Someone commented this but deleted it because they were getting downvoted:
Land ownership, intellectual property and limited liability ownership of companies by individuals are the basic building blocks of capitalism. I.e., property forms guaranteed by the government. Which one of these are being challenged by unicorn startups, again?
I think this is spot on and deserves repeating.
Unicorn startups are changing the way we utilize capital (Uber=cars and labor, Airbnb=property) but they are not changing the fundamental fabric of capitalism. Our legal framework forms the backbone of our society, and regulation/policy is the tool we use to adjust that foundation. Entrepreneurs and investors respond accordingly.
Uber and AirBNB might hire some lobbyists to change a few minor rules in the hoteling/taxi industry, but the really important variables are the distribution of government spending, scope of and resources committed to regulatory oversight, and the tax code.
The article lacks a comprehensive review of the data and its arguments come across as surface level speculation.
If anyone is changing the fundamental fabric of capitalism then it's the Chinese. They are ignoring intellectual property, the government prints its own money and hands it directly to the the banks that operate as partially privatized central planning with heavy political control.
Some people argue that Uber and AirBNB are not actually changing the way we use capital on a fundamental economic level, but are instead using new channels in a way, and with a magnitude, never used before.
IMHO I tend not to agree with the hole "Sharing Economy is The Next Capitalist Revolution" thesis.
I'd be curious if it's really an unprecedented magnitude (not impossible that it is, but I haven't seen numbers). For lodging, for example, it'd be interesting if someone could estimate at least approximate numbers for what proportion of the paid travel-lodging market was served by formal hotels vs. informal lodging arrangements in various cities over the decades. From what I've read of New York City (but no numbers), there has been a pretty wide array of lodging besides "proper" hotels in various periods, ranging from families running a few spare rooms as a boarding-house business, to large-scale "flophouse" operations. And, like today, it has been a political issue and led to debate over regulations periodically.
Or are they eroding laws and customs built up and evolved over time to manage complicated situations without clear-cut solutions in order that they can extract wealth and feed off society without contributing value? Frankly, I see both of those companies as parasites.
That is such a foolish statement I hesitate to reply. I use the term "parasite", do parasites die out?
Really the point hinges on your definition of "value". I don't credit these particular companies with adding any particular value to the domains in which they operate, and they are arguably degrading the local economic environments where they operate.
Part of my umbrage with airbnb in particular is personal: I live in the San Francisco Bay Area and I am looking for a new place to live. In the past I've used Craigslist for a long time with very good results, but these days it's very obvious that opportunistic landlords have colluded with airbnb to turn quite a lot of available rental spaces into poorly-managed quasi-hotels.
There are important reasons why we don't allow ourselves to e.g. drive and operate illicit taxis, or run unregulated hotels. We have, collectively, thousands of years of experience with letting to lodgers and hiring porters and carriages, etc.
If you got in your car and started driving people around for money, that's not legal. If you started a hotel in your spare bedroom, that's not legal. Just adding computers doesn't make it legal. Calling it "disruption" doesn't make it legal or right. These companies are criminals, they are extracting money and degrading the domains they operate in, and (as Airbnb's recent appalling ad campaign demonstrates) they are fully up their own asses when it comes to owning up to the consequences of their behaviour.
With any luck at all they will "die" soon and we won't be talking about them anymore.
I think the "sharing economy" represents a significant change, and things like AirBNB or Zipcar constitute major parts of that change. I don't, however, see why Uber gets lumped into that. Uber is not a "ride sharing" service; it's a transportation service to connect professional drivers to people getting driven.
> it's a transportation service to connect professional drivers to people getting driven.
It looks more like a "service" that destroys a job in which people can support their family and replaces it with another hand-to-mouth subsistence job.
Nor are they addressing the reproduction of the classes shown by historical materialism to be just as fundamental a building block as the legalistic ones.
Not a great article, and I think it misses the one big thing that is genuinely revolutionary about the Silicon Valley form of entrepreneurship. And that's that venture-backed entrepreneurial companies are, by and large, the new Research & Development Departments. Acquihires can in fact be great deals for VCs, founders, employees, and acquirers. Many companies are curtailing their own research agendas and relying upon smart technology investments to position them for the 5-10-15 year time horizon. I suspect we will ultimately consider this a vastly more efficient form of capital allocation than the old-fashioned "R&D Department" at IBM, GE, DuPont, AT&T, etc.
Which Silicon Valley companies are pursuing the high risk R&D these days? I can only think of a few that are building high risk hardware (Theranos, some of the small photonics shops), and even many of those have proof-of-concepts already built in academia. Many of the medtech startups I've seen revolve around algorithms, which is kind of hard to compare in terms of risk profile to Bell Labs putting a bunch of researchers in a room to figure out how semiconductors work or needing a couple million to build a prototype.
