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How Tech Giants Invest: 5 Strategic alternatives
AJ Neeme
December 01, 2024
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How Tech Giants Invest:
Amazon recently made headlines by making its’ largest external investment:
A staggering $8 Billion in AI Start-up Anthropic.
They are not alone:
One natural question might be: Why do these tech companies, with unlimited resources and talent, need to invest in startups ?
A simple answer is: it’s not that simple to “featurise” cutting-edge tech.
Another is: They have different choices. Each with pros and cons.
Why not take advantage ?
If you’re interested in investing in a company (especially Tech), you need to understand how it’s deploying its resources and where.
It can be a telltale sign of its priorities in the Future.
Let’s get to it!
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1. Developing their own Products
What it is: Building the tech in-house.This is the most obvious option.
And the one that’s often most oversimplified. “Why don’t they just build it themselves ?”.Example: Google's Gemini
The upside is limitless but it’s not without downsides:Pros: Full control, potential for unique products, keeps profits in-house
Cons: Expensive, requires specific expertise, can take a long time to market.
2. Investing in Startups
What it is: Funding promising companies. Why develop in-house when you can just invest in (And maybe later acquire it) ? If it fails, hey it’s only a few $billion amiright ?
Example: Microsoft investing in OpenAI (creators of ChatGPT), Amazon investing in Antrhopic.
Pros: Access to cutting-edge tech, potential for huge returns, less risky than in-house development.
Cons: Less control over the startup's direction, potential for competition, investment could fail.
3. Partnerships
What it is: Two companies team up to integrate into an existing product or service. They work together, often sharing resources and expertise, to enhance the user/customer experience. Usually, one company gets distribution and the other gets access to technology.
Example: Apple bringing ChatGPT to the iPhone. This gives iPhone users direct access to a powerful AI chatbot within their familiar interface. OpenAI gets distribution into the iPhone.
Pros: Enhanced user experience, access to a wider audience, potential for increased brand loyalty.
Cons: Potential for conflicts between companies, reliance on the partner's technology, may require significant integration efforts.
4. Licensing
What it is: One company allows another to use its AI tech for a fee. It's like renting the technology.
Example: GPT-3 API (licensing language model to developers)
Pros: Generates revenue from existing tech, expands the reach of the technology, requires minimal effort for the licensor.
Cons: Potential for misuse of the technology, may create future competitors, licensing fees might be less profitable than other approaches.
5. Hybrid Approach
What it is: A mix of all the above!
Example: Amazon investing in AI startups while also developing its own models.
Pros: Diversifies risk, maximizes opportunities, combines strengths of different approaches.
Cons: Can be complex to manage, requires significant resources, potential for internal competition/duplicate work
In conclusion, there’s no ideal strategy.
Big Tech has:
complex needs + fierce competition + regulatory requirements (existing and incoming)
= Likely to need a Hybrid approach going forward.
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This Week in Business
Klarna files for IPO. Nature is healing. IPOs were all the rage a few years ago, reaching an all time high in 2021.
But: Valuations tanking + High interest + worried investors = steep drop off in the past 3 years.
We’re seeing signs of recovery and many exciting companies are rumored to be next in line: Stripe, Revolut, Instacart to name a few.
The Big Green Vault
Meditations by Marcus Aurelius I watched Gladiator 2 last week and Roman Emperor Marcus Aurelius and his “Meditations” are mentioned multiple times throughout.
This is a book I’ve read, at least in part, once per year since 2019.
You can finish it in a few hours but that’s not how you get the most value out of it.
Instead, read a few paragraphs every day and reflect on the ones that resonate.
It’s not a polished book. It’s literally the journal of the most powerful man on earth as he manages his own emotions.
The information contained in this newsletter is for general informational purposes only. It should not be construed as financial or investment advice. Please consult a qualified financial advisor before making any investment decisions.