Certain events in the past, including but not limited to such milestones as the IPOs of Amazon.com, Apple, and Netscape, provide valuable perspective on how circumstances have changed. (NB: In the interest of full disclosure, Hambrecht & Quist served as lead underwriter for each of the aforementioned IPOs.)
Apple was the entrepreneurial leader of a new industry. The company was brilliant and early, but it forgot to broaden its markets and open up its technology, and it never got a leadership position in the corporate market. And, obviously, the guys who did that better -- Microsoft on the software side, and Compaq, and later, Dell, on the hardware side -- those guys won, while Apple failed to leverage its lead and entrepreneurial premium. It's no mistake that the return of Steve Jobs brought entrepreneurial spirit, vision, charisma, and improvements to Apple's products and marketing. It's also no mistake that those weren't enough in the long run.
Hardware companies can grow rapidly in a critical period of time, but over the longer term, particularly when standards emerge, value migrates to software and services. Any hardware provider who fails to understand that shift generally gets turned into a commodity -- as happened in semiconductors and PCs. The next place it's going to happen is in remote devices -- personal digital assistants, cell phones, the stuff we carry around. Unless you're always on the bleeding edge of hardware, the one who captures the software-and-services part of that trail is going to win. And when a standard emerges, that will be the catalyst for changing your game or being commoditized.
Netscape burst onto the scene and created not only a new industry but a new understanding. It became the vanguard, as Apple had done for desktop computers. Netscape did a brilliant job getting to the maximum number of people as quickly as possible. It had entrepreneurial vision and management skill, and it built a scalable business more rapidly than anyone ever had before.
Longer term, Netscape probably tried to do too many things. It tried to compete with Microsoft, and that is definitely a contact sport. It's interesting that one small part of Netscape's business -- the membership community -- turned out to be incredibly valuable to AOL. Even so, Netscape had all of this entrepreneurial capital. If it hadn't had Microsoft gunning for it, it could have been far more successful. The lesson there is that if you are playing in the big leagues, you'd better finish first or second. The middle's a lousy place to be.
Amazon had a clear understanding not only of a new industry and a new application but also of the changing capital markets that would fund a leader with a different model for profitability. And Jeff Bezos is a brilliant guy. He understood that doing one important thing well would let him do a lot more later -- and history will soon judge whether or not he tried to do too much more later. He also understood, partly because of the early evidence that we showed him, that the ability to get big fast required a capital advantage.
But Bezos basically built the business model predicated not on short-term profitability but on long-term or terminal value. That was a huge advantage. Maybe Amazon stayed with that model a little too long. But I put myself in the category of people who think that B2C got overhyped and is now in the process of being overcriticized. I think the ultimate value of Amazon and other B2C leaders will be higher than conventional wisdom suggests today and lower than it suggested last year.
The amount and timing of expenditures will vary depending on a number of factors, including whether big companies can avoid complacency and whether they can genuinely embrace change.
Clearly, there's been way too much easy money and way too much value created that wasn't going to endure, and the hangover that we're going through will cause a serious headache, which won't go away quickly. But it's just a hangover. The level of innovation and value creation in the next up cycle will surpass what happened in the last one. But we'll probably see fewer IPOs.
To the great legacy companies of the world, and to the more mature tech leaders, I would say this: Here is your big opportunity. Now that the stocks of new entrants are no longer shooting up, you have a cost-of-capital advantage again. And you have a treasure chest of innovation, both inside your company and available through partnering -- if you can get at it. But history shows that most big companies are incapable of exploiting an opportunity this large. Their biggest problems often come from within. The only thing I can guarantee is that the entrepreneurs will be getting smarter, so you'd better get smarter too.
Paul C. Judge (pjudge@fastcompany.com) is a Fast Company senior editor. Contact Dan Case by email (dan.case@chase.com).
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