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We’re now in the second Internet bubble. The signals are loud and clear: seed and late stage valuations are getting frothy and wacky; hiring talent in Silicon Valley is the toughest it has been since the dot.com bubble and investors are starting to openly wonder how this one will end.
The bubble is being driven by market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. And those customers may be using their devices/apps continuously. The revenue, profits and speed of scale of the winning companies can be breathtaking.
Rules for building a company in 2011 are different than they were in 2008 or 1998. Startup exits in the next three years will include IPO’s as well as acquisitions. And unlike the last bubble, this bubble’s first wave of IPO’s will be companies showing “real” revenue, profits and customers in massive numbers. (Think Facebook, Zynga, Twitter, LinkedIn, Groupon, etc.)
But like all bubbles, these initial IPO’s will attract companies with less stellar financials, the quality IPO pipeline will diminish rapidly, and the bubble will pop. At the same time, acquisition opportunities will expand as large existing companies, unable to keep up with the pace of innovation in these emerging Internet markets, will “innovate” by buying startups. Finally, new forms of liquidity are emerging such as private-market stock exchanges for buying and selling illiquid assets (i.e. SecondMarket, SharesPost).
Today’s startups have all the tools needed for a short development cycle and rapid customer adoption – Agile and Customer Development plus Business Model Design.
The Four Steps to the Epiphany, Business Model Generation and the Lean Startup movement have become the playbook for startups. The payoff: in this bubble, a startup can actively “engineer for an acquisition.”
Order of Battle – Each market has a finite number of acquirers, and a finite number of dealmakers, each looking to fill specific product/market holes. So determining who specifically to target and talk to is not an incalculable problem. For a specific startup this list is probably a few hundred names.
Wide Adoption – Startups that win in the bubble will be those that get wide adoption (using freemium, viral growth, low costs, etc) and massive distribution (i.e. Facebook, Android/Apple App store.) They will focus on getting massive user bases first, and let the revenue follow later.
Visibility – During the Lean Startup era, the advice was clear; focus on building the company and avoid hype. Now that advice has changed. Like every bubble, this is a game of musical chairs. While you still need irrational focus on customers for your product, you and your company now need to be everywhere and look larger than life. Show and talk at conferences, be on lots of blogs, use social networks and build a brand. In the new bubble PR may be your new best friend, so invest in it.
Rules for liquidity for startups and investors are different in bubbles. Pay attention to what those rules are and how to play by them.
Unlike the last bubble, this one is not about selling “vision” or concepts. You have to deliver. That requires building a company using Agile and Customer Development. Ultimately, startups that master speed, tempo and Pivot cycle time will win.
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