SXSW: Bill Gurley and Malcolm Gladwell about Silicon Valley Outliers
For people even remotely interested in startups and new technologies, there was one fireside chat at SXSW Interactive that was not to be missed – a conversation between Bill Gurley and Malcolm Gladwell.
If you haven’t heard about him before, Bill Gurley is the tallest venture capitalist in the USA. No, he really is, and he has a blog to prove it! 🙂 Joking aside, Gurley is a general partner at Benchmark – Silicon Valley venture capital firm that was an early investor in successful startups such as Uber, Snapchat, Twitter and Instagram. He is also considered “one of the technology’s top dealmakers” by Forbes magazine. If you wanted to get an insight into how venture capitalists think and what is the next big thing in Silicon Valley, you wanted to be at this lecture!
Who better to interview one of the most powerful venture capitalists about economic and entrepreneurial outliers than a man who wrote a book on them? Luckily, Austin Convention Center had halls that can fit up to 5000 people because, in the end, every chair was needed.
They touched upon a little bit of everything, from US healthcare issues, Uber and driverless cars to cyber crime, missed chances and the newest tech bubble. These are the main takeaways.
(Lack of) Impact of Technology on Healthcare
The conversation started with maybe the most controversial topic these days – the impact of technology on healthcare. As Malcolm noted, should not we expect that entrepreneurs would try to make use of enormous resources venture capitalists have, to fund a solution that would change everyone’s lives for the better? Seems not, since there are comparably much less successful healthcare solutions than, for example, solutions in social and communications being offered every year. And by successful I mean solutions that really gain traction and make an impact.
Gurley explains this by the existence of completely different market dynamics in healthcare industry than any other industry. He said that he in person met with more than 100 companies wanting to make an impact in healthcare industry but that the market is so distorted that VCs are hesitant to bet even on a good product.
What makes it distorted?
Main reasons are government interventions that shape the playing field. There are government programs offering $44 000 to healthcare providers wiling to implement electronic heath record (EHR) programs. Not only that, another $17 000 is paid to doctors who can prove “meaningful use” of implemented programs. This means that doctors are implementing programs and using features they would not choose on their own and that they probably don’t really need. It’s a question if the software is used beyond the level needed to satisfy incentive requirements.
The other problem is that customers are not price shoppers because they don’t pay for health care.
Finally, he shares the example of a company like drchrono that has a great idea but doesn’t have the sales force necessary to go and get enough traction by explaining to people how to get a 44K investment with their solution.
What he sees the future in is data aggregation saying:
The biggest opportunity for having massive impact on healthcare is data. No one is aggregating this.
Transformational Power of Uber
As an investor in Uber and one of the board members, Gurley had a lot to say about the transformational power of solutions such as Uber.
Gurley cited Uber as “probably the largest job creator in San Francisco” with 300 000 registered Uber drivers in the city and 50 000 newly registered drivers each month on a global level. What draws them to Uber is the opportunity of flexible lifestyle – drivers choose when and how long they want to be working.
Gladwell noted how services like Uber have the potential of having dramatic impact on DUI. Highway traffic fatalities take 35 000 lives per year; one third of them are due to drunk driving. There are no reliable data to see in which way is Uber affecting this issue, but from the marketing perspective, this is a very powerful selling point. Can you imagine the penetration of service that carries this message in its brand?
Indeed, Gurley says that parents are recognizing Uber as a safe transportation option for their younger children.
Lot of parents are putting their children in Uber. Lot of parents of teenagers are putting the app on their child’s phone and telling them: “If you get somewhere where you are unsure about who is driving, just press this button”.
He says they also got lucky with demographic changes. Compared to previous generations, millenials don’t care about cars. They see cars as an utility, instead of a social statement.
It is no wonder that Uber is growing staggering 300% per year and that Uber’s market in SF today is 5 times bigger than entire black car and limo market was when they first entered the market.
