Recent news headlines and research make it clear that traditional asset-based companies are losing customers, employees, and value to today’s large and growing technology-based unicorns and trillion-dollar platforms. In fact, the most recent research by CB Insights shows that the number of unicorns (billion-dollar startups) is growing dramatically as more industry-wide platforms are being developed to remove the inefficiencies in traditional cross-industry supply chains. We aim to answer three simple questions on the mind of leaders today. First, what is behind the growth in unicorns and trillion-dollar platforms? Second, what are their unique and unifying aspects? And third, how can other companies benefit from these best practices to create superior returns?
To understand this new trend and how value and power is being created, we studied 3,000 publicly traded companies and used artificial intelligence (AI) to identify their business models–i.e. the way the companies interact with customers to create value. We observed that the highest enterprise value-to-revenue multiples (i.e. price to sales ratios) are achieved by companies that use new, multi-sided business models to attack existing markets. Those businesses share some common and interesting attributes.
- They deemphasize many of the traditional, physical assets
- The invest in intangibles including networks, brands and IP
- They seek to build “platforms”’ that eliminate cross-industry inefficiencies
- Their “assets” do not appear in their GAAP accounting statements
- They use their industry dominance to raise large sums of capital
- They have higher carrying capacity than traditional organizations
- They have near zero marginal costs of growth
The above elements are the key advantages to today’s newest competitive threat— modern business models based on AI-powered platforms. The evidence of this is abundant. For example, although the number of publicly listed companies has declined since 1996, their aggregate market value continues to grow. This means that more and more value is being consolidated into fewer and fewer companies. This consolidation is no different than the observation that wealth is being concentrated within the upper class over time. This is true not just on an aggregate basis but on an industry by industry basis.
Companies are constantly seeking paths to grow revenue, value and profits. But, there are different pathways of innovation, each with its own trajectory, time scale, and requirements. Some pathways can be implemented in 1-2 years (Horizon 1 – cut costs), while others take 2-3 years (Horizon 2 – convert to subscription revenues) and yet others can take a greater number of years to implement (Horizon 3 – build multi-sided platforms). But once completed, Horizon 2 and Horizon 3 are more valuable, scalable and defensible.
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Evolutionary theory can provide a compelling lens with which to consider the business model evolution currently creating this disruption. New ideas, including those ideas used in business, are created through an evolutionary process, much like the evolution seen in organic life, through the replication, and incremental modification of DNA. It’s a combination of heredity, random mixing and mutation.
However, unlike organic evolution, whose speed is a function of reproductive rates that have remained relatively unchanged over billions of years, the speed of the evolution of ideas and business models is a function of the speed of communications. And the internet and social media have pushed the speed of idea generation to new and ever expanding heights.
While we tend to think of “inventors” as having a spark of brilliance that leads to an invention, the reality is quite different. Inventors pull from the “DNA” of ideas that surround them for inspiration. For example, powered flight was not only invented by the Wright Brothers in 1903, but nearly simultaneously, by several other inventors, all over the world, who had each reached the same conclusions and all created similar machines. There was Santos Dumont in Brazil, Gustave Whitehead in Europe and Clement Adler in France. They all relied upon the same foundational ideas and technologies: Bernoulli’s principles for wing design, aluminum castings for engines, and so on. Even when information travelled slowly, by boat or telegraph, it was the recombination of existing ideas that led to new insights.
Today, the ideas that are evolving and spreading rapidly are around artificial intelligence, shared resources, platforms, and multi-sided business model. One after another, every industry is putting those pieces together to form modern business models that suit their particular ecosystem. In transportation, so far, it has taken the form of a platform that uses the vehicles of others. In the future, the platform owner may own self-driving cars as well. In fashion, it has taken the form of a “retailer” that rents clothes rather than sells them. For navigation, it has taken the form of an app that tracks its users to gauge traffic speeds, rather than a “traffic chopper” observing the city from above.
The ideas are evolving quickly as industries take these new ideas as ingredients, mix them together, and create new types of businesses—often learning from other industries. And, just like in evolution, sometimes a new trait is so adaptively advantageous that it rapidly outcompetes old ideas (or businesses) sending them towards extinction faster than a taxi company.
An organization’s survival is now based upon its ability to rapidly adapt as never seen before. The story of evolution is often framed as “survival of the fittest,” but there is an equally compelling and relevant story of extinction for those species whose adaptations left them unable to compete for resources. In the biosphere, over 99% of all species that ever existed are extinct.
Major extinction events in the biosphere are always associated with major disruptions in the environment. For example, a giant meteor impact 65.5 million years ago disrupted the atmospheric stability that caused the extinction of the dominant dinosaur species of the time. In the event of a major environmental disruption, most species are left unable to cope with the rapid changes, especially given their low speed of reproduction and adaptation. Technology is causing just such a rapid change in the environment of business species.
In a rapidly changing business environment, it is impossible to predict your success. However, one can observe what traits are advantageous in the market—even if they appear in different “species” (read: industry, market, geography). The analog in the organic world would be to observe those DNA combinations that were most useful, and then to instantly add those to your own DNA. Those organizations with the right DNA, end up with the most capital, and in a virtuous cycle, that capital allows for greater experimentation and adaptation today’s environment. Our research indicates that modern business models, those used by technology-based network companies, are the leaders in valuation and thus have the strength of longer-term survival through an aggressive process of acquisition and transformation. Those firms relying on less competitive traits will head the opposite direction, into cycles of cost cutting, value decline, and, perhaps, extinction.
This article was coauthored by Bob Caspe