New Rules of the Game for Capital
In a digital world, the key to survival is not profitability but market power.
The luster of the public markets has waned over the last 20 years to the benefit of private capital. Fewer companies are listed on US stock exchanges today than at the turn of the millennium.
Many reasons have been proposed to explain this trend. Hundreds of dot-com start-ups went public in the 1990s and many collapsed in the ensuing crash.
Start-ups are enterprise often held in private hands. venture capitalists (VCs) believe net earnings are decidedly vulgar.
It is accepted wisdom that the objective of any newly created business is exponential growth. Expanding at all costs and burning cash as quickly as possible is not just normal practice in Silicon Valley, it is the only responsible course if the goal is to dominate or control a market.
Achieving critical mass costs money, and as the recent unicorn stampede demonstrates, start-ups with international ambitions are expected to raise multi-billion-dollar rounds to fuel their expansion. By the time of its stock listing, Uber had raised more than $25 billion.
Up until the dot-com era of the late 1990s, start-ups were supposed to follow a methodical approach. That meant demonstrating the sustainability of their business model and charting a clear path to profitability. That is no longer the case.
The development of global online platforms like Amazon, Google, and Facebook changed the rules of the game. In a digital world, the key to survival is not profitability but market power. Start-ups must quickly establish, if not a monopolistic position, at least an impregnable one.
The methods adopted by private capital fund managers have changed the rules of the game.