Web Startups Are A Commodity
Paul Graham has written a very provocative essay on The Future Of Web Startups in which he argues that like computers, and many technological developments before them, web startups themselves are commodifying. Paul says:
So my first prediction about the future of web startups is pretty
straightforward: there will be a lot of them. When starting a
startup was expensive, you had to get the permission of investors
to do it. Now the only threshold you have to get over is whether
you have the courage to.
Even that threshold is getting lower, as people watch others take
the plunge and survive. In the last batch of startups we funded,
we had several founders who said they’d thought of applying before,
but weren’t sure and got jobs instead. It was only after hearing
reports of friends who’d done it that they decided to try it
Starting a startup is hard, but having a 9 to 5 job is hard too,
and in some ways a worse kind of hard. In a startup you have lots
of worries, but you don’t have that feeling that your life is flying
by like you do in a big company. Plus in a startup you could make
orders of magnitude more money.
Paul is right about this. I experienced it first hand yesterday. I am trying to help friends recruit a kick ass Ruby/Java/PHP developer for their company. I asked a person I met via this blog to consider the job yesterday and he responded that he’s doing a startup himself with four friends.
The barriers are so low to starting a web company these days that it seems like everyone is doing it. That turned out badly last time when every investment banker left wall street and became a dot.com entrepreneur. But Paul’s essay makes me think this time may be different. Because its hackers that are leaving their day jobs and starting companies.
And the companies that hackers are starting are building parts of the web. And since we are developing a modular, programmable web, it may be that the way the web evolves is bit by bit, startup by startup.
Is that a sustainable model? Well if the web is a media platform and if the advertising systems that support the web are open and anyone can play in the sandboxes we create (like you can with adsense) then it could be a very sustainable model.
And so what about VCs in this model? Paul says:
If the number of startups increases dramatically, then the people
whose job is to judge startups are going to have to get better at
it. I’m thinking particularly of investors and acquirers. We now
get on the order of 1000 applications a year. What are we going
to do if we get 10,000?
That’s actually an alarming idea. But we’ll figure out some kind
of answer. We’ll have to. It will probably involve writing some
software, but fortunately we can do that.
So it looks like we are going to need to hire our own Ruby/Java/PHP developer sometime soon. I guess that’s the way it is. And I am OK with it.
Here is the a question, though… Would the game be still worth it for VC. I mean I am sure that there are numbers in the equation that would make it work, the question is would the market stabilize around these numbers.The danger, as Paul, points out, with 10,000 applications all looking for 25K is that it becomes a big gambling table where you might not have time to even think about where the chips are being placed. Not sure this model can work.
What’s so bad about 25K applications ?Wouldn’t offer and demand still work ?Business models are destroyed and invented all the time.Aren’t those in charge of taking decisions prepared to face difficult problems and solve them somehow ?Then maybe we’re better off without those who aren’t prepared.It’s all good stuff as far as I am concerned, and it’s not because we’re lacking competition ! I know I can do better than most applicants, it’s only fair VCs should do the same.
Good post Fred.Not sure I feel as good though about it being hackers rushing to do startups this go around vs. financial analysts the last time around. Anecdotally, a fair number of the hacker-driven start-ups I’ve seen as an active angel, are “me too” features for existing web services, and not as modular a programmatic fit as one might hope to the broader web.But I do agree that anecdotally again, there seem to be as many technical folks leaving internet incumbents to try their own thing, as there were financial analyst leaving wall street incumbents the last time around.The dollar numbers in each of these bets is a lot smaller than the last time around, which is a relative blessing.
You’ve gone and used the “C” word here, which is seldom a good thing for most markets. I don’t know where it will end, but there’s been a lot written about how the web is unusually tolerant of experimentation at the moment. That is what drives the “me too” Michael Parekh describes. The question is where we are on that cycle of experimentation because real commoditization says we will eventually tail off the experimentation and let just a very few benefit.It’s a good strategy to cover the particular niche of social web startups, but woe unto the firm that decides this is all it has to worry about. When the real commoditization happens, most of the deals will be worthless. Woe unto the market too, because it currently pushes an unwholesome amount of the overall attention to this arena. I am reminded the contrarianism is often helpful when investing. Failing that, securing a portfolio that covers more niches than just cheap web startups seems prudent.OTOH, I don’t think it signals the death of VC either, as some have suggested.More on my blog:http://smoothspan.wordpress…
Great post Fred. Sorry about the blog spam, but the timing of the post was too good to ignore.We’re a startup building the “open ad systems that anyone can play with” to enable future innovation. We are speaking with firms you’ve coinvested with and were interested in speaking with you about our company and our similar views.Please drop me a line ([email protected]) or let me know how we can connect. Have a great weekend.
