Market Classifications — Are They Irrelevant?
Rehinged is a studio company of Hinge Capital focused on analyzing technology startups and the markets they’re impacting. Since we’re data scientists, we want to dig deeper than many of the typical financial analyst reports. We’re looking to uncover trends in technology markets before the mainstream analysts share their reports.
One of the challenges of using data science on sets of startup company data is that their market identifier isn’t always clear. Take Bird Scooters for example. When we were evaluating Bird prior to Hinge Capital’s investment last year, what market data could we analyze? Is Bird a technology company? A scooter company? Or a last-mile transportation company?
Bird is taking advantage of a weakness in Uber and Lyft’s business model: short trips in densely populated areas. To travel one mile in downtown San Diego in January of 2019, you can:
● Request an Uber/Lyft, which will typically take 8 minutes to arrive and cost $6.65 during non-peak hours. Your ride, in traffic, will take another 10 minutes, for a total of 18 minutes.
● Call a taxi, wait 15 minutes for it to arrive and pay 30% more than Uber or Lyft.
● Rent a bicycle at one of the docking stations for a few dollars — but you may have to walk for 10–15 minutes to get to the docking station. You might also find a dockless bike from Ofo, but they’re quickly disappearing.
● Drive and then spend $20 or 20 minutes searching for parking.
● Ride the trolley for a few bucks, if you happen to be traveling close to the limited green or blue line.
● Walk for free, which will take an average of 22 minutes.
● Ride a Bird (or Lime or Razor), which on average takes 2 minutes to locate, 7 minutes to ride and costs $2.14.
This market is so new and so specific that little of the existing market data was beneficial. Taxi data is difficult to obtain and that market is rapidly shrinking; bicycle owners and riding data wouldn’t accurately represent the potential market opportunity; technology company data wasn’t directly relevant.
Instead, we had to create our own analysis, focusing on Bird’s unit metrics over time (only three months of history) to create our predictive analysis, then apply that to other markets that Bird was entering that were similar to San Diego. We layered this over Uber and Lyft data to arrive at our conclusions.
Is Every Company a Technology Company?
Many of the other investment opportunities we review present similar issues. If you subscribe to Carlota Perez’s theories on technological revolutions and financial capital, we’re entering the Deployment phase of the internet — almost three decades after it began to be used by the public.
The internet, the cloud and the subsequent technological inventions, such as machine learning and AI, are affecting some areas of most businesses and most areas of some businesses.
In the 1970s, 80s and 90s, it was pretty easy to identify a technology company. They made hardware, software and networking. But today, is it fair to say that every company is now a technology company?
Christopher Mims, technology columnist for the The Wall Street Journal, thinks so:
There was a time when the primary role of leaders at most companies was management. The technology required to do the work of a company could be bought or siloed in an “IT department,” treated more as a cost center than a source of competitive advantage.
But now we’ve entered a period of upheaval, driven by connectivity, artificial intelligence and automation. The changes affect the world of business so profoundly that every company is now a tech company.
The Deployment phase will continue to blend technology into almost every type of business. Mims writes:
As the competitive landscape continues to change and technology becomes ever more essential to how business is done, investments that might have seemed too risky a few years ago now may sometimes turn out to be the best path to survival.
“There is an existential threat to Fortune 500 companies before the end of this decade,” says Mr. O’Sullivan, the angel investor. “You can actually see companies that are less than 10 years old knocking off and surpassing companies which have been around for 100 years.”
Bird, Uber and Pinterest all have apps and fall into the old school “technology” bucket. Amazon started out as a tech company, offering e-commerce for books, but now they’re also a media company, a software infrastructure company and a physical retailer. With their acquisition of Whole Foods, they could potentially become one of the largest brick and mortar retailers in the United States.
Is Spotify a music company or a tech company?
Is Google a media company?
Data Groupings
As we analyze startups and their markets, we immediately encounter a problem with market classifications.
● Crunchbase data uses approximately 45 industry groupings and over 700 subgroupings, and places most companies in multiple industry groupings.
● Standard Industrial Classification (SIC) codes are over 80 years old and were mostly replaced by the 6-digit North American Industry Classification System (NAICS) system.
● However, the NAICS system isn’t universally used.
● Angelist uses a different market subgrouping system that goes 6 layers deep and can place companies in multiple market classifications.
Even if everyone used the same system, would it be enough?
Hinge Capital Markets
Hinge Capital’s new fund is focused on a variety of pursuits, few of which fall into the above industry classification system. Here’s the description of those pursuits from their manifesto:
Breakthrough innovations come from technology that is radically better. A ten or twenty percent improvement in performance won’t do it. It needs to be at least a 10x improvement in performance to qualify as breakthrough.
That’s what will support the monumental technology changes heading our way. That’s the long-term greed that will win.
At the broadest level, H//NGE pursues companies that address one of three broad challenges, with their respective technical pursuits:
Humanity
These companies are focused on creating equity out of inequity and improving humanity’s prospects in health, finance and skills/education. They leverage human capital, physical capital and social capital with the goal of helping people to live a healthier life, with more opportunity and freedom and better skills and education. The pursuits within Humanity are:
• Health
• Financial Services
• Skills & Education
Frontier
Frontier companies are focused on the distant future, making big, discontinuous bets on things that could create trillions of dollars of value. This category is 1000x bigger than what was built on the traditional internet starting in the 1990s. The pursuits within Frontier are:
• Advanced Intelligence/Machines/Things
• Decentralized Networks
Compound
There’s still a tremendous amount of opportunity in the traditional world of software and the internet. We still make bets in this area, which are still hard and binary, and we deploy a third of our capital against sure things that compound.
Once these bets hit the law of compounding interest, we expect this to deliver our 3x return, giving us the freedom to allocate the rest of the fund to companies taking on the challenges of Humanity and Frontier. The pursuits within Compound are:
• Core Internet
• Distributed Enterprise Software
• Marketplace / Commerce
• Transportation
• Housing
Our Solution
The startups being formed today are redefining how we’re looking at markets. Instead of attempting to find commonalities in the existing industry classification systems, we decided to rethink how to group the companies of today and tomorrow and how we should be evaluating their markets.
We believe this will enable us to gain far better insights into how markets are evolving, and we’ll share our results when we’re done. Check back in a few months!
