The Hot Space
December 4th, 2006
I fail to understand why there’s such a rush of entrepreneurs to get into the latest “hot space.” Do entrepreneurs really think they’ll succeed by jumping into an area that’s already been publicized to death, with massive competition already lined up, and where Google, Yahoo and the other major companies have already made their big acquisitions? I’d much rather work on something completely obscure and out of left field, and develop it until it becomes the next “hot space.”
Maybe I’m missing something obvious — please enlighten me on the logic here.
December 4th, 2006 at 7:03 pm
A. We’re in a startup bubble OR the nature of work for highly educated, tech savvy individuals is changing, with dramatically lower barriers to entry for entrepreneurship than were seen even 2 or 3 years ago. Either way it creates a lot of people looking at a small space and
B. See James Surowiecki’s piece in the new yorker last week. Extrapolated to the web, you can probably make it as a web business assuming you have some kind of monetization capability if you’re in the top 10 sites in your segment/niche. That arguable makes execution more relevant than the idea.
C. Along those lines, Paul Graham’s essay on finding ideas for startups is worth considering http://www.paulgraham.com/ideas.html. As in B, the point is essentially “you get lucky or you execute”. When you get lucky, the thing you’re doing for your own benefit transmogrifies into a business… these also seem to correlate highly with astoundingly successful businesses like Apple, and Yahoo! Otherwise, you execute. RealNetworks wasn’t the first web audio/video company on the market, and a lot of what they’ve done (perhaps still do) in the past has sucked from a user perspective, but Rob Glaser is one smart kitty and he’s executed and kept Real in the game. My point here is that entrepreneurs congregate in cities like new york or palo alto, look at what’s out there and try to make it better. Social lensing if you will, and the lens is currently focused on social media, search and UGC/video. The reason these crazy innovative companies tend to be hobbies is that NO ONE has the risk tolerance to roll their mortgage on building something that out there into a full-fledged biz. But when you see an established market and you think you can build a better widget AND you’re a “crazy entrepreneur”… you don’t see the risk so you go for it. After that as PG says, it’s all execution b/c chances are >50% you’ll have to do a complete change of course and overhall down the road in order to stay in the game
December 4th, 2006 at 7:12 pm
All of these may be true, but even if it’s dramatically easier to start a startup business now, that doesn’t imply they all should be doing the same thing. Everyone doing the same thing (a) reinvents the wheel, (b) makes it harder to be one of the top 10 sites (c) makes it less likely you’ll be acquired because of all the competition.
If it’s easier and cheaper, then it’s correspondingly easier and cheaper to explore an area different than the crowd.
I’m thinking specifically of social networking as an example. Seriously, it’s like once per week now I get asked for advice/info or to be cto on a social networking MySpace clone site. And apparently they’re getting funding. Normally in business you want to avoid too much competition. But lately it seems like the more competition, the faster the rush to get in.
December 4th, 2006 at 10:51 pm
The short answer is that money is dumb and for all the ballsy rah-rah surrounding tech entrepreneurs, their risk tolerance is no greater than any other ultra-ambitious professional’s, it’s just different. So the entrepreneur (particularly the entrepreneur stepping to the plate for the 1st time) takes dumb money if dumb money is easy to get.
The longer answer is that the micro-climate you are describing sounds an awful lot like irrational exuberence. The accelerating pace of acquisitions by Yahoo/Google/Microsoft (there’s a nice visualization of this on the web somewhere) and the increasing mainstream media coverage (web1.0 billinaires are starting to become biz-media “celebrities” again - the recent NYTimes article about the LinkedIn founder (a PayPal alum) envying the YouTube acquisition is a nice example - after years in the wilderness following the bubble collapse… how these tides and cycles of major media kingmaking converge is beyond me, but it’s happening right now, and if I had to guess (again) I’d say the YouTube and MySpace buys are the catalysts) of the internet are creating a “train leaving the station” mentality again, and with a mountain of capital to invest (have you ever seen more angel organizations in the US than at this moment?) entrepreneurs are selling what customer #1 (their seed investors) are buying (social networking).
Sales is the key metric for many entrepreneurs. If someone’s buying it, that means it’s working, and right now seed investors are buying social networking, so that means it’s working. The quality of the idea is irrelevant, because again the sales-oriented entrepreneur is going to sell what works for the maximum return, keep selling it til the wind changes then, if he’s wily, get out of the game and start selling something else.
From this perspective I view Jason Calacanis’ departure from Netscape as the “smart money” move on social networking/media. Now is the perfect time to be rooting around in other areas, because *everyone* is trying to plant in one corner of the garden.
What I wonder is how innovation occurs, and if certain environments are more conducive than others. I would argue that 300 startups in the hothouse fighting over the same turf will lead to innovation at the same rate as the self-selecting geniuses who have the foresight to zig when everyone else is zagging (and to my point above, do this when zigging gets them no love from investors, from talent on the street, from the media, etc etc). Zigging may in the end produce winners at a much higher percentage within the cohort, but the lack of capital and traction in so many ways will probably continue to support this imbalance going forward. Also we *might* be in a bit of a sea change here where tech startups going forward are going to be capitalized in much greater numbers but at much lower initial valuations — shops like USV, Y-Combinator and the Charles River loan program validate this trend. Entrepreneurs recognize this, but money may not have quite figured it out yet, and this might cause “bubblets” until the investment community as a whole adapts to the new way of doing business. If Y-Combinator really is the future then there need to be about 30-50 more Y-Combinators, and right now there’s… 1st Round Capital? Others?
December 4th, 2006 at 11:09 pm
Well, that’s what I thought — dumb money, and entrepreneurs who don’t want to risk it with an actual business that is different than the pack or provides real value to real customers to make real money, but want to have a fun steady job on someone else’s dime.
I’d like to know what these “investors” are thinking though. “Gee, I’ll just throw my money at some unproven guy who has the ability to sell me on an idea that hundreds of other companies are doing, has no revenue model, and a miniscule chance of selling to a big company! Sounds good to me!”
I wonder if this is less of a problem in places where there are more people making serious careers out of startups, innovation and entrepreneurship. In NY I get the sense there’s lots of people from unrelated industries, with no clue about the Internet or technology business, trying to jump in and become entrepreneurs or investors.