In August of 2004, Silicon Valley and investors worldwide were engaged in what would turn out to be an historical debate: what is Google worth? Google was preparing to go public, and while investing in the company’s IPO shares would seem a no-brainer today–the company’s share price, originally priced at $85, roared past $600 per share by 2007 and today trades at about $500–many people still had their reservations.
But in the summer of 2004, even smart, forward-looking investors could not predict Google would become what it has. “I’m not buying,” Stephen Wozniak, co-founder of Apple, for example, told The New York Times in the weeks before Google’s IPO. “Past experience leaves the taste that a few people–never ourselves–will make out the first day, but that it’s not likely to appreciate a lot in the near future or maybe even the long future.”
A well-known Silicon Valley entrepreneur and technologist, Jerry Kaplan, who proved himself as the principal technologist at Lotus and went on to launch and bring multiple companies to IPO, said, “I wouldn’t be buying Google stock, and I don’t know anyone who would. My experience is that when you step outside the bounds of normalcy, you are in very dangerous territory. A lot of things can go wrong.”
The company’s explosive growth from $439.5 million in 2002 to $1.46 billion in just one year looked to many investors too much like the trajectory of Netscape, the Silicon Valley darling who was introducing the “web browser” and a new Internet era, competing far ahead of their slower incumbents. But Netscape’s velocity proved insufficient to escape the gravitational pull of competition. Microsoft eroded Netscape’s lead, replacing it with Internet Explorer.
Investors believed Google was following a similar rise and fall trajectory. A look at the company using traditional financial analysis supported the view that the Google IPO would fizzle. A good friend of mine is a professional investor. He manages the office of a wealthy family, helping assess investment opportunities, guiding them on where to deploy their millions in assets. He was attracted to the Google IPO because, coincidentally, his last name is Google. But his attraction was fleeting. The application of few basic strategic tests–Porter’s Five Forces, market share analysis, sources of sustainable competitive advantages–quickly underscored the fundamental unattractiveness of Google’s prospects.
But look at what Google has achieved since going public. It has positioned itself at the center of the Internet world. It has transformed the advertising industry. Its $27 billion IPO valuation in 2004, once viewed by educated investors as excessive, is six years later overshadowed by its market value of more than $140 billion. It has created $150 billion in wealth since going public, creating thousands of millionaires.
Google is not the first to defy and surprise knowledgeable critics. Most breakthrough companies do this. At the time of their founding few experts thought that Wal-Mart, Microsoft, IBM, Southwest Airlines, or Dell would succeed, let alone have such a transformative impact on their industries. This is because each of these companies appeared at a revolutionary time and was led by outthinkers, people who thought outside of the prevailing paradigm and so embraced new strategic options that others dismissed. People who saw the old rules were expiring and embraced a new path.
Such a paradigm shift is underway today, as I wrote in a recent white paper. A new cadre of companies understands this and is adapting. Apple, Facebook, Amazon, and even some incumbents like AT&T, Microsoft, and L’Oreal are adjusting their strategic approach to a new world. Is your business ready for this shift?