Newsletter #18: Increasing Rates of Change, Creative Destruction, And The Venture Response

Jeff Bezos has been quoted as saying “if anything, the rate of change is accelerating.”  This sentiment is not unique to him: James Clerk Maxwell had a similar quote in the 1860s, Ray Kurzweil in 2021, and many others in between.  Data supports these assertions: if you Google “rate of human progress over time” the results will include dozens of charts, showing human progress as a flat line from the dawn of humanity until the early 1800s (around the beginning of the Industrial Revolution), followed by an asymptotic hockey stick rise over the following 200 years.

Longtime General Electric CEO Jack Welch considered the impact of that rate of change on businesses: “if the rate of change on the outside exceeds the rate of change on the inside, the end is near.”  Welch’s comment is based on a concept called ‘creative destruction,’ popularized about 100 years ago by prominent Austrian economist Joseph Schumpeter.  Schumpeter wrote, “with capitalism we are dealing with an evolutionary process….many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.”

The trend line depicting how long public companies remain amongst the 500 largest in the US supports the above quotes.  Since 1950 the average lifespan of a company in the S&P 500 has shrunk by 78%, and in just the last decade it has shrunk by 42% (Deloitte & Touche, Credit Suisse, CB Insights).  Forecasting those trends into the future, Inc.com expects half of the companies in the S&P 500 will churn over the next decade.  It is increasingly difficult for companies to stay on top- and incumbent companies must become more nimble and build more substantial moats around their businesses in order to remain there. 

Just as change threatens incumbent market leaders, the barrier to new market entrants has fallen dramatically.  For the year 2024, the US Chamber of Commerce reported 5.5 million new business applications, up about 50 percent over the past decade.  The onslaught of new businesses looking to compete is unrelenting.

Paradoxically, startup fundraising is slowing down considerably.  According to Carta, the average time between startup funding rounds has increased dramatically over the past several years, and investment hold periods for venture capital firm investments have meaningfully extended.  One consequence of the greater overall competitive pressure, combined with longer venture capital hold periods, is venture funds are shouldering more risk of antiquation of the businesses before they reach exit events. 

While this antiquation risk is less pronounced in consumer packaged goods companies than technology companies (both in the public markets - where the Consumer Staples sector has the longest median age of any sector in the S&P 500 at 112 years – as well as in the startup markets) even CPG is getting disrupted by new entrants.  And some consumer VC funds are responding by adjusting their investment strategy: investing in later stage companies to avoid hold-period risk, or actively looking for buzzworthy marketing campaigns as primary investment criteria. 

I believe those perspectives are wrong-headed.  While I acknowledge that marketing programs are important, the greater risk of disruption and longer hold periods only further emphasize the need for strong product-market fit to protect against competitive entry.  In other words, stick to the strategy of building good businesses that can stand the test of time in this ultra-competitive market, rather than betting on marketing hype machines to try and flip as soon as possible.