Here We Go Again, But Is It Bad?

March 24th, 2011 6 Comments

I’ve been biting my tongue for several hours now, hoping the cynicism with abate.

It didn’t. Haters gonna hate.

Color Looks To Reinvent Social Interaction With Its Mobile Photo App (And $41 Million In Funding)

That $41 million was committed pre-launch. Here’s another in the same vein:

Pretty Flipboard Fundraising at an Even Prettier $200 Million Valuation

I know the Bubble 2.0 talk has been circulating for years, since before Facebook passed MySpace, since before Twitter existed, since startups began dropping vowels. Many rational people would point to the fact that a micro-blogging service or a social network of friends got funding at all as evidence of VC insanity, but bear with me.

Banksy's handiwork

I’ve talked about found business models before, but lately, a lot of funding has been thrown at known business models like “do better advertising” or “sell it to businesses” with shaky execution plans.

Let’s be honest though. This isn’t my money, so why would I care?

I lived through the end of the last Bubble, right in the middle of it, failing at a few startups. I missed the salad days, thanks to a geographical detour, so my memories are definitely biased.

One thing I learned that hasn’t changed is that Silicon Valley startups are exactly like cults; there’s an easy formula. You start with a known leader, e.g. ex-Googler, early employee at Facebook, co-founded some startup people know.

This leader then recruits a couple known rockstar developers (again, known for their work at other known startups), and then you work on an idea.

I know a lot of these startups begin at gatherings where people share their mutual desire to collaborate on something. The something doesn’t always come first, but developers all have a ton of itches to scratch. Ideas are a dime a dozen, whereas good people are not.

Then, you recruit more people and VC based on name value first, idea second.

VCs don’t often invest in unknown founders. Likewise, talented people want to work with names.

Very much like a cult.

Two things that had been different from the late 90s until recently were lower valuations and smaller rounds of funding.

These are related to the slimming down of startups made possible by web services and virtualization and by the rise of smartphone app development. Lower infrastructure costs led to smaller rounds.

Plus, unlike the 90s, there is no more big money poured into salaries. Many of the big name people who lived through the first Bubble actually have money and work for fun. Plus, early in the millenium, VCs were more gun shy, making leaner startups look more attractive.

Problem is that many developers are not motivated by money; they’re motivated by reputation and a sense of achievement. So even though many startups pay well below what a talented developer can earn at an established company, the lure of rockstar recognition and being an integral part of a successful startup can be very alluring.

Anyway, back to the point, large rounds have reemerged, largely due to comparisons to large valuations for companies like Facebook and Twitter.

I think it’s safe to say the bubble has returned.

Again, is this bad?

I’d say yes. It’s not good for the overall economy to point to an artificially bolstered sector as signs of a recovery. If that sector were pumping money into other sectors via disposable income or other spending, maybe, but mostly, startups don’t do that.

Specifically related to tech, again, I’d have to say yes. Another Bubble means another example proving the way to fame in development is to start a company, get VC, make it to a liquidity event, then GTFO. If not that path, then it’s the way of burning through VC money, while not getting paid and dying on the vine.

The shame here is what’s left when the startup either dies or grows too large for the founders to care anymore.

Many of the cult members are left wondering what happened to the high-minded idea the leaders used to recruit them.

No one wants to build enduring value anymore. It’s not sexy, and it’s too hard. It’s a shame that another wave of developers will see this as the path to take, and this doesn’t apply only to Silicon Valley.  Thanks to The Social Network, we now have Justin Timberlake telling everyone that startups have to be in the Valley.

I find that sad, all of it, not just that last bit.

Find the comments.


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6 Responses to “Here We Go Again, But Is It Bad?”

  1. oraclebase Says:

    I agree. If you have a Facebook or iPhone app you seem to get millions of VC $ these days. History tells us it will all come crashing down around us and the only survivors will be those with a sound business model.

    As you mentioned though, by that time most of the founders will have run off with their buyout cash and won’t care, ready to start bubble 3.0.

    Cheers

    Tim…

  2. uvox Says:

    All part of Schumpeter’s Creative Destruction process I guess. Let’s not decontextualize this – there’s a lot of solid stuff going on too. Startups are built to be sold (or at least that’s the ethos to aim for even if they never are). Who’s Justin Timberlake? Beiber surely…

  3. Jake Says:

    Yeah, my biggest gripe is that it bolsters an unrealistic trend. Don’t drop out of school to become the next Gates or Zuckerberg. Don’t jump into a startup with dreams of striking it rich with options.

    Follow your own great ideas, scratch your own itches, bootstrap yourself, contribute what you can. Greatness is as variegated and relative as the paths to it are.

  4. Jake Says:

    Completely disagree that startups are meant to be sold. That’s the big problem. For every bootstrapped, successful company (e.g. 37 Signals), there are dozens of flips.

    It’s bad for overall innovation bc as you say, there is a lot of solid stuff going on, and yet how much of that will flourish? When the time comes for the VCs to get some return, who will stick up for the idea of building something great over turning a quick profit?

    Plus, the money grabbing land rush devalues the good ideas by fostering the not-so-good ones.

  5. joel garry Says:

    A Not-Bansky (this is on my route to my favorite Friday night fish-fry). Here is a poster of the sign Bansky is making fun of (in I-5 rest stop next to Camp Pendleton).

    VC’s always have an exit plan, it’s a necessary part of the business proposal. If it is a home run, they keep a big chunk of it too. They have to cultify it to convince everyone it will be a home run. This is the classic scam or marketing tactic of using people’s greed to get something from them, including the fiction they are building something of lasting value, for those so inclined. Lasting software, what a joke.

    That Color thing reminded me of a science fiction story I read not long ago. (Warning Label by Alexander Jablokov). I think we are already overwhelmed by too much information, adding more is not a good thing. Do you really want to be in a restaurant looking at the half-a-head lying in the street? (What, you’ve never seen Red Asphalt?)

  6. Jake Says:

    I’m familiar with that classic sign, saw it first on the ocean side of the highway as you head (way) south of LA, as if there were people running from the ocean onto the highway.

    That is a Banksy in LA, from his site. The one you see in Oceanside is a mashup of his work :)

    I don’t think the VCs are part of the cult. They follow it, willingly bc, as you say, it makes them money.

    The people that get the stick are the developers who work hard for an idea and get squat.

    Re. Color, I don’t get it, but what do I know ;) Sounds like a great sell job though, love to see the pitch.

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