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CHAPTER I - A Blessing of Unicorns

“The real difficulty in changing any enterprise lies not in
developing new ideas, but in escaping from the old ones.”
-- John Maynard Keynes

A striking recent development in the world of business has been the appearance of a growing number of unicorns. The term was first used in 2013 by Aileen Lee, founder of Cowboy Ventures, an early-stage venture fund, to describe start-up companies that reach a valuation of at least $1 billion from private investors before going public. At the time that Lee started talking about the phenomenon, she had identified 39 companies founded since 2003 that had met the criterion, with one company, Facebook, with a valuation in excess of $100 billion, qualifying as a “super-unicorn.”

Two years later, a study conducted for The New York Times found at least 131 unicorns, with 50 more start-ups that seemed to be on a trajectory to reach a pre-IPO valuation of $1 billion. Although the majority of these promising newcomers were based in Silicon Valley, as might be expected, the rest were located across the country as well as outside the U.S. in places like China, India, the UK, Germany and South Africa. Virtually all of the emerging unicorns were based on digital and/or online technologies, but they covered many different industry sectors ranging from consumer products and financial services to healthcare and business services.

Any consideration of the phenomenon of unicorns calls for a couple of caveats: first, the lofty valuations placed on start-ups may be more indicative of the optimism of investors than the reality of the marketplace (as the dotcom crash of the early 2000s amply demonstrated). And, second, it is always good to remember that past performance does not guarantee future success. As one venture capitalist quoted by The New York Times noted, some promising early stars are likely to turn into “zombie unicorns” that fail to live up to lofty expectations and see their valuations fall as they struggle to survive. No matter how promising, every start-up runs the risk of burning through the funds it has raised before reaching profitability.

Still, beyond these cautions, the emergence of a growing number of unicorns does seem to signal a real shift in how businesses operate. Companies that fully leverage the power of digital technology and the reach of the Internet have demonstrated the ability to grow at an unprecedented rate (see Figure 1 below). While it is typical for a current Fortune 500 company to have taken several decades—or more—to achieve a billion dollar market cap, many newer tech-based companies have reached this milestone in less than a decade. And, in the immediate past, a number of start-ups have achieved the billion-dollar valuation within just a few years of their founding. In fact, as this kind of hyper-growth becomes more common, the term “unicorn”—which Aileen Lee chose because it described something that was “rare and magical”—may become less appropriate.

Figure 1
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Source: John Seely Brown

A broader and arguably more important trend is the increasing ability of companies, both new and not so new, to function and to grow at unprecedented rates of speed. In fact, this kind of exponential growth may become the new normal for successful 21st century firms.

While start-ups unencumbered by the inertia of legacy systems or the complexities of large organizations are free to grow rapidly, there are examples of companies that have reached substantial scale yet have continued to grow at impressive rates:

Over the past five years, Google’s revenues, which reached $66 billion in FY2014, have grown at an annual rate of 22.8 percent compared to a rate of 9 percent for the tech sector as a whole and 4 percent for the S&P 500. Even though Google now captures more than half of all digital advertising dollars, it has continued to increase its market share.

Amazon, with FY revenues of $89 billion, has achieved a five-year revenue growth rate of 29.4 percent compared to a growth rate of 5.2 percent for the retail sector as a whole. The company also continues to gain market share: in 2015, the company captured 26 percent of all U.S. e-commerce sales, up from 22 percent in 2014 and 16 percent in 2011. In July 2015, Amazon’s market capitalization surpassed that of Wal-Mart, the world’s largest retailer.

Facebook, with FY2014 revenues of $12.5 billion, has actually accelerated its growth rate over the past three years—increasing year-over-year revenue growth from 37.1 percent in FY2012 to 54.7 percent in FY2013 to 58.4 percent in FY2014. In August of 2015, the company announced that for the first time, one billion users—approximately one-seventh of the world’s population—had had logged on to Facebook in a single day.

Apple has maintained a remarkable year-over-year revenue growth rate of 36.3 percent over the past decade. With current annual revenues of $182.8 billion (up from $8.2 billion a decade earlier), in February 2015, Apple became the first American company to reach a market capitalization over $700 billion, making it the most valuable company on the planet.

The unusual achievements of these firms has inspired the acronym GAFA (Google/Amazon/Facebook/Apple) to identify four companies whose level of success has set them apart from other, more ordinary companies. Each has achieved dominance in its market sector, enabling it to benefit from the so-called winner-take-all effect. But each of them has also continued to innovate in significant and sometimes surprising ways: beyond its core search service, Google has been responsible for creating the world’s most popular mobile operating system (Android), pioneered the deployment of high-speed fiber to the home, and has invested in new areas ranging from robots and self-driving cars to augmented reality and combatting age-related disease. Amazon has not only steadily expanded its role as the leading online retailer, but has been responsible for the popularization of e-books and e-readers, become a major force in cloud-based computing, has experimented with producing original television content (exclusively for Amazon Prime subscribers) and is exploring the use of drones for package delivery. In addition to its dominant role in social media, Facebook has been actively exploring the potential of new technologies ranging from virtual reality to high-altitude drones to extend Internet access to rural areas. And Apple has steadily moved beyond its initial success in personal computers—in essence, disrupting its own core business—to transform the way in which music is distributed and consumed, establish smartphones and tablets as important product categories, and, most recently, lead the development of smart watches.

In some fundamental ways, each of these firms has continued to think and operate like a start-up even as they have become large publicly traded companies. One critical characteristic shared by all of these market leaders is their ability to execute quickly and effectively. And even as they move into new product categories, these companies continue to steadily improve their existing products, often operating at a scale and speed that would have seemed improbable just a few years ago. In 2013, for example, Amazon announced that the mean time between deployments of updates or new applications for Amazon Web Services was 11.6 seconds, and the maximum number of such deployments recorded in a single hour was 1,079. The mean number of hosts simultaneously receiving these new deployments was 10,000, while the maximum number of such simultaneous deployments was 30,000 hosts.

Another example of a large company that operates at an accelerated rate is Xiaomi, the Chinese maker of mobile phones. The firm was founded in 2010, released its first phone is 2011 and achieved annual revenues of $12 billion and a valuation of $45 billion by the end of 2014. The company updates both its Android-based operating system and its phones on a weekly basis. To help inform its decisions, Xiaomi supports online forums that are used by some 40 million users of its products whom the company regularly polls to help to decide on the features to be included in the OS updates that are issued every Friday. Users also vote for “popcorn awards” that are given to the employees responsible for creating their favorite feature or update.

Making the Invisible Visible
Over the past eight years, the Aspen Institute Roundtable on Institutional Innovation has explored the challenges of increasing competition and declining performance among many companies that had flourished in the last century. In particular, firms that were built to succeed by achieving economies of scale based on maximizing size and efficiency have found themselves lacking the flexibility to adapt quickly to changing business conditions.

Exponentially increasing performance of digital technologies has transformed the infrastructure for business and made it possible for businesses to operate in new ways. In a world in which competition is steadily increasing, traditional firms are under growing pressure to reconsider old assumptions and explore new models of operation. For example, companies are facing the challenge of shifting from deriving value from building and exploiting stocks of knowledge, a strategy that works well in a stable environment, to participating in and benefiting from flows of new knowledge, which is a necessity in an environment that is constantly changing. Enterprises that have built up large asset bases to serve as barriers to entry against new competitors have found themselves outflanked by new ventures that use technology to leverage assets that they do not need to own in order to grow at unprecedented rates. Organizations that have built elaborate hierarchical management structures as a means of dealing with complexity have been outpaced by organizations that have increased their responsiveness and accelerated their rate of innovation by decentralizing decision-making. And perhaps most critically, the 20th century imperative to achieve scalable efficiency as a path to success is being supplanted by the need to scale learning within an organization order to enable it to respond to new challenges.

Figure 2
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Source: John Seely Brown

The focus of the 2015 Roundtable was the challenge to existing enterprises of achieving “exponential operations” that have produced results that would have seemed improbable if not impossible a few years ago. In particular, the participants considered how organizations can shift from pursuing scale efficiencies to achieving scalable learning in a rapidly changing environment.

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