What’s With All the Unicorns?
Geoffrey Moore
Author, speaker, advisor, best known for Crossing the Chasm, Zone to Win and The Infinite Staircase. Board Member of nLight, WorkFusion, and Phaidra. Chairman Emeritus Chasm Group & Chasm Institute.
The number of tech unicorns — companies valued at over $1 billion — is growing fast.?According to The Economist, there were about a dozen eight years ago, and now it is up to 750 today. These firms are now valued at a combined $2.4 trillion, and funding for these companies has increased exponentially from a year prior. What is going on?
The report claims that a spending spree by VCs that cashed out of startups after IPOs and acquisitions, as well as more competition between investors, are pushing up valuations.?I think that is indeed a factor.?I also think there is an oversupply of capital looking for investment, for while an asset-light digital economy has less need for capital than an asset-heavy industrial economy, we keep managing our enterprises to maximize shareholder returns.?
But set all that aside for the moment.?If we are not living inside a bubble, if the current valuations do not represent irrational exuberance, then what does account for the current herd of unicorns??In a phrase, category power!
A company’s valuation represents its shareholders views of how much in future returns it is expected to generate.?In established categories, this is largely determined by track record, as seen from the impact of quarterly earnings reports.?But in disrupted categories, as the adverts like to say, “Past performance is no indicator of future results.”?Most of these unicorns, after all, have never shown a profit.?So, it is not performance that is being valued—it is power.?
When you double click on sources of enterprise power, you generate a hierarchy, as illustrated on the slide below:
Unicorns are being valued almost exclusively on category power.?That’s because it is the highest form of power in the stack, the one that has the greatest impact on future returns.?Electric vehicles, last mile delivery, telemedicine, work from home—all are disrupting traditional categories, meaning massive amounts of spending will migrate away from the current set of incumbents and to the emerging set of challengers.?This is rational.
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What is not rational is the notion that the majority of these unicorns will actually survive.?In each of these categories, there is going to be a battle for company power that will end with “gorilla takes most,” “number one chimp does good,” and “monkeys are left scrambling.”?How many future gorillas can there be??Well, how many do we have now??I can name maybe up to ten, but I can’t get to twenty.?Ten more gorillas seems like a real stretch, then add ten to twenty chimps, and you still have over 700 monkeys in waiting.?
So, I do see a reckoning coming.?But like every other visionary there ever was, when I closed my eyes and looked into the future and saw what had to happen, I forgot to look at the calendar to find out when!
That’s what I think.?What do you think?
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Co-Creator and Host, GROW: Profitable Growth | Co-Founder, Revolution for a Customer Revolution | Founder, Center for Customer Engagement | Consultant | Speaker | Author (HBR-31 publications) |
3 年Geoffrey, could that $2.4T valuation be considered reasonable as the present value of future earnings from the eventual winners of the categories (like the ones you mentioned) whoever they turn out to be?
"Good writing is good thinking."
3 年No-one can see the future. Not even for a second. It's not that we are not often right, but rather that we don't know when we are going to be wrong. Few people have predicted the rise and fall of entire industries that were all taken for granted in their own finite lifetimes. (Much less individual companies.) Some had it right, but had no idea when. Some made the wrong prediction many times and finally it came true in quite a bit of detail. Richard Feynman, Warren Buffett, and many others have said this in various ways.
AZ Tech Roundtable Host - 20 Yr Broadcaster + Biz Owner / Interviewing Top Leaders on Biz, Tech, Investing & More / Insights for Entrepreneurs, Bus Owners & Execs / Economic Knight + KFNX GM
3 年It is too early to tell. This could literally be a VC investor bubble raising valuations to partner w a SPAC to get a IPO payout, or Hope a larger tech co acquires the ‘Unicorn’. Obviously some great co’s will come out of this and be huge. There are many tech companies that have gone public last few years that are not even profitable (see Uber). The sex appeal of tech and the fear of missing out has driven up speculation for a century + ( see Railroad bubble)
Technologist & Product Manager
3 年Perhaps view this $2.4T from the lens of re-inventing all these categories/verticals, and not just category expansion. We do see a lot of partnering, but value and profitability will move to the newer firms. The legacy firms that are not destroyed will be much less profitable. Tesla & SpaceX are good examples to emulate in every category.
Go-To-Market & Strategy Leader
3 年The on-demand economy has arrived and A.I. / robotics driven solutions are starting to really show their value.