Why Digitalisation Changes Entrepreneurship – and Everything

The recent decade has witnessed a major trans­formation in how entrepreneurship is practiced and taught. This is manifested in the ‘New Venture Accelerator’ phenomenon, the ‘Lean Startup’ movement, and grassroots initiatives such as the Slush event, and, e.g., the Global Entrepreneurship Week. Billion-dollar startups, or so called unicorns such as Uber and Airbnb have captured public imagination while disrupting traditional industries.

These trends are global: entrepreneurs in new business accelerators tend to look the same and talk the same, regardless of whether they are based in London, Bangkok, Tallinn or Silicon Valley. Emerging economies such as India are coming up with their own versions of services like Uber, and even hitherto orthodox centrally planned economies such as Vietnam are now officially backing new business accelerators.

Although the first new business accelerator – Y Combinator – was launched already in 2005, this phenomenon has swept the globe much more recently, most of it taking place during the past five years. Because of the recency of this pheno­menon, there has not been much research-based exploration of the reasons for these trends.

I suggest that a major driver of the trends visible in entrepreneurship and also other pheno­me­na such as the ‘Platform Economy’ and ‘Sharing Economy’ is the pervasive digitalisation of business processes[1], as intensified by the ‘Web 2.0’ mode of the Internet. Web 2.0 is character­ised by user-generated content, interoperability, and intensive social networking. Whereas in the early versions of the Internet, users were limited to passive viewing of content controlled by website owners, Web 2.0 leverages social networking, blogs, wikis, mashups, and Web applications to engage the users much more interactively than before[2]. This new, interactive incarnation of the Internet empowered users to become active, contributing actors and became a major driver of entrepreneurial opportunities.

Digitalisation and Web 2.0 modes of engaging with the Internet are exercising a profound impact on how industrial value creating processes are organised. Traditionally, industrial value creation has been neatly organised in vertical, upward-branching value chains. This organisation is the result of two factors: (1) tight coupling between physical products (e.g., cars, shoes) and the function they perform (e.g., driving); and (2) modular product architectures. Tight coupling means that a shoe cannot be easily converted to perform the task of a screwdriver. Modular product architectures mean that physical products consist of sub-assemblies, each of which may recursively consist of sub-assemblies of their own. When these two are combined, the result is vertical, upward-branching value chains with an integrator firm at its apex. In such value chains, ‘value’ flows neatly from ‘upstream’ to ‘down­stream’ – i.e., from suppliers to the customer.

Digitalisation does three things to change this organi­sation of value processes. First, it breaks the tight coupling between product and function: any digital device can be flexibly repro­gram­med to perform different functions. Second, as analogue information is converted to digital form (i.e., digitised), it can be read by any digital device and combined with any other digital information (e.g., combining text with voice and so on). Third, digital properties can also be em­bedd­ed in physical products, making them programmable, addressable, sensing, communi­cable, memorizing, traceable, and associable.

These three effects of digitalisation have a profound effect on how value creation is organised, and, by implication, on entrepreneurial opportunity creation and pursuit. Instead of vertical value chains, value-creating activities are increasingly organised around platform-centric innovation ecosystems. Instead of distinguish­ing between ‘upstream’ and ‘downstream’, it makes more sense to distinguish between the ‘core’ and the ‘periphery’ of innovation ecosystems, with a set of shared technology resources and standards (i.e., a ‘platform’) at the core and ‘suppliers’ and ‘users’ in the periphery. Because digitisation breaks the coupling between devices and functionalities, functionali­ties can be combined and recombined at will, speeding up combinatorial innovation. A running shoe can be combined with a smart­watch, for example, or a google map functionality can be combined with a car pooling service. The net outcome of these developments is that previously vertical and linear, physically-bound value processes become horizontal and distributed in networks. At the same time, the cost of creating new bundles of functionalities (also those involving physical products and services) has dropped dramatically.

In short, digitalisation: (1) re-organises value processes from linear and vertical value chains into horizontal and distributed innovation ecosystems; (2) dramatically speeds up the process of creating new combinations; (3) enables users to become much more engaged in innovation processes than before; and (4) dramatically reduces the cost of creating new bundles of functionalities. All these developments have the effect of reducing the upfront investment required to start a new business, and also, substantially reducing the cost of entrepreneurial experimentation. The result is a new wave of entrepreneurial activity that takes advantage of the reduced cost of entrepreneurial experimentation while also taking advantage of another property of digital products – i.e., ease of scaleup – to pursue opportunities in novel ways.

These effects of digitalisation are manifest in the defining principles of the ‘Lean Startup’ mode of entrepreneurial opportunity pursuit that underpins the New Venture Accelerator movement. Those principles are: (1) bias for action rather than planning by taking advantage of the low cost of creating new functionality bundles and leveraging the internet to engage with users early on; (2) frequent experimentation enabled by the low cost of bundling and re-bundling; (3) collection of frequent, real-time feedback from potential users, again leveraging Web 2.0 affordances; (4) frequent business model experimentation and evolution, as enabled by the absence of sunk cost in physical production and distribution assets.

This mode of entrepreneurial opportunity pursuit also explains why new venture accelerators have become so ubiquitous. Because functionality bundling and experimentation occurs virtually, fledgling ventures require few physical assets and can be more easily co-located in shared office space. This is also beneficial for new ventures engaged in intense experimentation and business model development: because of the intense social learning induced by this activity, there is value in exchanging ideas with others and learning from the experiences of others. Because virtuality reduces the importance of physical location, new venture teams can more easily co-locate in shared spaces to benefit from rapid social learning.

One final, parallel set of developments is worth registering here. Digitalisation is not limited to products, services, and manufacturing processes. With digitisation, entire business processes can now be digitalised. The result has been a rapid increase in business process outsourcing and offshoring, to complement the already well-estab­lished manufacturing outsourcing trend. Such services are increasingly available to new ventures, and the availability of ‘software-as-a-service (SaaS)’ and cloud-based applications[3] greatly facilitate the opportunities available for new ventures to rapidly and flexibly scale up and internationalise their operations, should they ‘strike gold’. This means that digitalisation not only affects startup, but also, scaleup and internationalisation.

Summarising, digitalisation (notably, Web 2.0) has been a key enabler of the ‘Lean Startup’ mode of entrepreneurial experimentation, which, then, has been the driving impetus of the New Venture Accelerator movement. Because of these developments, entrepreneurial opportunity recognition and pursuit are very different processes than what they were a mere decade ago. Furthermore, this phenomenon is in no way limited to IT or Internet sectors, because: (1) through digital embedding, even physical products can be connected to digital innovation ecosystems; and (2) because of the ubiquity of the Web 2.0 mode of the Internet, the Internet has become an indispensable aspect of any business model, virtual or physical. Combined, these developments have had a major effect in the creation of a new, arguably global, form of entrepreneurial culture, and also, the emergence of the ‘entrepreneurial ecosystem’ phenomenon.

[1] Digitisation is the technical process by which analogue information is converted into digital form. Digitalisation is the sociotechnical process by which digitising techniques are applied to broader social and institutional contexts that render digital technologies infrastructural.

[2] Incidentally, the term ’Web 2.0’ was introduced into the public consciousness in 2004 with the first Web 2.0 conference, a year before Y Combinator was founded.

[3] E.g., Dropbox for file storage, sharing, and distributed access; Basecamp for distributed project management; Freshbooks for accounting services and so on.

Erkko Autio
Erkko Autio
Erkko Autio is professor of technology venturing at Imperial College Business School. He blogs about entrepreneurial ecosystems. You can follow his tweets at @eautio.