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The Fall and Rise of Technology Juggernauts

Originally published in The Financial Times

Most investors in tech companies lose vast sums reacting to short-term jitters, writes Michael Moritz.

The San Francisco-based buyout firm Francisco Partners recently published a delicious analysis relevant to anyone wondering about what the future holds for technology stocks. It is a bulletin in which both pessimists and optimists can find hope and it offers a helpful perspective for those wondering about the current valuations of technology companies.

First, the bad news. The 15 technology companies with the largest market capitalisations in 2000 have been decimated — losing about $1.35tn, or roughly 60 per cent, of their combined market value.

Only one, Microsoft, has a market capitalisation that is higher than in 2000. One extraordinary aspect of this meltdown is that it did not occur, as some might suspect, in the much ballyhooed dotcom wonder companies of yesteryear. Instead it was a blight that affected most of what were once considered blue-chip technology holdings.

In 2000, Nortel sported a market value of $209bn that, like those of its classmates, had been bloated by the enthusiasm of the era; it has since gone bankrupt. While other members of this corporate bracket have avoided that ignominy, their long-term stock charts present bleak pictures. Cisco’s market value has faded from $403bn to $144bn; Intel’s from $288bn to $161bn; and EMC’s from $218bn to $51bn.

For the class of 2000, the sharpest property price declines have been in the deteriorating neighbourhoods of systems, hardware and semiconductors. This is because of the continuing decline in the cost of computing, the rise of open-source software, the move to the “cloud” and the emergence of huge datacentres where companies such as Amazon, Google and Facebook are designing their own approaches.

Now a word from sunnier climes. Fifteen companies that were together worth less than $10bn in 2000 are now among the world’s 50 top technology companies as measured by market capitalisation, with a combined worth of $2.1tn. (Had Amazon been included, rather than being classified as a retailer, this number would have swollen by another $250bn). Apple, which even in 2000 was viewed as little more than a curiosity, has risen in value from $6bn to $659bn. A few themes jump out of this listing: the power of novelty, the shift towards China, the benefits of patience and the virtues of capital efficiency.

Several of today’s most valuable technology companies did not even exist in 2000. Facebook, LinkedIn and Twitter together have a collective corporate history of only 33 years. Even Google and Salesforce were barely smudges on the horizon in 2000. These companies now have a combined value of about $850bn. Beyond some of the customised systems they operate in their own datacentres, and in Google’s case, some sideline activities such as its Nexus phones and Chrome notebooks, none of these companies sully their hands with anything as taxing as hardware. They have thrived from the artful deployment of software, in particular the “cloud based” variant, and — for Facebook, LinkedIn, Twitter (and Google’s YouTube service) — organising and collating the contributions of their users.

Perched in a clump as the fourth, fifth and sixth most valuable technology companies of the day are Alibaba, Tencent and Baidu. This threesome is now worth $409bn — testament not just to how much China has progressed in a decade and a half but a harbinger of the next several decades as the country places increasing emphasis on spawning its own technology.

Woe betide the management of any western technology company that underestimates the challenge posed by the vast number of emerging Chinese competitors, fuelled by an ambition and work regimen that is hard to match in Europe and the US.

Finally, a note about two other themes that jump out of this listing: patience and profits.

Most investors in technology companies squander vast sums by reacting to short-term jitters or global jolts rather than concentrating on the staying power of those emerging enterprises on the right side of history.

And for the founders and chief executives of all of the current billion-dollar “unicorns” there is another abiding message. Almost all of today’s technology juggernauts formed before about 2008 required smallish amounts of capital. Google, for example, consumed only $8m before turning profitable. Maybe this means that sooner or later a new class of company will come into vogue — a rare species known as the profitable unicorn.

The writer is chairman of Sequoia Capital and co-author with Sir Alex Ferguson of ‘Leading’. Views expressed are his own. Sequoia Capital persons hold interests in certain companies mentioned.