The stock market or capital markets (banks, finance companies) at times show indications of where business and economic trends are heading. They make investments, some say bets, in types of businesses they believe will provide a good return on their capital.
Many business owners are pretty well invested in their own company; therefore, typically they pay little attention or do not invest in the stock market. However, it’s important to observe the major industry shifts that identify a new set of companies as the world’s most valuable. This affects any business in a global economy.
Specifically, the S&P 500 lists digital or technology platform companies as more valuable than companies with physical, tangible assets. Why is this noteworthy? Well, increasingly it is the newer digital enabled powered companies that banks and investors will allocate capital to. Companies that can provide tools and services, and means of communication to people in connected networks are the new, valued assets.
Long time companies that own property, plant and equipment such as Exxon, GE, or Citigroup (think lots of bank branches) are supplanted by companies that didn’t exist in the 1990s such as Facebook (1.7 billion users) , and Google.
Among the 5 most valuable companies today only 3 were public companies in the 1990s (Microsoft- founded in the 1970s) Amazon (a mid 90s start up), and Apple ( almost done for in 1997). More on this is available in a Knowledge@ Wharton article entitled, Finding a Better Way to Value Companies in the Digital World, published 8/30/16.
What can be learned from this change? I think regardless of company type or size there’s significant value in a business’ digital assets. This might include at the top of that list customer information or related sales data.
Additionally, new trends are forming in significant ways. They offer both opportunity and challenge as our current business is disrupted. Quickly adapting new models becomes necessary.
- There’s value in ideas, and in connecting users. The sharing economy, for example, Uber, AirBnB (private homes for hotel, short term use), or connected users for a sharing community (LinkedIn, Facebook)
- U.S. financial markets are incredibly nimble and adaptive in realizing opportunities to finance new and innovative business models. In less than 20 years we’re seeing major shifts in what are our most valuable companies centered on ideas and connected networks vs. capital intensive, asset laden companies.
- Companies that incorporate and shift mental thinking and discipline to an openness to new business models that integrate a capacity to develop the intellectual property of ideas will thrive. For example:
- Next time you see an Enterprise Car commercial notice how they’ve incorporate ride and car sharing as part of their service offer.
- Microsoft and IBM are offering sophisticated cloud services and no longer sell software in a physical box, or sell hardware as core to their business.
- Wal Mart will continue to push their retail business online with acquisitions of ecommerce companies to complement their logistics, distribution, and retail expertise (brick and mortar). Amazon will augment their online store mega mall with new means of delivery (Amazon drones), and distribution centers around the world.
- One business will not necessarily replace another. If a company is adaptive to embrace and develop technology and digital assets as core to their business, they will be more attractive to growth capital (i.e. debt, equity), and be more productive and efficient in serving their customers and markets.
As capital markets reward idea companies with increasing valuations the incentives are in place for entrepreneurs and business leaders to continue to develop new businesses and markets not previously conceived. Imagine, perhaps with a mix of excitement and dread, what innovations on the horizon we will see in the not too distant future.
Digital business models will push the frontiers of software developments that will drive AI (artificial intelligence), robotics, bio chemistry, material sciences, or innovations in information management-decision making. New discoveries and opportunities will be elevated and accelerated in myriad ways.
One last thought regarding the rapid changes we will see and the anxiety this will engender with some people. I just finished America 1900. This is a PBS American Experience video produced in 1998. I was struck by how the video topics of the year 1900 touched on some of the same themes, ideas, issues and concerns with the economy, society, foreign affairs, and the incredible new inventions and their effect on society as we see in 2016.
If we’re open to possibility, and willing to adjust to new situations most of us will thrive as our ancestors did a 100 years ago.
About the author. Peter Klinge works to help owners of private companies execute strategies and plans to achieve their desired growth potential.
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