The writers and venture capitalists are calling this a new ‘bubble’ but really we are in a ‘Black Swan’ internet situation.
Taleb defines a ‘Black Swan’ as an event that is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight. The ‘Black Swan’ today is ‘open’. I never liked it and I don’t trust it. It’s bad for sales. Sales and Scale are being mixed up because of the ‘Social Graph’. Soon we will all be pulling the Facebook Social graph and it will disappoint. The ‘Social Graph’ will get polluted like our oceans.
Fred Wilson writes that there is a ‘War for Talent‘ in Silicon Valley. I would argue that the war for talent in Silicon Valley is the ‘Black Swan’. If all the good coders can get bought for 4 screens and a desk in a loud ‘open’ room’, I think you can stand aside as we are on the verge of some woopass. As Richard Dreyfuss says (Lindzon circa 2006) in Jaws…
Take a step back before you leave your corporate job and think about how lucky you are to be the last one standing. Fart around a bit. Take a walk. You might have won. You likely are not prepared for the war and carnage that is going to take place in the aftermath of the start-up boom. Than (then, whatever), read this great post from Steve Blank that outlines the ‘New Rules for the Internet Bubble‘. They are spot on and you better be prepared to honor them or bring the skills needed to your startup or you will be working for peanuts and your stock will be tissue paper:
Breathtaking Scale
The bubble is being driven by market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. And those customers may be using their devices/apps continuously. The revenue, profits and speed of scale of the winning companies can be breathtaking.
The New Exits
Rules for building a company in 2011 are different than they were in 2008 or 1998. Startup exits in the next three years will include IPO’s as well as acquisitions. And unlike the last bubble, this bubble’s first wave of IPO’s will be companies showing “real” revenue, profits and customers in massive numbers. (Think Facebook, Zynga, Twitter, LinkedIn, Groupon, etc.) But like all bubbles, these initial IPO’s will attract companies with less stellar financials, the quality IPO pipeline will diminish rapidly, and the bubble will pop. At the same time, acquisition opportunities will expand as large existing companies, unable to keep up with the pace of innovation in these emerging Internet markets, will “innovate” by buying startups. Finally, new forms of liquidity are emerging such as private-market stock exchanges for buying and selling illiquid assets (i.e. SecondMarket, SharesPost, etc.)Tools in the New Bubble
Today’s startups have all the tools needed for a short development cycle and rapid customer adoption – Agile and Customer Development plus Business Model Design.
The Four Steps to the Epiphany, Business Model Generation and the Lean Startup movement have become the playbook for startups. The payoff: in this bubble, a startup can actively “engineer for an acquisition.” Here’s how:Order of Battle
Each market has a finite number of acquirers, and a finite number of deal makers, each looking to fill specific product/market holes. So determining who specifically to target and talk to is not an incalculable problem. For a specific startup this list is probably a few hundred names.Wide Adoption
Startups that win in the bubble will be those that get wide adoption (using freemium, viral growth, low costs, etc) and massive distribution (i.e. Facebook, Android/Apple App store.) They will focus on getting massive user bases first, and let the revenue follow later.Visibility
During the the Lean Startup era, the advice was clear; focus on building the company and avoid hype. Now that advice has changed. Like every bubble this is a game of musical chairs. While you still need irrational focus on customers for your product, you and your company now need to be everywhere and look larger than life. Show and talk at conferences, be on lots of blogs, use social networks and build a brand. In the new bubble PR may be your new best friend, so invest in it.Lessons Learned
We’re in a new wave of startup investing – it’s the beginning of another bubble
Rules for liquidity for startups and investors are different in bubbles
Pay attenton to what those rules are and how to play by them
Unlike the last bubble this one is not about selling “vision” or concepts.
You have to deliver (emphasis mine). That requires building a company using Agile and Customer Development
Startups that master speed, tempo and Pivot cycle time will win
Not so sure this time it will be revenue versus sales, as it ws during the dot.bomb era. It will likely have something to do with customer reach ( the Groupon $25 billion market cap seems to be the first in its class to do that, though their revenues and earnings seem real enough). The also-rans and add-ons will not be so lucky. I would imagine this version of the bubble will be a cross between the 1994 biotech collapse and the 2000 dot.bomb bubble. Remember, if you go to luncheon presentations in which the CEO of the start-up is a former institutional broker, eat your rubber chicken…and run like hell for the exit.
