August 2009

"An entrepreneur tends to bite off a little more than he can chew hoping he'll quickly learn how to chew it."

Roy Ash, co-founder of Litton Industries

Technology-based ecosystems are everywhere. Consumer Internet-based ecosystems are almost always large scale entities because the Internet has few real boundaries. The center of these ecosystems is often a large company that is a household name and has played a significant role in creating, or at least shaping, the market segment its ecosystem serves. Because of this, Internet ecosystems are often thought of as the exclusive domains of large established companies. In the past that was typically the case, but tech entrepreneurs are now increasingly able to act as the driving force behind the creation of Internet-based ecosystems. Entrepreneurs are moving into the role of ecosystem creation and development, and the established big companies are evolving to a supporting role of ecosystem enabler, investor, and operator. This article will review and contrast the roles of tech entrepreneurs with the roles of large established Internet companies in the creation and development of consumer Internet ecosystems.

The Technical Ecosystem

Merriam-Webster's online dictionary defines an ecosystem as "the complex of a community of organisms and its environment functioning as an ecological unit." Applied to a technology context, an ecosystem matches several well-known business models. A clear example is the wireless communications business. Anchored in the middle are the wireless network operators, providers of the infrastructure behind mobile phone communication and owners of the end-customer relationship. Participating in this ecosystem are handset providers, accessory providers, and third-party application providers. The wireless network operators benefit from the differentiation and user-appeal provided by the other participants, and the other participants benefit from a large managed channel to the end-user, the consumers of their products. The customer only deals with one interface, hence the applicability of the "functioning as an ecological unit" aspect of the definition of an ecosystem. This highlights a significant point about ecosystems: the center of gravity in the ecosystem is the participant that controls the relationship with the customer's wallet, not necessarily the company with the biggest bottom line.

Business ecosystems have long been under the control of large, well established companies. This is because ecosystems have traditionally required significant resources to develop the multi-component opportunity and to manage all of the moving parts. The remainder of this article will discuss the expanding role of the tech entrepreneur in consumer Internet ecosystems. This role is being expanded by the availability of new applications, services, and processes.

Internet Ecosystems as Fertile Ground for the Entrepreneur

Internet businesses differ from most other tech-based opportunities in a few important ways that make them a natural attraction for startup entrepreneurs:

1. Reaching and educating the target user/customer directly is relatively straightforward and low-cost compared with traditional non-Internet based market development. Blogs and social networks can be used for little or no cost to reach well defined demographics. A $1M online brand-building campaign might cost $20-30M in traditional media advertising to reach the same number of right people. ComScore's most recent report indicates approximately 307 million registered Facebook users and 123 million registered MySpace users. These two social networks alone have a population greater than the USA. Easy to place ads can contain a simple and non-intrusive pointer to the company website or directly to a YouTube video commercial explaining what's behind the tag line. Ad content must still be compelling to attract a following, but the cost and distribution barriers are much lower than for any other effective advertising medium.

2. Online sales and distribution channels avoid the costs associated with brick and mortar based channel options. In addition, many third-party services exist to support necessary but non-core aspects of the business from day one. These include hosting and online payment services.

3. The addressable market tends to be large and geographically independent. Even a niche opportunity can translate into a healthy business when applied to an Internet-scale addressable market.

4. Time-to-market speed and responsiveness. One of the most important competitive weapons that the startup company has in its arsenal to combat larger and more established competitors is speed and responsiveness. It's rare for a new company to create a perfect offer right out of the gate. Internet startups have learned to leverage a release-and-iterate development model that plays to the strengths of a small company and is enabled by the near immediate distribution attribute of an Internet-based application or service.

These points are well known advantages of Internet business models, but what about Internet ecosystems? An ecosystem implies a broader offer than a straightforward vertical Internet application or service, which is what startups have typically focused on for reasons of complexity and scale.

Tech entrepreneurs are being supported by new industry developments, both mainstream and just emerging. This makes it more feasible for startups to drive larger and more complex opportunities, including undertakings of large scale ecosystem development.

Three significant developments are:

1. Open source is now mainstream. When discussing open source technologies, Linux desktop and server platforms immediately come to mind, but open source includes an extensive and growing list of important solution elements for the startup to choose from. These include databases, Internet protocol stacks, and a wide range of business and consumer applications. The entrepreneur can select the optimal open source component, customize it with unique value, and make it a differentiable component of a new solution or ecosystem. The customization can occur quickly and with an unbeatable cost model. While many established companies are also getting onboard with the benefits of open source, it is significant that the starting point for the entrepreneur and the established company is now much more of a level playing field. Without open source communities, technical startups would be hostage to commercial platform components, resulting in many failed business models for companies that could have proven to be successful. Would Facebook have reached the scale it has achieved without the availability of open source platforms? Unlikely, because the cost model would have been entirely different.

