I recently watched a recording of a brainstorm session with Steve Jobs and his ‘Next Incorporated” 11 team members back in 1985. It is an incredible 20 min episode highlighting some of the characteristics we all already knew about one of the greatest entrepreneurs of our era. In the video, Steve Jobs said this to his team:
“Companies come and go with the crest of the wave”
I have found that through history there is nothing more true than that statement. People, governments, and companies have all come and go with these cycles. Sometimes this happens slowly and sometimes quickly, but they all are born, grow, diversify, expand, decline, and often eventually disappear.
Peter Thiel, one of the most successful startup investors in Silicon Valley says “every moment in business happens only once”. These are his words:
What I dislike about business books, is that they all have a formula: the 7 (or 5, 8, 10) steps to success. But the truth is, every moment in business happens only once; the next Bill Gates won’t be building an operating system. If you’re just trying to copy, you’re not learning from them…
… Take Google, for example, and ask yourself: why is it so successful, on so many levels? Because they’ve been able to carve out a unique category that has put them years ahead of their competition; they are not competing like crazy (the way a restaurant in San Francisco would, for example).
This statement articulates the main reason I will be keeping Google (GOOG) in my portfolio for years to come. Google right now is a very successful company, and every single technology company on the planet wants to operate just like them. The model is perfect for our time, and I expect the company to keep growing and diversifying at least for 10 more years. However, this doesn’t mean that the Google model will be the perfect model for the future. At some point Google will stop growing, it will slow down, and eventually will start to decline.
As companies grow they become more difficult to operate and responsibilities and goals inevitably decentralized. While Larry Page and Sergey Brin may have hired their own employees, I assume that’s no longer the case now that they have more than 40,000 employees worldwide. The original Google employees from the 80’s and 90’s are now married, have kids and priorities in their lives may have changed. Over time this shifting in employee focus and tenure can result in a slow down in efficiency and innovation, change frequently becomes difficult, and new smart people that want to move up the ladder face a lot of internal barriers from “originals” employees more interested in protecting their jobs before retirement than in coming up with the next great idea (let alone investing the energy required to realize it).
If a life cycle can be applied to a company, Google is still in the expansion phase, and it may stay in this phase for as many as 10 more years. At the same time, Google’s innovation and diversification has slowed. Google maps was launched in 2004, and Youtube in 2006 – both from acquisitions, in the case of Google maps from Keyhole, and YouTube from former PayPal employees that created the company in 2005. Since 2006, Google has not launched any significant product or service as big or with the potential of Google Maps or YouTube. However, despite the lack of recent innovation, these two products, plus Google Fiber and Google AdWords offer Google a lot of room for growth. The focus of the company has changed from innovation to expansion and distribution. That is what it makes Google so attractive it is a company that, with its current lineup of products, has the potential for growth every single year over the next 10 year at a reasonably healthy rate. It is true that the company may have its ups and downs like any other company, but a company in this phase has a very good chance of outperforming the S&P 500 over the next 10 years.
Personally, I look for businesses that have a competitive advantage, a big barrier to entry for competitors, and are expanding, just as Google is right now. As long as technology trends don’t change, Google would be a reasonably safe bet. 20 years from now, Google may not be that relevant anymore (even if that is hard to imagine), but today they can easily sustain their growth and the expansion and continue to be a company that will do well for years to come.