(The Economist) How Tech’s Defiance Of Economic Gravity Came To An Abrupt End

Photo by Markus Spiske on Unsplash

The Economist had a good 2022 year-end article on how the environment has suddenly changed for Big Tech:

As I read the article, I asked myself how these factors impact emerging scaleups:

1. Digital markets are maturing. 

The digitization of the economy is continuing, but at a slower pace. The article mentions advertising where the growth in that area is slowing as the offline to online shift is mainly complete. In a larger context, “the greenfields are gone”. The accessible applications for digital technologies are taken. Your customers are more sophisticated about their needs and how they choose their solutions. 

  • Founders need to dig much deeper to identify the utility of their solution (problem-solution fit) and the value of this utility for the end-user. First, design the business, then build a product that fits the business. Too often, technical founders do things the other way around and hit a brick wall when attempting to transition from development to deployment.

2. Competition.

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A Few Unicorns Are No Substitute For A Competitive, Innovative Economy (Gary Hamel, HBR)

So we’ve built this whole system to find the Next Great Unicorn that will save our local economy, sucking up hundreds of millions of dollars of public and private money. Is this strategy realistic or a waste of time, money and effort?

By design, Unicorns can only succeed if they establish a monopoly by being the sole receiver of all transactions in its market. But the moment you become a monopoly, you cease to be entrepreneurial. The game is no longer to add value but rather to defend the monopoly position. We’re seeing now how even the unicorn of all unicorns Facebook is growing out of their geeky teenage mindset and behaving like just another corporate behemoth.

Gary Hamel’s piece in HBR starts off by making a good point about how unicorns don’t contribute to the economy and actually stifle innovation. And that it’s harder and harder for a startup to achieve unicorn status, anyways.

But then he makes a mistake in pointing out how Amazon is diversifying by encouraging lots of little startups (Whole Foods?). Continue reading

Redefining Dilution (Eric Paley)


Raising more capital is not necessarily dilution. It’s what you do with the money after raising it.

Eric Paley (Founder Collective) describes a novel distinction between accretion and dilution:

When you accept a new investor, everyone’s piece of the pie gets smaller because the pie is fixed but the number of shares issued have increased. So your share of the company may go from 20% to 15% because of the new investor.

However, if the shares are priced correctly, the value of each share should go up because more equity has been sold. So your total 15% after the round should be worth more than your 20% before the round. This is accretion, or increase in value. The important thing is to look at your worth, not your percentage.

Now if you take the money and use it on things that do not add value to the company, such as features that customers don’t want which cause your sales to fall, then you have lost money and the value of your company decreases. This is the real dilution.

“Dilution is a function of your burn rate relative to your accretion of value. It is often measured in financing events, but it actually plays out every day in the choices the startup makes and the work the startup accomplishes. Simply put, if you are accreting more value than you burn, there is no dilution. If you’re burning more cash than you’re accreting value, then there is dilution.

Put another way, you’re not being diluted because a VC decrees it; you’re being diluted because you spent money building features that your customers didn’t want, instead of the ones that they need. You’re being diluted because you kept scaling up an ineffective sales process because you didn’t want growth to slow.

Each financing event is more of a check-in point on the value of the company than a true dilutive or accretive event. It’s the time between the financings, when the company was burning cash to build additional value, that was truly the accretive or dilutive journey. In other words, the company isn’t worth $20 million because someone bought stock in a day. Its valuation increased from $10 million to $20 million because of the work that was done to increase the value of the company that greatly outpaced the cost of creating that value. If the cost outpaced the value of the work, that would have been dilutive, as demonstrated by a down round.”

In summary, ensure that each dollar you spend adds value to your business.