Why is empire building important?
Because it results in extreme outcomes. Consider the Mongolian Empire:
“In twenty-five years, the Mongol army subjugated more lands and people than the Romans had conquered in four hundred years.
Genghis Khan, together with his sons and grandsons, conquered the most densely populated civilizations of the thirteenth century. Whether measured by the total number of people defeated, the sum of the countries annexed, or by the total area occupied, Genghis Khan conquered more than twice as much as any other man in history.
The hooves of the Mongol warriors’ horses splashed in the waters of every river and lake from the Pacific Ocean to the Mediterranean Sea. At its zenith, the empire covered between 11 and 12 million contiguous square miles, an area about the size of the African continent and considerably larger than North America, including the United States, Canada, Mexico, Central America, and the islands of the Caribbean combined.
It stretched from the snowy tundra of Siberia to the hot plains of India, from the rice paddies of Vietnam to the wheat fields of Hungary, and from Korea to the Balkans. The majority of people today live in countries conquered by the Mongols; on the modern map, Genghis Kahn’s conquests include thirty countries with well over 3 billion people.
The most astonishing aspect of this achievement is that the entire Mongol tribe under him numbered around a million, smaller than the workforce of some modern corporations. From this million, he recruited his army, which was comprised of no more than one hundred thousand warriors—a group that could comfortably fit into the larger sports stadiums of the modern era.”
The world's largest equestrian statue—befitting a horseback warrior—is of Genghis Khan.
This is an excerpt from the book Genghis Khan and the Making of the Modern World by Jack Weatherford. Without getting into questions of right or wrong and whether Khan was good or bad, the point is this: Genghis Khan had the vision and the ability to execute, and the desire to keep on conquering.
Part of this stemmed from having built the military machinery in the first place. Having to keep his soldiers busy, Khan had to find new peoples to conquer. Khan’s people had needs too. Weatherford writes that, “Novelties became necessities, and each caravan of cargo stimulated a craving for more. The more he conquered, the more he had to conquer.”
The world’s most ambitious teams are led by Genghis Khan-like personalities: always ambitious, always seeking growth. And the world’s most successful companies resemble the Mongolian Empire in their vast reach: Apple has an installed base of over 1.6 billion devices globally; Facebook has nearly 2 billion daily active users.
These are extreme outcomes in the modern business world and, as Phil Knight observed, “Business is war without bullets.” The struggle for conquering territory through war is now played out in the business arena. In the place of standing armies, modern companies have sales forces, product managers, software engineers, designers, business development analysts and marketing teams. All of them need struggle, to conquer. The more they conquer, the more they need to conquer.
This is true for the outliers. There are some companies that are quite content in staying small; in not conquering. These might be good investments, but they won’t generate long-term outsized returns.
Companies that become too successful and saturate their market might have no choice: for them, there is nothing left to for which to struggle.
Consider the packaged foods industry: many of the oldest companies in this group were created in the 19th century, on the heels of the industrial revolution. Families needed food that was ready to go, and the market filled the need. You’ve heard their names: Nestle, Unilever, Campbell Soup, etc.
Let’s look at Coca-Cola, which was founded in 1892. Early in its life, it was competing with non-consumption, in the words of Clay Christensen: soft drinks didn’t exist. Growth was exponential. In the five years from 1895-1900, the volume of Coke sold increased nearly five-fold to 371,000 gallons.
Adoption curves follow the shape of a sigmoid or “S”: they start slowly, kick into the exponential phase, and then taper off as growth becomes harder to find. Coca-Cola seems to have had instant product/market fit, because its product exploded as soon as it was invented.
Fast-forward 122 years and Coca-Cola is everywhere. The company has grown to selling 200 brands and has even entered the alcoholic beverage segment. But now it’s in a crowded, saturated field. It’s competing with consumption. There are hundreds, if not thousands, of competing beverage companies, and startups popping up everywhere. Throats to quench, on the other hand, aren’t growing nearly as fast.
As a result, growth has become anemic. In a recent presentation, Coca-Cola said its long-term aspiration is to grow 4-6 percent per year, which would be an improvement over recent years. In the last twelve months, Coca-Cola had about $38 billion in sales, which is just 9 percent more than it had eleven years ago.
