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The trend of startups seeking massive funding to dominate their market is illustrated by the example of OpenAI considering raising 5 to 7 trillion dollars. This strategy does not guarantee success, as shown by the failures of overfunded companies like WeWork. Conversely, more agile and frugal companies, such as GitHub, Stripe, and FlixBus, have thrived by focusing on the quality of their products and user experience. The article also highlights the regulatory risks associated with market domination. It is therefore important to strike a balance between the ambition to become a leader in a segment and the desire to control the entire market.
E. Krieger
Hallucinogenic substances were once popular in California, but these practices no longer seem to be prevalent. However, several statements from famous entrepreneurs leave one puzzled about their grasp on reality… unless one assumes that hubris constitutes a powerful fuel feeding the propensity to create monopolies with billions of dollars.
Thus, the co-founder of Open AI announced in February 2024 that they were in talks with investors to raise between 5,000 and 7,000 trillion dollars for providing the computing power necessary for AI developments.
Raising 5 trillion dollars: a publicity stunt?
Such a goal is audacious, even with direct access to industry and finance magnates: this is equivalent to raising enough cash to effortlessly buy out the top three global market capitalizations.
Such an announcement can be interpreted as the ambition to be on par with the leaders of one’s industry: it is therefore a message to investors explaining that Open AI’s valuation at the upcoming financing rounds will be astronomical… if the investment thesis is credible, otherwise returning to reality will be challenging.
The temptation to « kill the match »
This example illustrates a trend of wanting to kill the match with nearly unlimited financial means.
Hypergrowth fueled by billions of dollars is common: besides the Open AI asteroid, one can mention Airbnb (lodging), Uber (ride-hailing services), SpaceX (space launchers), Palantir Technologies (data science) … and even WeWork (shared workspaces).
The same phenomenon is found in China with similarly sized companies: Ant Group (financial services), Didi Chuxing (transportation services), ByteDance (social media), and Meituan (online services).
Money isn’t everything
This bet on gigantism accompanied by great speed of execution can prove successful. But it’s not always the case, as seen with WeWork or the trials of OneWeb, which went bankrupt in 2020. After burning through several billion dollars of investment, the satellite telecom phoenix was able to rise from its ashes in 2021.
In short, the money shower isn’t always the alpha and omega of entrepreneurial success, even if one has an almost unlimited capacity to spend and build highly qualified teams.
Just as the best football team in the world isn’t created with the best football players in the world, the recipe for sporting and entrepreneurial success is more subtle.
Strategic agility and team motivation
As rare as it is to see an amateur emerge victorious from an MMA fight with the reigning champion, it happens that intellectual power and strategic agility manage to outshine startups inflated with heavy helium.
This is how medium-sized structures like Studio Ghibli manage to create global successes more significant than some cinema behemoths that have forgotten their raison d’être. Among these agile and frugal actors in the startup universe, we can mention:
- GitHub: acquired by Microsoft for $7.5 billion in 2018, this software services platform started with modest funding. Its considerable organic growth is based on the quality of the offering and the engagement of its user community.
- Stripe: this online payment platform also experienced rapid growth with minimal initial funding. The ease of integration of this solution by application developers was crucial.
- FlixBus: this startup became the largest European long-distance bus company in a few years. Created with modest funding, FlixBus succeeded in disrupting its industry with low prices and a highly qualitative travel experience.
The development of these companies shows that frugal resource management combined with a focus on product quality and user experience can lead to success, even against much more funded competitors.
The « free fox in a free henhouse » syndrome
However, even agile companies may struggle to thrive against overfunded startups developing a high-value offering at an intentionally reduced initial price to eliminate competition. It’s better to re-segment to avoid direct confrontation and to address unmet or poorly met needs with a considerable value proposition.
Like civilizations, monopolies are ephemeral. If a company that has managed to oust its competitors sets arbitrarily high prices coupled with excessive user control, politics will inevitably prevail in Europe and elsewhere.
A free fox in a free henhouse rarely has a beneficial effect on the chicken population. A startup that « succeeds too well » to the point of ousting the competition will sooner or later trigger antitrust investigations and calls for stricter regulation of its activities.
This shows that one cannot « kill the game » sustainably even with nearly unlimited financial means because there are recall forces, both in terms of opposing teams, referees, and even spectators.
The dream of many entrepreneurs is to have an impact and thrive with recurring customers while keeping their peers at bay… but there is a limit between the ambition to become a leader in a significant segment and the desire to dominate the entire market.
