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.