The F-word

Jackie DiMonte
6 min readOct 11, 2020

There are “only two ways to make money in business: One is to bundle; the other is unbundle. “ — Jim Barksdale, CEO, Netscape

Fragmentation & Consolidation

Most startups unbundle existing products and markets. This is fragmentation. When startups undergo M&A it’s generally to bundle products and services. This is consolidation.

VCs make money on this cycle in a very specific way. We invest in fragmentation and exit into consolidation.

Markets go through cycles of fragmentation and consolidation. Whether a market consolidates or fragments is dependent on environmental changes. These may be consumer preference changes, macroeconomic events, or new technology innovation.

We can infer where an industry is in the fragmentation/consolidation cycle by using a fragmentation index. I’ve defined a fragmentation index that compares how many new companies form and existing companies merge each year:

When the index is positive, the market is fragmenting. When it’s negative, the market is consolidating. The larger the absolute value of the index is, the stronger the fragmentation or consolidation trend is.

Ex 1: SaaS market oscillates

SaaS (software-as-a-service) emerged in the late 90s. At the time, most software was hosted on-premise and customers were slow to transition. They didn’t trust “the cloud.” They thought their data was safer behind the corporate firewall. Also, SaaS companies still had to buy and maintain hardware on behalf of their customers. Starting a company and selling your services wasn’t any easier than before. Even so, the market began to grow and fragment.

The dot-com bust in 2001 drove the market to consolidate. Presumably with fewer sources of capital, companies had little choice but to sell.

The global financial crisis further tightened capital markets not to mention customers’ budgets. 2007–08…



Jackie DiMonte

Early stage venture investor at @chicagoventures. Formerly @hydeparkvp, #IoT at @silverspringnet, and #tech at @Accenture