…well, not completely dead but the upside is very limited, according to my old friend Brian Taptich, who has witnessed firsthand the rise and maturation of the Internet ecosystem in Silicon Valley.
Brian worked at Red Herring from 1994-1998, co-founded a new media startup, Alarm Clock Worldwide, and held senior executive positions at Electronic Arts and Bit Torrent. Somewhere in there, he also managed to get his MBA from Kellogg. He now consults for the new media industry.
A couple of months ago, Brian was back in DC, where he and I attended high school together (we also went to college together) and I asked him for a download on the state of affairs in Silicon Valley.
The key takeaway from our chat was this: in the ’90s, the Internet ecosystem had deep instabilities and inefficiencies, which created a massive opportunity for startups to create value and capture market share. Now, however, the ecosystem has matured, which means that opportunities for value creation are fewer in number and smaller in size. Thus, investors and employees in startups have much less upside than they used to have. This holds important (negative) implications for Internet investors and entrepreneurs in the US.
I requested a follow up from Brian and, rather than paraphrase his response, I cut and paste the email below. If you have any interest in investing in or working at web-based businesses, read on…
When the Web was born as a truly consumer platform (thanks to the Netscape browser), THE enormous problem that needed solving was the lack of structure and stability to all the component stuff – from the network level to the UI (on one dimension), and from the enterprise to the consumer (on a second dimension). Through the late ’90s, all this unstructured stuff was both stabilized and organized, and many billions (trillions?) of dollars in market capitalization was created – by companies like Cisco/Akamai at the network level to Yahoo/AOL on the front end (on the first dimension), and Oracle/Symantec in the enterprise and Amazon/Ebay with the consumer (on the second dimension). Of course these dimensions are fairly fluid, and there is much overlap.
Today, the Internet is an entirely stable platform – all of this component stuff is now every bit as dependable as most every other utility in your life (eg electricity, gas, etc). And the vast preponderance of innovation happening right now is dependent on this stability, which has led to an entire generation of startups focused on incremental opportunities (ie most every consumer internet company not called Google) – we should expect that the aggregate market capitalization that is/will be created by this generation will be at least an order of magnitude smaller than the companies born just 15 years ago. Not only will the “huge wins” be smaller compared to the ’90s, there will be far fewer of them. Case and point: The consumer internet companies widely expected to be this year’s “huge wins” – eg Facebook, Twitter, LinkedIn, Zynga, etc – are not only a relatively short list, but also are tracking to public equity valuations (should they even get there) absolutely lower than the previous generation.
This is precisely why the early stage venture capital that led tech funding in the ’90s has been desperately expanding into areas like clean/greentech or medical technologies (in which they have little-to-no domain expertise), and/or seeking out international expansion opportunities in places like China and India and Brazil (ie self-sustaining markets that are about 10 years behind Silicon Valley in terms of localized innovation) – VCs need to find the next thing that will provide their LPs a 20% annualized return…and tech investing in the US ain’t it.
This is not an entirely novel hypothesis – everybody from Mark Cuban to hedge fund investors have made similar and widely circulated diagnoses in 2009.
However, what has not been widely discussed – even amongst those who provide the fuel that runs the Silicon Valley engine (ie the employees, not the founders or investors) – is how the compensation structure for tech startups in the US has not adjusted to fit this new world order. It used to be that top talent would take a paycut to work at a startup – trading the known compensation of a stable company (higher base salary, greater benefits, etc) for the potential upside on the equity (“sure I’m getting paid less but my 0.5% will be worth millions!”). In a universe where founders aspire to create $100 million not $1 billion in value, the potential upside for an employee is significantly lower than it used to be…and there is no economic incentive to take the chance on a startup…unless the startup pays employees significantly more cash or gives significantly more equity…and they are currently doing neither.
It may be that, for now, people are fairly content just to have jobs. However, as the job market loosens, and people have the freedom to risk-adjust their opportunities, there is the likelihood of a flight to more established companies and/or a departure from tech altogether. Which could have profound implications in the business of tech innovation in 2010 and beyond.