Fred, if this trend continues, would it not make sense for VCs to encourage rollups — combinations of similar or complimentary businesses?
This is interesting Jeffrey McManus. And does make sense. A VC may be able to see the startup landscape from a 10,000 ft. view, and be able to grab a few startups, put them together, and thus combining a few different ideas into a better idea. Or taking one company that is missing something, and fleshing it out with another startup. Very interesting… merging of startups.
there’s something better…. mashups.mashups work because startups don’t need to licence code, use the same programming language, or agree on standards other than the readily existing web technology.it’s frictionless. publish the API. use the API. that’s it.no administrative overhead. you don’t want administrative overhead, unless you’re an administrator !what else do you think would be necessary ?
Fred, do you feel like there are a lot more good startups now than during the last bubble? I always thought “This time is different” is the mantra of every overly exuberant market, so I’m interested in your thoughts on the quality of these new web startups. After all, I don’t think geeks/hackers are that much more resistant to the temptation of quick riches or the urge to get on bandwagons than investment bankers.
the difference may be some hackers can actually build something people want, now they have a motivation.
The problem with Graham is we don’t like noodles 🙂
The gist of Graham’s post is more focused on technology – in other words, its become much easier for people to build small parts of the web – so I agree that that part may be commoditizing.But finding an entrepreneur with the skills, wisdom and fire to turn those small parts of the web into significant companies…I don’t see those types falling off the trees.If anything, I think venture capital firms will have to increase their human capital abilities to find the right people to match up with the techies who are building the technologies.
that has been one of the defining characteristics of successful VC firms since the beginning of the VC business.many VC firms have deep rolodexes they rely on to help build their portfolio companiesthe harder part is finding the right people who can work hand in hand with the founders so that the founder DNA can remain part of the business for the long haul.fred
This may be true except that there is a qualifier that always separates the winning new venture from the rest of the pack and that is the team. As a VC it has always been my experience and I believe the experience of nearly all of my peers that the dependency is on the quality of the entrepreneur/senior manager and the rest of the management team to succeed more so than the idea itself. Building a new business is simply hard and requires superior individuals who can navigate the company through the tough times and make the good decisions along the way to win in the end. We hope to follow successful entrepreneurs in our ecosystems through multiply startups in hopes of a repeat performance of past successes and more often than not it works. We have even created a holding pattern in our firms (called Entrepreneurs in Residence) to retain the talent between gigs in anticipation of the next great idea. Unfortunately there are more interesting ideas than there are quality leaders to insure their success. Ron S.
So true ron
I have dibs on the Webstartup futures business…
I think we’ll agree on the large number of startups coming out — the problem is that the web is now full of startups producing really “cool” and “interesting” technology that has lots of features and can do really cool stuff, but is of no REAL VALUE to the masses. I think too few people are focusing on providing scalable, mainstream, easy to use, and most of all valuable products. Instead, we are seeing all these widgets, mashups, etc. that do nothing more than some interesting hack or limited feature set.End story:cool technology does not mean valuable technology
Of course that’s true in general but I could point to dozens of really useful technologies that have come to market in the past six monthsFred
If this is so, they should all be funded immediately. I think the commodification of web apps demands differentiation. You can only differentiate yourself in two ways: make whatever userbase + userdata closed (boo!) or offer technology which provides value to users (allowing the data to roam free).I think Boris is right on that the next round of successful companies will be more technology plays than content plays.
Typical late cycle “new era” thinking – I say that as a Paul Graham fan. Paul thinks he has discovered something new here – but just go back and look at the late 80’s-early 90’s PC era (thousands of PC companies in just the US, most bootstrapped – and this was after a big bust in the mid 80’s that killed the non-IBM clone vendors – does that sound familiar?), and the early internet access era in the mid 90s (7000 ISPs, most bootstrapped again). The number of web startups today is probably of a similar magnitude. This is a point in time snapshot of an industry in transition. The next logical cycle is relentless consolidation. Consolidation is driven not by the dictates of ambitious capitalists, but by the needs of the consumers.
This is a very interesting way to characterize things though I’m not sure this is helpful when winnowing winners from losers. When computers became a commodity you didn’t run huge risks with a wrong pick (unless it was one of those early Packard Bells). “Startups, however, are almost all crappy but luckily face the ruthless axe of user enthusiasm. Only a handful out of a hundred will survive. VCs (present company excluded of course) have, on average, failed to break even with investments. Will this bad record will get even worse?
“Paul Graham… argues that… web startups themselves are commodifying.”No, he says they are hugely increasing in number. In fact, I think if anything that will increase gap between the best and the worst of them. So they are becoming even less of a commodity than previously, which was not at all.
