Building for the future requires we assess the potential value of new world companies according to their capacity to develop, create, produce and sell innovative products rather than their capacity to pay dividends or generate free cash flows. The growth of companies like Facebook, Netflix, Amazon, Google, Uber and Airbnb is exponential and shun all traditional models for valuation. Firms of the future are less about short term profits or dividends but Capital appreciation of the shares. An investment in these multi-sided platform (MSP) companies creates more shareholder value than traditional firms. Today, the shareholder primacy era is under pressure from multiple sources. Technologies, markets and customer expectations are all changing rapidly.
As the economy has become more service-oriented and increasingly digital, the importance of speed has increased dramatically. Those who can’t keep up fall by the wayside. For instance, five-year survival rates for newly listed firms have declined by 30% since the 1960s, according to new research from the Tuck School of Business at Dartmouth College.
Capital is superabundant. Global financial assets are now 10 times global GDP, making talent and ideas rather than capital the binding constraint on growth in most large companies. Industries have become more winner-take-all. A Bain study of 315 global corporations found that just one or two players in each market earned (on average) 80% of the economic profit. The pursuit of shareholder value itself increasingly focuses on the short term, driven by shorter management horizons and greater pressures from activist investors. Leverage, buybacks and dividends are up, while long-term investments in growth have lagged. They change society, they change economies and evolve the very way of doing business. A Bain’s Insight document “Firm of the Future” sets out that the defining traits of such companies are:
1. They can achieve achieve scale AND intimacy
2. They focus on mission critical roles as opposed to professional management
3. They focus more on ecosystems than their assets
4. Their value resets capital, lengthening investment horizons because of the breathtaking nature of disruption, innovation and societal transformation
5. They protect the core and set it aside while they invest all earnings in innovation, disruption and transformation.