Innovation Debate: Take Two

7 May

Yesterday I posted the video of a recent debate between Marc Andresseen and Peter Thiel regarding the state of “innovation.”  One of Thiel’s contentions is that breakout innovation leads to big ideas which in turn ends up creating huge companies.  To support his thesis that levels of innovation have declined, he points to the fact that the total market cap of tech companies founded in the 1990s is significantly larger than the combined market cap of companies created in the 2000s.

A couple thoughts and questions on this:

  1. There is a time effect here that needs to be adjusted for.  There’s natural market/GDP growth that older companies will have benefited from.  Salesforce has a $25b market cap today, it’s completely plausible it will be 2-4x that in a decade. Ditto for Facebook, Workday, etc. etc.  This effect, however, probably isn’t large enough  to explain the variance on its own.
  2. How much of this effect is one company – Google?   Google’s market cap today stands at around $285b, dwarfing the next largest company in the analysis set (Amazon at $116b).  Google is a special company that’s going to skew any comparison like this.  Google was also incorporated in September 1998.  Move that forward 16 months and suddenly Thiel’s comparison reverses.
  3. While the aggregate public market cap dollars created might have declined between the 1990s and the 2000s, my sense is the the absolute number of tech companies reaching a $1b valuation has definitely increased (anyone have the analysis to back this up?).  It certainly wouldn’t be any surprise given the lowering of startup capital requirements, huge increase in internet users and IT spend, etc.
  4. Fewer companies are going public today, which Andresseen noted in his comments.  A proper analysis would need to adjust for M&A transactions and valuations of well-established private companies like SurveyMonkey.

My point here isn’t to argue that Thiel’s comments are necessarily wrong.  I just don’t know that looking at public company market caps leads to the easy conclusion he’s trying to make.

His overall question still stands though.  Are the big, low hanging opportunities in tech already taken?  Are there still $100, 200, 300 billion opportunities available?

Note: spoke to a friend after this.  He made a great point, which is that it would be interesting to do Thiel’s analysis for other sectors.  Which sectors show the opposite effect?  My guess would be Healthcare, Biomed, and maybe Energy/Commodities?

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