In a tech-crazed age where innovation leads to billion dollar paydays and anyone with a great idea (and the technical wherewithal) can make it big, it’s hard to believe that Silicon Valley might be shrinking.
It certainly isn’t shrinking in terms of dollars and cents, and it isn’t shrinking in terms of total employees or market share, either. The contraction we see now is of a different nature: fewer competitors, and fewer giants at the top “ruling the roost.” One might say that the Royal Family of Silicon Valley is consolidating its power and tightening its grip.
Steven Solomon penned his concern in a recent New York Times article, calling into question whether legislators should take action to stop the rapid quelling of competitors through anti-trust laws. While new laws may not be the right answer, the concern is justified.
Great Ideas, No Profitability
No one doubted Jet.com’s ambition when it went online a year ago, and some people actually believed that the discount ecommerce retailer might be able to rival Amazon.com down the road. Unfortunately for Jet, it had to exhaust $40 million each month just to achieve competitive volume—that rate simply wasn’t sustainable, especially with profitability still in the distant future for Jet.com.
CEO Marc Lore needed to raise billions from investors in order to reach a profitable margin, but investors haven’t been throwing money at tech startups like they were three years ago. Tech startup IPOs haven’t been as successful lately as in the past—only 9 have even occurred this year, to date—and Jet wasn’t going to receive the money it needed to reach profitability. Fortunately for Lore, Wal-Mart was willing to pay $3.3 billion for a company that had been valued around $1.5 billion.
In short, young tech startups like Jet start off by hinting at healthy competition with the old guard (Amazon could use a competitor), but the current capital market demands profit rather than sheer volume. Jet was good at the volume part, but not the profitability; that leaves the door open for current powers like Wal-Mart to make an irresistible offer and sweep up the technology and the people. With the signing of a document, the competition is eliminated and the status quo returns. That can’t be a win for the consumer, can it?
The “Royal Family” of Silicon Valley Settles With Buying, Not Out-Innovating
Some other high profile acquisitions probably come to mind: Microsoft buying LinkedIn and Facebook purchasing Instagram and WhatsApp, just to name a couple. What do these types of purchases have in common?
They all take the easy road to winning. Flush with cash, they use money to snuff out the candle of competition. The Google/YouTube deal simply combined the two leading search engines in the U.S.—again, no innovation war.
One takeaway could be that volume doesn’t always lead to profits, as Jet.com will tell you. On the other hand, no one will challenge Amazon without enormous volume (and Amazon didn’t even become profitable until 2001). In short, the current investment landscape doesn’t favor tech startups that don’t keep profitability in plain view—a likely sign of an aging bull market.