Some thoughts on the future of the tech industry

The internet is mostly complete. Where does tech go from here?

Joi Ito from Inbamura, Japan, CC BY 2.0, via Wikimedia Commons

I was sitting in a restaurant the other day, and a friend asked me “What’s going on in the tech industry these days?”. And because I’m terrible dinner company, I launched into a long rant about how we finished building the internet, so the tech industry is looking for something else to do, and blah blah. But apparently my friend thought the rant was interesting, and demanded that I publish it as a blog post. So here we are. Anyway, it’s a nice break from writing about the presidential election.

There are really two things in the U.S. that we mean when we say “the tech industry”. There are the big IT companies — Apple, Microsoft, Nvidia, Google, Amazon, Meta, and so on. And there’s the venture capital industry and its associated galaxy of startups. In fact, even put together, these two are only a piece of the real U.S. tech sector, which includes everything from little privately held software companies you’ve never heard of, to obscure hardware companies making specialized devices, to biotech, etc. A whole lot of American industry is high-tech. So when we say “the tech industry”, why do we mean “big IT companies and VC-funded startups”?

I don’t know for certain, but I’m guessing it’s all about financial returns. The “Big Tech” companies are absolutely gargantuan — they’re the most valuable companies in the entire world. And yet they didn’t cost a lot of money up front. Amazon is now worth $1.75 trillion, but the total amount it raised from private markets before its IPO was only $8 million, in a single Series A round in 1996. At the time, Amazon was valued at just $60 million. Even accounting for inflation, that’s a return of over a million percent!¹

So there’s a lot of money to be made by picking the next Amazon, or the next Google, etc. This is why people lump together startups and Big Tech — the former, at least notionally, has a chance of becoming the latter. This is also how VCs make their money — top VC firms consistently perform much, much better than the median VC firm, and they do this by picking more big winners rather than by avoiding the losers. And even if you’re just some retail investor who bought Google or Facebook at IPO and held on to the stock, you’ve made quite a bit of money.

So when we say “the tech industry”, I think we mean the piece of the tech industry that offers the chance of a gigantic financial return. (Not unrelatedly, those companies also tend to pay their employees a lot. A mid-level manager at Google makes over half a million a year.)

The question of “the future of the tech industry”, then, is whether those kind of returns are still available — not just to a few very lucky people, but to the masses. And my intuition says it’s going to get harder going forward. Because fundamentally, I think the boom in tech returns was about the building out of the internet. And now that the internet has been pretty much built out, I think it’s not clear if any other effort — AI, deeptech, etc. — can offer the same kind of huge rewards for small commitments of capital.

The internet has mostly been built

“We did it Reddit!” — unknown

There was a time when railroad companies were hot growth stocks. There was a time when the companies building electrical grids and the telephone system were hot growth stocks, too. Some of these companies are still big today — Union Pacific, General Electric, AT&T — but they’re sleepy, slow-growing conglomerates in sleepy, slow-growing industries. The reason is that the railroads, the electrical grid, and the telephone network — now including the cellular network — have all been built. You don’t need to build them twice.

The global internet hasn’t quite been completed, but it’s getting there, particularly in rich countries:

There’s still some work to be done wiring up the countries that don’t have extensive broadband networks, but local telecoms and Starlink (or Huawei) will probably do most of that work. There’s not much growth left in the physical construction of the internet. The century-long quest to connect every human being on the planet with high-speed electric-powered text and voice communication is reaching its endpoint.