The Go-To-Market Economy
What exactly is a go-to-market (GTM) company? A GTM company is intensely focused on creating new and innovative strategies to attract new customers. Rather than building new technology or new service models these companies don’t have to have the latest and greatest offering to attract new business. In order to be viable, they have to have a reasonable path to profitability, typically by achieving a certain scale by a target date. By leveraging powerful marketing techniques, existing marketing technologies and large incentivized sales teams they are able to create new demand for existing business models. What does the growth in GTM companies tell us about investing in 2019?
Technology and product
Today’s GTM companies don’t rely on amazing new technology or amazing new products to attract attention. The majority of their company’s features and products have already been invented. A GTM company focuses on attracting a lot of capital quickly, and just as quickly attracting a surging stream of users.
New investment dollars are pushing GTM companies, sometimes too far and too fast. When GTM companies turn into successful businesses, they contribute significantly to our economy. GTM companies have a constant need to hire to attract and service customers.
The profitability path
The path to profitability must be reasonable in a GTM company. The old WeWork could never be profitable (for many reasons, including offering a ludicrous 100% commission to any broker who places clients with their service). The new WeWork, controlled by Softbank, now has a reasonable path to profitability. The company did not invent the concept of office real estate, but by reinventing the way space is promoted, branded, leased and utilized, it can attract a large user base and reach profitability. And they hired 12,000 people in the process.
Incidentally, the cost of change from the old WeWork to the new WeWork will be borne completely by current investors. The founder escapes with $1.7B, a large prize for creating a never-profitable business.
From company to economy
Any country that achieves a Go-To-Market based economy has a big advantage and a long future. The United States is the one country that has consistently achieved at producing GTM companies. CVS and Target are two quick examples that come to mind. The GTM economy started sometime in the ‘80s when investment dollars in venture capital exploded and new customer acquisition became the crown jewel. The US has sustained a GTM economy and looks to continue doing that for some time.
Before the ’80s, large corporations had most of the control over advertising and marketing strategies. These large corporations were best suited to launch new products to massive customer bases with only a few true competitors. The only way for startups to effectively challenge these incumbents was to invent radically new technology and radically new products and then win almost entirely on that basis.
Since then, two major changes have happened: technological breakthroughs have become increasingly expensive and powerful marketing channels have become cost effective and accessible to all new startup companies.
One example of increasing technology costs can be seen in biotech. Bill Bryson in his new book The Body talks about antibiotic research costs, quoting Michael Kinch, Director of the Yale Center for Molecular Discovery. “It’s just too expensive for them,” Kinch says. “In the 1950s, for the equivalent of a billion dollars in today’s money, you could develop about ninety drugs. Today, for the same money, you can develop on average just one-third of a drug.”
As the difficulty of inventing new technology rises, companies are increasingly finding their niche by innovating on how to reach new customers. The benefit of the GTM economy is that this strategy employs many people. Companies need massive sales forces to gain traction and hit the lofty growth targets demanded by investors.
Value traps and value investors
GTM is one explanation for the puzzling lack of returns found in value investing. Value investors have a long, profitable history of buying established businesses with attractive valuations, and waiting patiently for the market to realize the true worth of those businesses. The last 10 years have been especially brutal for value investors as the returns have been considerably below expectations. It’s possible that the intense focus on growth by all sectors and companies has created an environment that is too competitive. Established businesses cannot count as much on their past sales to continue into the future with much reliability. The incumbents are facing increased competition at nearly every revenue source.
While value investors can get caught in “value traps” for some time, companies that are constantly focused on new user acquisition seem to be consistently winning the battle. Value investing follows an intelligent conservative set of investment standards, but it’s possible that the competitive business environment is making those conservative standards nearly obsolete. Analysts have rightly pointed out that value investing has lagged for decades now.
Survival of the fittest
GTM companies employ a lot of people and spend a lot of money to reach their goals. GTM companies also offer significant employee incentives like stock options with the potential for future IPOs. The lifecycle of GTM companies is short enough that an individual can take on the risk of accepting employment many times during their career. Successful GTM companies almost without exception rise to the top of markets based on their uncapped upside growth targets. They are on a rapid trajectory. They either fail or become dominant and their failures are a fraction of the size of the dominant survivors.
GTM and the future
The emergence of so many GTM companies in the US bodes well for our economy. GTMs contribute to full employment for some time, growing companies in which to invest, and a growing economy overall. There is plenty of venture capital available to continue to fund GTM companies. GTMs are one reason we are optimistic about investment returns at this stage in the business cycle.