2. Cloud computing and storage. Internet-based ecosystems require processing and storage in large quantities. Computing and storage used to be one of the largest hurdles for entrepreneurs due to the large amounts of capital needed to pay for servers, disks, power, air conditioning, specialized real estate and people to plan, install, and maintain it all. This is the worst kind of capital expense for an entrepreneur because the infrastructure to support the first wave of deployment has to be in place before the business launches. The recent availability of cloud computing services from the heavyweights in the computing industry, including Amazon's Elastic Compute Cloud (EC2) and Simple Storage Service (S3), has changed all that. Now an entrepreneur can purchase pay-as-you-grow cloud computing and storage services. The entrepreneur's scarce resources can be focused on maintaining value-added applications and managing customer support while infrastructure costs are tied to real customer growth. Cloud computing is not free, and in fact will likely cost more than purchased and self-managed equipment over the long haul. But, in the early days of a new business, cash flow is critical and avoiding up-front expense where possible is a high priority. To an entrepreneur, cloud computing is like the difference between purchasing a new car and leasing it. The initial fears associated with cloud computing, namely reliability, scalability, and security, are abating. Twitter, one of the Internet's fastest growing social networking services and a flagship user of Amazon's EC2 computing and S3 storage services, is showing the world that it works. Without cloud computing, Twitter's growth would almost certainly have been much slower.

3. Crowd sourcing. Crowd sourcing is an emerging form of open sourcing that doesn't refer to software, but to the use of non-employee and non-contracted resources to contribute new components to solution development. People get exposed to a project through blog posts or other online calls and volunteer to contribute. Crowd sourcing of content is the model used by Wikipedia, an online encyclopedia, and YouTube, an amateur video content site. Crowd sourcing for software development is newer and is not yet a solution for everyone because it requires project visibility and comes with some unsolved challenges associated with process, legal issues, and quality control. However, crowd sourcing is becoming a tool of startup entrepreneurs, who view it as an extension to bootstrapping. It provides a means of accessing a larger group of resources without initially needing the capital to support a corresponding increase in employee or contractor costs. A recent example of design crowd sourcing is the Netflix Prize competition, in which Netflix offered a $1,000,000 prize for the best collaborative filtering algorithm that predicts user ratings for films, based on previous ratings, and which improves on Netflix' own algorithm by at least 10%. Netflix must have concluded that the internal cost of improving their predictive rating algorithm would exceed $1,000,000, and crowd sourcing became a prudent business experiment. By focusing on the algorithm, Netflix kept the scope of the project to a manageable challenge.

Everything discussed so far points to the advantages that entrepreneurial startups leverage to create and develop new Internet ecosystems. None of these points is a secret weapon consisting of an exciting new capability. All are about scale: more platform capability at less cost (open source), more computing resources for less up-front cost (cloud computing), and more human resources for less cost (crowd sourcing). Greater scale enables startups to evolve more quickly beyond vertical applications to ecosystem development.

The same elements that make startups effective at the front end of Internet opportunities create a challenge for the large, well-established ecosystem members. Speed and responsiveness are not characteristics associated with big company culture. Neither is a release-and-iterate development process.

The Role of the Big Company in an Entrepreneurial Ecosystem

If big companies are disadvantaged to lead the charge for new Internet ecosystems, what is their role? The answer can be found in the Microsoft Windows personal computer (PC) ecosystem example. Microsoft, the dominant PC operating system provider, depends on hardware manufacturers and application providers of all shapes and sizes. Microsoft partners with and supports channel partners to ensure that the Windows ecosystem remains strong. The model for Internet ecosystems will be the same. Amazon has its sights on becoming the Windows of cloud computing platform providers and has a good head start. Microsoft recognized the opportunity and responded with their Azure program. Google, Intel, and others will no doubt be major players. These large concerns will become the platforms, sponsors, and ultimately the operators of Internet ecosystems. Entrepreneurs will be the innovators and the ground-breakers that leverage the services provided by the big companies and by open source and crowd source communities to get new ecosystems off the ground. Large service and platform providers have the infrastructure and skillsets necessary to operate large-scale hosted platforms. Diverse members result in a symbiotic ecosystem consisting of the entrepreneurial startup driving new business and market development, supported by large and well-established enablers. In this model, the entrepreneurial startups become strategic development tools of large companies.

