Everything Is Technology

The world can flip more quickly than you expect. Things we take for granted today can disappear in a decade, replaced by things we did not even know we wanted.

There is a famous pair of photographs, both taken of the Easter Parade on New York City's Fifth Avenue. One was shot in 1900, the other in 1913. The first shows a street roughly the way it may have looked for centuries: full of horse drawn carriages, with a single motor car somewhere in the frame. The second shows the same street on the same day thirteen years later, full of motor cars, with a single horse drawn carriage.

Ford introduced the Model T in 1908. If he had asked customers what they wanted, he quipped, they would have asked for faster horses. Just five years later, the shift away from horses in New York City was practically complete. The Model T was both faster and cheaper than a horse, and it did not foul the street.

By 1919, the US Census showed that all 2,544 establishments across the entire carriages, wagons, and materials industry generated $118.2 million in value of products. That same year, Ford sold over 900,000 Model T's at $360 each, for $324 million. That is more than twice the total product value of the industry it had displaced. Technology had won the day.

Over time, if a new technology is successful enough, it stops being lumped in with "technology" and earns its own industry. In the internal combustion engine's case, that was the automotive industry. After an initial period of experimentation, the Big Three, Ford, GM, and Chrysler, came to dominate America's car market. Imports arrived in the 1970s, the industry went global, and by the end of 2003 the world's twelve largest automakers were worth a combined $450 billion.

Because these were old automotive companies, that $450 billion was not considered tech market cap. Then Elon Musk did what Henry Ford had done. He did not ask customers what they wanted. He built electric vehicles. Today Tesla alone is worth close to $1 trillion, more than twice what all of the big automakers were worth combined the year it entered the market. Technology wins again, and this time it pulled the value back into tech and grew it.

Two ways to eat the world

One of Not Boring's core theses, maybe the core thesis, is that everything is technology. I have made this argument before, in various ways, and I will make it again, because I do not think people have fully grasped it. It is the most important thing to understand if you are building or investing in technology companies.

Here is the simple version. The addressable market for venture backed tech companies will grow by at least an order of magnitude as they battle incumbents in industries not traditionally considered tech, and as they turn previously fragmented and unaddressable markets into addressable ones.

Software alone is not eating the world. Technology is, and it does so in two main ways: by eating someone else's lunch, or by cooking up its own.

Tesla is an example of the former. Using technology to build a better product, it grew larger than the entire automotive industry was by market cap the year it was founded. Ford is an example of the latter. By pairing a new technology with assembly line manufacturing, it created a company that filled an existing need better, and at greater volume, than the entire horse and carriage industry could.

A modern example of cooking up its own is Uber. In a now famous 2014 post, Benchmark's Bill Gurley took apart a valuation that pegged Uber at under $6 billion. That analysis assumed the market was the roughly $100 billion global taxi and car service market, and that Uber would capture at most 10 percent of it. Gurley argued both assumptions were wrong. The real opportunity was a slice of the multi trillion dollar cost of car ownership, and a much better product could take far more than 10 percent of it. Uber is worth around $175 billion today. Venture capitalists never invested in taxis. They did invest in Uber. That is roughly $0.2 trillion of venture addressable value created out of thin air.

Constant, relentless change is the hallmark of capitalism.

Joseph Schumpeter

My contention is that as this churn happens, technology companies will replace non technology companies. Sense check it. Assume the churn continues and new companies replace old ones. Can you imagine the replacers not being built with modern technology?

There are two ways technology companies eat old industries. The first is direct displacement: competing in a large existing market with a better, cheaper, faster product, the way Tesla did. The second is market creation and aggregation: building a new addressable market out of a fragmented one, the way Ford and Uber did. History is full of both, even if the once new technology companies do not look like technology companies today. These transitions tend to happen faster than anyone expects, usually within a decade or two, and the new companies often end up larger than the entire industry they replaced.

In defense of the megafunds

This framing explains something that puzzles a lot of people, including people in venture: why the multi billion dollar megafunds are not simply fee grabs.

