Did The Technology Industry Reach Its Plateau?

The Technology Hype

There is too much hype around staggering technology startup valuations, unicorns, Apple’s cash position, Alphabet’s vision, and many more. Most of what I hear and read is whether or not the technology industry reached a plateau. Partly the reasoning is the exaggerated valuations, sometimes lavish life style of few technology entrepreneurs, and whether we really want so much new features in our mobile devices, or augmented reality?!

The Scope of the Research

That’s a very broad subject, and I spent time researching various angles that can tackle some of the questions that arise towards the technology industry. In essence, I decomposed the questions I want to answer based on different stakeholders:

Venture Capitalists: Should we raise a new fund? Should we continue investing in more startups? Is there enough room for mergers and acquisitions activity so we exit our positions?

Entrepreneurs: Should I start a new tech startup? Doesn’t it seem a bit too much crowded now to start yet a new startup? Would the big boys with big bucks have any interest/capital in the next 5 years to buy out my startup?

Executives of tech companies: How much more room we have for growth? Can we still play the acquisition game to grow our market share?

Methodology

Obviously, those questions cannot be answered in a one page blog post. However, a simple yet data driven approach can give us amazing insights into answering them.

Business Consolidations

Industries go through four stages until they become so called “mature” or “stable”. Based on the article “The Consolidation Curve” in Harvard Business Review, the four stages are Opening, Scale, Focus, and Balance and Alliance.

Briefly describing, the article tackles the consolidation curve of industries by measuring the market share of the top 3 players of the industry.

  • Opening: A monopoly that soon vanishes and the top 3 players control between 10% to 30% of the market due to an influx of competitors.
  • Scale: Major players emerge and buy up competitors. Top 3 players control between 15% to 45% of the market.
  • Focus: Top 3 players focus on aggressive growth and control 35% to 70% of the market. Still 5 to 12 major players are around.
  • Balance and Alliance: The top 3 players control about 90% of the market and form alliances between themselves.

Current Market Analysis

So if we take that segmentation as a basis to find out how much the technology market has emerged, and how much growth can it still absorb, then what we need to find out is how the top 3 players of the technology market stack against the entire market.

Unicorns and Listed Companies

My assumptions going forward would be the following:

  1. The basis of the research is the United States market.
  2. Listed Technology companies in the NASDAQ market comprise all the publicly traded technology companies. Link to the list.
  3. Private technology companies that matter are the Unicorns, i.e. startups that reached beyond the $1 Billion valuation. Link to the list.

Total Addressable Market

Screen Shot 2016-05-26 at 10.59.44 AM

Top 3 Players of the Tech Market

Screen Shot 2016-05-26 at 10.59.54 AM

Scale Stage

Sum of the top 3 players’ market shares is: 27.9%. This puts the Technology industry into the second stage of scale based on HBR’s article.

So What Does This Mean?

To answer the questions we addressed at the beginning, we need to take a look at the scale stage. Here’s how it’s described based on HBR’s article:

Because of the large number of acquisitions occurring in this stage, companies must hone their merger-integration skills. These include learning how to carefully protect their core culture as they absorb new companies and focusing on retaining the best employees of acquired companies. Building a scalable IT platform is also crucial to the rapid integration of acquired firms. Companies jockeying to reach stage 3 must be among the first players in the industry to capture their major competitors in the most important markets and should expand their global reach.

This describes the rapid M&A activity by large players trying to acquire as much good startups as possible to ensure their own survival. In summary, the answers to the questions would be:

Venture Capitalists: Should we raise a new fund? Should we continue investing in more startups? Is there enough room for mergers and acquisitions activity so we exit our positions?

Answer: In short: Yes. There is still room. However, funds should predict the estimated timing of stage 3 of the market. VCs should focus on growth startups in the industry’s transitioning phase into the third stage. Reason why is that the big players won’t have enough time to buy out startups at early stages and can only accommodate growth startups that will immediately add to their top lines and make fast synergies with their businesses.

Entrepreneurs: Should I start a new tech startup? Doesn’t it seem a bit too much crowded now to start yet a new startup? Would the big boys with big bucks have any interest/capital in the next 5 years to buy out my startup?

Answer: While entrepreneurship is always encouraged, and one should be dedicated to growing his/her company, I think with the tech scene becoming too crowded, tech entrepreneurs should have a solid idea regarding their possible exit strategy to one of the major players in the technology scene. That may seem trivial but from personal experience, I see lots of startup founders tackling legitimate problems but not having an idea about their exit strategy. Also, it does not necessarily mean that the exit synergy should ONLY be with Apple, Google, or Microsoft. Although these three are the giants, other major players are still very legitimate options since the industry hasn’t gone through the third stage yet.

Executives of tech companies: How much more room we have for growth? Can we still play the acquisition game to grow our market share?

Answer: Yes. There is plenty of room to grow. 27.9% of the market is way behind the 90% mark. However, acquisitions should be targeted smartly in various verticals in the sense that not only adds to the top line directly, but also makes it harder for the competitors to join that specific vertical. In short, release products and acquire startups revolving around the product to make the barriers for entry in that product’s vertical harder bracing for an aggressive competition in stage 3.

Leave a comment

2 Comments

  1. Interesting approaching to answer the questions you mentioned by I disagree in a number of points:

    1- Exit Strategy: I don’t think the entrepreneur should think of an exit strategy at all. We get this question a lot from investors and it’s something we discussed a lot while at 500Startups. I believe an entrepreneur should focus only in creating value to his customers and shareholders. Quick tip for entrepreneurs: if you get asked this questions you can answer on the following way “I’m passionate about what I’m doing and I’m happy to do this the rest of my life, and there is still a lot of things to do before thinking about an exit. But, there is a price for everything. I’m not against selling the company at the right price, actually here is a list of potential acquirers”. Yet I agree with you that the major driver of acquisitions is competition.

    2- Investing in startup and starting a startup: Startups always been there before even technology as we know it today exist. The first hotel in the world is a startup and the first company that discovered soap is also considered a startup. The main difference between a startup and a regular company is that a startup is usually doing something innovative and the other big difference is that startups can scale because no one yet is doing something similar. New tech platforms (smart phones, faster internet speed, AWS…etc) are opening new doors for innovation. Most startups exist because the change in technology platforms is allowing us to do things we couldn’t do or think of doing before, thus solving existing and new problems. And the cycle of change and innovation is getting shorter. I believe opportunities for entrepreneurs will continue to exist, and we should change our mentality from “who will buy us” to go old school and think “how to go public”. Don’t you believe that some of the established startups we have in the region now can go public? I think they should, but the entrepreneur and their investors are busy dreaming how to get acquired by their American clones!

    3- You didn’t tackle the reality that the average life of a company listed in the S&P 500 is 15 years only! And actually the article mention that this is happening because of the M&A activity: http://www.bbc.com/news/business-16611040
    That means the market leaders are dying faster and instead of relying on them to acquire you, you should probably go head to head and replace them.

    Sorry for the long comment, it’s just a very interesting topic 🙂

    Reply
  2. sayedalmohri

     /  May 28, 2016

    This is the beauty of being an entrepreneur. We discuss all these differences in opinion and the thought development process never ends. I’d leave it to the rest of the people to figure out a way to ignite the world of technology with startups and be realistic in their goals. After all, we all agree that entrepreneurship is shaped by such ideas and discussions.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: