Even if unicorns are overvalued, dinosaurs that cannot keep up with the times must die

There are always so-called experts who believe that startups in the billion-dollar club are overvalued, but few people realize why the valuations of large publicly traded companies may also be too expensive.

Traditional public companies may be too optimistic to calculate their P/E ratios between 15 and 20, which is difficult to maintain given the slow growth of future cash flows and operating profit margins of large companies. Unless large companies accelerate their pace of innovation (or acquire a peer Internet company), the clumsy "dinosaur" companies included in the S&P 500 (Standard & Poor's 500 Index) will be defeated by venture capital-backed unicorn startups in the long-term competition. After all, the pitiful reptilian brains of "dinosaur" companies are no longer adapted to software development and Internet marketing.

It has become fashionable to attack unicorn startups for being overvalued. Granted, there are some lousy startups in the unicorn club whose sky-high valuations come from nowhere, but there are a few startups that are steadily moving toward greater success (such as Uber, Xiaomi, and Airbnb). In the world of startups, winners are always a minority, and failures are common. It is precisely because of this asymmetric result that the valuations of most startups that have already joined the unicorn club are further pushed up, while those outside the power law and have not yet entered the unicorn threshold are always seriously underestimated.

This is the natural law of venture capital, winner takes all, winner is king, just like in the jungle, a majestic gorilla takes all the venture capital money, and the remaining skinny monkeys can only get a little or nothing. But before the dust settles, all the apes (and their investors) believe that they can become the only gorilla king. Unfortunately, their judgment is wrong in most cases.

It is easy to predict that many of today's unicorn startups will disappear in the long river of time in the future, but don't forget the fact that the valuations of many listed companies in traditional industries (hereinafter referred to as dinosaur companies) are also too high.

I am so sure of this for three main reasons:

1. Dinosaur companies don’t seek innovation

This is not news, and people far better than me have written extensively on this topic (Schumpeter's Creative Destruction and Kristensson's The Innovator's Dilemma), so I won't discuss this point in detail. It is easy for dinosaur companies to get caught up in mature business lines and the steady revenue and profits they bring, and it may be better for them not to take risks. Over time, these dinosaur companies will slowly lose their original winning status.

2. Dinosaur companies have a hard time recruiting and retaining top technical talent

Although the dinosaurs know that technology is a very important part, and they also realize that software is eating the world, the geeks are not interested in dinosaur companies because they cannot satisfy most top technical talents, whether it is the million-dollar equity in the future or the generous salary they can get now (note: exceptions exist, some large Wall Street companies offer considerable salaries to technical personnel). The result is that dinosaur companies have lost their competitiveness in the battle for technical talents, and further lost their armor in the innovation war. This is really the end.

3. Dinosaur Company did not realize the importance of Internet marketing

Not only that, they also did not understand how important online platforms are for acquiring and retaining customers, which is directly related to future sustainable profits. This third point is actually very subtle for dinosaur companies, because most listed companies may not have a clear sense that consumers are rapidly shifting from offline to online. Similar to the reasons mentioned in the second point, the competition for top online promotion talents among companies is very fierce, and dinosaur companies cannot stand out from the crowd. Even in this precarious situation, most dinosaur companies still do not realize that they should do their best to snatch talents who can bring rapid growth to the company.

All the above conclusions are based on the following observations: Most listed companies in traditional industries do not pay attention to software development and Internet marketing, which can increase business competitiveness. Therefore, almost every dinosaur company seems so vulnerable when facing unicorn companies coming to grab their food.

In short, if a listed company can maintain an average P/E ratio of 15-20, it means that the market believes that this dinosaur company can maintain a continuous cash flow and profit level from its existing business for 15-20 years. Do you dare to believe this? You are totally wrong. In the next ten years, the dinosaur company will be attacked by unicorn companies and will be defeated.

Seeing this, you may be dismissive: Wow, this guy is really alarmist, saying that traditional large companies are worthless. Maybe you think that I, an Internet activist, have lost my mind and know nothing about the real operation of capital and economy. Because if what I said is true, why didn't the market play a self-correcting function to gradually reduce the stock price of Dinosaur Company? Why does the related market still overestimate the value of Dinosaur Company?

I am a benevolent venture capitalist and armchair economist. I certainly agree that the market can usually find its own balance, but there is a small problem: you can't substitute the short-term behavior of the market into long-term expectations, and you can't assert that the company will remain strong in the next 5 to 10 years because of the current stock price. There is no suitable short-term derivative instrument in the existing securities market to hedge the destructive effects of unicorns. If you want to avoid being defeated, you have to become a unicorn yourself.

This is what the market does, and it explains why those pesky unicorn startups are always overvalued, and why all the dinosaur companies that don’t make progress are doomed to fail in the long run.