Investment Factors Of Tech - Market Share and Regulation
Reigning In Tech Titans, and the relationship of competition and resource.
Cross-posted on The Financial Coconut. Check our their awesome content!
In this series of posts, I’d like to cover the factors affecting tech companies, both negatives, and positives - We'll release a few more as we cover deeper concepts per company so everyone can follow along.
Ready? Let’s go!
What is a growth company? What is considered growth-stage?
A growth company (as we define it), would be listed, tech companies.
They could also be tech start-ups - both can grow at a fast pace, make money differently, and these affect their valuations and thus prices (whether on the public or private markets).
A growth-stage company has some overlap.
This refers to companies that have found product-market fit, and are trying to scale. They are somewhat more mature, gaining more and more traction either in the form of users, or customers.
In a gist, these companies found what works, but are expanding on what works to grow bigger.
These terms are used quite interchangeably in the media, all pointing to the same thing - growth.
The size of companies are not compared usually - big or small, they’re lumped into growth for general understanding. Let's segment these further.
What is Big or Small Tech?
We’ll define “Big Tech” as the large, listed tech companies, while “Small Tech” are the small tech companies who may / may not be listed (some could be listed but with small market capitalizations).
Whew! Now that we've got the definitions down, let's get into what matters most - the investment factors.
Starting from the latest developments in China and the US, we try to draw insights on what the Governments are trying to do, and forming hypotheses on what may happen in the future.
Alibaba has been circulating the news recently, and not for good reasons. The Chinese government has been deliberating about this move, not just for Alibaba, but for all large tech companies in China.
Apart from risks to the Chinese financial system, it also poses data and privacy risks amongst its citizens. It is not just Alibaba - Xiaomi, Kuaishou, NetEase, and Tencent are all required to conform.
Monopolies and Fakes
In another article, the “deep fakes” created by AI are getting increasingly powerful, and difficult to detect or deter.
Think of spambots, but now with very real pictures, interactions, and even videos - all created from the digital profile you.
That’s really scary, identify theft taken to the next level especially.
Given a big enough monopoly of enough citizen data, Tech companies can easily recreate profiles, pump fake users in any platform to make it seem “alive” while getting real users onboard.
Think it hasn’t happened before? Read the founding story of Reddit.
Now, we even have the capability to produce fake content via very powerful AI models.
These models will be at the forefront of consumer-facing applications, and it will be increasingly difficult to detect what’s true or what’s not.
You can extrapolate how bad this can be for a country - spreading fake news, sowing dissent amongst communities, and negatively impacting the spirit of a people. Sounds familiar? Check out this piece by Time on social media disinformation (not a conspiracy!).
Be careful what you read out there folks, trust good content sites ;)
What Does This Mean For Tech?
Shrinking Moats, Expanding Moats As Defensive Action
I previously wrote on hyper customization and “digital” moats. The moats are in the form of:
It seems there would be a third; Trained models. These are in the middle of Data and Compute, but it seems if companies have a good enough model to re-create interactions, this an additional way to create activity on platforms, further speeding up the flywheel of acquiring more users.
Tech companies, expecting Government pressure on chipping away at their moats with data and privacy concerns, will start to respond by forming even larger moats before policies come into effect. This can come from hoarding data or compute even more so than they have now, or raising prices for these services/capabilities.
Small Tech Start-ups May Become Harder
The moats don’t just serve as a defense for castles. For you gamers, it’s almost spawn-camping.
Think about it:
To have a ‘passable’ tech start-up these days, you need to have enough data to provide the experiences customers demand (which only large companies can acquire).
You then need to store the data, and to train your models, you need compute (which large companies are using most of), and lately there’s been a semiconductor crunch.
To acquire customers, you need an increased level of hustle, and thus costs, whether in terms of time or money.
At some point, the margins don’t add up. Ramen profitability isn’t as easy to achieve compared to 5 years ago - what more in the next 5?
The moment a large company sees your use case, it is easy for them to replicate it, having all three already, and blocking everyone else from entering the space or putting up a reasonable fight, to begin with.
Additionally, the regulations may also creep into requirements for new start-ups to adhere to. That would put more pressure on efforts to grow at the same pace.
The big companies are going to get bigger, especially in the realms of those providing the data, or the compute power.
I’m thinking the trajectory will be very stable for these companies, as they are selling the raw resources required for any tech company to function these days.
For those offering ancillary services, the increased competitions are likely to affect each others’ margins, as more players are able to enter the market.
Remember the period when everyone wanted to start an e-commerce store?
Compare that moment to now - it’s extremely competitive cutthroat, and much more tiring than “usual”.
Striking out on your own is no easy feat - the ones I knew who are successful now had a runway of 4 years or more, and this was 7 years ago. Know anyone else in mind with a success story? Let me know what you think.
Who Benefits? Big Or Small Tech?
I’d say this isn’t the main question to be asking. Each has its own markets, and thus opportunities. The costs and opportunity sets differ for each based on their business models.
However, let’s focus by compare apples to apples here, and what helps further, is if we can look at this by each company, and its business models. For now:
Is regulation looking at the data moat? Yes
Is this a big problem for big tech? Yes. Their sandwiches are being taken away.
Is this a big problem for small tech? No, they don’t have much data, to begin with, unless regulations become a requirement for them too.
Is regulation looking at AI models? Yes, but difficult to check and enforce, unless placing Government official in AI teams.
Is this a big problem for big tech? Oh yes. Their dinner is now slowed.
Is this a big problem for small tech? No. Unlikely to have officials in every start-up, unless everyone pushes code into a central Government code repository…
Is regulation also looking at computing and storage? No
Is this a big problem for big tech? No.
Is this a big problem for small tech? No. Mostly price points - start-ups only face this once they hit scale.
We've defined what is a growth company, and why it’s important to differentiate Big or Small Tech.
Regulations and market share dynamics affect both differently, as their impact using technology are imbalanced - and so is the playing field.
Small Tech does not mean they are not listed at all - they can also be listed companies with small market capitalizations.
There are opportunities in the space - it does not necessarily mean Big Tech always wins, and it depends on each company's business model.
The winds are changing, but we should find out which companies are preparing for change, or those that are just facing in the wrong direction.
Monopolies and Fakes are top of mind for Governments, most certainly for China.
Leading tech companies will respond by hoarding resources to form moats.
Moats, higher user demands, and increased costs will make tech start-ups hard.
The tech space will become more competitive and saturated with similar solutions - from large companies.
It seems the regulations are favoring Small Tech so far. How about the positive factors? We’ll see in the next posts!