Editor’s note: Tom Blomfield is a Ruby developer and co-founder of GoCardless (YC S11). He was named one of the Top 5 Entrepreneurs under 30 in Europe and blogs at tomblomfield.com.
Over the last few years, it’s become dramatically more simple and capital-efficient to launch and grow Internet businesses. In particular, “X-as-a-Service” providers help startups get off the ground with only a few hundred dollars. Amazon and Rackspace provide on-demand servers that scale to meet hosting requirements, Mailchimp and Sendgrid run high-performance mail servers at very low cost, while Stripe, Braintree and PayPal make payment processing straightforward.
As companies become more comfortable using these outsourced services, more specialized and niche services can flourish, and so the process of launching startups becomes faster and cheaper. It’s become possible to build billion-dollar companies with a handful of engineers. Thanks to these services and tools, we’ve “decoupled the technical ability and experience needed to write tricky software from the ability to solve problems for people.”
In the brick-and-mortar world, it’s a different story.
While outsourcing to external services is certainly not a new concept, the benefits haven’t trickled down to newly launched companies, as the scale required to access most offline outsourcers is prohibitive.
Three related factors may explain this disparity. First, with most online “X-as-a-Services,” you can get up and running straight away. There’s no procurement or long purchasing process; you can simply sign up and go, often without even talking to a human being.
Second, robust, well-documented APIs make this sign-up-and-go approach possible. Implementation consultants and long integration processes are usually a thing of the past. Plugging services together is a matter of minutes or hours, not weeks or months.
Third, the minimum required volume to use these services is often “one,” with a price-point of “free.” These zero-cost trial periods make sense because the infrastructure to power the API has already been built. You can have customisation, but only within the boundaries of the existing API.
In contrast, solutions offered by brick-and-mortar outsourcers are effectively custom-built each time, making the marginal cost of an additional customer prohibitively high. This, in turn, explains the long procurement processes and staggering minimum-order volumes.
In certain brick-and-mortar industries, we’ve seen a fundamental change in the way business is done. Take the fast-food delivery market. Chains like Pizza Hut traditionally operated a vertically integrated model, owning and running their own website, delivery fleets and restaurant portfolios.
As smaller competitors struggled to compete, the first thing to be “outsourced” was the website, iPhone app and payment processing, led by companies like Seamless, GrubHub and JustEat.
The next candidate for outsourcing might be the delivery network. Seamless’ core competency is branding, building colorful websites and acquiring customers. For restaurants, it’s cooking great food. But no one is particularly good at optimizing a last-mile delivery fleet – I’d expect to see a number of very large Delivery-as-a-Service companies emerge in the next few years (think Uber Rush, Wun Wun and Postmates on an industrial scale).
The next billion-dollar fast-food corporation probably won’t even run their own kitchens – it may simply be a collection of intellectual property – brand name, menus and recipes – with all the physical work of food preparation and delivery performed by service providers. Indeed, Burger King has doubled its stock price by taking this approach.
In another real-world industry – grocery shopping – Instacart is a fascinating example, as it has the potential to build the largest grocery chain in the world without owning a single grocery store. It uses the existing network of grocery stores to effectively warehouse their inventory, while focusing on the final-mile delivery and a delightful customer service.
In its early days, Instacart found an ingenious way to solve the three requirements for efficient outsourcing; instead of spending years dealing with large warehousers, woeful APIs and huge minimum-order volumes, they simply had their personal shoppers walk into city-centre grocery stores to pick produce off the shelves. Instead of negotiating access to stores’ inventory lists, they simply bought one of every item in Trader Joe’s and photographed them all in a studio over a weekend.
Instacart is a dramatic example of Everything-as-a-Service – the ability for smart, scrappy entrepreneurs to build billion-dollar, real-world businesses with a handful of staff, no premises and minimal capital investment.
It’s an exciting time for entrepreneurs working in offline spaces: Real-world startup costs will become dramatically lower, allowing new business models to be developed and tested with much greater velocity. As in the online world, access to capital, infrastructure and specialist skills have become less important than the “the ability to solve problems for people.”