Normally, when I read something on the Internet, I have one of three reactions:
- “This guy is so wrong he’s not worth acknowledging.”
- “This guy is stating the obvious so he’s not worth acknowledging.”
- “This guy is so right there’s nothing to add.”
Sometimes, very rarely, there’s a fourth reaction: “This guy has a really good point, but something’s not quite right.” So, the Reaction #4 award of the day goes to this post on Entrepreneur2Be, called “Why There Will Never Be A Startup (Bubble) Bust“. I realized I was entering #4 territory when I started writing a really long, well-formatted comment that I had to use PageDown several times to read. If I have so much to say, I might as well put it here so others can read it to. So here goes (I think I’ll add more #4 posts in the future):
He says that people think there’s a startup bubble because so many crazy little companies are getting funded. There is no bubble because:
- There are billions of people still waiting to get on the Internet
- People can switch products quickly online
- The Internet makes real life products and services (package tracking, listening to music, etc) better
- The audience wasn’t there in the 2K bubble burst
These factors mean that Internet growth will eventually slow as they catch up to the real world, but since the cost of starting a company is going down, more and more startups will continue to be created.
I agree with the main point (no bubble bursting) but not so much with your arguments. (well, I do like #3 and #4). If I had to give my arguments for it, I would say:
- The internet lets people with common interests that would never have found each other find each other and create new markets that wouldn’t otherwise exist (like the zillion dollar internet knitting communities that keep getting mentioned, or Lisp programmers, etc). This lowers the cost to supply a new product, which will create more value (in a microeconomic sense).
- Innovation in the physical world has been going on for thousands of years, and online for about 15. There’s lots of room for trial and error and improvement. I’m sure there are big ideas (like the equivalent of car financing in the real world) that will change the way people work on the internet.
- There hasn’t been a generation of programmers/entrepreneurs yet that had the WWW around for their whole life. I think their perspective will create a lot of new ideas because they will lack older (possibly outdated) assumptions
- The economics of starting a startup in college (something Paul Graham and others are promoting) are so favorable now that participation will continue to increase. A lot of really awful startups will get done by college students, and a few outstanding ones will also happen. A la “The Black Swan”, if 10,000 new startups are formed a year, and 100 of them become successful businesses or acquisitions, and 1 of them IPOs, that’s a lot more value created than the 99,899 that go nowhere lose (especially if they just go back to school or try again next year).
- Some big problems still exist on the internet (trust, privacy, identity segmentation, etc) that will open huge new opportunities when they are solved.
- As long as the only bubbly characteristic is “lots of little angel and VC investments”, then generally the only people that can get hurt are rich people. I’m sure it still stings, but the difference between and angel investor blowing $500K on some college students or a ski condo is a wash for the economy as a whole.
- In the 90s, a successful company was one that IPO’ed for 9 figures and sucked cash out of investors from around the world. The much more common successful exit now is acquisition by a big company. That’s not a big deal because
- most acquisition prices are small compared to the acquirer’s resources (even a $1B purchase by Google won’t break the bank) so there’s little chance of completely wiping our investor value
- acquisitions are generally inline with the same company fundamentals that cause someone to buy stock in the parent company, whereas Bubble IPOs were based on a bunch of enthusiastic question marks
- Acquisition pairs a new innovation with a successful business model. IPO pairs a new innovation with a one-time financial windfall that doesn’t mean jack for the ongoing success of the business
Overall, it doesn’t matter what reasons anyone offers for why we are or aren’t in a startup bubble because history will decide that for us. But I think that E2B and I are onto something.