Going Asset-Light Can Boost European Startups
Just as the global sharing economy has gone asset-light, so could many startups. Having relocated back to Europe in 2015 from the consumer goods sector in Asia where the model is widely used in a product innovation, technology and manufacturing context, I have seen differences in the how this model is being perceived and employed among the startups I meet here in Europe.
Much like in the software sector, technology, intellectual property (IP) licensing and other asset light business models have been successfully used in industrial consumer goods businesses and in the wider manufacturing sector for years -- from consumer electronics to the automotive industry. Although primarily used as a means to overcome the much higher barriers to entry that those sectors pose (driven by higher cost of capital required to develop, launch and scale new products), these models have played an increasingly important role in the speed and return on investment with which organizations can effectively innovate by executing on new product ideas -- and taking them to market. Vertical integration is often not preferred in such capital-heavy environments and is replaced by partnerships and specialization across the value chain.
A good generic example is the mobile phone sector and Apple, which not only chooses not to manufacture its own semiconductors but has for years managed its entire phone assembly through external partnerships in manufacturing. Both these areas would otherwise require multibillion-dollar capital investments in R&D and manufacturing.
Conversely, these types of models are being increasingly used in Europe, but largely in an original equipment manufacturer (OEM) or private label context. A recent Nielsen study even shows that the value share of private label in European retail is close to 10 times higher than that in Asia Pacific and double the global share.
Rarely, however, have I seen these models being used in the context of product innovation or disruption within an industry. Too much focus is often put on developing internal capabilities first (and fundraising for them accordingly). This becomes even more critical as early stage and growth capital become increasingly picky and look to efficiency in return on invested capital (ROIC). Yet, among the many hardware startups that I have met, this model is rarely considered, especially at an early stage in a strategizing and fundraising context. It is often perceived as a model historically more suited for private labels or for cutting costs in manufacturing, yet not as a model that adds capability and competitive advantage.
What is an asset-light model and what benefits does it offer?
An asset-light business model is essentially about focusing on your existing core competences while establishing external partnerships for product development, production or sales capabilities/resources across the value chain, often on demand (whether for physical goods, services or digital products). As a result, the business will have less capital-intensive assets (human capital included) employed relative to its sales and operations while the marginal cost for growth will go down. Many Chinese consumer goods businesses, for example, often solely focus on product development and assembly, while their tight network of partners are all specialized in the design and manufacturing of the individual components that go into the end product.
Local Motors in the U.S. is another great example when it comes to product development. Operating a network of community-supported micro-factories, co-creation and collaborative development forms the backbone of its R&D organization. With its R&D model based entirely on open innovation, the designs are open-source while large parts of the product development are being made by a collaborative community. Only certain elements of the value chain are being owned in-house. Coupled with a digital manufacturing process that avoids capital investments in tooling, Local Motors can likely develop an entire vehicle faster and with more capital efficiency than many big automotive giants can update a plastic trim in the interiors of their existing vehicle models.
Whether your company is a mobility startup, an online flight search engine requiring miles computation technology or a fast moving consumer goods (FMCG) startup seeking to disrupt a space within consumer products bogged down by too heavy operating working capital needs, here are a few examples of competitive advantages these types of business models can offer when done right:
1. Time-to-market and flexibility during launch phase
This will of course depend on your business and its nature, but focusing on your core competence without the need of developing adjacent capabilities or operations nor having to fundraise against those capabilities, will often allow you to launch faster and with less initial funding. With on-demand resources, as opposed to sunk capital investments, your ability to be flexible during product launch and make quick adjustments will likely improve.
Many consumer goods and hardware startups will benefit tremendously here and will be able to scale and grow their business at a lower marginal cost through access to more abundant on-demand resources in their partner networks (and often investments already made). As a result, more consumers will be able to access the innovation your startup brings -- in less time -- thus effectively democratizing the new product or service that your team is bringing to the market.
3. Open innovation.
As Henry Chesborough, UC Berkeley professor and executive director of the Center for Open Innovation, wrote in his 2003 article that later set the scene for the open innovation of this decade, "In a world of abundant knowledge, not all smart people (will) work for you." The ability to generate a new idea, execute on it and democratize it (by getting it adopted) is critical for any innovation to become meaningful. When founders and entrepreneurs focus on what they do best while gathering complementary capabilities and input from outside of their immediate environment or backgrounds, ideas have the potential of becoming even better while execution in a partner network is often more effective. Leveraging the capabilities, resources and perspectives that exist in your network of business partners often leads to better innovation.
As Chesborough puts it, "Look outside of your firm's walls to innovate." There is much more to the asset-light models than cost.