Category design thesis 6-10 law category lifecycle

There are three phases to a category lifecycle. And depending on where your company sits in the cycle, it could spark different investment opportunities. In this section, you’ll learn how other Category Kings navigated through the phases to increase their value in the marketplace and attract investors.

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Transcript

So, I wanted to walk you back a little bit, because this is not something that was just based on anecdotal evidence or just our, our particular instincts. When we started this project, we really wanted to back it up with some real data and background information. I'll walk you through this crazy chart here.

We took data from thousands of venture-backed companies and just ran it and asked a whole lot of questions of this data, and trying to just see what kind of patterns we could, we could get out of it. And we ran across this one thing that we thought was kind of interesting, but we didn't quite know what it meant – but we'll get to that in a second.

But what this ends up showing is that when we looked at the value created by venture-backed companies after they went public, post-IPO value. We noticed this pattern that if you, if companies that went public before they were six years old, the trend line basically had them dropping in value, from IPO time to after the post-IPO value tend to go negative. Companies that went public between six and 10 years old, created enormous post-IPO value, and companies that went public after they were 10 years old tended to basically flat line. Didn't really lose value, they didn't really excite anybody either. And we wondered what this meant.

We took it to places like Morgan Stanley and JP Morgan, the investment bankers there, and we said, showed 'em this, and they said, this matches our instincts. This is matches what we see. We never ran the data, but actually it's really interesting that this kind of proves out, but it kind of makes sense to us. But they didn't know why this was happening either. So, we went searching, and we, the next step, when we asked why this was, oh, by the way, yeah, here's, this is a little reminder of that six to 10, some of the biggest successes.

Facebook went following at eight years, Amazon at eight years, Salesforce at six, Uber in 2018 is nine years old, so it suggested if they go public in a year and a 1/2, just don't buy the stock. So, we asked why is this happening?

And that led us to the work of an economist named Paul Geroski. And Paul Geroski studied category lifecycles. And he, he ended up creating this very simple chart that has two steps to it, and I'll walk ya through each one. So, the first step is that, and this, this makes intuitive sense if you think about it. When a new category gets identified, and you're down here basically, and one company or two companies figure out that there's some new invention, some new, cool thing to do.

There's, there's hardly any companies at a space. As soon as like, think back to that chart with like a zillion companies on it. As soon as it starts to be identified as interesting space, zillions of companies jump in, right? You get this spike in the number of companies in this space, and then you get this time period when the number of companies starts to drop off, because one or two kings solidify, they either acquire some of the other companies in the space or the other companies go outta business. And, and so the number of companies in that category starts to fall into a smaller, and then over time, it kind of flat lines. It kind of stabilizes at a few companies that are in that, dominating that space.

The other 1/2 of the curve goes like this, which is when a category is created, obviously it's worth pretty much nothing. And it takes a while for people to get the idea, and it start to have some real value into that category. And then all of a sudden it catches on and it spikes, the total value of that category starts to spike. And over, and over time it matures and levels off. So, Geroski put these together and created this chart of what a category lifecycle looks like.

And as you can imagine, the value is still climbing. The number of companies pile in, even though the value is not there, suddenly the category catches on, king emerges and it consolidates. But the category is actually taking off now and spiking. And then you get to someplace where there's two or three companies dominating and the category is pretty much mature and flat-lining. And as you can probably tell, when you look at that chart, and you say, well, that kind of overlaps to this. And it makes some sense, because in this particular phase, the category is very uncertain and who's going to be, the king is very uncertain. So, you get situations like Groupon going public when it was three years old. And you've got a category that looked really promising, but ended up not being so promising.

And a company that went public at a huge evaluation and ended up tanking afterwards. In this particular time period, you end up with one or two companies emerging that seem like they're gonna be the obvious kings of this spiking category, and investors are very excited. That's when you wanna put money in a company. And so the value starts to climb, because it's got a lot of upside. And then in this last phase over here, what tends to happen is that the, as the category sort of matures and flat-lines and the number of players consolidates, it's all the excitement is out of it. It's just basically a mature stock at play at that point. So, that's why when companies go public with it late, there's not, it doesn't do bad, it doesn't do good. It's just that all of the information is already there, right? You're not really like, investing in something that's gonna spike.