There has been a long running argument about venture math. Two questions come up again and again. Can a $1 billion outcome even return a fund anymore, and are the megafunds just sizing up to collect management fees? My answer to the first focuses on the number itself. One billion dollars is a round number, but that does not make it meaningful. What has always mattered in venture is backing the small set of companies that drive the power law, and $1 billion outcomes are simply less extraordinary than they used to be.

In the early 2000s, a $1 billion outcome sat around the 99th percentile. By the 2010s it was closer to the 90th. Today it is roughly the 85th. Put another way, the 99th percentile outcome went from about $1 billion in the early 2000s, to about $5 billion in the 2010s, to something like $20 billion today. Venture firms do not get paid for 85th percentile outcomes.

The same logic applies to fund size. Critics point out that some celebrated wins, impressive as they are, would not come close to returning a multi billion dollar fund. That is true if you assume the future looks like the past. Arguing either side of this actually requires a prediction. If you believe megafunds will generate strong returns, you have to believe the value of venture outcomes will be far larger in the next decade than in the last. If you believe they will not, you have to argue that the investors who have been unusually good at seeing the future suddenly cannot, all at once, and that the centuries old pattern of technology companies displacing and outgrowing incumbents has stopped, at exactly the moment when founders have more powerful tools than ever.

I am on the side of the megafunds. I think they understand that everything is technology, and they are positioning accordingly. My bet is that today's eye popping fund sizes will look quaint in a few years.

How asset managers grow

Something clicked while I was writing this. What the megafunds are doing today mirrors what Vanguard, Blackstone, BlackRock, and Brookfield did in earlier shifts: seeing a change early, building a relevant strength around it, and flexing that strength across more products and larger pools of capital.

Vanguard launched in 1975, just as deregulation and new retirement rules created demand for cheap market exposure, and turned low cost indexing into trillions under management. Blackstone, founded in 1985, used deal structuring expertise to ride the rise of private equity, then carried that underwriting muscle into real estate and credit. BlackRock built a risk management platform and scaled it into the passive investing era. Brookfield applied its operating expertise in long duration hard assets across infrastructure, renewables, and more. Each firm spotted a big shift early, built a differentiated edge, and compounded it into a multi strategy, trillion dollar manager.

If the current shift is that everything is technology, then it makes sense that funds are sizing up and expanding out. If you believe some companies being built today will be larger than the incumbents they displace, that others will create entirely new markets, and that they are staying private longer, then raising larger funds and offering new financing products is the rational response. The bet is that technology people can learn finance faster than finance people can learn technology.

Everything is technology

Remember, the thesis is that every industry currently dominated by large, slow incumbents will come to be dominated by technology companies. Studying past transitions, we see they can happen surprisingly fast, and that the new companies often become larger than the entire industry they replace. A market expands when you offer a cheaper, better, faster product, and valuations expand when you do it at higher margins and faster growth.

There is one key difference this time. The earlier transitions were financed in a patchwork of ways. The Liverpool to Manchester railway was essentially a public private partnership. JP Morgan funded Thomas Edison. Henry Ford raised a small amount from a syndicate and got profitable fast. Those businesses were built on the modern technology of their day, but they were not venture addressable, because there was no venture capital. This time, the winners will be backed by venture capitalists, and the value will be venture addressable.

Billion dollar exits are still real wins, but a unicorn is not what it used to be. In a single recent stretch we saw a string of billion dollar and multi billion dollar acquisitions, alongside a long list of fresh $5 billion valuations. Those are the appetizers. There are startups operating now, or soon to be built, that will displace incumbents in energy, healthcare, defense, manufacturing, education, housing, finance, and aerospace, and create addressable markets out of fragmented industries like accounting, law, and consulting.

If you believe that, you have to believe that tens of trillions of dollars of value will be both transferred from incumbents and created new, all of it within reach of venture capital. If you do not believe that, then what are we even doing here?

Historical case studies, modern technological capability, and some of the most experienced capital allocators in venture are all saying the same thing.

Everything is technology. Who am I to disagree?

Packy McCormick, Not Boring