Tech Companies Have a Problem, and the Public will Pay the Price
Dilettante technology investors and founders’ tunnel vision on ‘exit strategies’ is shortening the longevity of their companies and consequently could be creating a bubble.
IN early September, the technology review published an article suggesting that technology is exponentially shortening the lifespan of companies; indeed we see that in the last fifty years the company life span for S&P 500 companies has shrunk by over 60%. One theory goes that as the time it takes for disruptive technologies, particularly in electronics, to emerge and replace incumbents is ever shortening and companies are finding their products in decline in a matter of months.
Large companies, burdened with inertia, struggle to adjust their course to accommodate the need to innovate. To adapt, many companies have turned to an acquisition strategy, both to acquire new products and technology as well as fresh perspective. The paragon of this strategy is Google, which has acquired dozens of companies for billions of dollars in order to accommodate the ever-shortening product life cycle every company faces today.
My belief is that this has led to a fundamental shift in the focus of young entrepreneurs, who are presumably focused on coming up with these new technologies. With big companies on the prowl for acquisitions, suddenly entrepreneurs find themselves with the option of an easier exit strategy than creating a profitable company: selling out.
Herein lies my problem -if entrepreneurs, society’s idea generators and innovators, no longer think about longevity of product, but focus on multiple exit strategies whose barriers of entry have been made lower by a market full of hungry, dominating companies, then there is serious adverse selection taking place.
I was at Web Summit in Ireland last week, and all I heard of was talk about ‘exit strategies’ — from the great Goldman Sachs investors to the humble pre-seed entrepreneurs — the entire ecosystem was infatuated with exit. But this begs the question, what happens after a company ‘exits’? If all entrepreneurs are fundamentally focused on strategy to exit their market, could this also be a reason why company life spans are diminishing?
Our infatuation with the economic benefits in technology, the hyper-growth that is possible, is causing the prospect of of financial gains to trump product value. If you look carefully, we see this happening everywhere in tech. Regularly, I talk to Angel Investors who say that their attrition rate is 90%! That means in some sense, that 90% of their cash is invested in junk.
People with no idea about technology, not the remotest idea of the markets they are investing into, not a clue about the quality of their products are investing in technology companies and the first question they are asking is ‘what is your exit strategy’.
Here is the most scary thing: if a company successfully exits, spurred on by cash hungry investors and leadership with tunnel vision on exit strategy, then the public absorbs a loss. Whether the company floats, or is acquired by a company that is traded publicly, the joke at the end of the day is on the general public who directly or indirectly invest in these companies. What the public don’t realize is is that they buy companies at a point when the founders head off because for them -mission accomplished. This feels like a textbook bubble.
My thoughts are that if we do not reassess the relationship between investor and founder and we if we don’t encourage entrepreneurs to focus on the longevity of their products, we are heading toward catastrophic consequences for the technology world.
Originally published at www.linkedin.com on November 25, 2014.