Salim Ismail: How Exponential Organisations like Uber, Airbnb are changing the world

As human beings, we struggle to understand exponentiality. In a local context, many investors have been shaking their head at the soaring share price of Naspers. But once you get your head around what happens with an Exponential Organisation (which is precisely what Naspers 34% owned Tencent is) the valuation becomes easier to understand. Silicon Valley have given birth to many Exponential Organisations, so was the natural home for Singularity University which was established to study the concept. In this special podcast, Singularity’s co-founder, best-selling author Salim Ismail explains how the democratization of information is transforming the world, putting businesses which “get it” onto a different growth trajectory. Sceptial? Consider how Uber is crunching the traditional taxi business; how Airbnb is killing hotels; how Google and Facebook dwarf other media companies. What happened there, is going to happen to energy, water, motor vehicles, pretty much every business sector. This has been a fascinating couple of days for me attending the Barclays Africa-sponsored event. Share in the learning by absorbing this and the other interviews with the Singularity University faculty. It will change the way you see the world. – Alec Hogg

I’m with Salim Ismail, who is the co-founder of Singularity University. You brought Silicon Valley to South Africa this week.

Hopefully. I think there are many great values in South Africa already, so hopefully we can add another one.

It’s almost as though you’ve upgraded the knowledge level – there’s much going on in the world that being far away in South Africa you wouldn’t quite get….

To some extent but you’ll have to remember that even if you go five minutes from our headquarters to the Google Campus, the average engineer inside Google has no idea what we talk about because everybody is ‘heads down’ – getting stuff done. They have very little time to keep pace with what’s going on and the pace of change means that it is constantly transforming.

Next door to the Google Campus’. That’s where Singularity University is. Founded in 2008, what was the idea behind it?

Yes, in 2008. We’re based at the NASA Ames Campus, which is where all R&D and supercomputing is done. Out of the ten NASA Centres, that’s where they focus on that. The basic idea was that we are facing a world with increasing destruction volatility, and all of our leadership structures around the world are geared towards predictability and managing the status quo, and managing for efficiency if you’re in business. Whereas now, in this world where you need to be managing for disruptive change. Yes, and the focus throughout the sessions that I’ve been able to have a look at is that their technologies are massively changing our lives.

Maybe let’s just start with the investment worlds, because many in the investment world don’t understand exponentiality. Is that just part of the human condition?

Very much so. You know, all of our intuition and all of our brains are programmed to, and our education systems, are programmed to think/teach linear progression, and it is very easy to project out, if I take 30 steps where I’ll be in a third of the way or two thirds of the way. If I take 30 doubling steps, 2/4/8/16, at step 30 I’ve gone a billion metres. I’m 26 times around the world, which is a little bit further than a 30-metre stretch, and it’s hard to gauge where I’d be a third of the way or two thirds of the way. What we found is that the foundation of the way we think about things is that everything is becoming information enabled, and the web becomes information based. It starts going to an exponential doubling growth path.

Salim, I loved your book. It’s a breakthrough book about exponential organisations. What drew you to the subject?

Well, you know, I was at… For a couple of years, before Singularity, I was the Head of Innovation at Yahoo, and I found that you do or attempt disruptive innovation in a large organisation that the immune system of the organisation will come and attack you because all of our work structures are built to withstand change and withstand risk. Then there was a quote by David Rose, one of our faculty who said, “Any organisation or company designed for success in the 20th Century is doomed to failure in the 21st Century.” That really struck me. Then in about 2009 – 2010, we noticed, as a weak signal, this new breed of organisations were scaling very, very fast, so the idea is we’ve learnt how to scale technology.

How do you scale the core organisational structure, which has always been painfully linear and incremental? You give examples in your book. One of those that I loved was ‘Waze’ on the one hand and ‘Nokia’ on the other.

Yes, so Nokia, after the iPhone was announced in a ‘big bat’, bought Navtech, which owns all the circular traffic sensors on all the roads in 35 countries or so, and they were figuring they would protect themselves against… By having real-time traffic information and owning the source. At the same time, Waze launched, which piggybacks on your GPS, and five years later Nokia has essentially, gone out of business. They get sold for less than what they paid for in Navtech, and Waze gets sold for a billion Dollars, and they had 50 million traffic points because every single GPS, and of course, that’s excluding exponentially. It’s probably up to about 100 million today. There was therefore a great indication of a few ‘bank on’ physical assets than somebody who was doing the same thing with the digital environment or an information-based environment, will surpass you very, very quickly.

