What if Google / Amazon / Microsoft were to build this?
This question is almost a meme at this point. But it is still one which many an entrepreneur gets from VCs, although fortunately it is becoming less common. I’ve always thought this question is a bit silly at the earlier stages but especially now as the size of these big tech companies has grown which I’ll elaborate on below.
Large Companies and Scale
First, let’s get a sense of scale. So how big is big tech? Google, Amazon, Apple, and Microsoft are each worth over $1T in market cap and enterprise value, and their stock typically moves by 1.25% on any given day, a market cap swing of ~$12-25B, as in the chart below
Think about that for a second. The daily movement in the value of these companies is bigger than all but ~20-30 of the largest startups created over the last decade.
As Jeff Bezos writes, a key criterion for investing in an area is the belief that it could become significant in the context of the overall company.
“We must convince ourselves that the new business can grow to a scale where it can be significant in the context of our overall company.” - Jeff Bezos (2006 shareholder letter)
These companies have gotten so big that the things that are worth their time now have continued to get smaller and the bar has continued to get higher.
Let’s consider why the “what if Amazon builds this” is silly in the context of startups going attacking both small and large markets.
Why are big companies generally not a threat to startups getting started in small markets?
To these big tech companies, entering a market should have the ability to add at least 2.5-5% of additional enterprise value to be worth pursuing or at least putting any sense of leadership behind it.
That means that capturing a reasonable share of the market should be worth $25-100B in enterprise value, implying at least a $2.5-$5B revenue opportunity for the big tech company.
Markets smaller than that are unlikely to get much leadership support and resources since they will be kind of irrelevant to the overall size of the company.
However, for startups, often a $100-$500M revenue opportunity is often enough at the time of starting since that can support a $1-$10B company, which would be considered a huge success.
So, stated simply, there are many markets which are large enough that they are interesting to startups, but not interesting to these large companies.
A note on small but rapidly expanding markets, which are a subset of these. These can go down in one of two ways:
Big tech companies don’t recognize the long-term opportunity of them and don’t enter because they are too small today. Given the number of things they could be working on, and the temptation to ignore something which is small today, this happens pretty frequently.
Big tech companies recognize the importance of them and do enter.
In the latter case, these companies are still disadvantaged relative to startups. The reason is that given the market is still small, it can take a while for the business to take off. And while startups can move more quickly and nimbly, large companies have to deal with the corporate hierarchy.
As Bezos points out how the traditional corporate hierarchy functions:
"Let's say a junior executive comes up with a new idea that they want to try. They have to convince their boss, their boss's boss, their boss's boss's boss and so on—any 'no' in that chain can kill the whole idea."
Startups meanwhile don’t need multiple “yes’s” in a chain. They can pitch 30 venture capitalists and just need one yes to get started or keep going as the case may be.
This dynamic is especially true in small but expanding markets, where if the timing isn’t absolutely right or its taking too long to grow, a big company might eventually lose interest or kill it or not give it additional resources, and that’s if they greenlit it in the first place.
Now let’s consider large markets. Obviously, big tech companies may be interested in these given the size.
But given their scale, big companies have to build with the intention of capturing a fairly big share of the market. They end up building for the lowest common denominator i.e., the median user, and almost certainly can’t focus on niche sets of users or power users.
Startups meanwhile, by definition, will either focus on a very specific niche of the large market or certain power users or early adopters when they get started. These are likely to be users whom the big tech companies aren't catering to or won’t cater to properly.
The recent set of startups attacking the various elements of G Suite is a great example of this.
G Suite is focused on selling to any and every large organization and is trying to be as horizontal and wide as possible. Meanwhile, Superhuman for example in the case of email, is strictly focused on the 0.1% of power users of email. Gmail has over a billion users and its primary objective is to improve gmail for its 1 billion users. Not the million that use email the most. Gmail could even copy some of Superhuman’s features, but there will always be a market for a product focused on the power users. Also, when viewing the market as 0.1% of super users of email, the market then appears small, and the same arguments as in the previous section apply.
Even some of the large markets such as storage, which eventually became features within most big tech company products (iCloud, Google Drive), still support multiple independent companies that were once startups (Box, Dropbox).
Most startups end up competing against irrelevance, and rarely ever large companies as they get started.
This is especially true today, when there are many markets and niches which are extremely attractive to startups but would not be appealing to the big tech companies given their scale.
A big tech company’s stock moves by ~$15-20B based on normal fluctuations so new opportunities have to be multiples of that for them to get interested. Going from 0 to even $5B in total value would be a huge success for a startup.
By the time these startups are “competing” against large companies, they’re often already somewhat successful. And even then, typically startups can continue to compete if they remain focused and nimble.
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