Warning: If you don’t like colorful data or linking together abstract concepts, hit the back button and find a USA Today!
TECH IS A GIANT LAND OF GIANTS
I am fascinated with the emergence of dominant technology platforms (eg, Google and Apple) and how this affects the startups we invest in. I wanted to explore this more deeply by first asking, “is this emergence of a giant industry with giant companies an anomaly in history?” To answer this, look below at the industry mix of the top 20 US public companies since 1925.
Source: CRSP; Notes: “Consumer” includes retailers, non-durables and food; “Other” includes insurance, durables, industrial manufacturing and med devices
There are amazing trends in this chart: (1) Look at the decline of the railroad at the entry of the truck/auto, (2) Notice a dominant manufacturing economy selling chemicals, autos and energy in the 50s with little foreign competition because of trade barriers and WWII aftermath abroad, (3) See that manufacturing economy decline in the 70s – with entry of foreign competition – giving way to an emergent high tech industry, (4) Witness the dominance of a “knowledge economy” in the new century led by high tech, pharma and financial services, (5) Above all, notice that ~30% of the value in the top 20 companies in 2012 is in high tech, namely Apple, MS, IBM, Google and Oracle.
We see there have been giants and giant industries before but few as we see in high tech now (excepting oil and gas… more on that below). To understand this, let’s define two buckets of drivers that create extreme consolidated value – call them “giant drivers”:
Relative to other industries, O&G is an outlier because of the exceptional power of scarce resource ownership. The framework shows, however, that high tech benefits from almost all “giant drivers” with pharma a close second. Indeed, if we compare the mix of the top 20 public US companies to the overall public market (below), we see high tech and pharma mix heavily to the giant side because of these drivers. High tech companies are heavily over-represented among the largest of public companies.
GIANTS WILL ONLY GET MORE DOMINANT
These “giant drivers” become more powerful over time, which is why the giants may only get bigger. In @BobZukis’s new book, Social Inc, Bob explores the evolution of “social technology” over time, investigating how social technologies from fire to Facebook help us Connect,Communicate, Collaborate and build Community. He says these technologies are now at an inflection point in value creation. As the velocity and volume of connection increase with each new technology – fire, railroad, telegraph, phone, internet, mobile phone, social network – the platforms that deliver them become increasingly valuable to users and businesses. This means standards wars offer a higher ante, network effects explode and brands become stickier… and the tech winners become more giant. The giantism builds on itself – we literally can’t get these companies out of our heads. Google is a verb, Apple is a religious symbol and TechCrunch, which purportedly “obsessively covers startups”, can’t stop talking about the giants – who are not startups:
Source: TechCrunch headlines from daily newsletter e-mails from March 21st, 2013 to April 20th, 2013. Notes: Mentions of headline products (eg, iPhone, Gmail) counted as company mention. Mentions of iOS and Android not counted.
My personal belief is that a coming wave of “integrative” tech plays – where the boundaries between the physical world, augmentation of reality and the human body will blur – will only deepen the ubiquity of a few tech platforms even more. Nils Muller @TrendONE calls this Web 4.0. Just a little hint about my next post…
SO WHAT DOES THIS MEAN FOR YOUR DECIDEDLY NOT GIANT STARTUP?
The talent war is a real threat – think ahead and be generous: I spoke about the tech talent war in my last blog. The giants are great voluminous black holes of gravitational pull for tech talent. With some giants offering $50K signing bonuses, a $100K base and $120K stock grants to top engineering talent out of undergrad, how can a startup compete? We much prefer companies that start with a tech co-founder or two just for this reason. They have tech capability built into their DNA, they know where and how to find more. So, if you are thinking about starting a company without a tech co-founder, think twice. You also need to be generous. Tech hiring is predominately what your option pool is for at the early stage. You will get what you pay for, and with vesting there is little risk to “paying too much”.
The app store play – consider the good and bad: We see and have invested in companies doing the “app store play”. In other words, they plan to distribute and integrate with the giants through the giants’ app stores. In this case, I don’t really mean Android and iOS. Having an app there is table stakes – like a web page 10 years ago. I’m talking about the emergence of category leader appstores like Salesforce and Constant Contacts’.
- The Good: Easier access to already sticky customers can mean fast traction to high LTV customers with lower acquisition costs.
- The Bad: The flip side is low barriers to entry (so anyone can do it), and there is a natural cap to value being on someone else’s platform.
- How do you break the cap? Get in many/all relevant app stores and then expand your applications and level of integration. You must also make sure there is more than one possible acquirer, with preference for acquirers who find value to your exposure across multiple appstores. For example, if you sell through email service provider (ESP) appstores, you must believe that there are acquirers other than ESPs. If not, the value of your being in other ESPs’ appstores will be destroyed at sale to a single ESP.
David vs Goliath – win with agility, speed and surprise: While agility and speed are not enough to compete with Apple and Google, who are quite agile and fast themselves, this can work with other giants. TempoDB and RethinkDB are examples of startup cloud database companies going after Oracle’s database dominance, while Oracle only tepidly enters the cloud market for fear of self-cannibalisation. Before the giants know it, you have created something so valuable and threatening to their core, they have to buy you. (otherwise known as the ankle biter strategy)
Look for lands beyond the giants – B2B: Unlike past evolutions, the last ten years of tech changes have been consumer first. The giants and consumers together have driven new technologies up the B2C adoption curve much faster than the B2B curve; think smart phones, social networking, etc [Zukis]. This has left fewer B2C opportunities where the giants aren’t already playing. But there are still countless openings in B2B, especially on the revenue line. This thesis partially underwrites HPVP’s investments in @ParkWhiz, @InContext, @FoodGenius and@FarmLogs, all of which drive revenue for businesses in very competitive industries.
Think about niche markets: Michael Porter identified three root competitive strategies – differentiated product, low cost product and pursuing the niche market (see source). In high tech, differentiation is necessary but often not sustainable or of high enough value to get a critical mass of customers before the giants catch-up. Likewise, it is hard to be the low cost producer without scale. But how about those $0.5B markets that are too small to move the needle for the big guys? You can create real value in an orphaned/niche market and either become a sustainable cash flow machine or target for mid-market tech companies rolling up targets in prep for an IPO. Just don’t raise too much money!
And yes, there are giants yet to be discovered: Maybe that is you?