You go into some detail about Kodak and I think it’s a well-known story, but you also mentioned the ‘iridium moment’.

Yes, so there are two kinds of flavours of that. First is the iridium layer is the sediment layer that indicated the comet had hit and the dinosaurs were in big trouble, and we use that reference in a couple of ways. One is that we think that we might be ending the era of large organisations. The comet has hit, which is essentially, information, and now we’re going to see a ‘Cambrian Explosion’ of little fury organisational forms being created. The second concept of the iridium moment is the satellite network in the late 90’s. That spent billions of Dollars trying to launch satellites to deliver telecommunication, and it turned out they did not change their operating plan and business plan assumptions for 12 years. That is fairly criminal in an era where everything is changing so fast, so by the time they launched they were, essentially, out of date.

What you’re saying is if you want to know what not to do you look at Iridium, you look at Kodak, and perhaps even look at taxis versus Uber.

Yes, many of these, the taxis versus Uber thing is more of a… You know there’s a unique time where there’s a confluence today, of payment systems/reputation systems, GPS location messaging. That allows you to information and label taxis or hotel rooms, by Airbnb, and things like that, which wasn’t possible before but the taxi world has not had any real innovation for probably a few decades now and the taxis, really look at, in many cases. Uber is coming along in a completely new paradigm. It really threatens the status quo in many of these industries, and you would never guess in some of these old industries that you would have such a disruptive market fall so quickly.

Yes, Netflix and Blockbuster was another example that you pointed out yesterday.

Oh, it’s phenomenal. You know, in the year 2000 the CEO of Netflix went to Blockbuster and said, “I would like to partner with you.” The CEO of Blockbuster said, “Look, we have every family in America coming into our stores, to get a DVD, buy popcorn, etcetera. We absolutely don’t need you.” He went on his way to build up Netflix 6. Seven years later, the CEO realised he made a terrible mistake, and went back to him, and his board preventing from doing so.

The Blockbuster board?

The Blockbuster board said to the CEO, “Do not go out, and do this. We have the capability. Wipe them out.” What happens is you cannot wipe out an organisation that is moving at a doubling pattern. It is moving too fast for you to do that, to quash it, because you’re operating off linear assumptions in your old pattern. Literally, two years later, Blockbuster was bankrupt.

Is there something to learn from all of this, in the way that people are viewing investment markets? On the one hand, you have… If you don’t understand exponentiality, the share prices look insane. On the other hand, those who do understand exponentiality, think they could still be cheap.

I think you’ve hit it exactly right. Peter Thiel invested in Airbnb, two-and-a-half years ago, at a valuation of 40 percent of hired hotels worldwide, about two-and-a-half billion dollars. People at the time said, “That’s kind of crazy. That’s a hell of an evaluation”, but he’d noticed the exponential growth, in Airbnb’s room’s lights, and that has continued. We’re now in early 2015, at this pace, by the end of this year; Airbnb will be the biggest hotel chain in the world. Now that’s just a staggering thought. From nothing, in about five to six years, you’re the dominant market leader and, most importantly, you don’t own any hotels.

Yes, so far all of these innovations have come from Silicon Valley or from areas where, if you like, the ‘first world’. Yet Africa, being so far behind, does have some kind of an opportunity here to leapfrog.

I think there are enormous opportunities and I think what will happen over the next few years, is that we will see South African entrepreneurs leapfrog the rest of the world. A simple example would be drones. The FA or Europe, scared of security concerns, will not allow drone development and, so Amazon wants to deliver packages using drones, and the FA has banned it. They went up to Canada to do their drones testing. Meanwhile, Alibaba is delivering drones, packages with drones in China freely, so in many existing ‘first world’ countries the regulatory frameworks do not allow for this new world. Africa has an extraordinary opportunity to think about what do these regulatory frameworks look like, and many of these companies really set the pace for the next Century. Then you also need to change the minds of politicians. As an example in South Africa, we’re still putting a lot of subsidisation into the motor industry. We’re also looking at an industrial plan that looks a little like what the Chinese did 20 years ago. This is not restricted to South Africa. Almost in all politics and all policy settings, is defensive and reactive. In the heart of Silicon Valley the Department of Transport in California, three or four years ago, announced a $70bn high-speed rail system to connect Sacramento, San Francisco, and L.A. together. That’ll be out of date before they lay the first rail, and it’s what prompted Elon Musk. He went a little bit awry with his… ‘Un-verb’d’ moment. Yes, and that’s what announced him to or spurred him to create and design the hyper-loop system.

