The Great Corporate Extinction

Summary

The video delves into the paradox of a booming number of new businesses in America, alongside a drastic decline in publicly listed companies. It explores how private equity, growing market concentration, and the dominance of massive corporations like Amazon and Meta have reshaped the landscape. Additionally, venture capital's focus on scaling startups for acquisition stifles innovation. Despite these companies' vast wealth and influence, the growing financial industry's share of the economy and lack of proper regulation contributes to the problem, resulting in a market that ultimately hurts both consumers and investors alike.

Takeaways

• 😀 In 2023, America saw a record number of new businesses registered, with 5.12 million new companies, but the public stock market is experiencing a decline in the number of listed companies.
• 😀 Despite a growing economy, the number of public companies has drastically decreased from 8,090 in 1996 to fewer than 4,000 today, even though the market value has increased significantly.
• 😀 The concentration of market capitalization is rising, with just seven companies (Microsoft, Nvidia, Apple, Amazon, Meta, Alphabet, and Tesla) accounting for over 30% of the S&P 500 market cap.
• 😀 Private equity firms have become a dominant force in the economy, with a 1,200% increase in assets managed since 2000, leading to fewer companies going public.
• 😀 Private equity firms often buy companies and prefer them not to go public due to compliance costs and shareholder pressure, making public listings less appealing for many companies.
• 😀 The growing dominance of large asset managers like BlackRock, State Street, and Vanguard has resulted in concentrated ownership, reducing competition in the market.
• 😀 Shareholders, such as those in Delta, Southwest, and American Airlines, often own stakes in multiple competitors, making them less likely to push for aggressive competition between companies.
• 😀 In industries like streaming, monopolistic behaviors, like Netflix’s dominance, have led to higher costs for consumers and fragmented services that require multiple subscriptions.
• 😀 Venture capital, a subset of private equity, has shifted its focus from nurturing innovation to quickly scaling businesses to sell to big tech companies, stifling genuine market competition.
• 😀 The financial industry now consumes over 10% of the U.S. GDP, with rising fees and commissions for private equity, venture capital, and asset management firms, contributing to economic misalignment.

Q & A

What record was set in America in 2023 regarding business creation?

In 2023, America set a record with 5.12 million new companies being registered within a single year.

Why is the number of public companies in America significantly lower today compared to 1996?

The number of public companies is much lower due to factors such as private equity taking market share, corporate consolidation, and a shift away from public listings due to high compliance costs and other financial factors.

How have the top companies in the market changed in terms of concentration?

The market concentration has dramatically increased, with just seven companies—Microsoft, Nvidia, Apple, Amazon, Meta, Alphabet, and Tesla—comprising 34.1% of the market capitalization of the S&P 500. In comparison, the top 10 companies accounted for only 16.2% in 2015.

What is the role of private equity in reducing the number of public companies?

Private equity firms have grown significantly in size, with their capital now accounting for a large share of business financing. Many companies choose to sell to private equity firms rather than going public, as this avoids the regulatory and shareholder pressures of a public listing.

How does the growth of private equity firms impact the public market?

The growth of private equity firms has led to fewer companies going public. Since private equity firms buy businesses without requiring them to meet the compliance standards of public markets, the overall number of publicly traded companies has significantly declined.

What are the negative effects of market concentration in large companies?

Market concentration leads to fewer choices for consumers, less competition, and the potential for reduced innovation. It also negatively impacts workers by limiting job opportunities and wages, and can harm investors by reducing the diversity and resilience of their portfolios.

Why is the role of large asset managers like BlackRock, State Street, and Vanguard considered problematic?

These asset managers own significant shares in almost every major company, leading to a concentration of power. Since they have stakes in competing companies, their interest is in ensuring that companies maximize profits rather than fostering healthy competition, which can harm consumers and limit innovation.

What is the impact of venture capital on new business development?

Venture capital has shifted its focus from nurturing businesses that offer genuine market value to those that are scaled quickly with the intention of being acquired by large tech companies. This process stifles innovation and creates 'kill zones' where startups struggle to compete against powerful existing businesses.

How does the dominance of big tech companies affect new businesses trying to compete in the market?

Big tech companies with massive cash reserves can easily outcompete smaller startups, forcing them out of the market or acquiring them. This limits opportunities for smaller businesses and reduces the incentive for startups to challenge existing giants, further consolidating market power.

How have private equity and venture capital firms impacted the financial industry?

As private equity and venture capital firms have grown, they have increasingly absorbed large portions of financial activity through fees, commissions, and performance incentives. This has resulted in a shift where more of the economy is tied up in financial transactions rather than actual production, with financial services now making up over 10% of the U.S. GDP.