By now you probably know that David Sacks, co-founder of PayPal and founder of both Geni & Yammer made some observations on Facebook that Silicon Valley “as we know it” was coming to an end.
“In order to create a successful new company, you have to find an idea that
(1) has escaped the attention of the major Internet companies, which are better run than ever before;
(2) is capable of being launched and proven out for ~$5M, the typical seed plus series A investment; and
(3) is protectable from the onslaught of those big companies once they figure out what you’re onto.
How many ideas like that are left?”
He didn’t mean to make a media storm out of it – it was a simple comment on his Facebook page. But then Marc Andreessen weighed in – as did I and several others – and the media picked up on his comments. They were stark in that he had just sold his company to Microsoft for a reported $1.2 billion less than 5 years after it was created.
Once he realized that the media was paying attention he narrowed his argument to:
“Internet is not a young growth forest anymore. There are giant redwoods. They have large canopies. Not much grows in the canopy.
Fortunately the forest is expanding, overrunning traditional industries. Entrepreneurs can still build big businesses on the outskirts.”
David encourages entrepreneurs to stay away from the big tech firms (such as Google, Facebook, Microsoft, Apple) because they are hard to compete with.
I have often encouraged entrepreneurs to “think bigger” and take on industries that are not immediately sexy but solve bigger problems. I have noted that we are over-weight as an industry in apps for restaurants, bars & music because many young entrepreneurs launch applications in areas they know. No wonder there’s a growth in video game companies and photo apps.
I believe there needs to be more focus on reinventing eduction, healthcare, energy and even less noble industries such as television, telephony and financial services.
Where I Might Expand the Argument
But it’s kind of hard to say “don’t plant near the big trees” when you just completed a big sale to Microsoft building an app that they should have created and dominated. And that Salesforce.com should have been able to eat for lunch with the millions they’ve spent promoting Chatter.
And Facebook wouldn’t have had to spend $1 billion buying Instagram.
And Twitter wouldn’t exist. Who needed them in a Facebook-dominated world.
And Dropbox & Box.net in a Google, Microsoft, Apple world.
I believe entrepreneurs should, in David’s words, “build big businesses on the outskirts” but I don’t believe that Silicon Valley tech giants will outmaneuver startups. It simply hasn’t played out in history.
As I point out in my video
- We once thought Microsoft was a monopoly on the Internet due to IE. Laughable now.
- We once thought the merger of AOL/Time Warner needed to be investigated by the DOJ. Laughable.
- We once thought nobody could unseat Google since all inbound traffic to the web came from them. Enter social media and its importance as a traffic source.
- Is Facebook unstoppable? Of course not.
Most large companies (tech or otherwise) have two functions that make it hard to drive the most successful early-stage innovation.
1. The Innovators Dilemma – which means that if you have large customers with big profit margins it’s impossible to throw that all away to destruct your industry. I described that here in this post.
2. Talent – in a world where startup founders are rewarded handsomely for taking risks of building their own startup companies and where the press shines a brighter light on them, much of the early-stage company traction will come from startups. It’s true that big companies can do a “fast follow” but the structure isn’t in place for a mid-level tech manager to work the kind of hours and attract the kind of talent that it takes to really break through.
Plus, the mid-level tech managers (which may be phenomenally talents but prefer a more risk-averse lifestyle and job) will often not get the full attention and resources from the host company to compete. That’s the biggest frustration I hear from talented people at bigger tech companies.
So I tell entrepreneurs to either build businesses at the edge of the forrest OR focus on businesses that drive deflationary economics. I think this is a really powerful concept and can be built right alongside the Redwood trees.
And a Final Note on Whether Silicon Valley Opportunities Remain
As per my video, think about the data in the following slide. In this world it’s hard to argue that the opportunity set isn’t larger.
I remember a discussion with an older VC who told me that in the early 90’s they wondered whether the VC industry had a future. It seemed like “all of the big ideas had been done” in technology. This was obviously prior to the Internet and everything that led to: (mobile smartphones, social networks, new payment technologies, etc.).
The future certainly looks brighter to me. Not just in Silicon Valley but in LA, NY, Seattle and other major tech markets. That’s why I say, “It’s Morning in VC & the Startup World.“
And my fear? The only thing that slows us down?
Our inability to cost-effectively educate large numbers of people to compete in the future world where software really does begin to eat the world (in Marc Andreessen’s wise words).