Call them unicorns. Or bubble companies. But there is something significantly relevant
about the technology startups that have joined the $1B+ valuation club. When investor Aileen Lee coined the phrase "unicorn" in late 2013, there was an estimated 40 companies
on the list. Now there are almost
100. Whether or not these valuations prove in or not is a hotly contested debate right now; but what is missed is how important these companies are to the world. To consumers. To innovation. To the balance of power. Whether or not venture capital IRR's are met are not.
Most can remember the time of the DOS operating
system and the step change that occurred for consumers once the upstart
Microsoft released Windows. Good timing and strategic blunders by the hardware
vendors at the time (i.e. IBM) afforded Microsoft to quickly gain a dominating
position in what became arguably the most important market on the planet. Forget that hasn’t been any meaningful innovation
to the computer operating system since then; it never mattered to Microsoft's shareholders. It still controlled over 90% of computers.
You can see similar domination by many of the
new technology incumbents in markets very important to consumers and enterprises. Apple took a similar approach and market
share gain in mobile phones (at least now it’s a two horse race with Android). Oracle and Salesforce have dominated the
enterprise software space for many years now.
Amazon crushed every meaningful ecommerce company that stood in its way
in the 1990s and 2000s. Google continues
to dominate search. Facebook boasts 1 in
7 people around the world as active users.
While many of the new incumbents appear much more friendly that its
predecessors (i.e. “Do no evil” compared to Ballmer’s Dr. Evil appearance), their
market dominance should continue to be tested.
Enter the unicorns.
Uber may not only be a cab company but also a
formidable commerce competitor in the all important race for local
services. Pintrest and Nextdoor have
cult-like followings that Facebook has not had since it was in the university
setting. Hootsuite and Palantir have a leg up on the
big data front compared to Oracle and IBM. The unsustainable profit streams of big
pharma and large healthcare service providers will be tested by ZocDoc and Theranos. And
even the country itself faces stiff competition as many of the unicorns such as
Meituan and Flipkart are based in Asia.
In a lot of ways, the unicorns took similar paths to the preceding
incumbent technology companies before them. They gained aggressive valuations through market acceptance, university connections, speed, innovation, and strong management teams. And now, thanks to frothy capital markets, they now have cash warchests to compete with any incumbent. These valuations afford flexibility, independence, and an ability to pace growth based on long-term vision. The beauty of many of the unicorns is that their business models are very low cost and highly scalable; in fact, many of them don't need cash now but are raising funds for the future and to cash in on generous capital markets.
Its true that Apple or Google could acquire many
of these companies if they wanted (and will); but
they can’t buy all of them. While each individual company creates unique challenges and competition to market leaders, the litmus test of success will come over time. Once the bubble pops, will the unicorns continue to thrive, keep prices down, and continue to provide innovative products and services to the market? I don't know if I believe in unicorns or not, but i don't think it matters. They are here today. They are preparing for battle. And lets hope they win.
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