Can startups hack down the ‘redwood giants’ of technology companies?

The hottest question circulating at the TechCrunch Disrupt conference this week is whether a startup is capable of unseating major technology companies, and whether innovation is still possible in the current tech climate.

The debate really began three weeks ago when Yammer CEO David Sacks posted a thought on his Facebook wall that said, “I think Silicon Valley as we know it may be coming to an end.” What ensued was a heated discussion, with major Silicon Valley players throwing in their opinions, and the story spread from a private Facebook wall to TechCrunch to the New York Times.

This morning during an interview, TechCrunch founder Michael Arrington accused Sacks of claiming that innovation is dead and that everything that can be invented, has been invented. Sacks denied that this is what he meant. Rather, his argument is that large incumbent companies like Facebook, Google, and Microsoft are difficult to unseat.

“I am not saying innovation is coming to an end,” Sacks said onstage. “But the Internet ecosystem is different now than it was in the late ’90s. It is not an early growth forest anymore. Giant redwoods have since entered, companies with tremendous assets and resources, and they have large canopies. Nothing grows under the canopy, so I suggest entrepreneurs go to the outskirts of the forest.”

His initial Facebook post laid out three obstacles that startups face when operating on the same turf as the incumbents: finding a genuinely new idea, developing it on a significantly smaller budget, and protecting the idea from the big guys who will attempt to replicate it, squash it, or acquire it.

Sacks’ point is that powerful incumbents have an distinct advantage. He encourages entrepreneurs to look to untapped markets instead of adding noise to an already saturated field.

“I still think innovation is going on and there are good ideas out there,” he said in an interview with VentureBeat. “The thing I keep telling entrepreneurs is, don’t develop something that is so clearly a feature of something else. Try to build products the whole world can use. There are still plenty of opportunities; try to find new industries to disrupt and change industries that were never seen as tech industries.”

Sacks cites the example of Uber, which used technology to take on the taxi industry and transportation regulatory agencies. However, in the Facebook dialogue, venture capitalist Marc Andreessen brings up that what is truly innovative is not always obvious at first.

“I think it is hard to tell ahead of time which companies are nibbling at the edges of existing categories vs. creating new categories,” he said. “The transformative things often don’t look transformative at the start.”

Multiple participants in this debate raised the point that disruption comes in waves. Empires are built, empires are felled, and then new empires are built. Andreessen posed this on the Facebook thread, stating that established companies are less likely to precipitate change, which means that startups are responsible for being disruptive.

“As the incumbents become more powerful, they increasingly prioritize stability over change,” he said. “Betting on incumbents over time equals betting against technological change. Incumbents tend not to cannibalize themselves through disruptive innovation not because they are poorly run, but precisely because they are well run.”

The incumbents are known for attracting incredible talent to work for them and for consistently updating and improving their products. When you have large companies that are well-resourced, well-run, and quick to react, Sacks said, chances are scrappy little startups are less likely to succeed. Andreessen, Arrington, and others took issue with this, interpreting it as a statement of doom for technology entrepreneurs. This implication caused quite a stir, although Sacks said this was not his intent.

“Clearly, I have hit a nerve,” he said. “I wasn’t seeking publicity. People can’t process nuances of my views. Why are they incapable of grasping the nuances of these arguments? I don’t think they are doing entrepreneurs a service by pretending that these dynamics don’t exist. I feel like I am being helpful by telling them some constraints they can face.”

The warning to entrepreneurs against making slightly altered versions of something else has been echoed by investors and certain journalists (ahem) alike. Kevin Rose quipped that he has no interest in investing in a “Pinterest for cats” and walking around Startup Alley yields far more “x version of y” products, trivial services, and frankly, the same old shit, than ideas that seem genuinely new and exciting.

However, Yammer actually won Startup Battlefield in 2008 and received criticism for not being a particularly original idea. Clearly, it was a compelling enough idea for Microsoft, who acquired it for $1.2 billion.

This morning on Hacker News, someone asked Paul Graham, “What is the most frighteningly ambitious idea you have been pitched on.” The scale ranges from “We are building the next Facebook” to “We think we’ve figured out how to hack into the computer our universe is running on.”

The search for The Next Great Idea is a collective effort, joined by entrepreneurs, venture capitalists, and people that want to see meaningful change (and money). Opinions differ on what the best strategy is to unearth these ideas. In a blog post titled “Black Swan Farming,” Y Combinator’s Paul Graham writes that the best startup ideas often seem like bad ideas, and big risks can lead to big winners. 500startups Dave McClure retaliated with a post called “Screw the Black Swans,” outlining his philosophy that it is better to “groom ugly ducklings” and nurture businesses that may not take over the world but can still succeed.

Forces like the migration to mobile, emerging markets abroad, and the phenomenon of “software eating the world” mean there are opportunities everywhere. Whether you are hunting black swans or ugly ducklings, revolutionizing an industry or creating a Pinterest for cats, the ultimate goal is to make an impact.

The greatest value in an event like Disrupt is that it brings together great minds and innovators to create an atmosphere that promotes change. And the free cupcakes.

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