Time stopped in San Francisco when Madison Bumgarner pitched the ninth inning of the 2014 World Series. As soon as “Madbum” won the game, people started calling him the greatest post-season pitcher in history.
Bumgarner’s performance is even more legendary when you consider the odds he had to overcome just to play major league baseball. The road to the top grinds out all but the elite of the elite. Only 0.05 percent of high school players get drafted into the minor leagues, never mind throwing the World Series winning pitch.
To better understand the odds of winning in the tech industry, last summer we began a research effort. We assembled a team of computer scientists, data scientists and business executives to comb through a variety of data sources to create a fact-based database on the velocity of market cap growth.
One of the key pieces of data we were interested in was how much market cap goes to the winner in any given tech category. We studied approximately 26,000 U.S.-headquartered, venture-backed technology companies formed since 2000. Here is what we found: Category Kings typically earn 70 to 80 percent of the total market cap of their space, leaving dozens of competitors scraping for scraps.
The data is clear. Our industry is a lot like pro ball — making companies like Facebook, Google, Workday and Salesforce the Madbums of tech.
The data also shows that the separation between winners and losers is happening faster than ever. Companies have to race like hell to define and dominate a category before someone else does and become the winner. Our research shows 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 market cap, it will do so in one-third the time that climb typically took just a decade ago. Our research also exposed the ramification for second and third-tier companies: A six-year-old startup that isn’t yet a Category King has almost zero chance of becoming one.
This acceleration in “time to market cap” is changing the competitive landscape in the technology world. With a $41 billion valuation, Uber became more valuable, more quickly than any other startup we’ve seen in recent years — faster than Facebook , Google, Amazon and Salesforce. This reality will make it very hard for Uber competitor Lyft to catch them.
As Facebook out outmaneuvered Myspace, Tribe, Friendster and countless others, they’ve been adding an average of $19.5 billion of market cap a year. For 11 years.
There has been a lot of talk in our industry about “unicorns,” a term popularized by Aileen Lee, of Cowboy Ventures to describe billion-dollar-plus value technology companies. Our research uncovered 11“super unicorns” that are growing their market caps by more than $1 billion a year.
Most stunning of all, we discovered that 100 American technology companies founded since 2000 have created $569 billion in new market cap. These modern leaders have set such a high bar for time to market cap that it will make it hard for their competitors to beat them.
“It is no surprise that the Play Bigger data exposes what many in the industry intuitively sense. Network effects are stronger as technology infrastructure becomes more pervasive and standardized, for both consumer and enterprise-focused businesses,” says Tom Ernst, global co-head of software investment banking at Goldman Sachs & Co.
Ernst goes on to posit, “Factors such as the ubiquity of mobile devices and the cost and availability of data storage are creating new opportunities and enabling new business models. As a result, Category Kings are able to grow much more quickly and reach a much bigger scale. Investors increasingly understand this dynamic and are willing to invest with greater confidence and at higher valuations to cultivate a Category King.”
Like it or not, the data shows that our industry is a high-stakes game with few mega winners. The big question for entrepreneurs, CEOs, and VCs is how can we increase the odds of becoming the Madison Bumgarner of our space.
Al Ramadan, Christopher Lochhead and Dave Peterson are co-founding partners at Play Bigger Advisors, a San Francisco-based Category Design firm that coaches technology executives to build market-leading companies. Follow on Twitter.