The best time for start-ups — 5 Reasons

It’s been 15 years since the dotcom bubble started inflating and it looks like we’re about to enter a new boom cycle. In this entry, I’ll explain why I believe that’s the case.

Distribution Channels: More, more, more

Since the inception of the web, computers have been the best way to access it. Efforts around making the web accessible via mobile phones (WAP, HDML, etc…) or TV (web TV profiles, Microsoft WebTV) largely fell flat due to a combination of lack of bandwidth, lack of processing power on the devices, and costs of production for such device making them unaffordable to the masses.

With the introduction of the iPhone, Apple changed all that (and the subsequent entry of Google, with its Android operating system further validated the space.) For the first time, a new distribution channel for web-based application has become possible on phones.

With the iPad, Apple has struck again, breathing new life in a category (tablet PCs) that was considered dead by most people. And over the next few months, we will see a battle between Apple, Google, Microsoft, LG, and others  as to who will control access to the internet in your living room.

A few years ago, I wrote about what may happen when every signal we receive moved to an IP stack. Those predictions took longer than I expected to become reality but we are now moving to a world where everything is finally going through the Internet. This months, millions of people watched at least one world cup game over the net. As the largest event in the world, this is something that is being experienced by people outside of tech circles. Similarly, the explosion of smart-phones has moved the needle from access to the internet being a geeky thing to such thing becoming the norm.

While I do worry about the app stores (from any of the providers) potentially becoming chock-hold points of access to the internet, I do believe that the explosion of apps that are sitting on the device but getting information from the internet (something I’ve been waiting for a decade to happen) represents a substantial paradigm shift that will reinvigorate internet innovation.

Furthermore, the rise of the cloud and the availability of internet bandwidth at any time and from any place is making the desktop metaphors the computing industry has been used to since the mid-eighties irrelevant and, to some extent, moving the computing world back to where it was prior to the introduction of the PC, with applications running largely on remote servers. This phenomenon has two important impacts: first, it makes it possible for people to rent out applications and infrastructure instead of purchasing them outright, thus lowering costs in the short terms; second, it solidifies control of such applications in the hands of a few large players, making it difficult for new entrants to gain scales in those markets but creating potential acquirers for interesting features.

Tools: HTML5 and CSS3

For almost a decade, web standards were in the doldrums. There were a few pockets of innovation here and there but, for the most part, the internet industry spent the first decade of the 21st century digesting what had been created in the previous decade.

In 2009, HTML and CSS were finally updated, providing a new set of standards that keep up with modern applications. This may seem like an insignificant detail but the lack of new standard impeded the growth of the internet as it led to a browser market that was largely stagnant (with the dominant player of the time, Microsoft, introducing very little innovation in that space) and made it difficult to implement bleeding edge technologies because the browsers couldn’t follow.

The innovation in HTML5 in particular is astounding as HTML moves from being a largely representational language, great for static documents but not so good for interactive applications, and is now becoming a full-fledged programming language, allowing to simplify certain tasks that were, to date, only achievable through the implementation of substantial hacks.

Talent: Maturity in our industry

The internet industry is now over 15 years old. The net result of that is that we, as an industry, have grown substantial amounts of talent that has become increasingly specialized in particular areas. During the last boom, websites were designed with HTML and CSS (and, for the most extreme case, Javascript) but little attention was paid to things like user interaction, machine interaction, APIs, or channel targeting.

With the increased opportunities to target across different platforms and have web applications where the website is only a small part of the overall picture, the level of complexity has arisen and so has the level of sophistication of the experts working on such applications.

The great news is that experts from other fields can now join in and bring some of their expertise, hence enlarging our industry and its overall footprint on the economy.

The other great news is that many people in our industry now have well over a decade of experience, allowing them to have learned from mistakes made in the past and to establish some level of mentorship that didn’t exist in the early days of the industry.

This results in talent being fostered at a more rapid pace and innovation being increased as people can now learn a lot of the basics by following experts (either through blogs, twitter, or other online means or offline approaches like conferences, books, and magazines). Such talent can then turn around, having come up to speed at an accelerated rate, and innovate quickly, sharing their innovation with others at a speed that was not always possible before.

The economy: It sucks and that’s a good thing

From an economic standpoint, the times are also right for a number of reasons.

For starters, the state of the overall economy seems to mirror (or be even worse) than what we were experiencing in the early 1990s.

Let me roll the tape back a little for readers who didn’t experience this: Coming out of college in the early 1990s, the job market was horrible. Even prestigious programs had difficulties placing their students into jobs and the jobs that were offered were low-paying. This created a space for start-ups as there was little to loose financially by going into the internet space: in the worst case scenario, a new graduate may have forgone a chance at getting a job that paid in the low 5 figures for the opportunity to do something interesting and potentially rewarding.

I’d venture that the current unemployment rate is presenting this window again and many people are looking at the risk/reward of a startup in a more favorable light as a result.  I am not saying that all those new startups will succeed (in fact, I suspect that they will fit the normal economic model of a 8 or 9 out of 10 failing) but I am convinced that all this new energy will generate further innovation that can be mined by all.

This explosion of start-up also comes at a good time as the cost of launching a new company has dropped drastically. It used to be that one had to buy servers, memory, bandwidth, etc.. from different providers, creating substantial upfront costs. Today, one can rent that kind of infrastructure in a model that is purely based on the amount of traffic one receives. This means that bad ideas don’t cost quite as much. The net result of this is that, by the time an entrepreneur pitches investors, he or she can have real numbers to highlight the successful growth of his or her company.

Investments

The challenge for investors is that it also means that companies need a lot less in terms of investment (good for founders, not so good for investors as they don’t get as large an equity stake in companies; this also means that exit strategies leave more money to founders). On the flip side, the advantage for investors is that the ideas presented to them can be of higher quality than they were in the past and the startups that do get funding have a reasonable chance at good exits.

Speaking of exits, the investment exits scenario have changed. In the 1990s, the preferred way to return money to investors was to take your company public. The introduction of the Sarbanes-Oxley act in 2002 has made it almost impossible to successfully take a company to the public markets in the United States and many have called for its repeal.

This means that the primary way for an internet company to successfully exit has become through a merger or acquisition. Fortunately, the larger players in the market have been very acquisitive. Today, it is pretty routine to hear that companies have been acquired by Google, Apple, Facebook, Microsoft, Yahoo, or IAC. Players outside the industry have also been taking a little more of an interest, which results in further opportunities for acquisition (for example, companies like Disney and CBS often pick up startups for rich valuation)

Conclusion

All and all, the picture for internet startup creation is great. The last decade presented opportunities but I will go on the record now to say the teens will be a greater era of successful internet companies creation than the beginning of the last decade was.

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