Over the past two decades, Silicon Valley software companies have been, as Marc Andreessen wrote, eating the world. More and more major businesses and industries are being run on software and delivered as online services — from shopping to movies to travel.
Three industries, however, have remained largely apart from the trend: health care, finance, and education. But over the next 8-10 years, I expect these last three sectors finally to be disrupted by software, with new world-beating Silicon Valley companies likely doing the disruption.
The fact that these sectors have remained outside the disruptive influence of software begs the question of why. They are all heavily regulated, which makes innovation more difficult. I believe the key issue is that services in these fields have almost always been delivered along with face-to-face advice. Software companies will need to overcome the lack of face-to-face advice with low-cost services that primarily sell convenience.
Already, there are signs of breakthroughs, especially in the education sector. Khan Academy makes its software and tools for learning math and science available free on YouTube. CodeAcademy is winning praise from the tech community for the way it makes learning code accessible to everyone. In health care, Massive Health wants to develop easy-to-use apps to help people modify unhealthy habits. In financial services, a handful of players are carving niches in markets that didn’t exist before, including my own company, Wealthfront.
Funders are turning their focus to these sectors, too. My friend Chamath Palihapitiya raised eyebrows when he left Facebook to start his own venture capital fund, The Social + Capital Partnership, last year. His reason for going? Precisely to invest in these three sectors.
After three decades of watching innovators, as a venture capitalist and an entrepreneur, I believe we can make some specific predictions about which companies will succeed, and how they’ll do so.
They will offer low prices.
In order to overcome the lack of personal advice, startups need to offer extremely low prices. In order to become disruptors, they will also need to serve people who don’t consume existing products or services. In health care and financial services, that probably means young people, many who are happy to forgo face-to-face contact in exchange for low prices and convenience.
Look for “freemium” business models, like the one used by the immensely successful Dropbox, which offers the first 2 Gigabytes for free, and an additional free 250 megabytes for every person you refer who becomes a customer and then a modest fee for storage used above that level. Dropbox used microeconomics lessons to charge a low price for a service with a low marginal cost.
After the disruptors succeed in creating a new market, they will move upmarket as Clay Christensen, the Harvard Business School Professor, explained in his book “The Innovator’s Dilemma.”
The goal of convenience will drive their business models.
There’s a popular belief among the engineering community in Silicon Valley that “information wants to be free,” a mantra coined by “The Whole Earth Catalog” writer Stewart Brand, while speaking with Steve Wozniak at the 1984 Hackers’ Conference.
That being said, we don’t mind being charged for convenience. LinkedIn provides a great example of what we like in Silicon Valley. You are welcome to see every member’s resume for free. But if you want the convenience of contacting a member directly then you are happy to pay LinkedIn a fee. Other recent Internet successes, including Square, Uber, and Zipcar, have distinguished themselves on convenience rather than superior functionality.
They will embrace transparency.
In education, health care, and financial services, to greater and lesser degrees, information has become the purview of professionals. In a disrupted world, it won’t stay there. One strategy startups will use to win the trust of consumers is to embrace transparency.
I’m particularly familiar with the way information is kept from investors in the financial services sector. In the years when I was a partner at Benchmark Capital, I sat on the boards of a number of companies that went public. I saw countless investment advisors stalking new wealth created by IPOs. In order to justify their high fees, these advisors spent hours convincing young workers that they lacked the expertise to make decisions about their own portfolios.
The truth is that most every competent financial advisor uses the same approach, Modern Portfolio Theory, to manage client accounts. Like travel agents of the past, financial advisors use common software in their back offices to deliver what is often a commodity service. The world is waiting for a new entrant to make Modern Portfolio Theory software as convenient to consumers as Expedia made the Sabre System used by travel agents.
They will succeed first in Silicon Valley.
When it comes to the consumption of technology-based products and services, Silicon Valley almost always starts the trend. Engineers here design the products for the needs they see around them, and then test them out on their friends.
If the past is a guide, the companies that succeed here will make their models scalable and taken them nationwide. The process may be a bit more sluggish in these slow-moving sectors. Then again, maybe not.
One of the brilliant things about Silicon Valley innovation is that it happens fast. It also looks inevitable – after the fact.