Ahead of the Chinese New Year on the 25th and after the western calendar turned is an opportunity for reflection.
There is a thoughtful post by Morgan Housel at Collaborative Fund on the most important forces shaping the world. As he said: “The ultimate of those great-grandmother events was World War II…. The [other] three big ones that stick out are demographics, inequality, and access to information….
“The world is driven by tail events. A minority of things drive the majority of outcomes [especially in investing].”
Since 2010, when there were only about 800 managers in the entire VC industry, but by end-2018 more than 2,000 new independent venture firms had been founded, according to McKinsey Global Institute. But this underrepresents the actual picture when you factor in corporate and other in-house venture units from family offices, universities and sovereign wealth funds.
Capital deployment in innovation capital was up an average of 17% per year since 2015, capped by a 53% increase in 2018, according to data provider Pitchbook, when the industry invested $251bn versus the $60bn or so taken in by VC funds, Preqin said.
Corporate venturers were involved in about two-thirds of all venture rounds by value, according to GCV Analytics, and almost all the large, $100m-plus rounds, as well as the supersized ones of at least $1bn.
Supersized venture rounds in which startups attract $1bn or more emerged in 2015 and are driven by strategic, deep-pocketed investors rather than VC funds and made up about a quarter of all deal values by the end of the decade.
These large rounds have pushed up valuations and Pitchbook said the aggregate value of US-based unicorns – private companies worth at least $1bn – had reached $600bn.
Yet the share prices for some unicorns that go public, notably Slack and Uber in the past year, have dropped steadily and others, particularly We Company, have failed to float at all and at times in the past quarter has seemed at risk of running out of cash.
All this marks the sector, particularly companies targeting growth at any cost (or selling dollar bills for 95 cents as some put it), as one at risk of bubble status judging by the Economist’s World in 2020 annual review.
It is almost 25 years since this internet browser Netscape floated in summer 1995 and rewrote the rules for what could be public companies – up until then the thought of a company without at least four quarters of profits having an initial public offering would have been rejected by the VCs and investment bankers. Now, growth can be supported directly by crowdsourcing platforms at an early stage and direct listings later on.
The enormous value accrued to titans of the internet age, such as Alibaba, Facebook, Tencent, Google and Amazon, has been justified by their ability to turn fast growth into (at times) profits and free cashflow to reinvest in the next generation of startups and through mergers and acquisitions and research and development.
Shoshana Zuboff, author of The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power and a professor emerita at Harvard Business School, effectively questions their “features of an unprecedented and rogue capitalism” but as the Quarterly Review of Economics argues, rather than lax anti-trust policies, there could be a productivity-based explanation of increased market concentration: “If globalisation or technological changes push sales towards the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms.”
The titans’ worry remains whether the modern equivalent of Zeus and other Olympian gods will come on to the scene and bury them and their business models.
There is no shortage of aspirants for the crown and there is a host of opportunities as the speed of innovation remains ferocious and across sectors but questions remain whether any new gods can emerge given the slowing number of startups, falling numbers of venture rounds by volume and the difficulties for incumbents to catch up to the innovation capacities of the titans.
But at such times a tail risk can emerge and the 2020s promises to bring several given febrile geopolitics and widely overvalued asset prices. As British naturalist Charles Darwin wrote: “It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change.”
