We know how the high-tech industry evolves rapidly, due to the technology innovation cycle. What is not as apparent is why the business models of these companies have changed. Companies’ revenues are almost tenfold today when they go public, compared to 30 years back. Additionally, after going public, the CEOs stay focused on growth and take bigger risks – as opposed to focusing on quarterly results. Let’s examine the major determinants of this change:
1. The Explosion of Venture Capital (VC) Funding: Venture capital investment, the lifeline of startups, has skyrocketed since 2020. In the past five years, in the United States alone, VC investment has averaged over $150 billion annually, peaking at nearly $350 billion in 2021. This surge in funding is driven by the emergence of mega-VC funds, both traditional (e.g., Sequoia, Andreessen Horowitz) and non-traditional (e.g., SoftBank’s Vision Fund). These funds, with their vast resources and higher risk tolerance, prioritize rapid growth over immediate profitability. This “growth at all costs” mentality allows companies to scale quickly and remain private for longer, focusing on revenue growth rather than short-term profitability. Higher revenues are rightly equated to staying power in the market. In my time, companies blossomed but with slight changes in market or technology, they would fade or disappear giving rise to a fresher crop of startups. That was the norm.
Until the early 2000s, IPOs were the primary vehicle for tech companies to provide liquidity to investors and founders. Today, even companies with quarter-billion-dollar revenues can remain private. This shift has given rise to unicorns, companies with a valuation of over a billion dollars, thanks to mergers and acquisitions (M&A), where companies got bought by another company. This increased the portfolio of products and gave venture capitalists bigger rewards for their patience.
2. Evolution of Rationale Behind M&As: Companies like Cisco Systems exemplify the strategic shift in the tech industry. Cisco Systems (1984), which began around the same time as my company, Digital Link (1985). They brought venture funding and professional management soon after. Initially, they grew organically, but later their growth came from acquisitions to fill gaps in their product line and leverage their existing sales channels. This approach created synergistic efficiencies that drove the company’s growth and profitability and gave them staying power in the market. Interestingly, Cisco’s professional leadership transitioned from technologist founders, Len Bosack and Sandy Lerner, to sales-focused CEOs. John Morgridge, Cisco’s first non-founder CEO, was brought in after Sequoia Capital’s investment (led by John Doerr). Morgridge’s focus on customer loyalty and dedicated sales teams significantly boosted the company’s revenue. His successor, John Chambers, was hired as VP of Worldwide Sales. Chambers recognized that retaining top salespeople meant acquiring innovative startups whose products customers were already buying. This approach, detailed in a 2014 Forbes article, highlighted the tactical brilliance behind Cisco’s growth. Under Chambers’ leadership, from 1995 to 2015, Cisco’s annual sales soared from $1.9 billion to $49.2 billion.
3. Today’s mega-tech founders are a new breed, playing the long game: The new generation of tech founders also differs from their predecessors in their approach to leadership and growth. Unlike Cisco’s founders, many of today’s tech founders have retained their CEO roles longer or have a strong voice in the boardroom even when they relinquish the CEO position. In contrast to Cisco, companies like Facebook, Microsoft, and Google pursued technology-driven acquisitions, focusing on acquiring promising technologies. This approach is evident in high-profile acquisitions such as YouTube, LinkedIn, and WhatsApp, where the companies did not add significantly to their top line, nor the product fit was obvious. These founders are more willing to take risks and play the long game, focusing on long-term innovation and growth rather than immediate sales channel enhancement.
4. Pressure to Grow: The modern landscape, characterized by mega-companies and mega-VCs, has allowed companies to take longer-term horizons. Yet the pressure to grow has intensified. This contrasts sharply with the experiences of smaller companies like Digital Link, which went public with one-tenth of the revenues of today’s companies. Public companies often face intense pressure to deliver predictable quarterly profits, which not only hinders their long-term strategy and execution but is a distraction that they can ill afford. The short-term focus demanded by public markets can stifle innovation and limit a company’s ability to adapt to changing markets.
The longer-term horizons enabled by staying private come with their own challenges. While they provide more room for strategic planning and innovation, they also delay returns for VC funds and their investors, with increased risks. Fortunately, large investors in VC funds, such as retirement funds and endowments, have the capacity to tolerate longer investment horizons, making this newer model viable. Pulling investments in and out is not a recipe for success. Warren Buffets has been an advocate of that.
The Future of Tech Companies:
As demonstrated by the fate of many once-prominent tech companies, the only constant in the tech industry is change. Disruptive technologies like artificial intelligence (AI) and their adoption continue to create new opportunities and challenges for existing companies. Adaptability and agility are crucial but not sufficient for success.
The evolution of Silicon Valley and of the tech industry reflects a broader shift in how companies approach growth, innovation, and liquidity. In the current environment, the size of the company matters —both for mega techs and startups. At the same time, smaller companies are not forced to go the IPO route prematurely. That gives breathing room, to grow in a stealth mode.
The rise of venture capital, strategic acquisitions, and the changing focus of founders continues. The FTC is having a hard time redefining monopolistic behavior or even markets. Online vs brick and mortar storefronts, and advertising revenues are not even a market in itself. So how do regulators determine dominance over which market?
The landscape for tech companies is vastly different than it was in my day. If tomorrow I had to do it all over again, my approach as a founder, CEO, and entrepreneur would be very different.
2 responses
While what is stated is true, I feel the landscape for public issues will change again due to AI innovation and market conditions today as opposed to Vinita Gupta’s days!
The article throws light on the changed perspective of companies in general and Tech companies in particular.However, as the saying goes, the change is the only constant, we will continue to see such disruptions in near as well as far future. Let us hope the extent of changes we witnessed in a decade or longer, would hardly take 5 years now with the latest AI disruption at hand!