Mini-Bubble??
A couple of weeks ago, I heard Julie Hanna Farris of Scalix contrast the current environment in Silicon Valley with that of the Bubble era:
It’s been interesting to reflect on the past nine years. Scalix is my fifth startup. The first startup was in ’95 at the beginning of the bubble, and so I watched what happened as we went up the bubble. The last startup was a company that had an $850 million dollar exit after one year. I watched the discipline of the investment banking community completely go out the window from the first startup (it was the “four to five quarters” discipline) to my last company. They would approach us and sit down and talk with us and we’d say, “Well, we’re working on our first big deal and we think we’re going to have revenue soon,” and they’d say, “Well, you don’t really need that – why don’t we talk about taking you out?” It was a bizarre experience.
Scalix also is two years old – we started during a desert, and I started the company as an entrepreneur-in-residence at a venture firm. I’ve often wondered if that hadn’t been our start, if we would have been able to get off the ground because it was quite an adverse climate. I think the return to discipline is valuable – I think what disciplined a company after the crash was fear. And the combination of discipline and fear created a really hostile climate for entrepreneurs. The bar became very high – became, in some ways, impossibly high. Advising the venture firm that I was involved with on deals as they were coming in the door, I was a lot of great stuff, a lot of great entrepreneurs, and it was kind of sad to see that they didn’t really have a chance to get going because of the fear and because a lot of the unanswered questions (because they were so early stage)…there weren’t answers to the questions that were on the table.
We’ve seen a balance come back, but I’m concerned that we’re actually in a mini-bubble now, again. It seems we have a difficult time being balanced and sanguine and getting real about what it takes to build a long-term sustaining company. I think that part of that is coming off the high of the party that felt really good and intellectually knowing, “Well, gee, that was a passing thing,” and another part, an irrational part, saying, “Well, maybe we can do that again”. I see some of that going on right now.
The past month has seen a lot of action. Hell, the last week has seen a lot of action. Yahoo acquired Oddpost; Microsoft acquired Lookout; Google acquired Picasa; Symantec snapped up Brightmail and TurnTide in quick succession. Reaching back a little further, Friendster got VC money, and NewsGator got VC money. Looking forward, Novell appears to be cash heavy and looking for acquisitions.
It hasn’t all been funding and acquisitions. There is much jockeying for strategic alignment and position, and trends of note in the news as well. Flickr (a hometown favourite) and Feedburner decided to get together; MovableType got themselves a new CEO and acquired its French partner; both Microsoft and Sun approved internal employee blogs; bloggers have been invited to the Democratic National Convention; and Technorati has just passed the 3 million blog mark. Meanwhile, Apple has announced a new iPod to follow up on its Airport Express. Things are hopping in the circle of Silicon Valley life.
What’s going on? Is this the start of something real or a bunch of geek intellectual wanking? Is Julie right? Is this activity a result of a lack of discipline, a land rush? Or the Next Big Thing? While, it’s unclear where all of this will end up, I find it interesting to note all of these technologies are enablers for the individual – individuals create the content, individuals control the content, and individuals use technology to choose which content matters to them. Not a distributor or broadcaster in site. Provided the lawmakers don’t get in the way with silly legislation, this has the makings of a truly liberating wave of technology for consumers, a new era of interpersonal connections.
The trick, of course, will be figuring out if anyone can make a buck off it!
The question to be asked is if it’s possible to fuel startups without a speculative “bubble.” There are so many competing and incompatible ideas selling to the same market space; only some of them can be successful.
In order for your idea to win, you have to sell it to someone. This often involves some degree lying. Lying is in the form of either telling a customer something you know is not true (worst), or withholding information from a customer you think may break a deal (better but still a lie of sorts). With competition so fierce it doesn’t take much for many startups to lie to both their customers and investors. It sucks but that’s how it works.
Your investors trust you to some degree or they wouldn’t have invested. Your customers trust you or they wouldn’t have bought someting. So when they find the’ve been duped, there’s some sort of write-off and a burst.
My friend told me a story of his chip design company buying a startup in 1999. They soon found out what they bought was a scam and they wrote off $100 million and layed off almost everyone in the startup. They did their due dilligence (it’s a good company with good management all told) but still they were fleeced.
Though the bubble of the 90’s crashed, many companies survived and are profitable. Most actually sell things that have value for their customers. What you should ask is if these new startups are selling something that produces value for its customers. If you think they do, a bubble may not be a bad thing at all. If they don’t, slowly back away.
Yes, there will always be a need for speculation – no one can know the future – hence, a certain amount of guesswork will always be required. You take the sweet with the sour, the risk with the rewards. VCs as a rule always vet the management team appropriately to ensure that even if things go pear-shaped, the team they select has the skills to reshape the company and make their way to a liquidity event.
However, after the Internet Bubble, I would have thought there would be a lot more scrutiny of the ideas and business models behind these businesses. To my eyes, a lot of these RSS/blogging, social networking, and web-based email plays look a lot like the same content plays we saw a number of years ago. In some cases the déjà vu is overwhelming – just look at the story of webshots: they sold it in 1999 to Excite@Home for $82.5 million, bought the assets back later for $2.4 million, rebuilt the business, and just sold themselves to CNET for $70 million!
Is CNET detecting something different in the current environment that will allow it to avoid the fate of Excite@Home? That is the only possible explanation for this move, and the current Land Grab. That, or we haven’t learned our lessons as well as we claim.
Then again, we’re not privy to the plans of these companies – maybe they really have learned. Some of these companies have obvious value – the spam and content filtering space is certainly legitimate: regulatory drivers and liability risks are driving executives to pursue solutions in these spaces. However, the targets of the Symantec acquisitions did raise some eyebrows – consolidation for the purpose of consolidation doesn’t really serve a purpose for the acquirer. I’ll reserve judgment on all of these moves for now.
… Unless it provides synergy, or prevents synergy with a competitor…
Ah, ‘synergy’. As sole identifiable thing I learned during my MBA, this is probably the most expensive word in my vocabulary.
Sometimes I wonder if there needs to be a business re-interpretation of Godwin’s Law. Something along the lines of “The first business to use ‘synergy’ as justification for an acquisition loses their shirt.”
Sure, synergy’s a valid argument, especially in the case of blocking a competitor from gaining an advantage. Just look at Intel’s success when they purchased Trillium. However, I think synergy is overused as justification for acquisitions (and your company’s CEO will back me up on this one). Unless someone can enumerate the exact ways in which an acquisition will augment the value of the core business beyond the cost of the acquisition, “synergy” is just the business equivalent of an engineer hand-waving away the solution.