Three prominent tech thinkers recently declared the end of the startup era, questioned the future of tech innovation generally and heralded the rise of the..
Three prominent tech thinkers recently declared the end of the startup era, questioned the future of tech innovation generally and heralded the rise of the “ Frightful Five ” — Apple, Amazon, Facebook, Google and Microsoft — who will dominate the future of tech. All of the posts make credible arguments, but ignore how consolidation could be good, even great, for startups.
If we define startup success as building cornerstone companies that will go down in history and be worth hundreds of billions of dollars, we may, in fact, be entering a lean period. If we define success as building an ever wider assortment of products, shipping them to tens of millions of users and earning hundreds of millions, or even billions of dollars in short time frames, the good times may just be getting started.
Just look at the case of tbh — Ben Thompson suggests that Facebook likely paid ~$80 million for the seed-funded, one-year-old company. Each founder probably made close to $15 million for a year of work, making them better paid than All-Star NBA Champion Stephen Curry. Entrepreneurs may have to settle for acquiring mere generational wealth, rather than becoming “ pledge to cure all diseases ” wealthy, but the death of startups has been greatly exaggerated.
The kind of industry consolidation we see with the “Frightful Five” isn’t new to tech, it’s the norm in most industries and can actually spur innovation. The pharmaceutical and packaged food industries are heavily consolidated, have thriving startup scenes, are hyperactive in M&A and provide a glimpse of how the future of tech may unfold.
The pharma industry was one of the earliest tech businesses and is one where first-mover advantage is real. As many leading pharma companies were founded before 1780 as after 1980, and eight of the 10 biggest companies are more than 100 years old. This sounds like the makings of a moribund market, but, in fact, between 2014-2015 there were more than 100 biotech IPOs that generated $10 billion in proceeds. A hundred years after the “winners” were established in pharma, startups are still producing money-making miracle drugs and minting multi-millionaire startup founders with startling regularity.
1) Originally founded as Geigy. 2) Originally founded as Abbott Laboratories. 3) Originally founded as Laboratoires Midy. Market Cap data via Google Finance.
How did this happen? The established companies have scaled their organizations to handle the drudge work of getting a drug through clinical trials, past FDA review (and its global counterparts) and, once cleared, into the hands of doctors and patients. This organizational structure and scale make them ill-suited to pursue novel R&D, which is where the startups shine. Startups can now orient themselves entirely toward finding breakthrough cures and not worry about commercialization. If a startup develops a novel cancer drug, or even a molecule that looks promising, Sanofi, Novartis or one of their peers will buy it.
Critics of the pharma comparison will point out that intellectual property is critical in the biotech/life sciences industries and software-based tech startups don’t have the same negotiating leverage. This is a fair point. However, the pattern of large companies focused on marketing and distribution acquiring nimble innovators also plays out in the packaged food business, which, like software, has little in the way of IP, relies on commodities as inputs and thrives by surfing changing consumer tastes. Look at the top 10 packaged food companies by revenue and the years in which they were founded:
