The biggest opportunities for investors are in big data and efficiency.
That’s the line coming from Scott Stanford, the co-head Internet banker of Goldman Sachs, in three videos that apparently have just been posted today. The videos express the bank’s positioning on innovation and where investors should put their money.
Goldman Sachs is one of two or three big investment banks vying for thought-leadership in the technology industry; indeed it’s in cut-throat competition with Morgan Stanley. While Goldman has led deals such as the Yahoo-Alibaba sell-down, the Zillow follow-on, and the Yelp IPO, and was in on the big Facebook IPO, Morgan Stanley scooped Goldman to be lead bank on Facebook’s IPO and has scored other big IPOs, such as LinkedIn.
So it’s always interesting to take note of Goldman’s public stances on the industry, because it has no doubt spent considerable time thinking about it. Stanford, for one, has networked hard in Silicon Valley; I invited him to speak at DEMO two years ago. He’s also been very active managing the firm’s investments in Facebook, Uber, and Linkedin.
Here are the cliff notes on Stanford’s position:
First, and foremost, it’s about Data.
- The scale of data created daily is multiples the size of the Library of Congress and it’s very difficult for companies to harness this opportunity. This will create stark bifurcation between the haves and have nots.
- In order for a company to harness the data, they need three things: (1) access to proprietary data, (2) wherewithal/knowledge of what to do with it/how to process it, and (3) the right relationship with the consumer in order to apply the data. Some companies have some of these. Few have all.
- (Stanford doesn’t mention the Apple maps disaster, but the company’s fumble is a good example. The problem stems from a major disadvantage on the data side, where Google is winning.)
Second, it’s about efficiences or capacity utilization.
- Efficiencies/utilization is being applied universally to lots of sectors — not just transportation but education, labor, retail, etc. The Internet is disruptive because it’s wringing out huge amounts of inefficiency in each of these areas. (Stanford doesn’t mention the company here, but Uber is one of his investments; that company is helping create efficiencies in transportation.)
Third, the rate of innovation is unprecedented.
- The well-known websites today took ~80 months to reach 15-20mm users. The latest batch of startups took 10 months to reach same scale.
- New platforms that didn’t exist a few years ago gives entrepreneurs access to consumers, data, capital, global markets previously unheard of/inaccessible.
Here are Stanford’s views on what investors are looking for:
- First, size of “total addressable market.”
- Path to profitability. Not necessary to have profits today. It’s often better to invest in top-line growth with confidence in durable margins than eek out marginal profit today. Must be able to defend margin potential at the unit economic level. It’s ok to pro forma for future realistic assumptions.
- Scalability – ideally through network effects.
- Defensibility – not so much about barriers to entry any longer. Now the barriers are to scale and ability to develop moats as model/business matures.
- Data – per above, critical component of any company, large and small. Do you pass the three tests?
- Team – passion and ability to pivot as change will happen.
Stanford also summarizes entrepreneurship and the funding landscape.
We’ll update on whether these thoughts get translated by Goldman into new deals over the next year.
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