We're all busy people. So in addition to providing a link (with timestamps) to my discussion last week on the long-term future of technology with Hedgeye's Tech Sector chief Ami Joseph, I'm providing a quick summary of the topics discussed.
5 Key Takes for Every P.M.
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Tech Centric: We think the IPO floodgates are about to open. 340+ unicorns are still private, and even though they are spending more time in the private zone, many will soon come to market.
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Tech Centric: Most of the new gen software IPOs have ‘landed’ already with the largest enterprises which makes the % expansion rates critical. Companies today are being "born bigger."
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Demography Centric: Risk-averse Millennials are no longer willing to create startups at the same rate that Xers once did in Silicon Valley. Most CEOs of software companies are Xers, not Millennials. If the flywheel slows it will be a bad signal for tech multiples.
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Demography Centric: As we enter this new stage of the technological cycle, scale is everything. Our industry's key words now are penetration, maturity, larger, longer, crowded, modularized, etc. We’re beginning to enter the age of synergy and maturity. Tech innovation today is centered around streamlining multiple existing products, no longer on creating entirely new products.
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General: The new world in which Millennials will be playing a larger and larger role is not going to be like the world that Boomers and Xers once envisioned. It will prioritize public solutions over private ones, and community over individualism. More government will slow innovation, hinder M&A, and depress multiples in many thriving consumer- and enterprise-focused tech sectors. But it may also set new ground rules that will open up vast new sectors (like healthcare, education, and infrastructure) that have hitherto resisted tech-led innovation at scale.
I. Tech IPOs
It feels like we’ve had a lot of technology IPOs recently, but there have actually been far fewer in recent years relative to the late 90s peak. Tech companies are in no rush as a shift to the cloud and the evolution of AWS in the last 10 years have drastically reduced the fixed costs of software engineering. Time to value creation is much shorter and the amount of dollars invested is much less compared to 20 years ago.
Tech companies are now remaining private and waiting longer to IPO. When they do, the companies are on average much older, and their market caps and resulting gross proceeds are much higher.
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A generational shift has taken place as tech companies are going public at a different scale of market penetration. There is now a large focus on dollar-based net expansion for young software companies.
The enterprise scale and penetration among newly IPO’d software companies show that most of these companies have already “landed” with large enterprises.
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One of the technology sector’s biggest costs is finding a way to manage high levels of employee turnover to continue to meet growth targets. In 2017, the technology sector topped the list of top 10 sector turnover rates with 13.2%. Employees at tech companies that have had an IPO since the beginning of 2018 have an average tenure of 2.4 years. The national average of all wage and salary workers is 4.2.
Risk-averse Millennials are no longer willing to create startups at the same rate that Xers once did in Silicon Valley. Most CEOs of software companies are Xers, not Millennials.
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From here on out, scale is everything. Our industry key words are now penetration, maturity, larger, longer, crowded, modularized, etc.
II. Long-Wave Technology Cycle
We look at technological revolutions as four-stage cycles.
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1. Irruption: Isolated firms begin a new cycle by pioneering basic new technologies.
2. Frenzy: Many firms trigger a creative and competitive frenzy that typically culminates in a speculative bubble.
Turning Point: Political and social challenges reshape and strengthen the civic landscape.
3. Synergy: Competition declines, regulation rises, firm size grows, funding internalizes. This stage is not about new thinking; it is about how to choose winners, ramp up to scale, and install integrated tech systems into the social infrastructure. (This is a technology's "golden age.")
4. Maturity: Size maxes out. New innovations dry up. Creativity stagnates. "Old whales" become targets for the next technology wave.
We’re beginning to enter Stage 3 (Synergy). Innovation today is shifting from creating entirely new tech ideas to integrating and orchestrating all the tech layers we already have.
By stepping back, we can examine the historical constituents of these eras more broadly.
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Each generation is shaped by the revolutionary stage in which it comes of age. Boomers came of age during the era of irruption (1), Xers during the frenzy (1), Millennials during the Synergy stage right now (2010-2030), and Homelanders will come of age during the maturity (2030-2050).
Over time, we see that the birth of a technological revolution always follows a social awakening. For example, Bill Gates and Steve Jobs got started after the late '60s and '70s, an era of cultural realignment. During the first two stages, we see many small firms experimenting and thriving on speculative funding. This is the Generation X dream, and to a large extent, Xers still think the world runs this way.
But we’re now in a new world in which economies of scale, efficiency, and optimization govern the industry. To use Perez's phrase, "creative construction" is replacing "creative destruction." There’s also a shift to internal funding that follows a drop-off of speculative funding. Government starts regulating the technology in order to integrate it into society smoothly.
III. The Millennial Mindset
The Millennial mindset is fundamentally different from that of previous generations. They are risk averse. They like to plan ahead. They measure their progress against established metrics. They excel at system integration. And they demand a strong community.
Following the pattern of prior technological revolutions, Millennials want to avoid the mistakes that their parents made and focus their lives on harmonization and optimization.
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The new world in which Millennials will be playing an ever-larger role is not going to be like the world that Boomers and Xers once envisioned. It will prioritize public solutions over private ones, and community over individualism.
