Corporations Playing in the Margins Are Getting Destroyed
Why would a company like Uber, fully capable of going public and garnishing a boatload of cash in the process, choose to stay private? Well first, they already have a boatload of cash. They have taken in $15 billion to date and are valued at an astonishing $68 billion. Whilst they certainly have built up quite a large sum of money, they will need more if they are going to excel globally like they have domestically. Yes, Uber is still wanting for cash. So again, why not go public where they would likely compete for the largest IPO in the history of the exchange? Simply, Uber simply cannot afford to be limited by shareholder demands to generate profits at this point of their evolution.
Uber is a unicorn. A unicorn is a startup company with a market value in excess of $1 billion. Some well known unicorn as of April of 2017 include..
What do all of these companies have in common? They feel the need, the need for speed.
Imagine what a publicly traded Space-X would encounter when it decided that it was going to spend “tens of millions of dollars” in an attempt to be able to one day colonize Mars! Because that is exactly what Elon Musk is doing today. Shareholders would start running for the exits thinking that Musk is a crazy media seeking blowhard. I am quite certain that they would have had the same reaction if Musk invested money trying to compete with the huge players already in the satellite launch business.
What if Airbnb were publicly traded and their founders Brian Chesky and Joe Gebbia decided to spend $500M per year in analytics? Shareholders are inherently skeptical of the type of spend which can not be easily sold in terms of ROI alone, at least directly. The founders simply cannot be hamstrung by the constant pressure placed upon them by shareholders wondering when they will get their anticipated share of the profits?
What is becoming abundantly clear is that until shareholders become more interested in revenue growth and the capture of new market share instead of short term profits we will see more and more unicorns popping up across all industries.
In the digital age companies must be able to explore every available channel to pursue new business opportunities without having to prove out every last detail. The type of demands to which public companies are constrained take too much time and energy to be able to pursue the quantity of opportunities that are necessary today. I have worked at firms that spent 5 years just talking about upgrading their ERP system. Tesla talked about installing a new ERP, chose the technology, and executed on it all within 1 year. This was after they started down the normal path of looking at options like SAP and Oracle. They quickly realized that committing to a 3 year project was not aligned with their culture of speed and agility. So they decided to take on the risk of building their own solution which was “good enough” and decided it was worth the risk. Note that Space-X plays in a highly regulated industry and building a custom solution flies in the face of the industry best practice. Again, this is not the type of decision that would impress shareholders.
The problem with large companies and their need to play in the margins is not new. The rationale behind Innovators Dilemma is focused around firms who divest themselves from businesses that are not profitable, no matter how much revenue they are generating. As time goes by more and more of their businesses become non-profitable and without adequate profitable new business taking over they put themselves out of business.
The value of staying independent is only as good as that companies products and services. As long as they can keep generating new value added offerings to the market they will excel. The best way to achieve this is to ensure the proper level of freedom in pursuing those interests. With the advent of crowd-sourcing and the continued desire for the selected few willing to invest in non-profitable young firms the future is bright when it comes to moving the focus from profits to revenue.
One final note. The need for speed element and ability to pursue interests without a host of structure and governance is certainly a concern that public companies can manage. Whilst there is certainly places where the risk element requires proper risk management, much of which requires structure and a slower pace, when it comes to innovation and growth strategy firms would be well advised to protect those initiatives from the corporate stagnation that is likely well embedded in their business.