Monday, November 12, 2012

Takeaways From The 100 Largest Public Companies

As an entrepreneur about to start another company, I thought it would be interesting to take a look at the largest companies by market cap.  What can be learned from them?  Raw data is here.

1. Some takeaways from the top 100 public companies by market capitalization [1]:

A. There Are As Many Tech Consumer Companies As B2B In The Top 100 By Market Cap
The original emphasis for tech was on the B2B side with the pendulum swinging over to consumer in the 1990s through today.

Shockingly, the most recent B2B tech company to crack the top 100 by market cap was Cisco Systems, founded in 1984 - 28 years ago.  The other companies are all from the 1970s or earlier, or were acquired by the remaining survivors.  Will we finally see a B2B renaissance in tech (shout out to Box & Workday)?

B2B tech [2]:
#5 Microsoft ($240 billion) - founded 1975
#10 IBM ($221 billion) - founded 1911
#23 Oracle ($149 billion) - founded 1977
#53 Cisco ($96 billion) - founded 1984
#64 SAP ($83 billion) - founded 1972

Consumer tech:
#1 Apple ($570 billion) - founded 1976
#8 Google ($223 billion) - founded 1998
#40 Amazon ($108 billion) - founded 1994
#85 eBay ($64 billion) - founded 1995

Near misses: EMC (#104 at $51 billion, founded 1979), Facebook (#127 at $41 billion, founded 2004)

B. It takes time to build a massive company.  Only 2 of the 43 companies worth $100 billion or more were founded in the last 15 years (Google & Amazon).  It takes time to build a valuable company.

C. New markets create outsized value.
The youngest companies to crack the top 100 are consumer Internet companies - most of them from the 1990s when the Internet was an entirely new canvas for entrepreneurs to address.  Similarly, the largest B2B tech companies largely all date from the 1970s, when a new industry was being formed around micro-computers.

What are markets today with outsized new opportunities?

Is it genomics?  3D Printing & DIY?  Mobile Internet?  Something else?  Or is it still core Internet?

D. Distribution And Commerce Are Key Consumer Web Primitives
Of the 5 largest consumer tech companies, 2 are distribution switchboards (Google and Facebook) and 2 are horizontal commerce platforms (Amazon and eBay - which started off more vertically focused but then went horizontal).

This raises two interesting questions:
I. What other companies are primary distribution platforms (Twitter for sure, maybe Pinterest?)  What companies can move from vertical to horizontal commerce platforms (AirBnB and the shared economy?)?  These are areas of outsized value creation.

II.  What are other web primitives beyond commerce and distribution?  E.g. is file sharing / storage a web primitive?  If so, Dropbox will be a multi-$10 billion company.  Are there other fundamental components of the cloud/internet yet to be uncovered?

2. Looking at the 1882 public companies larger then $1 billion in market capitalization[1]:

A. Companies Worth More Than $1 Billion Follow A Power Law
As you can see from the data below there are large drop offs with each step in company size.  Getting past $10 billion in value, and past $50 billion in value seem like large hurdles

(The elbow in the curve seems to be around $45 or $50 billion, although I have not done the math, but if anyone wants to do it the raw data is here).

Close up on companies worth $1-5 billion:

[1] I pulled this data on October 20th, 2012, so it is already a little out of date due to e.g. earnings calls.
[2] I am not including semi-conductor companies - e.g. Intel, QCOM etc. in this definition of B2B tech.  Also, MSFT is a bit ambiguous as it has both consumer and enterprise revenue.  Similarly, former high fliers that have since been acquired (e.g. Sun) are not reflected

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Related Posts:
The Road To $5 Billion Is A Long One
How Can You Tell If Your Market Is a Good One?
What Wave Are You Riding?

Friday, November 9, 2012

How To Choose The Right VC Partner For You

Many people confuse the value of a VC firm (e.g. Sequoia) with the actual partner who joins their board.  If your co-founder is your spouse, your board member is like your mother or father-in-law.  Unhappy, inept, or troublesome in-laws can be a disaster.

Here are some of the criteria to consider for the VC partner joining your board.

1. Network and Access
What network can the specific partner bring to bear?  Brand name partners typically have more weight and can get more important people on the phone.  More junior partners have less pull on average, but might have a stronger network of potential non-executive hires if they just left a company with lots of talent (e.g. Google, FB etc.).

