By Peng T. Ong

This article was first published in Monk's Hill Ventures' blog

All of today’s most successful tech companies share one trait: they create value from bits much more so than from atoms.

Let me explain. Atoms are the physical assets of a business, such as inventory, property/infrastructure, and people. Bits are digital or otherwise intangible assets, including software and intellectual property. Bits can be more disruptive because they are more scalable, easier and faster to distribute, and cheaper than atoms (per unit revenues), and thus focusing in them to create value generates a much higher return on invested capital (ROIC). But profitability is just a benevolent side effect of the real rationale for bit-driven strategy: building innovative and efficient products that improve experiences and increase savings.

Major tech companies know this, and they have focused their investment strategies away from atoms and onto bits—and even if they are not conscious of this, they drive in that direction as they strive for higher profitability. Take Apple, for example. Its business may seem to focus on physical devices, but its real profit comes from its bits: its brand, its cloud, the App Store, iTunes, and of course, iOS. Amazon originally aspired to ship physical books, but today what makes for a lot of its revenues—and much of its contribution margins—are more intangible offerings like Amazon Web Services, Marketplace, Prime, and Kindle.

This is a vital lesson for tech founders. When developing a startup’s business model and strategy, founders need to start by distinguishing their company’s atoms from its bits. From the start, they might need to rely on atoms to assure quality and efficiency, as Apple and Amazon did in the beginning. But as a company moves forward, its goal should be to gradually shift to outsourcing or digitizing their assets. Both the market, and society as a whole, are constantly seeking more efficient ways to gain higher value; companies that focus on bits will more easily achieve those goals.

Don’t get me wrong, in the end, we live in a world of atoms. And much of what we perceive as valuable involves “things,” versus just “information.” The trick is to leverage your business’ bits to drive its atoms, and to have as little variable cost tied to atoms as possible.

Control Atoms to Control Quality

When a very new company is competing for market share, the quality of its product or service is more important than profitability. New users won’t leave more established competitors behind in favor of an untested startup if that startup offers a mediocre product.

Tighter control over atoms may be necessary to ensure high quality in these early stages. That’s why Apple, for example, started out owning most of its factories, even though it outsources almost all of its manufacturing today. Once a successful startup matures, it can start to outsource and become more asset-light, just like Apple did.

Ninja Van, the logistics company we first funded in 2015, is another good example of this trajectory. When Ninja Van starts up in a new city, it needs to control the quality of its service. That means hiring its own employees and leasing its own fleet of delivery trucks and bikes. Over time, however, it will work with third parties to make the company more asset-light.

The Value in the Digital

Atoms are attractive because they hold relatively constant value in the physical world; however, bits are what disrupt entire markets and build unicorns. When my co-founder and I built, for example, we took what had been an “atoms”-based business—personals ads—and translated it into more scalable, efficient bits. Similarly, there were plenty of transportation and logistics companies before Uber, pumping their money into fleets of cars and trucks. Uber managed to build a highly valuable transportation company without massive capital expenditure on vehicles, because it was able to streamline the ride-hailing process digitally.

Startups that think in terms of bits have even more potential to shine in Southeast Asia, because most companies are still rooted to trade in atoms. Those that can innovate will thrive. Emerging countries’ governments sometimes throw barriers in front of digitally-driven companies, but consumers in Indonesia, Thailand and Vietnam crave speed and efficiency. They quickly latch onto evolving digital trends. An asset-light business is easy to scale as well, an important consideration in a region experiencing growth as rapid as Southeast Asia’s.

This conversation extends beyond the startup ecosystem. Even businesses based in the physical world are constantly thinking of ways to de-atomize. Even if a company profits from hawking physical goods, entrepreneurs can try to move their inventory fast so they are not holding onto any atoms for long. More and more corporate offices are also going virtual to reduce the atoms in their portfolio; other companies are reducing team sizes to similarly stay lean.

Bits & Strategy

Successful Southeast Asian startups thrive because they figured out how to navigate the physical world while keeping their eyes trained on the bits. But aside from building and maintaining digital assets, thinking in bits and atoms prepares entrepreneurs to make strategic decisions about where they invest time and money. Even when managing atoms, the underlying mindset and technology used to control the flow of these atoms is digital—which sets the business up better for transition into a more bits-enabled, more profitable future.

Even in the people-centric domain of hiring (specifically hiring great people), the bits-vs-atoms mindset offers critical help. In the universe of a company, employees are atoms, so founders will make better hires if they consider how to structure the company to make the most of their employees and what value each new employee will bring to their company—the more effective an employee, the fewer of them are needed. In other words, the more employees you need per million dollars of revenues, the more “average” you will have to make the job spec.