That’s a good pointThat certainly was true of the hundreds of video sharing services and the hundreds of social bookmarking servicesFred
We think of web startup’s as commidities because programming is social network, user-generated or video website is really not that hard. I think it is dangerous to think that anyone can make it in this space; it is just too crowded. I sense a possible downturn.However, where unique innovations will come from are people who have a deep understanding of computer science algorithms. Sure, it still might cost very little in start, but not many can copy the knowledge or idea.
I am not sure deep comp sci knowledge is as important as early leadership which leads to network effects which leads to data leverageFred
I like what he writes about:Starting a startup is hard, but having a 9 to 5 job is hard too, and in some ways a worse kind of hard.The good news is that now it is easier (and less costly) to do your own thing if you are an out of the box thinker!
So is this a market for micro lending more than vc? Sounds like it might be a niche opp. Or maybe I should stick to what I know…which at the moment is making chocolate chip pancakes for my daughter.Happy Sunday
Just imagine if we solve the health care crisis with some solutions that make it even easier for more fence sitters to take the plunge into self-employment. The world gets smaller and smaller every day. What fun.
The thing is – there may well be 10,000 new start-ups created by hackers over the coming years but they won’t be 10,000 GOOD ideas. All it actually means is increased competition on the good businesses with good solid ideas who then have to try and out-compete another 15 doing the same thing with the same amount of funding, basically turning into an arms race again. The remaining bad ones go on to fail and reduce the chance of others investing in similar ones again…
Did some thinking about this…commoditiisng startups means more spend on marketing and PR as the 15 me-too’s Phil Wilkinson mentions try to grab mindshare. Blogged quite a long post here:http://broadstuff.com/archi…
Fred –The other point of this I think is that you still need massive scale to generate significant financial returns for yourself and investors — so while all these startups may be happening; and while it may be much easier for these folks to get payback individually on what they are doing — you still need VC financing to get to the promised land which is massive adoption. This gets back to a post you wrote a while ago about how you can “wait and see” now much more than you used to — the independent great entrepreneur will not need outside help to get some initial recognition, etc….you theoretically should be able to demand much better performance out there than previously to capture your attention — so my guess is your hit rate will go up ultimately. People who invest in raw startups will have it much tougher I think — will the very very best guys really need “seed” capital or will they (like a mutual friend of ours) get to millions of users before raising capital? Your model is better for the latter.
This seems true, but a bit overblown. What I’m seeing is an ecosystem like Cisco’s hardware acquisition ecosystem. “R&D” risk gets diversified by buying up the more interesting ones and putting them in your pipeline. The key similarity is a technology focus. As other commenters have noticed, it’s a technology and it’s not a solution. Paul starts with hackers and hackers generally do cool stuff, not mundane technolgies to cool solutions. Refer here to Nick Carr’s April 2004 “Does IT Matter?” http://www.amazon.com/gp/pr…. Hackers might play the role of developing technologies for aquisition by pure web businesses, but they also might just get crushed because you can’t sell ‘technology’ anymore. just users and defensible markets positions.
I’ve been suggesting to VCs that they make ‘net startups install reporting (GA, MBL, etc.) and get the analytics passwords before they get the pitches. Data mining in advance of powerpoint/keynote is the way to go.
Excellent post and you are dead on! In fact, at our startup we are already launching startups within our startup to retain talent and motivate our employees. Our launch of http://www.SocialRank.com would be the first example and there are more on the way.
Will we see the atomization of VCs? Probably not, but the trend happening on the internet will sure make its mark on “freer” markets for startups… if it can happen for banks (ie. wesabe, mint) it could for the startup market too.But then again, as Ron S said, it’s all about the team and that analysis is much harder to commoditize. We just raised seed money for our startup (praized) and it was on the combination of team/market much more than technology (and as the CTO, I still think it’s the right way to go)!
10,000 applications…not such a bad thing. it means survival of the fittest business model kicks in and those that are truly worth funding will be obvious because they stand out from the rest.business is business. as someone who was flying at the seat of her pants back in ’99 during the dotcom bubble in China (a place where EVERY business idea from every industry is new) — tech, new media, web 2.0 type startups are no different from any other industry in that it’s a business. it has to have a sound business model. it needs to be sustainable over time…and it needs to (eventually or hopefully being the operative words) be able to turn a profit or be profitable for those who found and fund it.
I completely agree that the cost inputs for start-ups have plummeted (server, hosting, bandwidth, coding, etc), but I think the tougher dilema for an entrepreneur currently is to decide whether or not to try to monetize the biz (via freemium, advertising, ecommerce, etc) or pursue the old get big fast paradigm (ie hypergrowth of the user base) and then get acquired for a large and buzzy community (a la last.fm or StumbleUpon).Hard to believe that this is back in favor again, but it seems to be the latest M&A zeitgeist (unfortunately for those of us making real revenue/profits).-Joel Smernoff President & COO, Paltalk