Huge Valuations – only for a category king!

Only couple of weeks ago, Uber got $1.2B funding on a valuation  of $41B! Earlier this year, Facebook paid over $19B to acquire WhatsApp. Dropbox is valued at $10B. All these three companies are less than five years old. What is going on? Is it a tech bubble seen earlier? No, it’s a start-up wealth gap as per Newsweek article by Kevin Maney.

Here is an interesting finding! A new study, which analyzed valuation data on thousands of tech startups, found that winning companies born since 2009 get to super-high valuations three times faster than companies started in the early 2000s. Looked at another way, this says that if a company is going to reach a $1 billion value, it will do so in one-third the time that climb typically took just a decade ago.  Of the 80 companies that hit $1 billion, half are what the study calls Category Kings—companies that define and dominate a new category of business. Uber is a good example of a Category King: It helped create a new kind of business, took the lead in defining it and became the dominant player. A Category King typically takes 70 percent of the total market value of its category. All the rest of the entrants split the remaining 30 percent. Examples of category kings are: Facebook, Google (new page ranking search algorithm), Linked-In, Twitter, Airbnb, Snapchat, Cloudera, Dropbox, Pinterest, etc.

Even worse news for the second-tier companies: The study found that a six-year-old startup that isn’t yet a Category King has almost zero chance of becoming one. Hundreds of companies are left to forever survive on their category’s scraps. That explains why Uber was valued at $41 billion earlier this month, while at about the same time the No. 2 in that space, Lyft, was valued about 40 times lower, at $1.2 billion. The rest of that category is barely noticeable. Investors look at the future value of that category and see one company taking most of it.

What about enterprise companies? Their valuation seems much lower than the consumer companies. The study pointed out the truth of this fact –  a typical venture backed consumer company is growing their market cap at more than $600 million per year compared to a typical venture backed enterprise company that is growing their market cap at $100 million per year.

The same study concluded that 35 Category Kings dominate the valuation of venture backed technology companies founded since 2000. These companies are more valuable than all the other companies combined and have taken more than 70 percent of the total available market cap of any category or era since 2000.

This is certainly a new economy for leading consumer companies!

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