How does that work?

You take refurbished oil pipelines, which are hermetically sealed anyway, and you chute people down them, like pods. You chute people down them. Yes, so you have to create pods that are hermetically sealed, and you chute people down it, as we used to chute pneumatic messages into companies decades ago, and you can get from… The thing that drove him nuts was L.A. to San Francisco takes about five hours, whether it’s by car or by plane, and there’s no reason that we’ve not had a major change in how fast you can go 500 kilometres. So the idea was how could you get 500 kilometres in 20 minutes?

How big is Elon Musk in the U.S.? You’ve mentioned this. It sounds like science fiction that you can push people through oil pipes to get to one place quicker than another.

There are two companies now, building the site. They are starting testing this year. It is actually, very well understood. The cushion, the air pocket, between the pods ensures that you actually wouldn’t have an accident, and it’s very doable and it is actually quite inexpensive, so there’s some extraordinary possibilities with it. I think the bigger point is that in the face of advanced technologies, our policy makers are looking backwards. I literally just heard yesterday that South Africa is looking to implement nuclear power, and that is just a terrible decision, given that we know what’s happening with solar.

Yes, what is happening with solar?

It turns out that, you know we think about doubling patterns. It turns out that the price performance of solar cells is on one of these doubling patterns and has been for a few decades. We have very clear data to show this. At this current pace, we will hit 100 percent of world energy supply, deliverable by solar in somewhere around 23 to 25 years.

At a price that is going to make a nuclear-plant a white elephant?

Essentially free because now, all of the costs… Already all of the costs in solar is now the installation of the panels, and as the efficiency keeps going up, it will become quite profound. It turns out that if you add up all of the energy and all of the fossil fuels in the world, all the oil reserves, gas reserves, and natural gas, and coal etcetera. That adds up to only about five days of sunlight hitting the world. We’re bathing in energy. You shift the conversation then, from a scarcity problem to a conversion problem and when the conversion is riding that doubling pattern, we encourage people to ride that pattern. Why not leverage it there. It’s already there, and, so we had this discussion with Israel a few years ago, with both the President and the Prime Minister there, and they changed their energy policy. They said, “Wow, why would we take 30 years to build nuclear plants. Why must we wait for solar, on the curve, to catch up?” It would be interesting and useful if South Africa looked at that same opportunity.

Like the high-speed trains in California?

Exactly right.

You’ve come here. You’ve changed a lot of minds. You’re talking to business people, on behalf of Barclays Africa. What happens next?

I think we’re in for the most disruptive period in the history of business, and the reason I say that is that the fact that we’re information enabling everything, allows anybody to attack legacy industries, with impunity. We’re seeing, today, a raft of new entrepreneurs, with no experience in the prior or space, where they decided to go after a particular area, and making radical changes and disruptions in those areas. If you look at the crop of the Googles, Ubers, Airbnb’s, or Facebook sections. None of them had any experience in that domain, right. In fact, one of our favourite sayings is that an expert in a field is the fellow who’ll tell you how something cannot be done, right. When you come into a new area with a beginner’s mind and leverage these very, very fast-moving technologies. Anything is possible. We are seeing, today, about a dozen technologies operating on this doubling pattern. We have never seen that in the history of the world, so we get hugely optimistic as to what options that they might bring.

From a South African perspective, the fact that you’re here now, for the first time, most of your faculty… Will you come back? Will you be working other South African companies or is this all it is?

No, the aim is to actually plant a footprint and plant a toehold here, and use South Africa and a partnership with Barclays, as a foundation to affect the whole of Africa. When I travel around the world, and that’s essentially almost all I do nowadays, on behalf of S.U., I need a lot of governments and I, simply can’t think of a more optimistic or more place with more upside than Africa has. The U.S. is stuck in its politics. Nothing will happen there for about ten to 20 years. Europe is a mess, with all of the debt and the back and forth, around how they deal with the banking crisis and so on. South America is mired in corruption and violence, and so on. Africa has a real opportunity. Well, many of the countries are ‘green field’ countries, so you can setup the next generation regulatory structures. Whoever sets up the figures of the future of how to navigate and regulate medical devices is going to attract a ton of R&D there, and so some really, interesting possibilities will come out there.

Salim Ismail is the co-founder of Singularity University and this special Podcast was brought to you by Barclays Africa

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