Weekly Thoughts


Weekly Thoughts: Smiling Curve, Golden Circle, and Small Business Financing

Here are three things that caught our eye this week:

The “Smiling Curve”

We read a great article this week on Ben Thompson’s stratechery blog regarding the “Smiling Curve” and how it is likely to effect the publishing industry. First proposed by Acer CEO Stan Shih, a smiling curve is:

“an illustration of value-adding potentials of different components of the value chain in an IT-related manufacturing industry…According to Shih’s observation, in the personal computer industry, both ends of the value chain command higher values added to the product than the middle part of the value chain. If this phenomenon is presented in a graph with a Y-axis for value-added and an X-axis for value chain (stage of production), the resulting curve appears like a ‘smile’.”


While originally conceived as a method for evaluating the IT value chain, according to Thompson, a similar dynamic is beginning to take place in the publishing industry as well. From the article:

“When people follow a link on Facebook (or Google or Twitter or even in an email), the page view that results is not generated because the viewer has any particular affinity for the publication that is hosting the link, and it is uncertain at best whether or not their affinity will increase once they’ve read the article. If anything, the reader is likely to ascribe any positive feelings to the author, perhaps taking a peek at their archives or Twitter feed. Over time, as this cycle repeats itself and as people grow increasingly accustomed to getting most of their “news” from Facebook (or Google or Twitter), value moves to the ends”

Essentially, publishing value will move to the creators of content (writers, etc.) and the platforms for content discovery (Facebook, Google), leaving content delivery companies (i.e. publishers) a smaller piece of the pie.

Like Thompson, we believe the smiling curve framework applies more broadly, from education with the advent of open source curricula to media with the march towards streaming. Regardless of industry, it will be important for us to identify and focus on opportunities on either end of the curve and to think strategically about how future technological advances might change the competitive dynamics.

Blog Post , NYT Article , The Smiling Curve

The Golden Circle

This week we listened to Simon Sinek’s TedX Talk “How great leaders inspire action.” Given that this talk has received 19.6 million views since its posting in 2009, we’re not alone in thinking that Sinek offers some compelling insights.

Sinek introduces a framework – the Golden Circle – to codify the way all the great and inspiring leaders and organizations in the world think, act and communicate. The Golden Circle argues that some organizations and some leaders are able to inspire where others aren’t because they ask ‘Why?’ before asking ‘What’?. Sinek explains:

“Let me give you an example. I use Apple because they’re easy to understand and everybody gets it. If Apple were like everyone else, a marketing message from them might sound like this: “We make great computers. They’re beautifully designed, simple to use and user friendly. Want to buy one?” “Meh.” And that’s how most of us communicate. That’s how most marketing is done, that’s how most sales is done and that’s how most of us communicate interpersonally…. Here’s how Apple actually communicates. “Everything we do, we believe in challenging the status quo. We believe in thinking differently. The way we challenge the status quo is by making our products beautifully designed, simple to use and user friendly. We just happen to make great computers. Want to buy one?”

Interestingly, the human brain is broken into components that correlate with Sinek’s framework. The neocortex – responsible for all rational and analytical thought and language – corresponds with the “what” level. While this part of the brain can understand large amounts of complicated information, it doesn’t actually drive human behavior. In contrast, the limbic system – responsible for feelings and decision making, but not language – corresponds with the “why” and the “how.” In particular, when leaders communicate the “why,” they’re talking directly to the part of the brain that controls human behavior. This is a particularly valuable insight, because, as Sinek puts it, “people don’t buy what you do, they buy why you do it.”

Within our firm and our portfolio companies we aim to constantly focus on asking the “why” rather than focusing solely on the “what.” We believe this practice will serve us well and give us the ability to deeply connect with and potentially inspire others.

Sinek’s Ted Talk

Small Business Financing

Finally, this week we came across several articles discussing the current and future outlook for small business financing. Post-financial crisis regulation has limited the ability of large institutional banks to offer significant small business financing and as a result other players are stepping into the space. From the FT:

Traders that previously concerned themselves with credit derivatives and complex arbitrage have suddenly begun to evangelize about lending to fish and chip shops and managing the invoices of fabric importers. In the past year some of the largest hedge funds in the UK have started investing their own money in platforms that bring together small savers and borrowers, as well as providing financing to small local businesses. Others have begun to invest in so-called factoring companies, which allow businesses to manage their working capital by selling unpaid invoices to the platform at a discount to their face value.”

A similar dynamic is in play domestically as alternative lenders join with smaller regional banks to fill the void left by larger institutions. In addition, technology is likely to have an increasingly large impact moving forward. In an interview with the Wall Street Journal, Ted Zoller, director of the Center for Entrepreneurial Studies at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, highlighted,

“Crowdfunding is providing impressive opportunities for new entrepreneurs to access nondilutive funding [which involves finding backers but not offering them equity stakes or in some cases taking on debt], in many cases abrogating the need for debt financing. In a few celebrated examples, this nondilutive funding has completely eliminated the need for the company to take debt. I expect to see this trend increase over time and for crowdfunding to become more mainstream as a vehicle to provide seed funding to new ventures, particularly new ventures that are prerevenue and are still as yet unproven.”

Each new entrant or technological solution in this space may not impact us directly, but it is clear that the financial industry generally is ripe for disruption. We will keep a close eye on the progress of new and innovative methods for accessing capital.

WSJ Article , FT Article


Have a great week,

Your Chenmark Capital Team

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