By Understanding the Technology

Business schools claim that it is not the technology, it is the business model but to understand the two most critical aspects of the business model, the value proposition, and customers, one must understand the technology. What does the technology offer that is better than the previous technology? Will the advantages translate into lower costs and/or a higher willingness to pay, and thus happy customers, profits for investors, and good pay for employees? And how do we translate these advantages into a value proposition, one that should evolve as the technology gets better?

Advantages and value propositions are only relevant when a specific context is presented, which can be called an application. Silicon Valley used to talk about killer applications, applications for which the advantages and value propositions are the largest for a specific new technology. For some reason, the importance of finding these killer applications and the customers who want these applications has been forgotten, perhaps lost in the hype of venture capitalists and entrepreneurs that has resulted in huge startup losses[1]. …


The six profitable Unicorn startups (out of 73) did IPOs many years ago and no Unicorn startup among those announcing or doing an IPO since Zoom in August 2019 were profitable in 2019 (or 2020). This suggests that the privately held Unicorns, ones that have yet to do IPOs, are mostly unprofitable and thus the record low profitability of startups is likely to get worse. With a global valuation of $1.9 …


Yesterday’s semiconductor research and startups created jobs and products for everyone while today’s biotech mostly creates science and engineering jobs and products for high-income people.

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Inequality has become one of the biggest issues of our time, particularly to liberal Democrats. And the concern is well founded. Thomas Piketty’s Capital in the 21st Century documented rising inequality in the U.S. and other developed countries over the last 100 years. His book brought the issue of inequality to the forefront of the Democratic with proposals such as a minimum guaranteed income.

But what about universities? Don’t they exacerbate inequality through high salaries for professors, salaries that continue to rise faster than inflation[1]? A big reason behind these rising salaries are tuition costs that have risen three times faster than the rate of inflation since 1983. Why tuition has risen is a separate question; the point is that tuition and thus salaries are rising faster than inflation thus exacerbating inequality. …


Which technologies were successfully commercialized in each decade, going back to the 1880s? Successful is an important yet vague word meaning that the technology should have added value in the relevant decade, it should have significantly diffused during the decade of introduction, and the suppliers should have become profitable. I made this list by looking at a variety of sources that describe the most important technologies commercialized in various decades, much of which is consistent with Robert Gordon’s book, The Rise and Fall of American Growth. Looking at the technologies commercialized in past decades (See table), this article, the 18th in this series on startups and technologies, argues that much fewer were successfully commercialized in the 2010s than in previous decades. …


The small number of companies on the Fortune 500 or 100 for both 1955 and 2020 is not due to creative destruction, and it does not symbolize the strength of the U.S. economy, as some claim. For instance, the American Enterprise Institute’s (AEI) analysis found that only 52 companies on the Fortune 500 in 1955 were still on the list in 2020, a conclusion I do not dispute. It claims that “The fact that nearly nine of every 10 Fortune 500 companies in 1955 are gone, merged, reorganized, or contracted demonstrates that there’s been a lot of market disruption, churning, and Schumpeterian creative destruction over the last six decades.” …


Only 8 of 25 Chinese-Ex Unicorns have had higher share price increases than did the Nasdaq between their IPO and January 7, 2020. The Nasdaq is used for comparison because many Chinese startups have done their IPOs in the U.S., and the Nasdaq is America’s most representative index for high-tech startups. January 7, 2020 is used to avoid the impacts from the lockdown, which has created extreme volatility in global stock markets. This also means that Unicorn IPOs done in 2020 are not included in the table.

These figures are roughly consistent with the results for U.S. ex-Unicorns, results that are reported in the second article in this series on startups and technology[1]. In that article, share price changes were also compared with the Nasdaq changes between IPO time and March 9, 2020, a bit later than that for the Chinese ex-Unicorns because America’s lockdown was instituted after China’s was. Of the 45 Unicorns who had done IPOs before that date, 14 of them (31%) had share price increases larger than those of the Nasdaq, a percentage roughly similar to the percentage (32%) of Chinese ex-Unicorns that had share price increases greater than the Nasdaq. …


Eighteen of 32 Chinese-Ex Unicorns are unprofitable or delisted (See below table), and many privately held Unicorns are also likely unprofitable. These Unicorns were valued at $1B or more while they were privately held, and the prefix “ex” means they have done IPOs and thus regularly report income. Only those startups defined as Unicorns after 2013, which was when Aileen Lee first described the phenomenon[i], and before 2018 are listed in the table. Newer unicorns are ignored because they will have had fewer years to achieve top 100 market capitalization and become profitable.

The 18 of 32 (58%) figure is high but not as high as the 85% that I have found for America’s ex-Unicorns in previous reports[ii]. The biggest reason for the lower percentage of unprofitable ex-Unicorns in China than in the U.S. is likely the more rapid economic growth of the latter than the former. China’s ex-Unicorns are on the average 11 years old, being founded in 2009, about the same age of America’s ex-Unicorns. But, 11 years in China is like 33 years in a Western country because China’s growth has been at least three times that of Western countries. …


It will not save data analytic or AI startups

Many VCs, startups, and consultants believe that today’s unprofitable Unicorns[1] will eventually make enormous profits because of the Data Wheel[2]. Building from another unproved theory, Data is the New Oil, the Data Wheel claims that more data leads to better algorithms, more value and thus more customers, a kind of perpetual motion machine that will lead to winner-take all outcomes[3]. …


Many have argued that deep tech startup Unicorns will do better than the low-tech money-losing startups that I have covered in previous articles in this series on startups and technologies. Beginning with Uber, Lyft, and WeWork, these articles have shown that today’s startups are doing worse than those founded 20 to 50 years ago. Only one startup founded since 2000 (Facebook in 2004) has achieved top 100 market capitalization versus six in the 1970s, nine in the 1980s, and eight in the 1990s[i] and none of America’s ex-Unicorns are even close to being ranked in the top 100, as shown in the second article in this series[ii]. Ex-Unicorns are also much less profitable than the most successful startups founded 20 to 50 years ago. …


Many VCs, startups, and consultants believe that today’s unprofitable Unicorns[1] will eventually make enormous profits because of the “Winner Take All” phenomenon, a phenomenon that the world’s most valuable companies benefit from. Platforms operated by Microsoft, Apple iPhone, Amazon, Facebook, and Google have been money machines churning out enormous profits for many years if not decades because they have virtual monopolies for their products or services. These monopolies come from strong network effects and switching costs[2], phenomena that some claim exist for today’s Unicorns.

For instance, Microsoft can charge high prices for its software because users do not want to pay the switching costs associated with moving their files to other word processing, spreadsheet, or power point software, costs that were even higher 30 years ago. With large amounts of files created in Microsoft’s formats, moving to different software would require users to make large expenditures in time and money. Many of these users are now “locked-in,” a process that began with the network effects associated with Microsoft’s software; the more people who could share Microsoft-compatible files, the greater the benefit from using Microsoft-compatible files. Thus, most of the world, particularly the corporate world, use Microsoft products and are willing to pay high prices that enabled Microsoft to become one of the most valuable firms in the world. …

jeffrey lee funk

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