, or reality for a billion-dollar narrative.
Then when the company finally can’t afford to keep growing unchecked, it crashes into a proverbial iceberg and sinks into a cul-de-sac of troubles, from layoffs to legal charges and in some cases, closure. The glorified scale becomes its own undoing, eroding the potential value its mission of disruption had in the first place.
At times, the race to create efficiencies for a platform has also created insidious “inefficiencies” on the part of consumers online, from privacy hacks to data leaks and fraud.
If the company does manage to stay afloat — or proves to be too massive and too widely used to take down — then it faces the pressure to incorporate stability and structure (almost 180 degrees from the kind of pressure venture-backed early stage startups normally face). This can be a challenging feat for companies without the early fundamentals and a disciplined culture.
Changing eating habits
While not the mean behavior of a company in general, the rapid growth environment that accepted the risks of letting the lack of fundamentals slide resulted in these messy side effects. Some companies have even taken advantage of this enthusiasm and willingness when it comes to growing software and technology companies to secure massive valuations and megarounds on top of faulty information and hollow business models.
The current conditions for fundraising and business in general are no longer capable of fuelling growth without fundamentals. Even though there is a lot of dry powder among funds picked up from last year, financial capital is being distributed more strategically as these funds also look to defend their existing portfolio.
As external sources of capital contract, companies are forced to re-organize and become more independent and structured in their growth (read: survival). Companies can’t afford to take the risk of making a mess while they pursue market share and drive adoption. Eating habits have needed to change, and are changing.
Teaching the new dog old tricks
Peter Thiel’s book, “Zero to One,” comments on the internet bubble of the late 90s and how this changed views on what it means to build innovative business. In particular entrepreneurs who went through that period learned the value of being lean, moving in intentional, incremental steps, and focusing on product.
These lessons on getting from “zero to one” have become gospel for startups over time. But as more incentives and pressure built up to get from “one” to exit and the available outside capital to fuel this growth pushed companies even further, these values gave way to compromise for the sake of growth and goals.
COVID-19 is an opportunity for this new generation of companies to learn firsthand the old tricks from previous downturns. Indeed, those that have managed to stay lean, innovate incrementally, and focus on product eventually emerged as market leaders post-recession. The Alibaba’s of this world, precisely because they had to hunker down and focus on creating a valuable product in their early days, came out as better suited to growth. Even companies that have grown massively in the past decade but are now hit hard will likely go back to their roots as well.
These old tricks are manifesting in new ways as business models emerge to tackle the relatively uneaten areas of the world — market-specific sectors like healthcare and education or the rural economy in Southeast Asia. Now that the world of social distancing has gone under forced adoption of the internet, the traditionally offline segments of economies will be new proving ground for this generation of companies going through the COVID-19 crisis. These companies, if they are equipped with these old tricks through this crisis and learn from their peers and predecessors, will be more prepared to venture into these uncharted waters.
Even though there is much to learn from the past, the impact of the crisis on consumer and business behavior present a unique opportunity to face very different future — a new normal — as software companies to rethink their assumptions, expand their operational capacities, and come up with better (read: less messy) ways of eating the world.
The abrupt changes to business operations are forcing lending fintechs to reevaluate credit scoring and basis for lending to customers and businesses. Logistics startups are starting to think more about how to quickly adapt to scenarios where there are disruptions along the supply chain.
Streaming and communication technology platforms are working with implications of scenarios where they are facing several orders of magnitude more traffic than they had ever expected — from privacy breaches (Zoom) to website slowdowns (Netflix, Youtube).
Ecommerce providers are being forced to implement new safety guidelines for employees in warehouses. Social media startups are coming up with ways to battle misinformation and support efforts to help frontliners, promote social distancing, and spread facts about the pandemic.
Governments are also trying to manage these changes as their very institutions are also forced to run countries and economies online (UK’s first digital cabinet).
Although these changes seem temporary and particularly suited to COVID-19, the hope is that it will make this and future generations of software companies more mature and equipped to handle a variety of scenarios and environments.
At the core of these changes will be a shift towards technology and business models better suited to flexibility and optionality, especially in industries where it is difficult to achieve either.
Asset-light but relationship-heavy
For the technology platform company, this new normal will reflect in how they support the networks that enable them to grow. Over the years we’ve seen how successful technology platforms have managed to grow fast by being asset-light, vis-a-vis their offline or traditional competitors.
But part-and-parcel of being asset-light is gaining the trust of a strong network — be it renters, merchants, or even individual consumers. It is these relationships that are at the core the platform’s success.
In Southeast Asia, the impact of the coronavirus has proven to be a defining moment for these relationships. Grab and Gojek recently cut down on rental fees and commissions to support their drivers. One of our own portfolio companies, Carro, a car marketplace, cut private hire rental rates by up to 50% together with 20% payment deferment to help their private hire drivers.
One can see this as an effective strategy to driven retention on the platform, especially on the supply side, but these initiatives are also inherently beneficial for the economy. It supports the many workers and businesses who depend on these platforms for survival, and can encourage other players to do the same.
Eating the world post-COVID19
Granted, there’s a reason why market cycles are cycles. And as many scientists have repeatedly warned, COVID-19 will not be a one-off for the world, and this doesn’t even consider the many other global challenges humanity faces.
But this is precisely why software companies need to change the way they eat the world — not just for the survival of their own business, but the positive impact it can bring to the people and organizations that use their products. Every new crises survived adds on to the value of the company and the ecosystem-at-large.
For Southeast Asia, whose recent rapid growth faces its first winter, startups and investors are hopeful having seen previous market cycles that this will give birth to green shoots that will become the enduring companies of this decade.
Not all business will make it through, but those that do will be left transformed. More importantly, they will also be better equipped to transform the world.