1. People Matter More and More
Why is the valuation of the internet industry significantly higher than that of manufacturing? Among equally excellent companies in their respective industries, Tencent’s PE is as high as 30+, while Gree’s PE is only 10+.
The internet industry is characterized by being asset-light: no expensive complex equipment, no need for large production plants. Unless you intend to keep them as a collection, equipment loses value every year, and on top of that there are maintenance costs, plus irregular replacement. Compared with manufacturing companies, a software company’s main equipment is a phone or a computer, at extremely low cost.
Employees of a software company need only a computer with network access to keep producing. As network coverage grows broader, transmission rates grow faster, and consumer electronics grow cheaper, the most important factor of production for a software company becomes people, and labor wages account for the vast majority of company costs. This trend is not limited to the internet industry; other industries show something similar, replacing manual work with robots and human labor with software services. On one hand this reduces labor costs; on the other hand, as equipment becomes homogeneous, people are valued even more. It seems contradictory, but in fact it places higher demands on employees. Concepts like DevOps and full-stack emphasize composite employee skills.
People matter more and more. Because people cannot be copied, they are the only source of differentiation. This differentiation ultimately determines whether you can respond quickly to market changes, determines whether the product is good or bad, and determines whether you can win in competition.
2. The Product Is the Output of Team Capability
The product is the delivery vehicle for the solution, and its quality depends on the team’s understanding of the core problem.
In recent years there have been quite a few SaaS startups. They leverage their accumulated connections in the industry and their understanding of industry problems to turn solutions into SaaS and offer them as services externally. SaaS doesn’t cost much; you only need to land a few customers to earn more than working at a company. Not everyone has such accumulated resources and opportunities to land customers. But the logic is right.
In a company with more people, it’s simply a finer division of labor. Some are responsible for making money through the product, some are responsible for product R&D. At different stages of a company’s development there will be different emphases. To survive, there is more emphasis on making money; for long-term strategy, more emphasis on R&D. This places higher demands on the team’s adaptability.
The more thoroughly the team understands the problem, the stronger the product’s viability. If you design only for the sake of being easier to use, the product is merely a pretty vase. Only by continuously going deeper into the domain can you drive the product to iterate in a better direction.
The product is the output of the team’s capability. The team must not only solve domain problems but also adapt to market changes. The upper limit of the team’s capability determines the upper limit of the product.
3. ToB Ultimately Comes Back to ToC
Today, large ToC IT teams must support not only the company’s customers but also their customers’ customers.
Killing two birds with one stone has many benefits: besides getting the team to straighten out the business logic and deepen its understanding of requirements, it can also build influence in the industry and incidentally earn back money. If you can take part in open source and give a few community talks, that will further motivate the team and make it easier to recruit new people.
Large ToC companies converting to ToB have a product advantage. ToC provides experimental scenarios with sufficiently low cost, letting the team iterate and polish the product. In the process of a small company growing into a large one, the solution evolves along with the business. Large ToC companies happen to have been through a complete cycle, and so have the capability to output externally and the foundation to provide solutions.
ToB’s profit comes from ToC; only by creating value for the customer’s customer can ToB share in ToC’s success. A ToB without a ToC foundation can only rely on deep cultivation of the industry and on customer service to win.
