It’s Not The End Of Awesome, Just The End Of Huge Valuations

Derek Thompson thinks things are going to be less awesome, from here on out, because of Facebook’s failed IPO:

Derek Thompson, Why the Social Media Revolution Is About to Get a Little Less Awesome

If we’re graduating from the “making delightful and cheap things” stage of the social media age to the “making money” stage, make no mistake: Things will get less delightful. In order to be profitable, it is highly likely that Twitter can only get more annoying, Pandora can only get more interrupt-y, Tumblr can only get more cluttered, Facebook can only get more devious, and the app baubles on your iPhone can only get more expensive.

The first few years of the social media revolution have been a golden age of tech utilitarianism, where maximizing users’ delight was considered, quite literally, the only currency that mattered. In Part II of the revolution, the desired currency is poised to change from attention to profit. That’s a shame. It doesn’t mean that the programs you love are anywhere close to coming to an end. It just means that things are about to get a little less awesome.

So the argument is that start-up investors — venture capitalists, principally — will start to demand more aggressive returns earlier, and will compel the entrepreneurs in their portfolio companies to build in more advertising, sponsorships, or other revenue sources earlier.

But what about the Darwinian laws involved? If Instagram had launched with ads all over the user experience, or demanded credit cards before the first upload, would people have adopted it? If Twitter was squirting sponsored tweets at us back in 2007, would we have joined?

The answer is ‘No’.

And Thompson’s arguments are based on the assumption that all the players in the market are moving in unison, like a giant stampede of buffalo. While VCs have some characteristics of herd animals, the smartest ones will continue to focus on early user adoption based on exceptional user experience as the primary indication of the future value of an investment.

What is more likely, however, is the ratcheting down of projected returns, and a decrease in the valuation of even the largest social players. That doesn’t mean the companies won’t get funded, it just means they won’t be able to hire and grow so fast. It will slow competition, not end it. And it won’t change the basis of competition, which is user adoption, not happy VCs.

So, in the final analysis, this may all be sour grapes. The VCs wanted billions, so they put in many, many millions, which the entrepreneurs were happy to take at inflated valuations. And now that the IPOs go south, the VCs start wagging their fingers at the entrepreneurs. But the investors are the ones who goofed, big time, not the developers of these tools. And the VCs are supposed to be the grownups.

Fundamentally, the investors shouldn’t have let ‘awesome’ push up the projected returns in their spreadsheets so far: they should have counseled the entrepreneurs to grow slower, and burn less money, but the herd wanted big returns, and fast. 

Source: The Atlantic

11 September 2012 21 Permalink

The End Of Silicon Valley?

David Sacks of Yammer wonders if Silicon Valley — meaning the venture-backed bastion of innovation and wealth creation in the Bay Area — has started to lose it’s mojo. His argument — more of a handwave really — is that a/ the economics don’t work in a system with such large incumbents (like Google, Microsoft, Apple, Facebook, etc.), b/ partly because todays agile, ramen-fueld startups don’t have the cash to effectively compete against the incumbents, and c/ the number of ideas that can be juiced into existence given that context are few.

It’s important to consider his arguments in light of what happened to Yammer. My belief is that Sacks intended originally to IPO to raise a large pile of cheap cash so he could effectively compete with SalesForce, Cisco, SAP, IBM, and Microsoft. However, the declining fortunes of Facebook, Groupon, and Zynga made an IPO unattractive or impossible (considering the huge amounts Yammer had raised). So Yammer was left in the unenviable position of having to fight it out against these huge established competitors, all of which fielded competitors to Yammer… except Microsoft. And Microsoft could have made the argument that they could knock off Yammer’s technology in a few months, if necessary. So, he gave in, and accepted the deal.

So, we are seeing — at the least — the completely maturation of this generation of work media tools, like Yammer. These are stream-based coordination and collaboration tools, intended for use behind the walls of the business, and which play a key role in the socialization of business. (I think there is another generation coming, based on other principles, but I’ll leave that for another post.)

Sacks looks at this corner Yammer found itself in, and thinks we’ve hit peak Silicon Valley (= peak VC + peak tech incumbents).

(There is an echo of the recent brouhaha around Dalton Caldwell’s encounter with the inner circle at Facebook, where they basically offered him a deal and said ‘surrender, or be crushed’.)

Most of the commentary on Sacks’ Facebook post is about point c, Sacks’ comments about the small number of ideas that can make it in today’s environment. Like George Zachary’s channeling of Chance the Gardener from Being There:

As long as the universe keeps changing, there is opportunity.

or Andreesseen’s generalization to Sacks’ question about how many ideas can get through this context,

An infinite number — human creativity is limitless. Which doesn’t make it easy, but does mean the opportunity is unending.

But they aren’t answering his question. He’s really saying, yes, a turtle can lay 1000 eggs, but in an environment with  dozens of hungry seagulls, how many make it off the beach? Or past the sharks? The commenters keep focussing on how many eggs can be laid, but not the beach, the gulls, or the sharks. 

The prediction that we’ve come to the end of all useful inventions is dumb. Julius Sextus Frontinus, Roman Engineer said ‘Inventions have long since reached their limit, and I see no hope for further developments’ back in 10 AD. But I don’t think Sacks is saying that. Sacks is saying that the game is rigged so that innovators are in an environment that makes it harder for really innovate ideas to escape the current VC/incumbent trap, and that’s a discussion worth continuing.

Related articles

• After Selling His Startup For $1.2 Billion, Yammer CEO Calls The End Of Silicon Valley (MSFT) (businessinsider.com)
• Yammer CEO: Silicon Valley as we know it may be ending (geekwire.com)
• After Microsoft Deal, Yammer C.E.O. Issues Gloomy Outlook for Silicon Valley’s Start-Ups (dealbook.nytimes.com)

22 August 2012 19 Permalink