Kellogg's uses a cartoon tiger and elves to sell $14 billion dollars worth of refined carbohydrates each year. But this calorie-laden corporation was once an idealistic startup. Created by the eccentric Dr. John Harvey Kellogg, Corn Flakes were intended as a health food that made it easier for the masses to adopt a vegetarian lifestyle. Kellogg's was the Soylent of its day.
Today, Pfizer is a $188 billion dollar drug conglomerate. But there was a time when the biggest of "Big Pharma" companies was a lot like today's Young Turks. At the time of its founding in 1849, when it produced small batch citric acid, the company was based in Williamsburg, Brooklyn, and its founder favored funky facial hair.
These companies that we now think of as the epitomes of "Big Food" and "Big Pharma" were once humble startups. But as success beget success, they managed to dominate their markets for over a century. Over the next hundred years, we could see the same thing happen with the most high-minded tech of tech companies. Google, Amazon, Apple, and Facebook could grow to dominate the market in the same way Pfizer and Kellogg's have dominated theirs. We could be witnessing the dawn of a new era: "Big Software."
Pfizer and the majority of the top 25 global pharma companies were founded in the period between 1849 and 1901. Notable companies sprung up in the 20th century, but to put it in perspective, as many top pharma companies were formed prior to 1781 as after 1981.
First mover advantage is debatable, but it is clear there is value to being early to an emerging industry. These companies built solid products, established distribution channels, and value accrued to their businesses as a result. Regulation also played a role. In 1906, the US Government established the Food and Drug Administration, and the increased regulatory scrutiny to ensure safer medicines made it to market, but this oversight also made it harder for upstart companies to enter the market.
This pattern is seen in most industries as they develop---food, automobiles, banks, TV network---all followed a similar pattern. A new technology, distribution channel, or demographic trend created a boom of startups. In relatively short order, a small group of companies enjoyed outsize success and bought their former competitors, or otherwise went on to dominate their industries. Market dynamics and regulations helped to cement the winners.
This could happen with tech as well. Intel was founded in 1968, Snapchat in 2011---roughly 50 years apart. Don’t be surprised if our great grandchildren still use Google products 100 years from now.
We've seen so much upheaval in tech over the last few decades that there's always an assumption that past is prologue. Apple is doomed to lose to Android because it failed to embrace "openness." Friendster and Myspace became uncool, making it a fait accompli that Facebook is doomed to do so once the patina of popularity wears off.
Plenty of big tech companies have failed, but many of those examples can be chalked up to the immaturity of the tech stack, a lack of infrastructure to support a web-based business model, e.g. AdTech, or even just poor management.
Paul Graham’s essay, "The Refragmentation," makes a case that the era of big companies is coming to a close. Don't be so sure. Craig Newmark and a team of hippies in the Haight upended print journalism across the country by decoupling classifieds from reporting. For the last decade, hundreds of millions of dollars have been invested in companies chipping away at Craigslist’s services. Airbnb alone is worth tens of billions of dollars. Yet Craigslist, with its laissez-faire approach to product improvement, remains the number 11 site in the United States. The value of liquidity in a marketplace, often earned by solving a problem early on, shouldn't be underestimated. Can you imagine the longevity that Google, Apple, Facebook, and Amazon will have?
How certain are you that a company will be able to upend Apple's manufacturing prowess? Who will be able to outthink Google's massive machine learning engine? Amazon has spent 20 years building the foundation of a retail empire that could last a century. These are not inconsequential advantages.
Yahoo would seem to be a counterexample, but looked at another way, it's amazing that a company whose entire raison d'être disappeared in 2007 has been able to survive for 20 years without a clear direction and saddled with a series of CEOs who were ill suited to the business.
Instead of assuming these companies will fail, entertain the alternate position. Imagine we've just seen the establishment of companies that will dominate their industries for the next century, in much the way that General Electric, Ford, and Disney have only become more powerful and influential in the absence of their iconic founders. Some might view the age of "Big Software" as a bad development. In fact, this could be an amazing development for entrepreneurs and investors alike.
Conglomeration hasn’t hurt entrepreneurship in pharma or food. In fact, it has accelerated it. In the biotech world, it's not uncommon for a startup to go from drawing board to multi-billion dollar IPO in a few short years. Editas was founded in 2013, IPO’d in 2015, and currently has a market cap in excess of $1B. In the first half of 2015, there were six biotech IPOs in Boston, and the average employee count was just 17.5. This analogy isn't perfect---bits and biologics have big differences---but the general trend is instructive. Mature industries tamp down outlier exits, but make entrepreneurship more efficient.
This pattern is already obvious in some segments of the tech industry. The Match Group owns 45 different dating sites including Tinder, OKCupid, and Plenty of Fish. They treat courtship the way Keebler treats cookies---an offering for every taste.
We’ve seen this principle at work first hand. As early investors in Periscope we believed in the founding team’s vision. We believed it could make for a strong stand alone business. We also expected it would take years to mature. It took all of nine months for Twitter to acquire the team and less than a year to launch the product. Everyone did well financially. Twitter got a shiny new feature and an influx of talented product visionaries and engineers.
Likewise, we backed Firebase because they made it dead simple for engineers to build real-time apps. Google snapped it up. Everyone made money. And Google probably saved years of development time. More importantly, customers benefited. If either startup had tried to go it alone, their success would have taken longer. Instead, they got to focus on their unique attributes and rely on the infrastructure of a "Big Software" company to handle distribution.
Between 2001 and 2015, Google acquired 187 startups. I wouldn’t be surprised if they picked up an even greater number in the next five years.
There are downsides to this new reality. Exits will likely be much smaller. We may not see another software startup approach Google's half trillion dollar market value in the near term. Even Facebook’s $250 billion dollar market cap will be hard to match. Founders and investors will just have to "settle" for more "humble" single billion dollar valuations---or maybe double digit.
This will require founders to develop a funding strategy that is capital efficient. Many venture capital firms will have to rethink their strategies and figure out how to operate in an environment where $100M, $500M or even billion dollar acquisitions are the new normal.
Conglomeration gets a bad rap, but it can have profoundly positive impacts. In 1922, being diagnosed with Type 1 diabetes was a death sentence. A group of entrepreneurial doctors believed they could treat the disease with insulin derived from an animal’s pancreas. They worked in makeshift labs, blending the body parts of pigs and cows to obtain life-saving insulin.
Their product worked in clinical trials and immediately saved lives. But instead of starting a company, they worked with pharma giant Eli Lilly to produce the wonder drug. Within a year, Dr. Frederick Banting had won the Nobel Prize for medicine, and Lilly was able to manufacture and distribute this elixir of life across North America, saving tens of thousands of lives in the short term and tens of millions in the years since. Banting probably could have made more money if he started his own company, but it would have taken much longer and many would have suffered.
Every tech invention doesn’t need to become a company and not every business is built to last, but if you set out to create more value than you capture, everyone can win.
