The Era of Internet Giants: Why Are Unicorns No Longer Emerging?

Today, books about the growth of Silicon Valley's internet companies are very popular among young people. They hope to draw lessons and find inspiration for their own startups.

However, the internet industry has experienced a transformation over the past few decades. Simply put, it's now much harder for startups to grow into unicorns, let alone giants.

But this wasn't the case for today's internet giants during their early days. The characteristic startup culture of Silicon Valley was the 'garage culture' – if you couldn't afford an office, you’d start working in your garage; if you couldn’t pay salaries, you'd offer future shares.

Nowadays, talents in Silicon Valley wouldn't settle for a garage or accept salaries below $120,000 annually. There's even a trend of moving away from Silicon Valley.

So, in my view, studying the entrepreneurial classics of Google, Amazon, and Microsoft today, hoping to apply them to your startups, is more an illusion. That era, whether in the United States or China, is gone. To some extent, these books are now more like historical biographies.

Today, let's discuss the new era that the internet has entered – the Era of Giants.

Decline in the Number of Internet Startups

Since the invention of the transistor, Silicon Valley has been the global center of innovation.

The first wave in the 50s-60s was semiconductor companies. For example, the Shockley Semiconductor Laboratory saw eight employees leave to found Fairchild Semiconductor, supporting most of today's semiconductor industry.

Then came Microsoft and Apple in the 70s-80s. The 90s saw the rise of Yahoo, Google, and Amazon. The 2000s belonged to Facebook and Tesla, and the 2010s to Uber and Airbnb.

It seems like giants continuously emerged, but looking ahead, have any new giants appeared in the last five years? It appears not – we still see Microsoft, Apple, Google, Amazon, Facebook, and Tesla.

Is this just our perception, or have no new giants really emerged?

Let's look at statistics from Silicon Valley Indicators, which tracks new companies in America's most innovative regions from 1998 to 2020.

The chart shows many curves representing the number of seed and startup companies in areas including South San Francisco (Silicon Valley) and all of San Francisco, as well as in California. The peak occurred between 2012-2014. For instance, Silicon Valley had 1,153 companies in 2014, but only 167 in 2020, a reduction of 86%.

If company size and innovation remained constant, this drastic decline would correspond to an economic collapse. But in reality, Silicon Valley didn't collapse; it just became more solidified and luxurious. So, how do we understand this dramatic decrease in the number of startups?

The answer lies in Silicon Valley Index's investment totals, adjusted for inflation, making it a reliable reference.

Specifically, in 2014, the total investment was $11.7 billion, and in 2020, it was $26.4 billion. In other words, when the number of startups shrank to 167, venture capital investment in Silicon Valley was more than double than when there were 1,153 startups.

However, most of this money didn't go to startups. Seed-stage startups received only one-fifth of the total investment, with the remaining four-fifths going to giants from previous years.

Today, Silicon Valley's innovation heat can be compared to the cold post-2000 internet bubble burst in 2002 and 2003.

Why Don't Unicorns Emerge Anymore?

The question arises: why are new unicorns no longer emerging?

This is closely linked to two competitive strategies of giants: acquisition and suppression. Acquisition is the primary and preferred strategy, with suppression used only when acquisitions fail. The statistics are as follows:

Apple has made 123 acquisitions throughout its history. For example, significant features like Siri, facial recognition, Apple Music, and health monitoring in Apple Watch were all acquired.

Amazon has focused on acquiring dozens of e-commerce websites. In the past decade, whenever it found itself at a disadvantage in a product sub-category, it would buy the company surpassing it, if affordable.

Moreover, Amazon acquired companies that provided secondary services to its products, like the movie and TV database company IMDb, box office tracking company Box Office Mojo, and, with sufficient funds, even acquired MGM for $8.4 billion for its upcoming autonomous driving venture with Zoox.

Google has acquired 183 companies. These acquisitions mainly occurred after its search business dominated and advertising growth slowed. For example, it acquired YouTube for video services, Motorola for phone hardware, DeepMind for AI, and Waymo for self-driving cars. This is just a few examples; many projects in Google's X Lab were acquired.

Facebook's acquisitions, although not as numerous as the others, are still significant. In 2011, they acquired Instagram for $1 billion, WhatsApp for $16 billion in 2013, and the VR device company Oculus for $2 billion in 2014.

In reality, each of these acquired companies was operating in areas the giants were considering entering. Starting from scratch was time-consuming and laborious, so it made more sense to buy a company that was doing well in a niche market but not yet a threat to their own industry. Even if these companies had grown to the scale of a unicorn (valued over $1 billion within 10 years of founding), they were still worth acquiring.

This is the first strategy and the one giants primarily use. Most startups agree to it, but some do not. In that case, giants resort to the second strategy – suppression.

For example, Dropbox, a cloud storage startup, was once very popular. In 2009, Apple offered $800 million to acquire it. Dropbox's CEO refused, believing they had more room to grow. Steve Jobs warned that Apple would enter the same market. Later, not just Apple’s iCloud, but also Microsoft's OneDrive and Google's cloud storage entered with more resources and lower prices, leading to Dropbox's decline around 2015.

Another instance is Snapchat, which refused Facebook's $3 billion acquisition offer. Facebook then replicated Snapchat's disappearing messages and stories features, leading to Snapchat's struggle.

For Silicon Valley's innovative companies, an acquisition offer from a giant is a matter of life and death. Nowadays, almost no small company that excels in a particular field can maintain its independence without being pushed aside by giants.

Is This Situation Good or Bad?

Overall, the acquisition and suppression approach hinders innovation in the internet industry. True innovation involves developing a technology from nothing to a market-dominant product. The damage to innovation before this point is not substantial.

This logic is similar to the survival logic of young scholars in universities today. I see universities proudly announcing the recruitment of famous foreign scientists and experts, only to find that these individuals are often in their 70s.

In reality, a scholar's most productive and efficient period for academic output is from post-doctoral graduation to securing their first stable academic position. This phase can take 5 to 10 years, during which they may not have impressive titles. To recruit genuinely high-level foreign scholars cost-effectively, universities should target individuals in this phase.

Back to acquisitions. Giants tend to make their moves just as these companies start to show their potential, which is very cost-effective. However, once acquired by a giant, the intense competitive atmosphere and survival pressure on startups ease, slowing innovation.

Although giants have various incentive methods, the core founders' sense of crisis and competitive spirit diminish with their first major financial rewards.

Can This Situation Change?

It can, by letting these giants continue their complacency. Over time, their profit margins will continue to decline, internal power struggles will intensify, and bureaucratic processes will deepen. After a decade or so, they might end up like Yahoo, naturally making room in the ecosystem.

Forced interventions, however, are akin to constantly using antiviral methods in HIV patients. Instead of cure, this approach accelerates the evolution of viruses under pressure, leading to new, more challenging strains. In such a scenario, giants will persist long-term, and the best outcome for entrepreneurs will likely be acquisition by these giants.

That's the content for today. See you tomorrow.