On the more somber note, Gladwell raised an important question. With Uber growing so fast, how will it affect part of USA’s GDP that comes from automobile manufacturing? For now, we don’t have a precise answer to that, but the questions itself confirms the disruptiveness of the technology that is Uber.
Future of Driverless Cars
On the topic of driverless cars, Gladwell and Gurley diverged in opinions. While Gladwell sees them as something that can save many lives, Gurley says he is a much bigger skeptic than most people. He argues that for a product such as this the acceptable margin of error is much lower than in other cases.
For a machine to be out there, that weights three tons, that is moving around at that kind of speed, any errors would be catastrophic. Humans would be much less tolerant of a machine error causing a death than a human error causing a death.
That means the system needs to be much better than a human driver, for it to be accepted. It has to be virtually perfect! Gurley thinks we still have a long way to go to achieve that level of excellence.
Hacking as a Form of Arms Race
The next topic concerns arm races, or as Gladwell describes it, a state where there is never an end in sight. For every innovation there is just a counter-innovation, there is no way to get an upper hand. He goes on to say that hacking is a great example of an arms race.
Indeed, if we pause to think about recent issues with cyber security and public exposure of confidential data, examples of Target, Sony and Apple must come to mind. If we combine the losses these companies suffered – loss of data, tarnished reputations, loss of key company players – they amount to billions. Recent study showed that hackers are costing consumers and companies between $375 and $575 each year. What is worse, most of them go unpunished.
Gurley agrees on this point and goes on to say:
As we all connect our organizations more and more to the Internet, the number of openings that are exposed are going up exponentially. People are using IRP systems in the cloud, all their financials are in cloud, they are using email systems in the cloud. A lot of it is out of their control because other third parties are hosting these. So I think you need a different approach.
One of the suggested ways to prepare for these kinds of risks is to act proactively. Gurley gives an example of HackerOne, a company Benchmark recently funded, that runs bug bounty programs. Bug bounty programs allow companies to act proactively by inviting white-hat hackers to look for holes in their security systems and rewarding them if they do find them with monetary incentives and community recognition. Internet giants like Microsoft, Google and Facebook run these programs internally but services like HackerOne allow even smaller companies to join in and safely outsource their security investigation. In nine months HackerOne had 150 companies join in, Twitter, Yahoo and Airbnb among them.
Companies Gurley Did Not Invest In But He Wishes He Did
Before the conversation came to an end, the audience had the opportunity to pose a couple of questions via Twitter. One of them was what are the companies Gurley did not invest in but wishes he did.
Not having to think much, Gurley responds: Airbnb, Slack and Nextdoor. He notes that what most of these companies have in common is that they all pivoted at one point. They were headed in one direction and when they saw it was not working, they completely changed it and went to be very successful on their new path. That is something he sees happening more and more often.
Of course, Gladwell would not be Gladwell if he did not push for more and asked why does he think that is. This is the response he got:
People who run those companies are repeat entrepreneurs. They have the confidence to admit defeat and the confidence to try something new, without giving up along the way. For the first time entrepreneurs these kinds of things are harrowing and they usually use up every penny trying to prove it will work.
On The New Tech Bubble
As renowned VC, Gurley is often asked about his opinions on the new tech bubble. That was the case this time too and Gurley was happy to share.
We’re not in an evaluation bubble, but a risk bubble. We’re taking on, in these startups, especially in these so-called unicorns, a level of risk we have never taken before in the history of Silicon Valley or startups.
As opposed to late 90’s where people invested in businesses that weren’t really businesses, investors now are investing billions in companies that did not have the time to mature. Gurley explains how nowadays investors are knocking on doors of startups that are showing any traction, offering to invest hundreds of millions. To this Gladwell responded that Gurley can direct them in his way any day, he would not mind. (I would not mind either!)
The conversation ended with Gurley’s words of caution:
There is absolutely no fear in Silicon Valley right now, a complete absence of fear. I think you’ll see some dead unicorns this year.
and the crowd’s loud applause. We join in!
