Probably the biggest news of last week was the major pop in Nvidia stock. After an AI-fueled earnings update that massively surpassed market expectations, its stock price rose by 24% in a single day (May 25), taking its market cap close to $1Tn.
While this was happening, I went back to check how the stock has moved since the company IPO’d in 1999 (see chart below). Interestingly, the stock remained flat for almost a decade starting 2006, before growing ~9x between 2016 and 2018, then dropped again in late 2018 before 10x’ing again in the next 3 years. More recently, Nvidia’s stock has been up 235% since its two-year low in Oct’22, beating out the performance of any other S&P 500 company since then.
Nvidia’s stock performance reflects a phenomenon that I see frequently play out in the world at-large, and especially in complex-dynamic systems like financial markets, technology innovation, growth of young companies etc. I call it the Bunches Principle – it states that both good & bad things tend to happen in bunches.
Some examples of the Bunches Principle at play:
1/ Driven by the pandemic lockdown, Zoom’s daily meeting participants rose from 10Mn on Dec 31, 2019 to 200Mn on Mar 31, 2020 and 300Mn on Apr 21, 2020. That’s 20x growth in 3 months flat! This translated to steep revenue growth as shown below:
2/ SVB was a top 20 bank in the US by assets, a category leader in servicing the venture space, and had crossed $40Bn market cap in Nov’21. Even with a downturn in public markets, it had a ~$17Bn market cap on Feb 28, 2023. From there, it went bust in a week and was put under FDIC receivership on Mar 10 (see collapse timeline below).
3/ I see a frequent pattern in enterprise software/ SaaS startups wherein it can take several years for a product to grow from 0 to $1Mn+ ARR (especially when run bootstrapped or with minimal capital infusion), but then, $1Mn ➡ $100Mn ARR happens in a fraction of that time (see chart below). Case in point is Calendly’s timeline – the company was largely bootstrapped in its initial phase, raising only a small $550k seed round in 2014. Tope Awotona (who is a solo founder, to top it all – I mean this company is riddled with narrative violations at all levels!) ran it super-frugally for the next 7 years, getting the company to ~$100Mn ARR in 2021 and only then raising the 2nd round of…wait for it…$350Mn at a cool $3Bn valuation.
4/ I often say that while we think we are living in the age of innovation, our rate of shipping new groundbreaking technology is perhaps 10% of what the US achieved during World War 2. In 10 war-torn years between 1935-1945, here is a sampling of all the things that were invented in the country – Flu Vaccines, Penicillin, Jet Engines, Blood Plasma Transfusion, Electronic Computers, Radar, Atomic Bomb, Jeep, Superglue, Synthetic Rubber, Radar, Microwave Oven and many other spinoff products. It wouldn’t be an exaggeration to say that the foundation of modern life as we know it, was built in WW2.
What creates the Bunches Principle?
Within any complex-dynamic system, there are many interconnected & intertwined constituent elements, each of which is continuously evolving. As this system tries to achieve its stated goal or purpose, its constituent elements are both interacting with each other (“internalities”) as well as with external forces (“externalities”). On a shorter timeline, changes in these internalities & externalities are hard to observe, and often, can appear random or chaotic.
However, in some systems and at a specific point in time, these internalities and externalities combine in a unique way, sometimes called the perfect storm in everyday language, to create a tipping point. Beyond this point, the system makes explosive progress that can be either positive (towards the goal) or negative (away from the goal).
So, in the above examples:
- Rapid acceleration of Generative AI via the launch of ChatGPT has created a positive tipping point in demand for Nvidia’s chips & data center products.
- The pandemic literally drove the entire knowledge worker population on the planet to adopt video meetings, creating a positive tipping point for a consumerized, self-serve video conferencing product like Zoom (& then eventually for Teams & Meet as well).
- Drastic interest rate increase by the Fed in less than a year (from 0.25-0.50% in Mar’22 to 4.75-5.00% in Feb’23) created a negative tipping point for SVB given it held a significant portion of its assets in long term treasuries that had to be marked-to-market to significantly lower levels, thus severely impacting its asset values & in turn, causing a bank run on it.
- Calendly is a calendar scheduling product with in-built network effects given meetings are multi-sided. While these types of products have a cold-start problem and take a lot of initial heavy-lifting, once adoption reaches critical mass, a positive tipping point gets created for network effects to take over in a massive way. Same dynamic can also be seen in products like Slack.
What are the implications of the Bunches Principle for me?
Whenever we are operating in a complex-dynamic system, eg. the stock market, venture investing, building a new business, working in a pre-PMF startup, or even careers in general, we should be prepared to encounter the Bunches Principle & take decisions accordingly.
Some of these considerations could be:
1/ While holding a stock, as long as your conviction in the initial thesis holds & the business continues to make solid progress in the right direction, it might be worth holding on even if the stock stays flat, as a positive tipping point could be around the corner. See this pic via a tweet from Ian Cassel that I found worth bookmarking.
2/ In my experience, careers move in step functions, in what I call a “sow-reap” format. You sow for a few years, getting yourself to a tipping point where you reap significant rewards in bunches, post which another phase of sowing begins.
Therefore, it’s important to be patient enough during career journeys, in order to be on the right side of the Bunches Principle & catch those tipping points. Founders & venture investors, in particular, will appreciate this point given their careers involve putting in years of upfront work, with the belief that a giant payout awaits in the end.
3/ Watch out for small systemic risks that could be silently accumulating in important aspects of your life, potentially leading to a negative tipping point down the road. This could be neglecting health on a daily basis, various kinds of small debt piling up, not saving enough on a regular basis, over-exposure to one asset class, taking an important relationship for granted & not giving it enough care on a regular basis, having small but frequent burnout episodes at work etc.
4/ As you operate in various macro environments & external contexts, be aware of any negative tipping points that could be lurking within them. Things like the pandemic displacing life as we knew it, remote work destroying commercial real estate, geopolitical conflicts & their ripple effects coming to your door, regime changes leading to social unrest in your communities etc.
While it’s almost impossible to predict these, designing your life in an anti-fragile way with a margin of safety baked in, can go a long way in countering whatever the world throws at you. PS: for more thoughts on this, check out my post: Building an anti-fragile career (& life!).
In the ever-changing landscape of life and business, understanding and embracing the Bunches Principle empowers us to adapt, seize opportunities, and mitigate risks. So, as you venture forth, be aware of the bunches that surround you, for within them lie the seeds of both transformation and caution.
Subscribe to my weekly newsletter…
…where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.