Ecosystems: An Important Source of Investor Capital

The downturn in the economy has severely constrained the amount of available venture capital, particularly for early stage companies. Dow Jones Private Equity Analyst reports that "the venture capital industry saw a 63% decline in fundraising in the first half of 2009". The emergence of the entrepreneur in a more significant ecosystem role may help with the greatest challenge each entrepreneur faces: raising investment capital. As the entrepreneur becomes a more critical link in the front end of the ecosystem development chain and the larger established companies understand the value of this role, it should become more common for established companies to become investors in their ecosystem partners. This model already exists today with Intel Capital as a flagship example, but it will become more prevalent as other sources of venture capital contract. The big infrastructure and platform providers will provide fuel to the ecosystems that drive new revenues. Everybody shares a common goal and everybody wins if the business is successful.

Testing the Theory: A New Entrepreneurial Internet Ecosystem

iPic Innovations is a new Internet ecosystem startup. It focuses on improving the recreational Internet experience by developing a new ecosystem design around online activity, in the same way that game console ecosystems were developed to optimize the well established PC gaming experience.

The major components of the iPic Innovations ecosystem include: i) a new network-centric desktop design; ii) a hybrid local-hosted computing, storage, and sharing model; and iii) low-cost Web-optimized name brand devices. Netbooks and Mobile Internet Devices (MIDs) are an ideal complement to the iPic Innovations ecosystem. Channel to market is initially a direct-to-consumer model, but the goal is to establish service provider channels for scale and service bundling opportunities.

The key ingredients for launching an entrepreneurial ecosystem that apply directly to the iPic Innovations offer are:

1. A large target user base should already exist. That's not to say that the value proposition being created already exists, but that a well defined user base that will easily understand the value of the new ecosystem exists. For example, when the Sony PlayStation game console was launched, PC video games were already mainstream with a large established user base. The PlayStation was successful as it offered a more cost-effective and specialized ecosystem for video games without compromising the experience. iPic Innovations is applying the same principle to recreational Web activity by providing a more cost effective and specialized ecosystem supporting both new and existing online applications and activities.

2. The other pieces of the ecosystem must be available. An incomplete ecosystem will not deliver the intended value proposition, and using less than ideal substitutes may lead to consumer confusion and disappointment. Netbooks are a recent example of this kind of mistake. They are Web-optimized devices released using PC software platforms instead of a purpose-built network-oriented operating system. iPic Innovations is using generally available cloud computing platforms and name-brand Web-optimized devices. The company will complete the ecosystem and create differentiation by providing a unique network-oriented desktop design that is optimized for a superior Web experience from both a functional and performance perspective, filling in the ecosystem gap that was left open when Netbooks and MIDs were introduced to the market.

3. The result must be a better experience at less cost to the end-user. The new ecosystem provider must overcome two significant hurdles to user adoption: inertia and perceived value. People become comfortable doing things in a familiar way and will continue with the status quo by default. It takes recognized value to overcome consumer resistance to change. Value can be delivered in many ways: solve a problem, deliver new capabilities, provide new aesthetic appeal, offer better performance, or provide the status quo at less cost. The iPic Innovations ecosystem will offer a combination of cost improvement, performance improvement, better privacy and security, and new entertainment capabilities.

Creating a new ecosystem for recreational Internet activity is not a small-scale opportunity. For the first time in history, the tools and platforms are in place to put this scale of challenge within reach of the tech entrepreneur community.


Entrepreneurs will take a lead role forming and driving new Internet ecosystem opportunities, enabled by a combination of open source resources, the power of crowds, and motivated ecosystem partners.

In the past, the infrastructure and platform development requirements for any technology-based ecosystem created significant challenges for any entrepreneurial startup with an eye on developing an entirely new ecosystem. This has changed thanks to the availability of open source communities and commercial cloud computing service providers. As entrepreneurs discover how to use the power of crowd sourcing, the power of elastic human resources will also become available.

These developments serve to significantly elevate the capabilities of entrepreneurs with an aim of launching new Internet ecosystems. The tools to launch high-value ecosystems are in place for the entrepreneur.

A new and healthy relationship will develop between entrepreneurs and big companies. The entrepreneurs will move quickly to exploit new opportunities to create high-value ecosystems, leveraging the best of the startup and big company cultures. Entrepreneurial startups will continue to be strategic tools for big companies, and investments and ecosystems will increasingly reflect this relationship. As ecosystems develop and grow, control will migrate from the entrepreneurs to the big companies that will productize and scale the ecosystem.

iPic Innovations will be a good test case to watch. All the elements of a disruptive ecosystem that will leverage open source, cloud computing, and crowd sourcing exist. The iPic Innovations value proposition is a good fit with many service provider aspirations so it will also be a good test of the potential for startup and big company ecosystem collaboration.


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