My friend Ben posed an interesting question - what will be the Pet's.com investments of this era? He made the point that it isn't obvious to everyone at the time that these companies are ignoring economic realities - many people were convinced to invest in the company and many others decided to work for it before it was exposed as hopeless.
Some people already had an answer to that: Groupon
. It's possible that Groupon will be representative of the issues with start ups in this era, but Groupon's rise and fall didn't occur at the tail end of a bubble. Consumer centric tech start ups have gotten less popular, but there are still many other things to consider.
- Today's era "bubble" investing is occurring largely away from the public markets. For better or worse, normal investors aren't getting involved in tech start ups until much later in the game. This means there are less high profile cases where individuals lose money, which is why people were so surprised by Facebook's public market performance.
- VCs are relatively secretive about their return on individual investments, especially failed investments. Many failed companies turn in acqui-hires for undisclosed amounts. When these companies shut down or change directions without an exit their profiles are either scrubbed of investors or are never completed in the first place to avoid damaging the reputation of their investors (Which is silly since all VCs invest in companies that do badly). This means there are less high profile failures.
- The old economy still has lots of inefficiencies, so there is still lots of room for smart programmers to team up up with people who know industries to fix inefficiencies. This trend can be summarize by anything from smart enterprise where new start ups are going to replace old inefficient software to software eating the world. Either way, it means that there will be many more success stories for every failure. And with all of the successful companies it seems silly to focus on the failures. No one is making fun of Bebo these days, unless it is to point out the elitism and hypocrisy of the founders' new clubhouse.
But even given that, there are obviously a lot of companies with overly optimistic business models and it might be easy to look back and point out some obvious misconceptions. Here are my candidates:
1. Generally ignoring that some users are more valuable than other users is insane. Looking to 10th graders
for investment advice should seem a lot sillier in 10 years later. Some users are much less likely to turn into cashflow down the road and companies that are engaging just those users shouldn't be valued at a premium.
2. It's crazy to assume that user networks are going to remain stable over a 10 to 20 year timeframe. Facebook's valuation is dependent on it not being Myspace. They bought themselves some time by buying Instagram, but they are going to have to do a lot of really useful things to justify their $62 billion dollar valuation. (The valuation makes more sense if it is seen as an option). In ten or twenty years, people might decide that the right way to value a social network is more similar to analyzing an active oil well, which we all know will predictably run out of oil (in the case of social networks, eyeballs and engagement) while there are numerous ways to maximize its yield in the meantime.
3. Counting on merely acquiring active users and then being acquired in turn. It worked for Tumblr, but eventually the companies acquiring these users might start to figure out that it isn't worth it. It's important to remember that during the last bubble there were many companies that were basically worthless that ended up getting acquired before the bust - the acquisition of useless companies even made a few people into billionaires
. These companies are successes for those who were able to build and sell them, but in 10 years the idea that a blogging platform was worth a billion dollars should look ridiculous.
4. The idea that users acquired for one reason can be transitioned to other purposes. Digg found out this doesn't work the hard way
when it tried to turn its news aggregator into a social network. Yahoo might soon find this out with Tumblr. Just because you have users on your platform interacting with each other doesn't mean that they will want to interact in ways that could be profitable for the platform owner.
5. That government regulation can be ignored and a business can be built before addressing the fact that the business is illegal. Hopefully these companies still succeed, but companies like Uber and Airbnb and newer companies like Sidecar were built by ignoring current regulations and hoping that by the time they were really challenged they'd have enough public good will to change laws in their favor. In the future, incumbents might be quicker to challenge fledging start ups in their sector that are technically illegal.
6. Dependable low cost part time labor isn't ubiquitous in a healthy economy. Many companies, including the Webvan type companies of this era, are dependent on low cost part time laborers to make their system work. Without these available workers, the companies would be unable to source workers to deliver food/wash a car/clean a house/drive a car at a cost that makes sense for both the customer and the worker when the company itself is taking a cut of the earnings and paying for insurance. Whether this turns out to be a misconception has a lot to do with the future economic growth as well as immigration and health insurance laws.
7. Bitcoin. This topic deserves a separate post, but generally companies that invest in bitcoin start ups when the start ups' success is generally dependent on the price of bitcoins going up just seems crazy - especially compared to the strategy of just buying bitcoins.
8. Sharing less durable goods (most products outside of housing) drastically increases the wear and tear because a significant minority of participants will treat the shared objects they are renting like they don't own them - because they don't. This is more likely to emerge as a problem after more sharing based companies attain scale, because as of now many participants in the sharing economy feel more affinity for the people they are sharing with/from because they are all early adopters.
With the exception of number 1, it would be good if most of these ideas don't turn out to the misconceptions of this era. Number 6 seems the least likely to be a misconception - if anything the gig economy
seems likely to be a growing trend enabled by a growing number of market places for short term work.
As Ben pointed out in his post, the idea that companies like Webvan and its ilk were extremely valuable in 1999 wasn't silly to a large group of investors. And some potential misconceptions would have been absolutely wrong in the past decade - Youtube, which was losing money on each user, is now quite profitable for Google. Facebook, whether or not its current valuation is justified, is bringing in enough significant revenue from its user base that it makes my 2006 discussion with an early investor on how he could convince Mark to just sell to Yahoo for $1 billion because $300 million is a lot of money seem very ridiculous in hindsight.
And there is still a lot of innovation in the personal technology space that is just waiting for a company to come along and execute efficiently. Wearable computing means forgetting people's names will be easier to avoid in the future. And the time period when you don't need a wallet, just a phone, and you'll be able walk in and out of a restaurant without dealing with a bill the same way this can be done for cabs today shouldn't be more than 5 or 10 years away. Progress isn't going to stop, but some of our current ideas about what that progress will be are likely to be very wrong right now.
What other ideas about start ups of this era will be seen as crazy 10 years from now?