Julie Meyer: Goliath really must dance with David to survive

Midweek View: Companies can no longer think of themselves as stand-alone. They are part of a network
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The Independent Online

Many people thought Facebook was crazy when it announced in April that it was buying Instagram – a profitless, two-year-old photo-sharing website with just 13 employees – for $1bn (£643m).

The real question is: "Why didn't Polaroid, inventor of the instant snap, or Kodak, creator of the hand-held camera, beat Facebook to it?"

Had they invested in, replicated, partnered with or bought Instagram (or a company like it), would it have prevented their demise?

It makes you wonder how two companies that were pioneers in film, cameras and photography so missed the consumer demand for a photo-sharing app for the iPhone.

Had the CEOs of Polaroid and Kodak met Kevin Systrom and Mike Krieger, co-founders of Instagram, would they have underestimated the company or understood its strategic value?

Companies such as Instagram are "digital Davids" – entrepreneurs bringing new, digital revenues to the existing industrial giants (the "Goliaths") with whom they partner. We can see examples of this everywhere:

■Yell bought Sokratis Papafloratos' Trusted Places to inject some real people's reviews and ratings into its business. He then led social media inside Yell for a period of time.

■British Gas invested £5.7m in Mary Turner's AlertMe to beef up its smart meter clout but also because AlertMe is at the heart of the home ecosystem.

■Google paid £37.7m for BeatThatQuote, not only to expand its involvement in price-comparison products but to tap into BeatThatQuote's "cashback" model, which compensates customers for using their data. BeatThatQuote recognised users in the core transaction; Google didn't.

Most investment bankers tell Goliath – be it the high street chain, the telco or the media firm – to gobble up smaller companies and then patch them together like a quilt. But industry giants need to think long and hard about their own assets – from distribution and brand to billing relationships and consumer habits – and then consider how they can open those up to the digital Davids.

If you're a Kodak or Polaroid with hundreds of millions of customers buying film and cameras, how can you manipulate that distribution for a young Instagram bubbling up from the start-up world?

Companies can no longer think of themselves as a silo or a stand-alone firm. They are part of a network and they must think like a "business-model architect", building up their natural allies and partners. That takes deep thought, careful market analysis, clever deal-making and digital, cloud-based infrastructure.

For inspiration, look at the late Apple founder Steve Jobs. His ultimate legacy does not rest on the beautiful products his company makes but on the revolutionary business models he invented. He opened up the music industry with the iPod, iTunes and framework that involved everyone – the artist, the listener, the label and, of course, Apple – in a piece of the action.

In my new book, Welcome to Entrepreneur Country, I argue that if Goliaths fail to co-operate with the Davids, they will be run over by them and then slowly drift into insignificance – or be forced to do deals at a significant disadvantage. If they refuse to join the dance, they will be left behind.

Witness Borders – a bookshop that thought time was on its side.

In 2001, the company decided to outsource its online business to Amazon. It launched its own site again in 2008 but, by then, it was too late.

It had lost seven years' worth of knowledge about how to build digital revenues. Battered by competition from internet retailers and burdened with too much debt, it filed for bankruptcy last year. It closed its 399 stores and more than 10,000 people lost their jobs.

The best entrepreneurs I've worked with at Ariadne Capital were all spectacularly underestimated at first: Niklas Zennström of Skype in mid-2003; Monitise's Alastair Lukies in 2004; SpinVox founder Christina Domecq in 2005; Richard Duvall, co-founder of Egg and Zopa.com, in 2006.

When David shows up looking a bit bedraggled (because he's working so hard), it's difficult for Goliath to take him seriously.

Be ready to open the door when an entrepreneur or digital David comes knocking. These small-tech firms are transforming industry and Goliaths that collaborate with them will reach their goals sooner.

Julie Meyer is CEO of Ariadne Capital and author of 'Welcome to Entrepreneur Country'

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