Company Lifetime Value

"It's pretty easy to get well-to-do slowly. But it's not easy to get rich quick."

There is a popular story that goes something like this. Companies today are dominated by tech. Tech companies are the largest companies to exist on earth, they’ve grown the fastest, and many of them seem to utterly dominate the industries they play in. Despite the laughable story that the bad VCs ask startups “what if Google built this”, the fact is nobody asks a community bank “what if JP Morgan did this”.

Their dominance seemed so assured that we have congressional hearings aplenty, worries about their power written regularly in the media, fines, anti-trust actions. Until the recent tech stock rout anyway the conventional wisdom was that software ate the world and the tech founders ruled the future.

When you look at it though, it’s a little weird. For one thing all the largest tech companies look very different to each other. (That’s starting to change).

Microsoft provides enterprise software. Amazon provided an unbeatable ecommerce platform. Apple creates some of the world’s best consumer hardware in the form of phones. Facebook connects you with all the world and runs ads on them. And Google organises all of the world’s information, provides search, and they too run ads.

Things are starting to converge - Microsoft, Amazon and Google have cloud divisions. Microsoft and Google have search. Google, Microsoft and Amazon have original content and media. They all have various bits of hardware, including for VR/ AR.

There’s a better image I remember having seen but can’t find anymore, that compares how all the tech companies have started similar business units

But they’re still remarkably dissimilar. Way more than any of the banks to each other, or big energy companies, or utilities, or telco, or restaurants, etc.

And they’re also all under threat! Much like Warren Buffett said and Bill Gates agreed, competition in the digital domain is fierce. Seemingly impregnable fortresses like IBM or Oracle seem to get overtaken with regularity.

There is competition, .. Can any Microsoft endure future competition without innovation? The answer is no. We've got to keep changing.

Facebook, until fairly recently a darling stock and one that most felt had the strongest moat, 3 Billion people using their apps weekly, saw its value cut by 70% in a hurry with the threats from Tiktok and ad business getting harder. Google’s under threat from AI tools, enough to change their entire business strategy. Microsoft has been working hard, including investing untold billions, to play catchup, and they’ve done it well enough that they’re again the darling of wall street.

None of this denotes that tech has dominance. Instead it indicates that tech is exceptionally fickle and surprisingly fragile.

The other side of the argument is that after the first boom brought by the web and the second boom brought by mobile, have you noticed we don’t have a generational company since the early 2010s? The companies we’re talking about are pretty old. Among the new crop we have Stripe and Databricks as private unicorns worth $50 Billion or so, SpaceX around $100 Billion. Amongst those who went public it’s Snowflake and Airbnb, maybe ServiceNow, but mostly its a wasteland. It’s a far cry from the incredible success of the previous generation - Microsoft and Apple in the 80s, Amazon and Google in the 90s, and Facebook in the oughts.

But even with this, Bytedance is pretty much dominating social media in terms of usage. OpenAI has basically built the field of generative AI anew. And on the other side Uber used to lead the pack but doesn’t really any longer. WeWork is like a curse. Most other consumer startups - Affirm, Klarna, Robinhood, or even Instagram, Snapchat, they’ve all seen meteoric rises followed by pretty precipitous falls.

Even if the new winners aren’t as large or as successful as the previous winners, their ability to destroy some of the older winners clearly remains intact.

In the modern era it looks like companies have steep rises and steeper falls.

Companies today don’t just become larger than any before in record time, they lose it too in record time.

What do you want your invested company to look like over time?

It’s not a question of centralised power residing in tech giants vs decentralised power residing with us as consumers, it’s a new sort of ecosystem where the speed of rise and speed of fall make things work differently to the way they used to.

One way I like to look at this is through Company Lifetime Value - an analog of the customer lifetime value that most companies use to figure out how useful a particular customer is.

In this view it’s not just a question of whether the company becomes extraordinarily large, but rather whether it stays that way. There are companies that stay alive for centuries, but remain rather small, and there are others who live a full, glorious life in a decade before they disappear.

And the way you build these companies also change. Some are steady accumulators of capital and expertise and don’t try to jump beyond their field, and some try to conquer new domains and with it bring fragility into their systems.

When you compare Chamath’s SPACs with Buffet’s Berkshire, one way to test it is by looking at this metric of area under the curve. It doesn’t prove everything, for instance that time when Buffett bought IBM or didn’t buy Microsoft, but the probability distribution of eventual profits makes for a remarkably prescient method of evaluating the investment criteria.

So, what are the benefits of this. For one it stops the meaningless contest to see whose market cap is the largest, and I think I can speak for everyone who’s seen CNBC while waiting for a flight that this is as close to a perfect deontological good that exists in our fallen world.

Second, it helps us get a vocabulary to figure out how to differentiate between different types of companies. So when we’re laughing at Warren Buffett for not having invested in Microsoft and loving sugar water, we know why. And when we’re laughing at the new Warren Buffett for having taken incredibly unprofitable companies public via SPAC, we know why again.

And third, probably most importantly, it gives us new tools to give employees better alignment. If you’re on a rocketship and want to get rich fast, then yes trying to conquer the world and letting your share price rip is the only option. It’s a quasi merry-go-round that we’re all on, willingly or not. But if there are profit sharing plans, or dividend plans, then the longer-lifetime companies have a way to differentiate themselves. Not with ESOPs that compound at 1.5% and are as boring as the paint they sell, but with something that’s meaningfully different.

People keep saying capitalism is the problem by pointing out how they are greedy and flame out. It’s worth figuring out how to talk about the other side.