Why there may be an uncertain future for tech start-ups down the road
AS WE ALL know, start-ups have always existed, as documented by a recent CNN report on the historical brands that are now celebrating their 100-year existence, which includes household names such as Tabasco and Nikon. Over the past few years, start-ups across the world have also been making a significant impact by contributing to both their local economy and the global economy. Yet, these were prominently propelled by the rise of organisations such as Facebook, Stripe, Uber, Mpesa and various others.
The question now is whether startups can continue to exist in the future, or whether we will see a different kind of start-up. Also, what led to these start-ups becoming so prominent so quickly?
One thing we’ve learnt is that it’s mainly because large corporations lacked innovation, or even the desire to innovate, rather choosing the safe and rigid path “more” travelled.
Imagine if Kodak innovated to be the next Instagram? Imagine if General Motors or some of the yellow cabs companies became the next Uber? Imagine if Sun International hotel group became the next Airbnb?
In my opinion, start-ups as independent companies will cease to exist in the near future. This is due to the fact that currently large corporations are quickly realising that they have to keep up and innovate to ensure they meet the needs of their innovation-embracing customers.
So now they’re starting to work closely with start-ups that align with their customer-centric business visions. This means partnering with start-ups, either through a trade exchange where the corporation offers to train and upskill them, but ends up taking their initiatives or buying equity in the business. Some corporations also just choose to employ the founder of the start-up full-time, by dangling a juicy and lucrative corporate carrot in front of them.
A new report from the Brookings Institution finds that in nearly every industry, from agriculture to finance, the share of new companies is falling.
What’s going on? Dan Kopf in his latest piece analysed this as…
One possibility: Start-ups are struggling in this era of rising market concentration. In most industries, since the 1980s, the share of all sales going to the top firms is increasing. Start-ups may have a hard time competing with these mega firms, which can out-pay them for the best talent and sometimes attempt to drive them out of the industry.
Another related possibility that Kopf mentioned was that the most-educated American workers were no longer attracted to entrepreneurship. In 1992, 4 percent of 25 to 54 year olds with a Master’s degree or PhD owned a small company with at least 10 employees. In 2017, this was true of only 2.2 percent. Companies started by the highly educated are often unusually productive.
The Brookings report suggests that high salaries for educated employees at big companies have made entrepreneurship less compelling. Why compete with Google or Walmart when they are offering you an enormous amount of money to come work for them, he wrote.
According to Joseph Flaherty, three prominent tech thinkers recently declared the end of the start-up era, questioned the future of tech innovation generally and heralded the rise of the “Frightful Five”, being Apple, Amazon, Facebook, Google and Microsoft, who will dominate the future of tech.
All of the posts make credible arguments, but they ignore how consolidation could be good, even great, for start-ups.
If we define start-up success as building cornerstone companies that will go down in history and be worth hundreds of billions of dollars, we may, in fact, be entering a lean period. If we define success as building an ever wider assortment of products, shipping them to tens of millions of users and earning hundreds of millions, or even billions of dollars in short time frames, the good times may just be getting started.
Just look at the case of tbh, an anonymous social media app available in all 50 US states designed for high school students. Reports suggest that Facebook likely paid $80 million (R1.07 billion) for the seed-funded, one-year-old company. Each founder probably made close to $15m for a year of work, making them better paid than All-Star NBA Champion Stephen Curry.
Entrepreneurs may have to settle for acquiring mere generational wealth, rather than becoming “pledge to cure all diseases” wealthy, but the death of start-ups has been greatly exaggerated.
The kind of industry consolidation we see with the “Frightful Five” isn’t new to tech, it’s the norm in most industries and can actually spur innovation.
The pharmaceutical and packaged food industries are heavily consolidated, have thriving start-up scenes, are hyperactive in M&A and provide a glimpse of how the future of tech may unfold.
So where does this leave African, or more specifically South African start-ups? Your guess is as good as mine.
In 2030, it will become easier to launch a business-to-customer start-up, because the next generation – unlike its predecessors won’t be shy about the risk/reward aspect of trying new products. Once a brand or company becomes established, however, it might be ditched for the new “new thing”.
In conclusion, the death of traditional “permanent stand-alone” start-ups may be looming in some sense, but there are endless possibilities and avenues for startups to fully exploit their innovative talents and realise prosperity.