Last August, Horizons looked into whether the rise of the super-company is encouraging or stifling entrepreneurship. Ahead of our Innovation Insights event in San Francisco – which will showcase Silicon Valley innovation from the FAANGs right through to exciting new start-ups – we return to the issue one year later.
“Dominance is swiftly evolving into monopolisation”. This at least was the Horizons opinion when we conducted a weather report on the FAANG (Facebook, Amazon, Apple, Netflix, Google) group’s unrelenting grip on their respective industries. Drastic, perhaps, but it is difficult to argue with such a statement in the year when Amazon captured 45% of all e-commerce sales in the US, Google was used for 75% of all online searches, and an incredible 3/4 smartphone users worldwide were using either Apple’s iPhone or Google’s Android.
We found, however, that such a scenario is not one in which competition has been irrevocably snuffed out. Drawing from Clayton Christensen’s seminal The Innovator’s Dilemma, we explored how it becomes inextricably harder for companies to remain nimble and fast-moving as they grow larger, allowing newcomers to carve out their own existence if they are precocious enough. It was for such reasons that an article in The Economist optimistically claimed that start-up culture was in a ‘Cambrian moment’ last year – the name given to the radical growth in multicellular life over 500 million years ago’.
But FAANG (a group which should now really be extended to include the likes of Uber and Tesla) dominance does nonetheless place higher demands on those hoping to break into the fold. Buy-outs and acquisitions often eliminate any genuine threat when it does arise. As their market shares, valuations and overall global standings rise indefatigably, the companies and their leaders appear almost pre-ordained to succeed.
Or this was the state of play last year. Since then, however, the road has been rocky for more than one of this exalted crowd.
Firstly Uber, which was thrust into a cultural scandal which severely tarnished its public image. Co-founder Travis Kalanick, along with 20 employees, resigned/were fired for various charges of inappropriate misconduct. This alongside the rise in fortunes of its competitors – such as Lyft, Via and Juno – has rubbed the shine of its expected 2019 IPO to an extent. A 17.5% company purchase by Softbank at the end of last year had already downgraded Uber’s valuation from $70bn to $48bn.
Snapchat, former darling of the new social media wave, has taken a beating on a number of recent occasions for perceived arrogance. Its share price initially slid in November 2017 as Wall Street expressed disappointment at its lethargic user numbers and beefy $443m Q3 loss. Earlier this year, a further slump was precipitated by user backlash against a particularly unpopular update. Despite 83% of reviews criticising it, the app remained headstrong, raising alarms for more than a few shareholders (voteless ones at that).
Nor of course has Facebook escaped controversy. This year’s privacy scandal has certainly eroded trust; nobody could feel overly comfortable using a website incapable of noticing Russian meddling in national elections, and passes on our data to election consultancy firms. Shares tumbled as a result.
Lastly, and most recently, Elon Musk ran into trouble at Tesla’s Q1 investor call when he lambasted analysts’ questions as “boring” and corrected his own executives in front of shareholders. Super-company impunity was challenged and, contributing to the trend, 10% vanished instantly from Tesla’s value.
Whilst different in each case, there is a prevailing theme here that the ‘my way or the highway’ attitude of these titans – until now a crucial reason behind their success – is no longer as inscrutable as before. With greater worldwide relevance and reach comes greater responsibility.
A WithoutBullshit blog had this to say on Musk’s ordeal: “Tesla’s business (like any start-up’s) is built on hope and expectations about the future. Musk needs financial markets to believe in his dream to keep open his access to the capital”. This is correct, and much the case for the others as well. Maintaining respect towards those buying into their visions, and those who will be affected by them (directly or otherwise), is a fundamental practice for any enterprise which wishes to have an impact in the world. The greater the impact, the more imperative this is.
Yet we should not get carried away with the precariousness of the situation. Market domination ensues (see statistics above), and shows no sign of relenting. Since their respective fiascos, both Facebook and Tesla stock prices have recovered fully.
The stakes of the game are galactic for these super-companies, and only get bigger as they do. The risk posed by human error and lack of judgment escalates alongside and, as seen especially with Uber, it would be wrong to believe that their influence and visionary aura are immune from critique. But their enticing offerings (such as Facebook’s 2017 Q4 $4.3bn profit) to investors and shareholders provide an undeniable safety net. Only in the case of calamity are these goliath, fast-moving ships likely to be sunk.
Whilst Amazon and Google have stolen the show, the rise of all 5 has been steady
One might think – given the concluding sentiment of last year’s blog that the super-companies are making life harder for newcomers in many ways – that this update bodes ill for the start-up scene. But recent statistics defy such a thought:
The Centre for Entrepreneurs reported that 2017 was a record-breaking year for start-ups. The FT announced “the UK start-up revolution shows no sign of ending”, as the number of new start-ups formed rose to 660,000, and the rate of escalation from SME to larger company also grew. Alongside this, 2017 also saw the amount of funding for tech businesses in the UK double from 2016, according to London & Partners.
Across the Pond the story was similarly positive. The Kauffman Index (an initiative which tracks start-ups in the US) end of year report revealed that 17 out of the 25 largest states experienced a rise in new start-up figures. In fact, look across any body of water and the result was the same; global venture capital broke 2015’s record, reaching $150bn.
There is more cause to be positive. In this salubrious but increasingly competitive environment, start-ups are developing promising traits in order to stand out from their rivals; in its early year start-ups report, Silicon Valley watchdog Silicon Valley Innovation Centre highlighted the rise of ‘start-ups with a conscience’, which it explained as follows:
“Start-ups with a conscience” [are] companies that give back sizeable sums of their revenue to non-profits and charities, or the like. In the past year, likely due to Millennials overwhelming preferring to spend their money on companies that support their own beliefs and values, the dominant trend has been for start-ups in Silicon Valley to either directly or indirectly affect those that are in the greatest of need.”
One such company given by SVIC to illustrate this emerging concept is Bayes Impact whose self-described mission is “to build operational solutions to social problems by building software for governments and nonprofit organizations”. If you have followed our blog over the last year, you will know just how exciting we find these developments in the social-conscience of emerging companies and the market as a whole.
But they have not come from nowhere. They come from a society and an innovating generation more in tune with the problems facing the world. Remarkably, it may no longer be enough for organisations to say “We want to change the world”. People now want to know exactly how you intend to do so.
Bringing the health checks of the super-company and garage start-up together, it is interesting to note that one end of the spectrum is grappling with ethical/identity issues, just as those at the other are concertedly enhancing their public image and social standards. Fortunately, we are likely to see this mature into a bottom-up influence, as pressure is exerted from beneath to concentrate focus on social impact, values-based practices and externality consideration. In a society ever more aware of socio-economic, political and environmental issues, companies will not wish to be found neglecting these areas.
For a conclusion on these developments, it might be most appropriate to repeat that which we made on this same topic last year: “the struggle for existence has brought the best out of humanity time and time again. As a competitive environment combines with swiftly expanding horizons, the potential for human innovation increases, and we can be trusted to fill that capacity laudably.”
As a microcosm of the innovative world, the Silicon Valley crucible is giddier, higher-octane and less predictable than ever. But within the chaos there resides a steady undercurrent of progress which looks to be travelling in the right direction.
Marcus Solarz Hendriks