A Few Unicorns Are No Substitute for a Competitive, Innovative Economy14 February, 2017 / Articles
The world’s unicorns, VC-backed startups worth more than $1 billion, have been getting a lot of press lately. At the moment, Google News lists about 16 million results for Uber and 7 million results for Snapchat. By contrast, there are fewer than 3.5 million stories about Walmart, 2.6 million about General Motors, and fewer than 700,000 focused on Exxon. Unicorns are to business journalists what Kim Kardashian is to Instagram users.
All this excitement about the unicorns is understandable — up to a point. Many of them have been growing at a ferocious pace. For instance, Snapchat’s recent IPO filing revealed that the company grew revenues by 600% (to $404 million) in 2016. Airbnb has nearly doubled its user base every year since 2012 and is now worth $30 billion — nearly as much as Marriott International, the world’s largest hotel chain. That sort of nosebleed growth has panicked a lot of big-company CEOs who live in fear of being “Uberized.” Those fears are not entirely unfounded. The explosive growth of ride sharing is a big reason why Hertz reported dismal quarterly results in November 2016, leading to a 23% drop in its market value.
Adding to this angst are the feverish predictions of industry pundits who believe today’s corporate dinosaurs are about to be wiped out by giant unicorn-shaped asteroids. For example, in their book, Exponential Organizations, Salim Ismail and Michael S. Malone argue: “… giant corporations aren’t just forced to compete with, but are annihilated — seemingly overnight — by a new breed of companies that harnesses the power of exponential technologies, from groupware and data mining to synthetic biology and robotics…. The founders of those new companies will become the leaders of the world’s economy for the foreseeable future.”
“Great,” you might say. Entrepreneurship aids economic vitality by getting rid of complacent incumbents, accelerating innovation, and creating jobs. Problem is, despite all of the attention and anxiety generated by the unicorns, they aren’t anywhere near as essential as typically portrayed. Considering the following.
The unicorns represent a tiny slice of the economy. As of November 2016, the market value of the world’s 179 unicorns was estimated to be $646 billion. U.S.-based unicorns accounted for 56% of the total, with a combined market value of $353 billion. While that’s a big number, it’s less than 2% of the market value of the companies that make up the S&P 500 ($19.9 trillion). By this barometer, the unicorns are mostly irrelevant.
There’s no reason to believe this will change anytime soon. Unicorn births and valuations are declining. While 38 companies joined the unicorn ranks in the second half of 2015, only 19 made it into the club in the first half of 2016. In fact, one could argue that the unicorn surge over the past five years is largely the result of a once-in-a-lifetime event: the emergence of that globally ubiquitous communication platform, the smartphone. Mobile platforms such as Apple’s iOS and Google’s Android have enabled app-based businesses to scale at unprecedented speed. Like California’s 19th-century gold miners, enterprising souls from around the world have rushed to stake their claims in the mobile ecosystem, but a decade after the launch of the iPhone, the biggest nuggets may have been found. Moreover, it’s not clear whether unicorns exploiting other technologies, such as genomics or robotics, will be able to expand as rapidly as Uber, Airbnb, and other smartphone-enabled businesses.
Successful startups don’t stay entrepreneurial for long. As young companies grow and have to cope with the demands of size and complexity, they bureaucratize. For example, one celebrated software company had managed to accumulate 600 vice presidents by the time it reached $4 billion in revenues. Like the incumbents they challenge, unicorns are not immune to bureaucratic sclerosis. As bureaucracy deepens, layer by layer and rule by rule, the sparks of entrepreneurship get snuffed out. That’s how yesterday’s insurgents become today’s laggards. Snapchat overtakes Twitter, Spotify vaults over iTunes, and so on.
The U.S. economy isn’t as startup-friendly as you think. Despite the media buzz around unicorns, the U.S. economy is steadily becoming less hospitable to startups. According to data from the U.S. Census Bureau, there were 700,000 fewer net businesses created from 2005 to 2014 than from 1985 to 1994. More worrying, recent evidence suggests that the number of transformational startups, those that contribute disproportionally to job and productivity growth, has been in decline since 2000. The U.S. economy may still be more dynamic than most, but it’s less dynamic than it used to be.
The economic power of large corporations is growing, not shrinking. Over the last several decades, industrial concentration in the U.S. has steadily increased. A recent analysis by The Economist indicates that two-thirds of all sectors of the U.S. economy became more concentrated from 1997 to 2012, and that the average share of the top four firms in each sector rose from 26% to 32%. A 2016 report by the president’s Council of Economic Advisers shows a similar trend.
Growing consolidation reflects a steady increase in mergers and acquisitions. In 2015 global M&A volume surpassed $5 trillion — a record. Many of these mergers, like the proposed tie-up of AT&T and Time Warner, seem designed to counter new competitive threats (like YouTube and Netflix), or to bulk up the acquirer’s political clout.
This trend, coupled with a slowdown in the rate of initial public offerings, means that over the past 20 years the U.S. has lost almost 50% of its publicly traded firms. This decline hasn’t been offset by a surge in the number of private firms, whose ranks have also declined, albeit less sharply.
The bottom line: Entrepreneurship is declining and conglomeration in increasing. That’s a problem, since it’s impossible to create a truly vibrant economy if it’s dominated by companies that are politically insulated and shackled to the ball and chain of bureaucracy. The challenge, then, isn’t merely to encourage more Silicon Valley–style entrepreneurship, as important as that is; it’s to recognize that growing more unicorns is no substitute for vigorous antitrust enforcement and a concerted effort to unleash the latent entrepreneurial energy that resides deep within large, established organizations.
On this last point, there are reasons to be hopeful. In recent years Amazon has become a new-business factory. Recent hits include Amazon Web Services, Prime Now restaurant delivery, AmazonFresh grocery delivery, Amazon Video, Amazon Tickets, and many more. Jeff Bezos, the company’s CEO, understands that innovation is a numbers game.
For every Uber-like rocket, there are dozens of startups that fail to achieve escape velocity. That’s why Bezos has vowed to make Amazon “the world’s biggest laboratory” — in other words, to infuse the massive company with the ethos of Silicon Valley. Similarly, Zhang Ruimin, chair and CEO of Haier, has committed himself to turning the Qingdao-based appliance maker into an “entrepreneurial platform,” one in which every employee feels like they’re working for a startup. In a speech at the 2015 Drucker Forum, Zhang said, “Our goal is to let everyone become their own CEO.” To that end, Haier has divided itself into more than 4,000 “microenterprises” — small, highly autonomous businesses in which team members select their own leaders.
Entrepreneurship flourishes in organizations that are bold, simple, flat, and open. These are not the hallmarks of a typical corporate leviathan, but they need to be, and they can be. So let’s stop worshipping the unicorns and start working to make every organization entrepreneur-friendly.