Actually, it was “Market Share”, regardless of revenue or sales, that was the golden criteria back in the good-old-days of the dot.bomb
You are indeed correct. I wrote that response rather quickly and didn’t fully check it. The other metric used was price/sales, completely ignoring the key metric of earnings. In one project I am still working on, the concept of reach is both a combination of market share and the often esoteric measurement of the viral component that mobile and social media provide. When this little project fires up at the end of this month, it will have to compete with about four similar mobile services (which I learned about in this blog and in TechCrunch), so, it too, may indeed be one of the many add-ons in the end. It is and should be for a time an interesting experiment . I just hope the experiment can turn a small profit and allow us to expand in some other areas.
Having read Taleb’s “The Black Swan” from cover to cover as well as having been involved in the 1998 surge and watched and anticipated, with grave concern and bemusement, the run up to 2008 bubble burst, your assessment Howard, in labeling the current Start-up froth and frenzy phase of Internet development as a potential “Black Swan” event seems to me to define exactly what we are seeing but ignoring once again.
A few will once again undoubtedly walk away with gazillions at the expense and great dismay of the many who will have poured bundles of cash into so many brilliant variations on themes that will most likely end up as lame ducks while desperately “hoping” for a great payoff that will recoup previous losses from previous bubbles.
From a post by Om Malik on GIGAOM, the following seems most apt: “Richard Tedlow, a professor at Harvard, in his book, Denial: Why Business Leaders Fail to Look Facts in the Face and What To Do About It once wrote: ~Denial is the unconscious calculus that if an unpleasant reality were true, it would be too terrible, so therefore cannot be true…~ ”
Caution: Hope is never a strategy.
love that woody allen quote, hilarious. it’s interesting that these times are reminiscent of the 90s, but that the internet is nothing new… it’s insanely competitive out there and it’s happening in the backdrop of a recession. i remember reading this great line by David Merkel on Abnormal Returns a while back and i think about it often today:
“Play to win, yes, but even more, play to survive, so that you can play longer.” – http://abnormalreturns.com/top-clicks-this-week-on-abnormal-returns-38/
Indeed buddy
The startup boom will only turn to carnage if the new companies can’t deliver what society needs. We’ll see a few sparks of life and disruption cycles till we get the new models right. It takes pain for businesses (the mitochondria of society) to leave local profit optimals, and move towards a disciplined value growth curve. Rereading Steve’s post, he’s got something brewing that looks like a rival to
YC/TS incubators but charges founders tuition :).
Howard, this bubble was confirmed to me when I noticed three investment bankers quit to launch their internet start-up.
That’s not a bubble. That’s LESS competition for existing startups :)
It’s extraordinary to me that no mention of the macro black swans are mentioned here. The dollar dissolving. Silver going through the roof. Increasing civil conflict.
These are more authentic black swans rather than an attempt to describe tech as a liquid and dynamic business that is in constant iteration. If anything the more expected that change is the less likely the term Black Swan can apply. Philosophically to paraphrase Le Monde after 911 “We are all Black Swan now”
I wrote about the dollar a few weeks ago. Scroll down
Time will tell but it’s a matter of time before the social sites fall by the wayside
i doubt that. They will splinter
Part of what we’re seeing, I think, is the conflation of “lifestyle startups” with the VC funding model, in hopes of turning into a multi-million dollar exit. For example, JDeal.com — basically, Groupon for things Jewish — would be a great lifestyle biz, where the founding team is out there selling it to advertisers, acting as a profit center instead of a cost. (I have no relationship whatsoever with them, except that I once told my brother about an offer on their site.)
One could pretty easily see it providing a solid, high (even by NYC’s standards) income for its founders — and do so while avoiding every single one of the potential pitfalls outlined by the except you cite favorably above. The market can support a ton of these, too. One in NYC and one in Chicago. One geared toward Jews and another toward sports fans. Etc.
But once you cross over into the land of big exits, it’s a different beast — and one the market cannot support too many of.