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Arbitrage vs Innovation - consider that startups that are using technology to make an existing market more efficient are profiting due to arbitrage of technolog
by jonmc12 15y ago
Arbitrage vs Innovation - consider that startups that are using technology to make an existing market more efficient are profiting due to arbitrage of technology. Consider that startups that are using technology to create a new form of value are innovating.
Technology arbitrage is kinda boring, but can have big rewards. I imagine the profit distribution among these startups looks kinda bell curvish.
Technology innovation and commercialization is a different game - here you have a few big winners effectively creating new paradigms, followed by technologies that may add marginal value in a large number of markets.
Its part of any economy to have a mix of those who arbitrage and those who innovate. Silicon Valley is no different.. in fact, you could argue that the arbitrage plays are necessary to create the funding environment that can facilitate technology innovation. I find it a useful lens for understanding the startup infrastructure.
To further refine the lens, you can look at through the asset class that each startup is attempting to create (personal reputation, team, tech, users, profits, strategic value) - Elad Gil has a good blog on this http://blog.eladgil.com/2011/01/m-ladder-position-your-startup-to-sell.html http://blog.eladgil.com/2011/01/m-ladder-position-your-start....
So, I see what the author is saying, but really I think she is looking through the wrong lens. Funded innovation sits at the top of a complex economic ecosystem of interconnected, evolving pieces.
- minimax 15y agoAre you saying "arbitrage" when you actually mean "incremental improvement"?
- jonmc12 15y agoNo, I was using the word in an economic context. Specifically the action of capturing value in one market with a technology that has been proven in another market. Groupon clones, Social game companies, etc However, I believe incremental improvement is a fitness criteria of technology arbitrage.
- minimax 15y agoAn arbitrage trade is a risk free transaction that involves buying something at one price and then immediately selling it at a higher price. How does creating a Groupon clone fit into that model? How do you get from imitation to arbitrage?
- jonmc12 15y agoConsider Groupon's tipping point sales model to be the innovation. Groupon clones took a method known to work in one market, and applied them to new vertical and geographical markets before Groupon could. As far as the technology (in his case a promotion methodology) can be applied to the market, and as far as this can be predicted with some certainty, an arbitrage opportunity exists. In my mind, yes, arbitrage is inherently a low-risk investment, but only when compared to the potential return of the investment.