The prominence in the economy of new companies in the US has decreased compared to the 1990s.
In the 90s, the weight in the industries of companies less than 4 years old was 40%. That figure between 2000 and 2009 dropped to 37%. Between 2010 and 2019, the decade when Silicon Valley became the global capital for start-ups, that weight decreased to 34%. Not only have they decreased in weight about the total, in some industries, they have also decreased in quantity. (1) (US Bureau of Labor Statistics)
The US Bureau data coincide with studies that show that currently, in more than 75% of the industries in the US, there are higher levels of concentration than 20 years ago, generating less competitiveness in the market (2). Were these results expected and desirable 15 years ago?
How is this greater concentration of large companies explained?
In the decade from 2010 to 2020, the stock market in the United States has seen its peak. The stock market indicator par excellence in the US, the S & P 500, has grown more than 400% in that period. The economic collapse caused by the 2008 crisis seems to have been left behind, which in countries like Spain caused unemployment rates of up to 56% in young professionals.
The stock market has had a historic decade. The following data is directly related to this stock performance, in which each of you will determine how sustainable will be.
- From 2000 to 2019, 185 trillion dollars was printed, to generate global economic growth of $ 46 trillion. In simple words, to create $ 1 of income, $ 4 of debt was generated. There is an abundance of dollars generated based on debt, which is driving an increase in the stock markets increasing the valuation (and budget) of large companies. (3) (Pre-pandemic data)
- Between 2010 and 2020, S&P 500 companies spent the equivalent of 52% of their net income on stocks buybacks (USD 4.3 trillion) causing a decrease in supply, generating an artificial rise in their prices. There are not a few economists who say that these buybacks should be prohibited. (4) For a comparison range of these buybacks, the summed valuation of all the unicorns in the world is $ 3.1 trillion.
- The investments that the S&P 500 companies have made in the last 10 years, in topics that increase productivity and long-term results such as research and development, infrastructure improvement, investment in technology, better conditions for their workers, etc. It reached its lowest level in decades. In the last ten years, the percentage that is invested in these areas is a third less than what was invested in the decade of the '80 -'90. (5)
- 30% of stocks buybacks have been made through corporate bond debt. If the largest companies in the US are not investing in areas that ensure competitiveness in the medium term, how are they going to pay this debt with the banks later?
When the historical rise of the stock market is based on facts that have little to do with the creation of value but are linked to new instruments or financial “makeup”, that is when the bubbles are born.
But how in this decade, where startups and venture capital have had their boom, is the relevance of new companies less than 20 years ago?
One of the reasons for having a greater concentration and decrease in competitiveness is due to the considerable increase in mergers and acquisitions (M&A) carried out by large companies.
Silicon Valley, we have a problem.
In this last decade, the eyes of the world are no longer only focused on Wall Street. Silicon Valley has taken on an increasingly important role. The spectacular stock market performance has generated an increase in new companies, which achieve a “valuation” of more than 1 billion dollars, known as “unicorns”. Being the objective to achieve many entrepreneurial ecosystems around the world.
To achieve this, the Venture Capital (VC) industry has become massive worldwide, helping these emerging companies to raise capital stage by stage, to achieve an "exit" or get their shares publicly traded on the stock market.
Evidence from the last decade shows that this business valuation system may become obsolete since it is not economically or socially sustainable. We will review some data that may be relevant:
- In 2009, the opening of new companies that achieved a positive return was 81%. In 2020 only 22% of companies were profitable after their IPO. (7) To what extent will it be attractive to invest in emerging companies waiting to go public?
- 75% of the industries in the US are more concentrated than 20 years ago, which is generating less competitiveness in the market. (8) Wasn't it that one of the purposes of the entrepreneurial ecosystem was to generate more competition in industries? One of the reasons for the increase in concentration levels is the considerable increase in mergers and acquisitions carried out by large companies.
- Between 2000 and 2019 the number of mergers and acquisitions of companies per year was 3.5 times higher than 30 years ago, generating an increasing economic concentration. (9) If the shares rise in price as in the last decade, large companies will have a greater budget to acquire their potential competitors.
- In 1997, the market share held by the four large companies in each industry as a whole was 22% on average. 15 years later that figure, instead of decreasing, increased to 32%. And the start-up ratio is declining across all industries, creating less competition. (10)
- New forms of investment called SPAC (Special purpose acquisition company), which are companies without productive spirit, are born with a blank check with the only objective of buying startups(11) The profitability of these strategies is even lower than the current IPOs. It would not be strange for SPACs to be like the CDOs of 2008, new investment vehicles that trigger a major financial crisis.
The data shown invites debate. Should the purpose of entrepreneurship be that the founders, given the growth and financing model of the VC industry, have to sell their company and thus generate a greater concentration in favor of large companies?
And if to overcome the very difficult path of starting, being successful, and going public, going from being a startup to a consolidated company. Should they be evaluated only by the profitability they deliver to their shareholders?
When incentives are misfocused, the world's best talent joins a movement that has an unsustainable future.
The solution is not to stop motivating entrepreneurship, on the contrary, entrepreneurship and technology have the potential to impact more than politics, as long as the form of growth and valuation is aligned with society as a whole and using metrics that are sustainable in the long term.
The evidence already shows, not only in social and environmental issues but now also in economics, that the incentives are misplaced and the time has come to change them.
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