Moving the Needle

We often wonder, “How did the incumbent giant allow the small start-up to completely disrupt its business?” Sure, new technologies might have snuck up on them, but I think that’s rarely the case. From what I’ve seen, large companies have many people looking at many different aspects of the business so they know what’s out there. It’s a matter of resource prioritization and in resource prioritization a question that will inevitably come up is: “Does this move the needle?”

As a consultant, I worked on a growth strategy project for a major telco in which they wanted to find growth initiatives for the next generation. But considering the telco has >$100B in revenues, to contribute ~5% to the top-line means >$5B of revenue. But…mega-unicorn AirBNB forecasts $2.8B in 2017 and Dropbox just passed $1B in revenue run rate. Examining recent IPO darlings, Cloudera forecasts $350M for 2017, Mulesoft $274M, Okta $237M…even Snap will not hit $1B this year. So recommending potential acquisition targets that would ‘move the needle’ for this telco became extremely challenging as innovative companies with needle moving revenues had valuations that were prohibitively expensive.

How are companies like Amazon, Facebook, and Google able to stay on the forefront of innovation? One key factor is that the CEOs are all founders that are able to make bold bets without a material risk of being fired. That’s why Jeff Bezos has been able to sacrifice profits to establish its dominance (current P/E ratio of 241!), that’s why Larry & Sergey have been able to make bets in self-driving cars, robots, and biotech, and that’s why Mark Zuckerberg was able to move fast in acquiring Instagram and Oculus. Even Samsung, with its family controlled structure, is able to invest $18B to maintain its lead in semiconductor innovation (thereby keeping its lead in the sector that provides the greatest profits for the company).

However, most public company CEOs do not have that luxury. The median tenure of an S&P 500 CEO is six years. Sure, lots can be done in six years, but it’s tough to invest in the future knowing there’s uncertainty as to whether you’ll be around to see it come to fruition, especially when the investment likely won’t move the needle in six years.

As a VC, the pieces have added up in my head to help me understand why start-ups are able to take on the giant incumbents with seemingly infinite resources. Start-ups can innovate in spaces that simply don’t move the needle for large companies, and by the time that space has caught on to create a market that could indeed move the needle, it’ll be too late. Uber, the “niche black car company” now similar in enterprise value to Ford and GM, and AirBnb, the “niche website allowing people to sleep on other people’s couches” now rivaling Hyatt and Marriott in valuation, are great examples.

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