Wile E., the hapless Coyote in the Roadrunner cartoon, never gets discouraged – a trait I admire.
Give Wile E. credit for his innovative schemes and clever subterfuges to capture the Roadrunner. His horrible results come from his reckless optimism. Wile E. never anticipates anything short of a feathered meal. He prepares one tactic at a time and seems unconcerned that something might foul up his idea. “Plan B? What’s that?” Alas, failure will plague him into perpetuity. Roadrunner’s storyline won’t allow him to correct his mental flaws. I understand. Learning would ruin the plot.
Inability to perceive risk is embedded in Wile E.’s endearing stupidity. Sure, he recognizes failure, but only after he accidentally collides with a boulder, or falls off a cliff. Through it all, Wile E. rebounds, calamity after calamity – a repetition that I find unexplainably hilarious.
Now imagine Wile E. as an investor, plotting get-rich-quick financial schemes. Maintaining the Roadrunner theme, he loses everything, but emerges able to recoup his squandered fortune. Repeat. Somehow, the jocularity evaporates. “Hey, this is serious. We’re talking money!”
Nobody has approached me about writing a cartoon script around this theme, although I’m up for the challenge. I’m guessing that when it comes to investing, most prefer to hear a cautionary voice, with a distinctly clairvoyant accent. The anti-Wile E Coyotes. People want to learn from investors who have failed and have the scars to prove it, but have turned that experience into success and predictive knowledge. That baseline story doesn’t make a great cartoon, but it does make a hit meeting for investors and business developers.
On February 3rd, The Mid-Atlantic Venture Association (MAVA)’s 2016 Crystal Ball Breakfast delivered it. This year’s speakers – Arun Gupta, Todd Klein, Sean Mallon, and James Socas – shared insights about some of this decade’s most breathlessly promoted tech gee-gaws: cyber-security, media and entertainment, unmanned aerial systems, and the Internet-of-Things (IoT). Even writing about them causes my heart to race! For confirmation, I didn’t check the display on an Apple Watch, because I don’t own one. I performed this diagnostic the old fashioned way: two fingers on the opposite wrist, counting my pulse for fifteen seconds, and multiplying by four. My reason for mentioning will become clear in a moment.
At the breakfast, hype was refreshingly absent. As for clairvoyance – I’m withholding judgement until the fairy dust settles. That won’t be until February, 2017. After all, who wants to be accused of reckless optimism?
Arun Gupta, Columbia Capital
Cyber Security Sector: Oversaturated or Opportunity?
Gupta believes the market is over-saturated, over-funded, and confused – a “game of clones.” Yet he thinks the cyber security is not a fad, because the threat is real, complex, and becoming worse. “The average data breach costs [companies] $3 million,” Gupta said.
In the cyber security market, “there was $2.5 billion funded in 2014, and $3.2 billion in 2015. There are now 1,200 private cyber-security companies.” He shared that fewer than 10% of them generate more than $20 million in annual revenue. “It’s an over-funded industry going after the same market . . . In the next 12-18 months there will be a reckoning – a bloodbath.”
The reason? “People who start cyber-security firms have an intellectual arrogance [about their technology], but the buyer isn’t that smart. The buyer is asking, ‘Can’t you help me with basics?’” So, for vendors, marketing will matter more than providing the best technology.
Industry revenue is growing at 5% per year. One reason is that changing enterprise risk topology introduces new cyber vulnerability points. “If you can get out of the noise, the opportunities are massive,” Gupta says. “[Cyber] security isn’t ‘man versus machine, it’s man versus man, and that adversarial relationship is more sophisticated and increasingly difficult to address. There’s different terrain, including nations versus companies.” Gupta believes this new landscape favors teams that can execute, an attribute he looks for in cyber security start-ups. What characteristics does Gupta recognize in the ones that succeed? They:
1. have strong cross-functional teams.
2. think about vulnerabilities more broadly, including networks, and people.
3. shift from developing products to offering hybrid solutions and services.
4. have a mindset of playing offense, not just defense (i.e. actively hunting adversaries on the network).
5. move to a risk management approach for cyber security. “No IT executive is going to say ‘nobody’s getting into my network.’ Risk management means being able to protect different corporate assets differently.”
Todd Klein, SWaN & Legend
Media Disruption: Where’s the Next “Mr. Robot” Coming From?
“$60 billion. That’s equal to the amount of market capitalization lost by major media stocks in the last six months, which is about thirty SpaceX’s,” Klein explained. At the same time, about $25 billion in market cap has gone to Amazon, which launched Amazon Prime video. This shift has happened because,
1. “Digital is eating traditional media.” Today, there’s cable cord-cutting and “cord-never-having.” And without subscriptions, “traditional media has no business model.”
2. Digital platforms can and do provide alternative content that customers want. Therefore, new networks sprout. “Netflix and even messaging applications are becoming content channels. For many young people, their first experience with media is on phones. Expectations are different.” Netflix has 70 million subscribers who spend an average of 60 hours watching per month. The next closest network is half that. Imagine – “Apple TV is considered a failed platform with 35 million subscribers [italics mine].”
Predictions:
1. There will be a premium on mergers and acquisitions. Expect to see a consolidation of companies. Disney and Viacom. Alibaba and a major studio.
