The Web 2.0 world is looking increasingly like a giant petri dish. There are so many experiments, so much innovation and, as yet, relatively little real revenue. Within this petri dish are a few ideas that will turn into billions of dollars, at which point we will all say “why didn't I think of that”? There are also lots of “what on earth were we all thinking” ideas out there. Numerically of course, there will be much more of the latter - but in $ terms the few big winners will mean it'll all make some kind of sense in the end.
The few places where we are seeing real revenue, such as at MySpace and Facebook, are enough encouragement to everybody else to keep experimenting. Henry Blodget, a man who knows a thing or two about the valuation of disruptive innovation, said something very insightful when commenting on the Facebook/Microsoft story:
“But the mistake analysts have made consistently, since the beginning of Internet time, is to underestimate the potential of the winners–and overestimate the potential for everyone else.”
Whether it is the network effect (aka Metcalf’s Law) or the swarm effect of millions of consumers and investors with ADD, I don’t know. But Blodget is right - it is increasingly a “winner takes all” environment in many markets.
The search for that pot of gold at the end of the rainbow keeps the experimentation going and the VC taps on full blast. It is also now so cheap to build an online service and get some initial traction that plenty of self-funded businesses are getting off the ground. Apart from all that, it is tremendous fun when the “the times they are a changing” and the old order looks ripe for disruption (the dinosaurs are sleeping and so on).
Storms Brewing
We probably should be in a digestion phase right now. But it does not feel that way. The innovation just keeps on coming.
We live on a street corner, where Main Street, Wall Street, Sand Hill Road and MG Road (Bangalore aka globalization) cross. It is a busy place. Storms from one street can cross another street quite easily. On Sand Hill Road and MG Road, the sun is shining on a perfect late summer/early fall day. On Wall Street you can see the shipwrecks, hear the shouts of “man the lifeboats” and also see the early signs of hardy types picking up the broken bits and starting to build again.
Meanwhile out on Main Street, the storm clouds are gathering. The Main Street storms take the longest to build, but they are the ones that matter. Recession will put a stop to all this, particularly if it impacts online advertising. At some point somebody has to buy something. That can be delayed for a long, long time when the prize is so big and the funding so plentiful, but when too many people say that consumers are locking up their wallets, the Wall Street/Sand Hill/MG crowd get affected as well.
Maybe the half point rate cut will do the trick and create the famous soft landing; and maybe it won’t. I don’t know, Bernanke does not know, nobody knows. But lots of people have factored the increased odds of a recession soon into their planning.
What Entrepreneurs Can Do to Weather The Storms
Entrepreneurs are not by nature people who walk around with a Plan B in their pocket. Even though it goes against the grain. It goes against the unflagging optimism and sense of “I can do this” that keeps great entrepreneurs going long after others have given up. But successful entrepreneurs are also savvy, practical survivors.
Great entrepreneurs are also masters of timing. The master of timing in Web 1.0 was Steve Case, when he persuaded Time Warner that AOL was their equal in a merger. It was so outrageous that it was the signal that triggered the end of the Web 1.0 boom. Of course when history does repeat itself - as it usually does - it does so with a surprising twist that takes everybody by surprise. The obvious parallel today, Facebook and Microsoft, does not apply. Microsoft is only investing what is a rounding error for them; and they may well have a preferred rate, which means that in the worst case they get the same return as they get on their cash hoard in Bonds.
So, no, I am not calling a bubble or even forecasting the timing of a recession. But I would say that one of the following should be on the To Do List for entrepreneurs in the current climate (which one depends on the lifestage of your venture):
1. Raise more money (a lot more) than you think you need. VCs have plenty of money to put to work and you need enough to ride out a cycle and really build something to last. Jason Calacanis said he raised enough for 5 years with Mahalo and he has seen a cycle come and go.
2. Get to cash flow positive quicker than you had planned. (And if you are already there, don’t take this as the time to start a major expansion built on borrowed money).
3. Accept that offer. Not the first one of course. Not the second one if you have good poker nerves. But take the third one. Live to venture another day.
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