The Enterprise Strikes Back

Many of the most important innovations in the mid-20th century came from big corporations -- places like Bell Labs, GE, Xerox PARC, and HP. Those companies invested large sums into innovation while supporting cultures that attracted brilliant people. Because innovators had to build everything from the ground up, big corporations were the only entities that could afford to outfit competitive technology teams. Over the last few decades, the financial cost to support innovation has decreased, and it continues to fall. Todays computers and software systems supporting rapid conceptual iteration are orders of magnitude more powerful than what scientists at Bell Labs had available. In an inter-temporal hackathon competition, a couple of todays top engineers could run circles around a whole team of top talent from 20-30 years ago in any area at a fraction of the cost. So its not hard to understand why so much is happening in technology startups. With the innovation-expense divide mostly eliminated, smaller companies have a variety of advantages. For example, incentives are more aligned given that the upside for a particular project is shared among the value-creators. And discarding the politicking and friction-creating bureaucratic and administrative layers that are needed to organize and preserve value in big corporations not only aligns incentives within a smaller team but helps create a better culture for innovation. Many talented young technologists and entrepreneurs sense this dynamic and write off large corporations completely. But this is nave. The corporate landscape plays a critical role in the global economy, and many large corporations are critical to solving fundamental global problems that demand our attention. Startups present a superior model for aligning culture and incentives to deliver innovation, but big corporations sometimes can better structure the delivery of value to the marketplace. There are still excellent returns to scale for many industries. In addition to possessing large data sets and distribution channels, many corporations also possess a tremendous amount of latent knowledge and expertise created through the course of working on big problems. They may know what the next large, valuable problems are going to be first. And certain industries still require massive investments to apply innovation and capture a market. The global marketplace is an evolving ecosystem, with startups and large corporations increasingly playing separate but complementary roles. Large corporations have scale and distribution advantages in key industries such as energy, insurance, health care, logistics, financial services, and government services. Startups are breaking into these areas on the innovation side, but in many cases startups would benefit from working with (and not against) big corporations. That big corporations run roughly half the economy is not just because they are better at using government cronyism to get favors and unfair advantages (though this may be part of it). Its also because in many cases the market has shown that a large corporation is the most effective way for our society to deliver a vital good or service. To solve the worlds hard problems and enable progress, startups should partner with large corporations where possible and equip them with better technology. Consider the major industries. In healthcare, our dysfunctional system threatens to bankrupt governments, but new innovations from startups like Health Tap, Palantir, Practice Fusion, and others will potentially save hundreds of billions of dollars if they can work well with insurance companies and various medical groups. In energy, rising costs could stand in the way of emerging market growth and prosperity, but equipping production wells with complex sensors and big data applications could mean 100% changes in efficiency and extraction. Applying startups advances to smart grids and modernizing infrastructure could reduce wasteful consumption and save hundreds of billions of dollars through creative efficiencies. In financial services, nearly a trillion dollars a year is made from selling financial products and services (much of this value is captured by legacy companies and gentlemen with an in to the financial fraternity) while millions of people still enter financial data manually. Confusion, errors, and fraud proliferate, but big data advances, innovators, and open platforms will work their way into this industry and cut waste and dysfunction. In sum, major enterprises use outdated tools to deal with many of the most important problems and that will change. My friends and I are not long technology in general. Rather, we are long on the secular trend of bringing smarter technology systems to bear on critical industries and making those industries work better.

In contrast, the consumer web gold rush is about investing in technology for its own sake. That space is led by young, excited technologists who arent fully aware of the most important problems in the global economy. Contrary to popular belief, far less than 70% of the economy is tied directly to the consumer. Although there are great things left to do in consumer web, that space is over-crowded.

Enterprise software, on the other hand, is not mostly about sales, as Y Combinator thought: If you don't think you're smart enough to start a startup doing something technically difficult, just write enterprise software. Enterprise software companies aren't technology companies, they're sales companies, and sales depends mostly on effort. This statement applies only to the first generation of enterprise software companies that help push paper faster. The new generation of enterprise software companies attract top talent by solving the hardest problems in global enterprise. For example, Palantir, a smart enterprise company, was rated to have the top engineering team in SV. To oversimplify, three of the major trends in SV starting in the 1980s have been Enterprise, Telecom, and Consumer. The fourth trend now emerging is about Smart Platforms, or what some might term Smart Enterprise.

Smart enterprise software enables creative processes that empower knowledge workers involved in interesting analytics and complex work work that generally takes place in non-consumer areas. Smart enterprise might involve self-monitoring information that automatically checks itself and spits out red flags to users, such as software for a city that monitors its goals and the thousands of things it spends money on and then reveals detailed insights to eliminate inefficiencies and waste. It may involve collaboration software to help teams better work together to leverage information to do their jobs, such as counter-terrorism analysts from allied countries or security experts working together between top banks to prevent cyber-attacks. Smart enterprise technology provides tools that save people time and make them better at leveraging data and solving problems. Knowledge workers operate at the top of the conceptual pyramid, combining abstract thought and large quantities of information. Smart software platforms learn from their work and automatically compare data and expose information to them, enabling new efficiencies and creative work.

Old Enterprise Software is more about linear processes, like payroll and expenses or TPS reports stuff that helped push paper faster. Smart enterprise is more about substance and about solving the problems hindering our civilization.

Innovation is not just about creating new industries -- trying to make flying cars or crazy science experiments to extend human life (both of which I support, but neither of which Id invest in). And its not just about doing something cool for consumers to share notes with their friends, get better deals, or find better restaurants. These are all important. But the innovation we need today is often about solving hard problems that matter to the key industries that run our world. This is not only what our society needs, its where the best economic returns live. Startups will solve these problems for the most part. But theyre only going to do so by understanding the industries dominated by big players and, in many cases, by learning how to work well with industry leaders to solve hard problems and scale up the solutions. For their part, the big guys are going to have to partner well and share a lot of upside with innovative smart enterprise companies, or risk falling behind. Although our governments and our society are in financial distress and institutional crisis, there is hope: more people aspire to entrepreneurship today than at any time in the past century. Costs to meaningfully innovate have plummeted. This is an awesome time to be an engineer. Yet instead of enabling new ways for consumers to share photos or talk to their pets, we advocate that the best young engineers focus their immense talent and energy on major global problems. Many of our forthcoming essays will concentrate on this theme, and specifically on how to build a smart enterprise company with revolutionary potential.

Joe Lonsdale Founder, Palantir and Addepar Partner, Formation 8

August 31st , 2012