Underlying the balance between bits and atoms is a philosophy of maximizing value. Building a business requires founders not only to offer new value to the market, but do so in an efficient, cost-saving manner. Beyond simply advancing your business, thinking in bits drives entrepreneurs to create products or innovative systems that bring a better experience to the customers they serve. From the moment that founders start sculpting their ideas into companies, they need to take stock of their bits and atoms, bring value to the bits they have, and work towards de-atomizing for the longer term.

163 views0 comments
  • Antevorta

Updated: Jan 15, 2019

By Peng T. Ong and Andrew P. Rowan

In recent years, there’s been a push for deeper and deeper tech to be developed and deployed by startups. As the joke goes: “All you need is AI and blockchain in your business plan to get funded.” Lately, it seems that entrepreneurs are getting caught up in deep tech—and forgetting about, or sidelining, deep value.

First, almost all new value is created by entrepreneurs. In fact, if you take the ten most valuable companies on the planet and look at the increase in the last year, or the last five years, most of the new value was created by the companies led by their founders—eight of the top 10 are (or until recently for Apple) founder-led. For most companies, creating an innovative business model is more important than creating innovative technology because the former creates economic value directly. Deep value means that you’re addressing customer needs and wants, and in turn, generating lots of revenues and profits (at least if you are a capitalist). Put another way, the deep value created by a product or service is reflected in the financial returns of a business. The best way to understand this point is to look at the most valuable companies in the world; their value creation was initially in their innovative business models. (E.g., Microsoft, Facebook, or Tencent.) The founders focus on deep value creation; they understand what their customers need and want and build products to serve and fill those gaps.

So, what about deep tech? Deep tech usually isn’t a business or consumer innovation. Furthermore, the definition of deep tech evolves over time, that is, the line moves depending on the state of the industry. If you are building a startup today, chances are that you might be using just regular tech (e.g. machine learning from existing open source libraries)—deep tech is what’s coming around the curve. For example, Deep Learning might be considered deep tech as there is still much research. Basically, deep tech companies create value by producing new tech, not by disrupting existing business models. (Think of DeepMind or SpaceX.)

Deep Value Creation

Entrepreneurship on the Internet is about creating deep value using tech... and sometimes using deep tech. In other words, entrepreneurs shouldn’t focus on deep tech — instead, they should focus on how to get a 10x increase in value for customers. Sometimes, it is only with tech that you get that kind of jump in value. In many cases, founders don’t need deep tech to create deep value. Thus, the guiding star for a company’s path to growth and scale should always be one of value creation (and ideally deep value creation—10x better than what's out there).

When developing tech, an optimizing function is what engineers use to achieve building a system or enterprise. In other words, how do you optimize it? And what are you optimizing for? For example, to be faster, cheaper, better, more fuel efficient, etc. It’s imperative not to solely use the best tech or the deepest tech. Rather, it’s more important to make a value judgment (an operational decision) to see what a startup can do with existing or available tech that can create deep value in a customer focused time horizon versus prioritizing product features that can wait. If a CTO can discern among the available options and make the right call, then her/his startup will be one of the better value-creating tech companies on the market.

Deciding on Deep Tech

If you do decide to create deep value with deep tech, then be aware that it will be both time intensive and expensive. Truly groundbreaking tech might require anywhere from a handful to hundreds of engineers, who are experts, to create. Experts don’t come cheap. Pioneering applications with new deep tech can be more time consuming than expected as well. However, after assessing the paths ahead, you might conclude that deep tech is exactly what you need to create deep value but this will more often than not be the exception—not the rule. (E.g. what was the deep tech initially used in DropBox, Uber, or AirBNB?)

That doesn’t mean you shouldn’t pursue your goals or try to further your worldviews. We believe in the free market—so go innovate and form ideas about what you want to spend your time or invest in. The point here is that the optimizing function you should be using to build a business—as an entrepreneur—is the creation of value and not the creation of tech. Ultimately, value creation is a requirement and the creation of tech is just one piece of the entire puzzle.


Peng T. Ong is Managing Partner at Monk's Hill Ventures, a technology venture fund based in Southeast Asia that he co-founded. Andrew P. Rowan is an American entrepreneur and author of Startup Vietnam: Innovation and Entrepreneurship in the Socialist Republic.

95 views0 comments
  • Antevorta

By Peng T. Ong

Last year AI companies attracted more than $10.8 billion in funding from venture capitalists like me. AI has the ability to enable smarter decision-making. It allows entrepreneurs and innovators to create products of great value to the customer. So why don’t I don’t focus on investing in AI?

