The Rationale behind the Conglomerate Incubators
We have Google with its well-known venture activities, Amazon investing every dollar earned into new businesses, and we have significant corporate venture activities. In a way, we see a pattern of these businesses turning into conglomerate incubators. Now what is all of this about? What’s the driver behind this pattern of companies increasing their early stage activities?
As I mentioned earlier, these companies could be looked at as conglomerates. However, this comparison misses an important point: there is a strategic rationale for many of their investments.
Partially these companies have to pursue these activities. Markets have changed in many ways since Warren Buffet started Berkshire Hathaway. The speed of change has increased, partially due to the decline of entry barriers. I recently wrote an article that discusses this development in more detail; using GoPro as a case study to show how success factors of businesses change as entry barriers have declined.
In order to stay competitive, companies have to adjust. Clayton Christensen’s disruption theory explained to us how established players get displaced by new entrants. As a result, today even the most traditional government official is aware of the dangers of being disrupted. Facebook acquired WhatsApp for this huge amount of money because younger people are more happy to use mobile apps like WhatsApp instead of Facebook.
Yet not only the threat of disruption drives activities in new fields. There is additional strategic logic to such investments.
One reason is that markets have become more integrated. If you think of companies such as Buzzfeed or Netflix, it’s clear that technology has become a success factor for media companies. The job board on Buzzfeed’s website doesn’t resemble the job board of the early Times Magazine. The inverse of that is that media plays a role for technology companies. When we buy consumer electronics products such as tablets, then the software and the content that it can deliver are a key factor that drives our purchase decision.
Further, businesses tend to consist of ecosystems or platforms. Controlling these platforms can be critical, which is also the reason why the consumer electronics company Apple and the software / media company Google became competitors. Theirs was a competition about controlling the next platform, iOS vs. Android.
Platforms are central to even smaller markets. WordPress is a platform. Evernote is a platform on which further services are built upon. There will be a logic for companies today to invest in building the next platform.
Similarly, Amazon offers e-commerce on one side and infrastructure on the other. This sounds like two different businesses. However, every product that Amazon builds can run on its infrastructure platform, turning Amazon into its own service provider. As stated in the a16z podcast, it’s the “ultimate eat your own dog-food.”
Not every activity may turn out to be successful. But we see a common pattern that those conglomerate incubators invest in new businesses surrounding their core markets. And unlike Berkshire Hathaway’s investments, the businesses they invest in provide high growth potential combined with high uncertainty. Their success is hard to measure. It’s hard to come by a Berkshire Hathaway portfolio company that would cause as many opinionated discussions as Facebook’s acquisition of WhatsApp or as the future of self-driving cars.
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