When I think of R&D departments these day I think of non-silicon/non-electronic computing, lab-on-a-chip, and maybe some other medtech stuff. I'm under the impression that companies doing these sorts of things are currently a minority of "Silicon Valley entreprenuership".
Others here can better answer this than me. All I would say is that "5%-better-marketing-dashboard-optmization-platform" type companies get far more attention from the tech press than they probably merit. There is a lot of high risk R&D going on here: medicine, medical devices, transport, semis, crypto, and insurance, to name a few disparate areas.
By which metric would you measure this "efficiency"?
The difference between VC-backed-startups vs traditional R&D departments is that the first one seems more short sighted, and with a tendency towards a narrow subset of IT problems with high scalability and disruptive potential, while the second one works on a wide array of industries and applications where the parent company already has the benefits of economies of scale.
"By which metric would you measure this "efficiency"?"
Good question. A few ideas:
-- ROIC
-- Competitive advantage versus peers (hard to measure, but one attempt: http://web.mit.edu/is08/pdf/Parrish.pdf)
-- Share of market
-- Enlargement of market
-- Quality of hiring versus peers
These are the things that can make a company last for centuries. The hunch I was stating -- though admittedly without a clear way to prove it yea or nay -- is that enterprises that invest in small nimble VC-backed technology companies will begin to outperform, on these measures, traditional in-house R&D departments.
I generally agree with your statement but personally I'd pull back on calling start-ups as R&D replacements. There are certainly a few start-ups taking big R&D-type gambles, but I think most people are working in some sort of technology-applied-to-old-industry role.
Therefore I'd liken start-ups to product team replacements or consulting + validation as seen from a big company's perspective.
What is so genuinely revolutionary about that form?
A large land owner could raise a small army and supporting farms, then join the local nobility. The land owner and his tenants could then enjoy the benefits of being part of the larger realm.
Maybe the current set of unicorn startups are just very clever financial inventions to get returns in todays crazy financial world of ZIRP and never ending QE.
This article tries to refute two different types of arguments, and in the process confuses them. The empirical arguments ("this isn't happening!") it refutes quite well.
The normative argument ("this is a bad thing!") it does less well at. Ownership in these companies is cut off from the rest of the economy, but the Economist seems to think that this trend is only worth reporting if the social issues can be brushed off. They cannot. SeedInvest is not a substantial source of capital on the same level as privately VC funds. Mutual funds, maybe.
But VCs are funds, not long term owners. Their goal is an exit, so they can pay off their investors in cash. Their goal is not to become conglomerates or zaibatsu or chaebol. YCombinator is not in the business of becoming the next Samsung.
I don't think the article was claiming that this is an innovation outside of the capitalist box - just that it's a form of capitalism that's different from the way it's been practiced in past decades.
The article does relatively little to justify that though. It's not as if companies being privately owned before they go public (or private equity buyouts of public companies) is a new thing. The time-to-IPO is the only non-anecdotal difference in ownership structures it notes, and that's easily explained away by market conditions.
Indeed the first example it cites - Uber - is arguably an example of the opposite to the trend it purports to spot... it's a market traditionally dominated by plucky privately held small companies that's becoming centralised under a large company or two that probably will go public. Even if Uber (and Lyft and a couple of others) doesn't IPO they still are and will be owned and managed in a way that resembles a public company more than your neighbourhood cab firm.
I'd give the article more props for identifying interesting but not really connected phenomena in new companies if it didn't include lines like "whereas nobody is sure who owns public companies, startups go to great lengths to define who owns what". The idea that startup share options are more transparent than employee shareholdings in publicly held companies traded on liquid markets is dangerously misleading nonsense that looks really out of place in a publication aimed at the financially literate
Land ownership, intellectual property and limited liability ownership of companies by individuals are the basic building blocks of capitalism. I.e., property forms guaranteed by the government. Which one of these are being challenged by unicorn startups, again?
I think this is spot on and deserves repeating.
Unicorn startups are changing the way we utilize capital (Uber=cars and labor, Airbnb=property) but they are not changing the fundamental fabric of capitalism. Our legal framework forms the backbone of our society, and regulation/policy is the tool we use to adjust that foundation. Entrepreneurs and investors respond accordingly.
Uber and AirBNB might hire some lobbyists to change a few minor rules in the hoteling/taxi industry, but the really important variables are the distribution of government spending, scope of and resources committed to regulatory oversight, and the tax code.
The article lacks a comprehensive review of the data and its arguments come across as surface level speculation.