The Gap Economy

The Gap EconomyIn recent days North Korea is in the news daily with its bellicose rhetoric and the famous threat to nuke the most awesome community of Austin, TX. It is hard to blend out. I am fascinated in figuring out how mechanisms, technologically, economically, or socially, work. So I started to look more into North Korea and discovered some interesting insights about our own economy as well.

I got to this topic after I discussed with my wife what makes her blog more successful and I kept on repeating the buzz word “pivoting”. This got me on an interesting thought. We simply cannot predict consumer behavior, we cannot say we want to create that perfect blog people want to read because we do not know. So a planned approach cannot work. But what is with an opportunistic approach and why do some blogger have done so much better than other? This brought us to some interesting observations: I want to call it the Gap Economy.

There are two competing economic systems in the world: on both sides of the axis are socialism and capitalism. Let’s start with socialism: in a socialistic economy a bunch of scientists sit together in regular intervals and predict the needs of a society which includes all sectors, like government, manufacturing, services, and agriculture. Needs and desires have to be predicted and anticipated in order for socialism to be effective. This is for obvious reasons very hard, if not impossible, to do – and we are not even talking about execution, effective use of capital, and motivation of the labor force of which history has taught us plenty of lectures.

In contrast, in a capitalistic economy there is chaos. No central entity exists but instead the free market decides over the faith of the entire economy. Individuals act independently from each other and thrive to maximize value. You could say, they thrive to maximize profits, and obviously since people are inherently closer to themselves than others, this is what motivates them. But in reality, they are maximizing value, because only if value exists, do customers buy and pay a price so that the entrepreneur can make a profit. The free market economy automatically tends to reach equilibrium by maximizing value.

An economy is constantly developing with the evolution of society, the development of values, desires, needs, and fads. The definition of value changes; some times quiet rapidly as we have observed with the real estate bubble where $150k charmers became $2.5m luxury homes within half a decade (and back on the foreclosure block a year later). A market economy is, just like natural selection, evolutionary and quick to adapt. Sure, during periods of extreme transition, there are hardships for parts of the society, and there is a human toll, a collateral, we trade for the benefit that the systems adapts and corrects itself for the greater good of the masses.

During the Dot-Com days, just like after WWII in Europe, we had a lot of obvious gaps. Anybody who would figure out how to close them would be a winner. Of course we had plenty of experiments as well, but really those gaps made the blockbusters. There was an obvious need for fast networks, and obvious need for effective online resellers, an obvious need to simplify user interfaces and make the Internet approachable to the masses. Just like there were obvious needs after WWII for housing, day-to-day necessities, transportation, end the like. This economy was driven by people who know how to increase efficiencies, scale operation, and speed up delivery. If you see who are the healthy survivors of the Dot-Com days, you will find many of those obvious gap fillers. And there is a reason why a good portion of successful businesses in Europe came out of the gap filler period of the 50s and 60s.

But today, many of those obvious gaps have been closed around the Internet sub economy. To come back to the discussion with my wife, the first generation of Twitter micro bloggers, the first generation of long format bloggers, they are celebrities these days because they filled the obvious gap – back then when this was a new medium.

Today, there is no such obvious gap in many places. People do not want “a” blog, they want the best blog, but they cannot even define what the best blog is. So bloggers, just like much of the tech community these days, is used to “pivot”. Pivoting on the other hand means nothing else than trial-and-error. Trial-and-error what sticks to the wall, trial and error to find those hidden gaps.

What is the take away from this insight, when an economy, or a sub space of an economy, moves from filling obvious gaps, to discovering gaps? Well…

  1. You cannot plan a successful startup. There is just not “the” recipe that you can just execute and it works.
  2. You odds of failing are almost given. But you do not need to fail in the end. Your success depends on your ability to alter your approach, to pivot, to measure success, and move on to the next variation, if things do not work out.
  3. That means your approach and endurance, your skills and that of your team, your analytical skills and your courage to think outside the box are more important than filling the gap by working harder and longer or trying to create organizational efficiencies.

What I told my wife: keep on doing what you are doing, alter your approach, see whether it works, and if not, jump back and start another iteration of the cycle. If you have the stamina to suck up failure, you will in the end succeed. And there is no guarantee that the obvious-gap fillers will survive either – so the playing field becomes leveled again, which is opportunity for entrepreneurs. (SB)

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