2. The value of curation, content segmentation, and audience segmentation will “go way, way up.”
3. Talent will both follow and lead the audience. Some high-end talent will go to short form. “For example, Mr. Robot was rejected for film, but accepted by the USA Network. It’s entirely feasible that the next killer show will be on a digital platform.”
If $60 billion in market cap flowing out of traditional media doesn’t convince people that industry disruption has occurred, maybe the emergence of TwitchTV, launched in June, 2011, will. As Klein explained it, the website provides a platform for “millions of people to watch millions of other people playing video games.”
Sean Mallon, CIT GAP Fund
Unmanned Arial Systems (UAS)
For a moment, pretend that you are a full-fledged, card-carrying drone geek. Imagine that in 2012, you wanted to be the first person in your drone club to have one sporting a GPS assisted hover, automatic flight logs, vision positioning system, 4K video camera, 12 megapixel photos, 3-axis stabilization gimbal, integrated DGI Lightbridge, live HD view, easy video editor, worry-free autopilot, and a built-in practice flight simulator.
That combination of must-have features would have dented your bank account to the tune of $250,000. Sure, you got a fancy toy, and three years to fly it without being out-droned by another club member. But today, a pimply high-school sophomore can buy the same contraption using what he earned last summer mowing lawns – around $1,145.
UAS prices are flying south, joystick to the metal. But applications for them aren’t blossoming quickly. There’s “not a ton of funding going into this space,” Mallon said. Blame government regulation. The FAA controls drone activity, and doesn’t want airspace to become the wild west. Home hobbyists and commercial developers alike must hew to the agency’s restrictions, which include a 450-foot flying ceiling, and no activity within five miles of a major US airport. Commercial operators cannot fly drones at night and must be a licensed airplane pilot.
While Amazon’s pioneering use of drones for package delivery has created industry excitement, Mallon pointed to promising uses that are less public, including:
1. Precision agriculture – not soybeans and wheat, but grapes and apples. A Virginia company, Digitalharvest, has developed a 100-pound unmanned helicopter that distributes herbicide.
2. Pipeline and power inspections.
3. Public safety eyes-in-the-sky.
4. Tanker inspections. Drones that can fly inside ships can perform routine safety checks.
“Don’t expect a lot of near-term revenue,” Mallon said. “The greater opportunity will be in software that makes drones fly, stay in the air, and come back.”
James Socas, Updata Partners
The Business End of the IoT: Looking Beyond Consumers to B2B and Backend Plays
“How many of you wear a Fitbit?” Socas asked the audience, straightaway. A few Fitbitted arms were raised. “How many of you used to wear a Fitbit?” A lot of arms went up. I didn’t count the number. But the results from the subtle change in verb tense yielded a key insight: with IoT, it’s unclear what drives adoption, or what sustains it. I can relate. An Apple Watch that can track my pulse, archive the data, and share it online doesn’t appeal to me – though I accept that it brings joy to others.
Like the administrator-nannies at Oral Roberts University. This year, ORU became the first school to require its students to wear Fitbits, as part of its Whole Person Education program. The school’s academic policies state that students who don’t make “satisfactory progress in physical fitness” must enroll in physical education courses. The Fitbit policy applies to incoming Freshman. Older students can opt in – though I’m not sure why. Whether there will be a domino effect in higher education remains a question. That would buck a trend: in the 1920’s, 97% of colleges required students to take physical education classes. In 2010, that number dwindled to 39%.
Socas cited some famously enthusiastic predictions about IoT. His purpose wasn’t to feed the hype machine, but to illustrate the zeal that many share. Reckless optimism? You be the judge:
1. Fortune Magazine wrote, “to not be invested in IoT is a very big (and potentially costly) mistake.”
2. Jeffrey Immelt of GE said, “Mashing big data with big machines is beautiful, desirable, investable. It could transform GE’s business—and the economy.”
3. Michael Porter of Harvard Business School said, “we stand at the brink of a third transformation.”
Expansion of IoT will evolve in three phases, according to Socas.
Phase I – Productivity applications. For example, smart meters that can be checked not every 30 days, but polled electronically every 15 minutes.
Phase II – IoT integration with other IT resources and applications.
Phase III – Brand new stuff. Energy optimization for utilities, transportation fleet management, manufacturing are likely adopters.
Emerging industry players will become stronger, including Parametric Technology, which has spent $700 million on strategic acquisitions. Other companies to watch are Sierra Wireless, Skyworks, Cisco, and Qualcomm.
“There will be 25 to 30 billion IoT devices by the end of 2016, and $6 trillion in IoT spending,” Socas said, before moving to adoption issues he illustrated at the beginning of his talk, including:
1. Security. IoT has low processing power, and the devices are not designed to be secured. They are susceptible to data breaches.
2. Value proposition, especially in marketing to consumers. With IoT, “there’s motion in the market, not movement.”
Socas reminded the audience of Apple founder Steve Wozniak’s observation: what might be happening is occurring too quickly for people to digest, absorb, and accept. A point that even Wile E. Coyote would understand.
Note: to read my article about MAVA’s 2014 Crystal Ball Breakfast predictions, please click here.
