Tech has grown up

I see this tweet and many variations on it from time to time:

The point the author is trying to make here is something like, “look at how rapid and innovative the tech industry is!” But I take away something quite different from this list.

Frankly, I’m pretty unimpressed. There are some sustaining innovations (Square, WhatsApp) on this list, digital toys, two stubbornly private companies whose real value is still highly controversial, and one – Bitcoin – whose reputedly revolutionary potential has begun to sound a little like cold fusion – forever just around the corner. (Shout out to Josh Cincinnati, a deeply knowledgeable buddy of mine who has helped me understand crypto just a little a bit. You should follow him.)

The transition to an industrial, oil-based economy led to the formation and then consolidation of the oil giants, particularly Standard Oil, whose descendants (post-breakup) include ExxonMobil (both of them), Chevron and a big part of BP. Likewise, the rise of the automobile economy led to the big car companies like Ford, GM and Chrysler. These firms all still dominate their sectors, and continue to rank among the biggest companies by revenue in America. Since 2000, a few big pharma firms and health insurers have joined that list, as well as Walmart, CVS and Apple.

Those of us who grew up experiencing tech’s ascendant rise from the 90s into the late aughts (learning to code QBASIC on a Gateway 2000 – anyone else?) got to witness something quite rare: the formation of a wholly new type of industry. A lot of people, including new types of investors and lots of early (mostly very lucky) employees got extremely rich. Indeed, a large crop of today’s tech VC wealth stems from the IPOs of this ’00s tech cycle. A lot of careers were made, and perhaps accordingly, many lessons were over-learned from this era.

By contrast, in the cycle since the ’08 crash, the leaders of the last one – Google, Apple, Facebook and Amazon – have only strengthened their dominance. Through both acquisition and internal development, they have broadened their grip over the digital landscape: search, advertising, social, commerce, media, more. Everyone points to IBM and Microsoft’s dominance in their heydays as proof that this kind of success is fleeting, but I think that’s wrong; instead, I look at ExxonMobil, Ford and JP Morgan. Success can be sustained over time. Tech is not special that way.

Most investors are smart, and I think they realize that GAFA are here to stay and pre-2008 cycles of mega-growth are unlikely to be replicated. Instead, the path to liquid 100x returns (on which the VC model is based) is to push for an acquisition or, barring that, an IPO. In either case, as I alluded to in “Mercenaries,” tech investors have gotten smarter about ensuring that investors capture more of the upside, regardless of what happens to the share price or, in most cases, employees. This leads to companies prioritizing sheer growth over all other concerns, including profitability. Growth in an attractive market segment makes you an acquisition target by a GAFA, or better yet, a fat-cat non-tech firm looking for a shot in the arm. Ergo, the tediously earnest discussions we see in tech circles of “growth strategies” (growth hacking, hypergrowth, etc) and manipulating CAC vs LTV instead of basic P&L. As a friend put it the other day, there are a lot fewer people working in tech today than you’d think, especially on the consumer side, who have ever had to worry about managing a business to profitability.

My hunch is that most tech-sector venture funds in the post-2008 cycle will not make great returns, relative to the overall market. The VCs will still get paid, of course, and there will be a lucky few outperformers; but in a tech cycle characterized less by innovation than baubles and distractions, returns will be modest.

Someone is going to tweet me to offer Tesla as a counterexample to my generalizations here. This is partially fair, though I await to see how the Model 3 rollout actually goes. Nevertheless, the truly revolutionary stuff Musk spouts off about – massive home-based solar, the PowerWall, tunneling under cities – are still mostly theoretical. I’m not yet a believer, but hope to be proven wrong.

The other area of revolutionary technology that still seems genuinely early-days to me are drones, and drone software. I am honestly fascinated by the potential in this area. (Battery tech, too, but I think that will be mostly dominated by major industrial firms.)

Yet today, what I hear tech VCs chatting about is a new high-end frozen yogurt gadget. One can’t help but think of the $120 million that Juicero raised. World changing innovation, right?

The frothy tech startup scene has mostly had its day. I expect that Silicon Valley has built its last 5,000+ person company (where would you even house that many today?), and that increasingly in the future, the really important stuff happening in tech will come from the majors, not startups. It may be easier than ever to start a company today, but it is harder than ever to scale one. I am re-reading this classic piece, The Deployment Age by Jerry Neumann, with increasing interest. Maybe I’ll write about that later.

 

 


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