Upstarts vs. BigCos and corporate transparency

Gordon Mohr
Wed, 9 Jan 2002 23:01:00 -0800

Jeff Bone writes:
> Gordon Mohr wrote:
> > > In a transparent world, the optimal
> > > strategy for the shareholders (who
> > > can own P, Q, and R) may be that P
> > > sticks to its knitting, which would
> > > encourage innovation at Q & R.
> >
> > This last point is gigantic.
> Considered out of context it is, and indeed it's the thing that has most given me
> pause during this discussion.  Until I realized a couple of things...  first, a
> relatively risk-conserving investment in P is preferable to a speculative
> investment in Q or R, for folks that can or do own any or all of these.  That is,
> the risk-adjusted rate of return on P is going to be higher than Q or R.  It is for
> this reason that rational shareholders of P (regardless of their investment status
> vis-a-vis Q or R) will prefer P to not "stick to its knitting" but rather to
> directly combat competitive / disruptive innovation.

However, by holding a diverse enough portfolio, the
investor is able to invest in opportunities based on 
their raw expected rates of return -- with little or
no risk-discount. Plus, there is still risk inherent
in P.

So why would a portfolio-theory investor want to put 
marginal eggs in the P basket? I don't follow your
BigCo bias.

> Second, while there is probably a liquid market for P, there is much less often a
> liquid market for Q and R while they are at "innovator" stage.  Given this, the
> "mass" of investment interest will always be with the established player.

I would expect transparency to greatly enhance Upstart 
liquidity. And when P's internal deliberations are
also public knowledge, that transmits to the markets
real information about the value of Q and R.

> > The interaction with stockholders (and their
> > portfolio preferences) that Dave points out
> > is one way.
> >
> > Another: No more "FUD".
> Again, don't bet on it.  FUD is often not a matter of if, but when.  Consider
> instant messengers.  The enterprise instant messaging market (such as it is ;-) was
> impenetrable by smaller players based on the presumed eventual entry of Lotus and
> Microsoft.  Transparency really doesn't minimize this kind of market adoption
> friction / prevent this kind of FUD.

Sure it does; if Microsoft publically says they'll have a
product ready in 1998, but any investor can look at their
internal schedules and arguments and see it won't be ready
until 2000, that pierces a big part of the FUD. Even better,
if there are internal discussions in Microsoft which say
things like "we should use Upstart's technology rather
than wasting 2 years trying to match it", or "we'll make
our product compatible with Upstart's at first but then
add features XYZ", that's both anti-FUD and gives Upstart a
head-start on strategically countering Microsoft.

Just think: all of Microsoft's plans, source code, bug logs,
and API documentation would be available to all Upstarts.
Microsoft can't plan or deploy anything with the intent of
hurting a specific competitor without all the details of
the planned move being public long before it becomes 

That's a powerful check on traditional FUD.

> > Similarly, BigCo's mere consideration that
> > COPYing Upstart might be worthwhile will be
> > public knowledge; this allows Upstart to
> > adjust and would prompt BigCo investors and
> > competitors to take more interest in Upstart.
> No, sorry, it would essentially put the fear of god into Upstart's investors and
> guarantee that the company wouldn't be able to get its next round of funding.  

Well, again, I disagree. Any savvy investors should already
know that BigCo is discussing the Upstart, so knowing the 
true substance of those internal discussions can't make 
them any worse off. 

If the BigCo discussions are serious, they can save their 
money -- an economically beneficial outcome. (No one has
the right to continue wastefully pursuing a course of
action that is guaranteed to be effectively countered
by the BigCos.) If the BigCo plans lack seriousness, 
or have other flaws, Upstart and its investors know to 
keep the pedal to the metal.

> > And when things are going wrong with BigCo --
> > projects are failing, customers are unhappy,
> > and so forth -- transparency means Upstarts
> > know exactly where to concentrate their
> > efforts.
> Look, even in the most abstract, this makes no sense at all.  Here's a metaphor:
> consider a battlefield.  Winning a battle is often a matter of concentrating
> resources strategically in certain areas / occupying certain essential strategic
> positions.  (In today's real-world battlefield, this is turning out to be the
> airspace over the theater of conflict.)  In almost all cases, stealth is an
> essential factor in an aggressor's ability to take those positions and inflict
> strategic harm on the defender.  Mapping over to business competition, it's clear
> that the defender is the entrenched player, the aggressor the innovator.

I don't buy your metaphor. The best innovations are nothing 
like zero-sum warfare, and involve taking strategic positions 
that the BigCos don't even yet agree are strategic.

Also, surprise and stealth are not innovations, nor are they,
alone, any sort of social good. If transparency kills a 
certain kind of company that was only possible via secrecy,
but enables others kinds that don't need secrecy, that could
easily be a net win.

> I like the suggestion made ages ago:  make public companies transparent, leave
> private companies alone.  *THAT* would guarantee not only continued but accelerated
> innovation.

I may have suggested something like that. I'm sure I suggested
the possibility of a "size" trigger -- transparency as antitrust.

I don't see exempting private BigCos as fair, though. It is the
privileges of incorporation, not those of wide stock ownership,
that might require some sort of transparency check. 

- Gordon