If we could visualize the technology adoption curve of Coca-Cola’s soft drinks, this is what it would look like:
Coca-Cola, like Genghis Khan, has the military machinery in place, not to mention the distribution, to keep growing. Its problem is the industry it’s in. No amount of selling and marketing can create more drinkers.
Internet technology, on the other hand, is a lot newer than Coca-Cola. Thirty years ago, the internet itself was just getting off the ground. Few people had PCs. Cloud computing was invented 16 years ago, with the release of AWS’s Simple Storage Service (S3). The iPhone was invented a mere 15 years ago.
Internet companies, as a result, have a lot more room to run. They are riding the coattails of the adoption curve of broadband around the world, and of mobile and cloud computing on top of that, and then, of the shift from on-premises computing to cloud computing. Those are strong tailwinds.
The most impressive aspect of digital technology is its ability to stack technology adoption curves. This is easier in the world of bits than in the world of atoms. Consider the iPhone: the installed base today is around 1 billion users. Its adoption has been quite rapid.
On top of the iPhone—this applies to smartphones in general—new S-curves have appeared: the adoption of music streaming (Spotify), social media (Facebook, Instagram, Twitter, TikTok), podcasts, and ride hailing (Uber and Lyft), to name a few.
It’s fair to say, then, that the world of digital technology allows entrepreneurs more degrees of freedom: when software is eating the world, anything that can be manifested in software will be, and a new S-curve will be born.
The inevitable conclusion is that the internet will usher new Mongolian Empires led by new Genghis Khans. Our job is to find them.
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Why are we so intent on finding new empires?
Because opportunity costs matter. If we’re going to allocate our precious capital to a company, it must be one that can keep growing, reach massive scale, and create value for a very long time.
Compare two different companies: Salesforce and Dropbox. Salesforce was founded in 1999 while Dropbox was founded in 2007. Fourteen years after founding, Salesforce had 43 percent more in sales, was growing much faster, and was worth more:
Salesforce (14 years after founding, in 2013):
$3 billion in revenue growing 35%, $25 bn market cap
Dropbox (14 years after founding, today):
$2.1 billion in revenue growing 12%, $9.6 bn market cap
Salesforce is led by Marc Benioff, an empire builder. His first product was customer relationship management software (CRM), but he has since acquired ExactTarget, Demandware, MuleSoft, Tableau, and most recently, our company Slack.
Marc Benioff
None of these are CRM companies. All of them solve pain points in adjacent areas for Salesforce’s customers. Once Salesforce has acquired customers through the CRM product, it can build and acquire adjacent products and increase lifetime value with no additional cost of customer acquisition. Benioff is stacking S-curves.
The result: Salesforce has continued to grow and is currently valued at $264 billion. In a recent presentation, Salesforce guided to sales growth over the next 5 years of 19 percent compounded.
Dropbox, on the other hand, is not led by an empire builder. They’ve made acquisitions, yes, but those have been small, have added to Dropbox’s core functionality, and haven’t turbocharged the company’s growth. In the most recent year, Dropbox’s sales grew 12 percent.
There is nothing wrong with Dropbox’s approach. The company will continue to chug along, and it may turn out to be a decent investment if the valuation is low enough. But in a concentrated portfolio such as ours, we’d like to own outliers. If a business and a management team don’t seem to be on a path to massive, multi-year growth, we are not interested.
Long-term outcomes in the stock market are dictated by power laws. A few companies, over long periods of time, generate most of the returns (this is also known as the Pareto Principle or the 80/20 rule). Real-world data is significantly more skewed than merely 80/20: an empirical analysis showed that over the last nine decades, all the net wealth in the stock market was generated not by 20 percent of companies, but by 4 percent of them. If a long-term investor had missed out on those companies making up the 4 percent, she would have been vastly worse off.
Thus, one way to frame our hunt for empire builders is: “Will this company endure and keep growing so that many years from now, I can envision it becoming one of the outliers in those 4 percent?”
The proof is in the pudding: if a company is busy hiring executives to help it scale, and consistently demonstrates that it can build or acquire—and preferably, do both—to solve more problems for customers, then that company is likely on its path to becoming the next Salesforce. It’s building an empire.