2. Understand Standard "Startup Problems"
All startups are messy.  You want someone on board who has either (a) started something themselves or (b) seen a lot of early companies as an investor or employee.   Newer partners who have not started or worked at early companies (e.g. ex-bankers or ex-consultants) have a higher likelihood of inappropriately freaking out if something standard goes wrong, and things *always* go wrong at young companies.

3 . Seniority in Firm
Having a senior partner join your board is usually better then having a junior[1] partner, although trade offs exist in both directions.

The drawbacks of a junior[1] partner largely center around their knowledge, network, and incentives.    A junior partner is trying to climb the partnership ladder at their firm and may put their career before your startup.  This can lead to split incentives (and finger pointing) if your startup runs into trouble.  A junior partner may not know what they don't know and give bad advice ("You should make it look more like Pinterest") or over-react to a simple issue.  A senior partner has nothing to prove to the partnership, and has seen a lot of twists in the entrepreneurial road before, so they can just focus on fixing the problems.

The senior partner's weight in the firm and in the industry can go a long way.  Do you need to raise another $10 million as an inside round?  A senior partner may cajole the rest of the firm into approving the investment while a junior partner might not.

The downsides of a senior partner is that they may be checked out, too busy, or out of touch.  Senior partners may overly pattern match or focus too much on what worked 15 years ago.  Alternatively they may aggressively push the latest blind fad ("You really need to hire a lean startup mobile growth hacker") without knowing what it means.  In general, a senior partner will have less time for you than a junior one.

4. Personal Chemistry
Would you actually enjoy seeing the VC partner regularly?  Do they have insights you will benefit from and comments you will respect?  Do they respect you and your abilities?  Can you ask them dumb questions without repercussions?

5. Past Experience, Smarts and Insights
Does the person have unique insights or creative thinking that can really help you?  Can they be a good sounding board to help you quickly identify what to focus on?

Do they have relevant past experience in the industry?  Can their knowledge help you get where you are going faster?  Do they have operating experience you can benefit from in building your company?

6. Hunger/Drive/GSD
How hard does the VC partner work for the company?  How hungry are they to make the company succeed?  Are they available on the weekends and late at night?  What will they tangibly do to help the company?

7. Board Seat Number
How many boards does the VC partner sit on?  Will they have time to help your company?  Alternatively, do they have enough board seats to prevent them from focusing too much on you (and showing up unannounced during the work week)?

8. Firm
The venture firm's brand the partner comes from can help with hiring or deals.  Institutional knowledge can help with industry trends / pattern matching and relationships in to potential customers, partners, etc.

Reference checks.
You should reference check anyone associated with the company.  This includes the specific VC partner you are considering for your board.  Some questions to ask:
  • How has the VC been most helpful?   What is the single thing they have done best for your company?
  • What are the specific areas they have helped with? (hiring?  company building?  introductions?  strategy?  product?  something else?)
  • What resources has he or she brought to bare?  How has the rest of the VC firm been of help?  How does the VC partner interact with the rest of the VC firm?
  • How do they react to bad news?  Provide an example of when something went terribly wrong.  What did the VC partner do?
  • What is the partner weakest at?  How does it manifest itself?
  • How much do you have to manage the VC partner?   Do they e.g. ask you for meaningless data all the time?
  • How would you improve the VCs involvement with your company?
  • Describe a situation where the investor has gone above and beyond to help the company.
  • How would you compare them to the other board members?  How do they interact with other board members?  Do they create a constructive environment?
  • How do they interact with the entrepreneur?  How do they interact with the company's executive team?
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[1] Don't confuse "new to the firm" with "junior".  There are a handful of newer VCs who have had a great operating career so far and made lots of money - so they have less pressure and incentive to push their career at the venture firm at your company's expense.  They often have a pre-existing relationship with the venture firm they joined - either as an entrepreneur the firm backed or an operating executive.  This means they have more pull and respect from the senior partners then a junior partner does.  They are new to venture and to the firm, so are still learning e.g. what makes for a good investment (unless they have been an active angel).

These people are usually a better choice for your board then a true junior partner and will have more pull with the partnership, as well as stronger operating insights.  They will also have a clean slate and have the time to do more investments.