TLDR: Go read Aileen Lee’s update to the Unicorn Club… and a few inevitabilities.
Before we jump in, a quick welcome to all the new Monday Morning Meeting readers.
We grew ~30% this month.
So as a quick background for the newcomers, you should know I write this Substack for myself—it helps me think—but you should also know that for the 9 years prior, Monday Morning Meeting was a live meeting. A simple work ritual I had from my time leading teams at LinkedIn. I found it to be a great way to start the week, get the team to the office early, shake the cobwebs of the weekend, and set the tone for how we would continue to win every single week, quarter, and year.
It’s also important to mention, the years we didn’t have MMM, we didn’t perform well at all. So when I left LinkedIn to become a full-time VC, I launched a Substack in its place. A personal ritual for myself.
So whether it’s a silly superstition or a very productive ritual, I’ll leave that for you to decide. In the meantime, if you want to know more about me, you can head over to my LinkedIn profile, or if you want more context on Monday Morning Meeting, I recently recapped the best performing posts. And, if you’re a founder or business leader, you might be interested in my book Inevitable, that I published last year. It’s a short hundred-page read that debriefs a collection of important concepts for building and leading. We sold 1,000 copies last year with 5-stars on Amazon.
Ok enough of that. Onto this week.
Did anyone catch Aileen Lee & Allegra Simon’s Welcome Back to the Unicorn Club, 10 Years Later?
If not, go read it. That’s your MMM.
If you did read it, you can’t help but wonder if the tech sector isn’t going to resemble the public markets over time. Ups and downs, but consistently up and to the right over a long enough period.
After all, we are creating leverage in ways we’ve never seen before.
And for unicorns, that meant 14X growth over a 10-year period.
Could you imagine another 14 or even 10X from here? That would be stratospheric, from ~500 to ~5,000 unicorns? What if the exit sizes did too? $5B, $10B, $50B?
Crazy to think, but hardly impossible. After all, we’ve already seen near-centicorns like Uber’s IPO at $75B in 2019.
The interesting part about that thought exercise though is not the crazy zero interest rate IPO’s, but the fact that entry valuations didn’t and don’t move nearly as fast as top end outcomes because of the time horizon to realizing them.
For example, Airbnb raised $20K from Y Combinator for 6%, then they took another $600K for 20% in their seed.
That was 2009. The idea of an IPO for $47B just 11 years later in 2020 probably wasn’t even a consideration. Paul Graham and the YC team would’ve had to believe Airbnb’s IPO could compete with AT&T, General Motors, and Visa.
Insane.
Fast forward, that $333,333 valuation at YC has moved to $1.78m (125K for 7%), and they’ll stack another 2.6% ownership on average from their $375K MFN with the average YC company raising seed at a $14.4m cap instead of Airbnb’s $3m.
That’s a ~5X increase in valuation at pre-seed & seed for a 47X increase in IPO size if you were modeling $1B outcomes into your VC fund model in 2009.
I’m not saying that will continue. There are counterforces of course.
Margins are way too high. The fact that software margins have persisted at 80% or more is just craziness. Companies will start to use price more aggressively to compete for market share as cheap AI tools enter the market and try to unseat them. This compression will change the value of discounted cash flow models.
Pricing models need to change. One way to reduce sticker price and maintain some semblance of healthy long-term margins is to pay a smaller implementation fee, but incur ongoing services & upgrade costs. This is a more traditional pricing model, and creative economics that leverage this kind of thinking run rampant in the titans of tech. It’s a game of deeper roots, higher switching costs, and long-term contracts. With API calls and data usage more prevalent, we’ll also see more pay-per-use models, the same way we buy copiers. We’ll also see more pay-for-performance models with attributable ROI, akin to Amazon’s ACoS model or Rakuten’s affiliate marketing model. Customers will prefer it too, placing a higher emphasis customer value. This will also drive margins to condense.
AI, AI, AI. AI will cut OpEx costs dramatically. SDR teams, gone. Copywriters at agencies, you don’t need as many. Data scientists? Just run a query against your data lakes. The list goes on. Costs of running these companies is going to get shellacked. Good for margins for sure, but also a compelling opportunity for newcomers to undercut and unseat incumbents too.
More hardware. With software margins condensing, hardware margins will start to feel more attractive too, the maintenance and upgrade fees will resemble what we see in SaaS, and the software that powers these machines will be incredible. Skynet for autonomous off-road vehicles, absolutely.
Less dilution, earlier exits, and stratification. We already see it in the S&P 500 with the top end accounting for an outsized share of total value. With that kind of cash on balance sheets, bigger companies will just buy the smaller ones. Think about how Broadcom rolls up companies. If you’ve built the business more efficiently, you’ve also raised less, incurred less dilution, and that $100m exit when you still own 50% is looking pretty prett-ty good compared to the same outcome 5-10 grueling years later to own 5% of $1B.
Massive founder salaries, less emphasis on growth. If you’ve built a company that’s profitable from day one, and you have complete control of your board, what’s your incentive to keep the pedal down on growth, or stay on the VC treadmill? World domination? Why not pay yourself 10X, stop fundraising, and continue to tighten the core business until someone acquires you? It’s better for the founding team and employees for sure, and it’s probably better for customers in most instances too.
These are just some of things I think we’ll see over the next five years until we approach ZIRPy-dirpy times again and massive growth becomes irresistible.
But there are also a whole slew of things I think are inevitabilities that will benefit from these dynamics because we will not only have new technologies, with more attractive pricing, but we will be tackling new opportunities that were created by the prior evolutions across adjacent industries.
For example…
Cost of energy is going to zero with nuclear fusion
Longevity is starting to work; check out Loyal for Dogs
Batteries & cameras continue to improve; medical devices, for one, will be more personal & affordable
Disintermediation of big ad networks with new global distribution channels; check out Benjamin
Massive cost reductions driven by AI
Software will be built by software
An aging population is retiring (10,000 per day); wealth transfer & SMB’s with no exit paths
Climate change
…and so on and so on and so on
The list is long. Much longer than this. If you want the rest, just reply or comment so that I know, and I’ll go deeper next week.
Net of all of it, I think we’re going to see a tale of two cities. Stronger, more profitable businesses, with smaller, but better founder founder exits in the near term, and a continued growth both in number of total unicorns, and what that top-end outcomes look like in the longer-term.
And like I said, go read Aileen’s post.
See you Monday.