January 6, 2020
The beginning of 2020 marks the end of a decade of continuous disruption. From Netflix & Spotify surging to the top of the digital media industry, to SeatGeek in ticketing, Uber’s disruption of taxi services, and Airbnb in the home rental business, it is difficult to find a trade or industry that has not seen entrants appear brandishing new technological solutions.
Every aspect of our daily lives has become more integrated with the internet and as a result, consumers have grown accustomed to speed, value, and quality from the businesses they choose to transact with. Information travels quicker than ever before, and while one application, product, or offline service may dominate today, when a new company comes along with a better and cheaper solution, customers are quick to make the change.
The venture capital industry in the US has grown substantially over the last decade by finding and funding the disruptors with the steepest growth trajectories. Research by Cambridge Associates shows the annualized return of all US venture capital funds pooled together has been 14.5% over the last 10 years, and the top managers have achieved far greater. These high returns have drawn in more capital, causing many investors to reflexively draw skepticism about future return prospects.
The reflex is both sound and diligent, however I would argue that the environment for disruptors remains ripe with opportunity. The flexibility and low costs provided by cloud computing and open source technology have made the barriers to entry for many disruptors extremely low. In the past, tech startups would have to invest in their own servers to support their operations, but now developers can run their software in the cloud across a massive network of servers, which is both cheap and rapidly scalable. This environment, coupled with consumers who increasingly desire cheap and immediate solutions for countless problems, has created openings for entirely new business models to thrive.
Another factor which has begun to impact investments made in these new and growing companies is a form of disruption itself, the increasing prevalence of direct stock listings as opposed to traditional IPOs. For decades investment bank led IPOs have been the standard for private companies to raise money and begin to trade publicly, but increasingly private companies are able to access capital at later stages, and companies like Spotify have begun to pioneer new ways to go public without raising additional capital or early investor lockups. Essentially, with a direct listing private companies are able to float shares on public markets without the exorbitant costs of an IPO.
Over the last decade a substantial amount of new capital has followed the disruptors. For comparison, 2019 saw V.C. funds close around $40 billion compared to $12.6 billion in 2010. As we look forward to the decade ahead, perhaps technological advancement will continue to outpace the ever-rising tide of capital chasing these opportunities.