During the AI boom of the 1980s, the field also enjoyed a great deal of hype and rapid investment. Rather than considering the value of individual startups’ ideas, investors were looking for interesting technologies to fund. This is why most of the first generation of AI companies have already disappeared. Companies like Symbolics, Intellicorp, and Gensym — AI companies founded in the ’80s — have all transformed or gone defunct.

And here we are again, nearly 40 years later, facing the same issues.

Though the technology is more sophisticated today, one fundamental truth remains: AI does not intrinsically create consumer value. This is why I don’t invest in AI or “deep tech.” Instead, I invest in deep value.

The problem with investing in AI verticals

Since 2000, there has been a six-fold increase in venture capital investment in AI. The number of active AI startups has followed suit, growing 14-fold in the same amount of time.

But the capabilities of AI technology are often over-promised and over-hyped — and the domains AI startups are targeting could be more impactful. Do we really need a WordPress page developed by AI? By focusing on the technology, deep tech verticals — such as AI or blockchain-only startups — are ignoring the most commercially valuable part of a startup: What problem are they solving? What deep value are they creating?

Many startups are getting caught in the hype.

Pitched as an “AI tailor,” Original Stitch claimed it was able to deliver tailored shirts by using computer-vision software to analyze photos uploaded to the company’s website. Original Stitch generated $5 million in big-name investments. Unfortunately, the shirts produced using Original Stitch’s AI were poorly fitted — many were made too tight, or the sleeves were too long — and the company ultimately had to ask customers to submit their shirt sizes. I believe, one day, our shirts will be better custom tailored by machines — AI-powered or not is irrelevant to me — what I care about is a well-fitted shirt. Though developments and breakthroughs continue, AI systems are far from perfect, and if a startup cannot create value with deep tech or significant technology, the product itself may not be necessary.

Instead, I choose to invest in companies that leverage AI to deliver deep value to their customers.

Future proofing: Focus on creating deep value

Today, calling your company an AI startup is one of the quickest ways to signify that you are a forward-thinking, commercially-sustainable company. But being future-proof doesn’t necessarily mean having futuristic technology; in fact, having a good business model with humble everyday technology is often more sustainable in the long term.

Consider the seven most valuable companies in the world: Apple, Amazon, Alphabet, Microsoft, Facebook, Alibaba, and Tencent. Today, those seven companies are doing research in AI and other deep-tech software, but most of them didn’t start off as deep tech companies. Instead, they began by trying to solve a problem using “shallow” technology.

Alibaba and Amazon were eCommerce platforms, and Tencent (WeChat) was an internet chat system; all three are now heavily invested in researching and acquiring new and innovative technologies that will help them to continue expanding their brands.

What does that tell you? When you invest in a company, don’t look for deep tech, look for deep value. If deep tech becomes necessary or valuable, it will follow in due course.

An investor looking at funding deep-tech technology would not have invested in Facebook 15 years ago. Facebook was a social network built on PHP, the simple scripting language that half the web is built on. But in the years since Facebook launched, the company has built deep technology into its product, leveraging new innovations to expand its value and make its product better, all on the foundation of delivering deep value to its customers.

Similar stories can be found across Southeast Asia, with the likes of Grab and GO-JEK, which took their inspiration from Uber and Lyft. Today, they are among the most valuable companies in the region.

Deep tech as a standard in the future

Investing in deep tech comes with another issue: The same technology that seems cutting edge today will become standard over time.

Not long ago, developments like websites and high-resolution screens were both novel and technically interesting. Today, they are ubiquitous and universally available. We are at a similar point with today’s deep tech. Bitcoin and cryptocurrency, next-generation solar cells, SpaceX’s reusable rockets: these are all functional technologies and will inevitably become standard components over time.

For example, when I was running Interwoven, a content management software firm, we talked for years about how important XML was. Our XML-based document management system, TeamXML, was released in 2001 and disbanded by 2007. Now, there are zero companies built on creating value on XML alone. Companies use it, but it is not a central part of the infrastructure.

When making investments, I think of the future, where I want to go, and what value I believe can be created. Then, and only then, do I consider whether AI and deep tech are necessarily involved in creating that future and that value. It’s not about whether you’re “into” AI; it’s about whether you’re into long-lasting value.

Lucy Spencer contributed to this post. This post was first published in VentureBeat

  • Grey Twitter Icon
  • Grey LinkedIn Icon

 2018 Antevorta

  • Twitter Social Icon
  • LinkedIn Social Icon