Bits vs. Atoms: Why We Invest in Asset-Light Businesses

By Peng. T. Ong

All of today’s most successful tech companies share one trait: they create value from bits much more so than from atoms.

Let me explain. Atoms are the physical assets of a business, such as inventory, property/infrastructure, and people. Bits are digital or otherwise intangible assets, including software and intellectual property. Bits can be more disruptive because they are more scalable, easier and faster to distribute, and cheaper than atoms (per unit revenues), and thus focusing in them to create value generates a much higher return on invested capital (ROIC). But profitability is just a benevolent side effect of the real rationale for bit-driven strategy: building innovative and efficient products that improve experiences and increase savings.

Major tech companies know this, and they have focused their investment strategies away from atoms and onto bits — and even if they are not conscious of this, they drive in that direction as they strive for higher profitability. Take Apple, for example. Its business may seem to focus on physical devices, but its real profit comes from its bits: its brand, its cloud, the App Store, iTunes, and of course, iOS. Amazon originally aspired to ship physical books, but today what makes for a lot of its revenues — and much of its contribution margins — are more intangible offerings like Amazon Web Services, Marketplace, Prime, and Kindle.

This is a vital lesson for tech founders. When developing a startup’s business model and strategy, founders need to start by distinguishing their company’s atoms from its bits. From the start, they might need to rely on atoms to assure quality and efficiency, as Apple and Amazon did in the beginning. But as a company moves forward, its goal should be to gradually shift to outsourcing or digitizing their assets. Both the market, and society as a whole, are constantly seeking more efficient ways to gain higher value; companies that focus on bits will more easily achieve those goals.

Don’t get me wrong, in the end, we live in a world of atoms. And much of what we perceive as valuable involves “things,” versus just “information.” The trick is to leverage your business’ bits to drive its atoms, and to have as little variable cost tied to atoms as possible.

Control Atoms to Control Quality

When a very new company is competing for market share, the quality of its product or service is more important than profitability. New users won’t leave more established competitors behind in favor of an untested startup if that startup offers a mediocre product.

Tighter control over atoms may be necessary to ensure high quality in these early stages. That’s why Apple, for example, started out owning most of its factories, even though it outsources almost all of its manufacturing today. Once a successful startup matures, it can start to outsource and become more asset-light, just like Apple did.

Ninja Van, the logistics company we first funded in 2015, is another good example of this trajectory. When Ninja Van starts up in a new city, it needs to control the quality of its service. That means hiring its own employees and leasing its own fleet of delivery trucks and bikes. Over time, however, it will work with third parties to make the company more asset-light.

The Value in the Digital

Atoms are attractive because they hold relatively constant value in the physical world; however, bits are what disrupt entire markets and build unicorns. When my co-founder and I built Match.com, for example, we took what had been an “atoms”-based business — personals ads — and translated it into more scalable, efficient bits. Similarly, there were plenty of transportation and logistics companies before Uber, pumping their money into fleets of cars and trucks. Uber managed to build a highly valuable transportation company without massive capital expenditure on vehicles, because it was able to streamline the ride-hailing process digitally.

Startups that think in terms of bits have even more potential to shine in Southeast Asia, because most companies are still rooted to trade in atoms. Those that can innovate will thrive. Emerging countries’ governments sometimes throw barriers in front of digitally-driven companies, but consumers in Indonesia, Thailand and Vietnam crave speed and efficiency. They quickly latch onto evolving digital trends. An asset-light business is easy to scale as well, an important consideration in a region experiencing growth as rapid as Southeast Asia’s.

This conversation extends beyond the startup ecosystem. Even businesses based in the physical world are constantly thinking of ways to de-atomize. Even if a company profits from hawking physical goods, entrepreneurs can try to move their inventory fast so they are not holding onto any atoms for long. More and more corporate offices are also going virtual to reduce the atoms in their portfolio; other companies are reducing team sizes to similarly stay lean.

Bits & Strategy

Successful Southeast Asian startups thrive because they figured out how to navigate the physical world while keeping their eyes trained on the bits. But aside from building and maintaining digital assets, thinking in bits and atoms prepares entrepreneurs to make strategic decisions about where they invest time and money. Even when managing atoms, the underlying mindset and technology used to control the flow of these atoms is digital — which sets the business up better for transition into a more bits-enabled, more profitable future.

Even in the people-centric domain of hiring (specifically hiring great people), the bits-vs-atoms mindset offers critical help. In the universe of a company, employees are atoms, so founders will make better hires if they consider how to structure the company to make the most of their employees and what value each new employee will bring to their company — the more effective an employee, the fewer of them are needed. In other words, the more employees you need per million dollars of revenues, the more “average” you will have to make the job spec.

Underlying the balance between bits and atoms is a philosophy of maximizing value. Building a business requires founders not only to offer new value to the market, but do so in an efficient, cost-saving manner. Beyond simply advancing your business, thinking in bits drives entrepreneurs to create products or innovative systems that bring a better experience to the customers they serve. From the moment that founders start sculpting their ideas into companies, they need to take stock of their bits and atoms, bring value to the bits they have, and work towards de-atomizing for the longer term.

Originally published at www.monkshill.com.