THIS BUBBLE IS DIFFERENT.
The NASDAQ approaches highs not seen since the peak of the first dotcom bubble in 2000. HBO’s new comedy series, “Silicon Valley,” portrays a hilarious, hype-fueled world of out-of-touch “brogrammers” (one built an app that alerts users to erect, oh never mind). Are we in bubble redux? Probably not. Underneath seemingly frothy stock prices are fundamental indicators much stronger than the ones from 14 years ago. And while there is plenty to caricature in the tech startup world — one of the best recent parodies took the genre to new levels — the most-hyped ventures these days seem to have actual business plans, not just ping pong tables and champagne-drenched IPO parties. Part of the reason is a surprising shift in the relationship between tech startups of all sizes and bigger, established companies, which is invigorating both.
SOCK PUPPETS AND IRRATIONAL EXUBERANCE.
If you lived somewhere on the northern California peninsula during the late ’90s and early ’00s, chances are you worked for a startup, knew someone who did, or crashed one of their epic parties. These tiny-but-tough companies created solutions to things we desperately needed — like email — and stuff we had no idea we needed — like social networks. Ideas and energy were abundant, and it was riveting to watch eBay catapult to incredible success while Webvan spun into oblivion.
Regardless of the product they were building, most of these companies focused on creating solutions to everyday problems. Some saw it as a service to their community, but others saw it as a vehicle to reach a singular goal: the vaunted Initial Public Offering (IPO).
Filing for an IPO gave founders and employees an innate sense of ownership, without becoming beholden to the whims of a larger corporate parent. They truly believed they could maintain their startup culture and innovative spirit. More importantly, they wanted to determine their own roadmap for future growth. It was a brave new world.
Few startups admitted the truth about their chance of succeeding through an IPO. As the bubble wore thin, roughly three out of every four startups began to fail by filing for bankruptcy, liquidating assets or simply disappearing. This happened for several reasons:
- Inability to scale. In 1999, Webvan filed for an IPO with a company valuation of $1.2B and plans to expand to 26 cities. Rapid growth with minimal margins is always a risky endeavor. Indeed, Nasdaq halted trading of their stock just two short years later, forcing the online grocer to close up shop. It seemed to focus on “rapid” rather than “expansion.”
- Believing the hype. Pets.com took many people by surprise when it ponied up millions for a Super Bowl ad in 2000, featuring an incredibly likable sock puppet. While its mascot and highly visible marketing campaign built rapid brand awareness, the hype surrounding Pets.com was more focused on the sock puppet rather than solving for a sustainable business model.
- Ignoring user behavior. When Kozmo hit the on-demand delivery market with their orange scooters, people were excited. The problem was that Kozmo didn’t implement delivery fees or a minimum order size until it was too late. Customers were ordering a single box of Milk Duds for $1 to be delivered within an hour and getting it. Demand for same day delivery was strong, but Kozmo ignored the economics of indulging consumer whims and didn’t understand the basic premise of how consumers shopped.
- Overinflated product ego. Friendster seemingly had all of the right ingredients for success: investors, talent and connections. Yet, all of these things couldn’t fix the one thing they needed to be successful — a site that worked. The site’s rapid growth bore well for the company’s future but may have also blinded executives to the potential for failure. When they passed on a $30M deal from Google in 2003, hubris ran high. Friendster executives held out for a larger payoff but executive level infighting prevented them from moving forward. They thought their users would never leave, but competitors moved in quickly. Google took its cash and invested elsewhere.
Today the pace of innovation is quickening. The stakes are higher, while operational costs are lower. More data is freely available and becoming increasingly less expensive to store. More tools are available to run analysis and allow stakeholders to pivot accordingly.
Some of those early entrepreneurs went on to join the ranks of more established companies. Others invested in a new breed of startups, learning from their past and helping to shift mindsets away from making something cool to making something scalable, sustainable and useful.
While the avarice and ambition of earlier startups hasn’t disappeared entirely from Silicon Valley, startups have taken a more pragmatic approach to getting products into the market. Some of the models that have taken root include:
- Incubator. Within an incubator model, early stage startups are taught business skills and provided access to professional networks. This model is gaining more attention from unlikely players, such as Pepsi Digital Labs, which leverages co-working spaces like WeWork Labs and invests directly in startups. In turn, those startups collaborate with Pepsi to innovate on their products and beverages. One of the advantages to this model is startups gain valuable mentorship, and Pepsi Digital Labs gets access to innovative ideas which can be pushed to market faster. The downside to this model is that a startup’s vision can get lost in the shuffle and business mentorship can be time-consuming for the larger corporation.
- Accelerator. Under this umbrella, mid-stage startups are mentored and given strategies for rapid growth. Companies like Mondelez Mobile Futures offer a 90-day accelerator program for mobile-tech startups where brand managers from the food and beverage conglomerate embed themselves in startups. It’s a relationship where startups can get more funding and pre-approval for future VC investment in exchange for bigger businesses getting direct access to proven products and technologies.
- Partnerships. Partnerships bring late-stage startups together with big businesses to develop ideas together. In 2013, GE and crowdsourced invention startup Quirky joined forces to tackle the Internet of Things. GE invested $30 million into this partnership with a goal to launch 30 connected products. With the Wink app firmly under its belt to control all of your internet connected in-home devices, Quirky and GE have recently introduced Aros, a smart air conditioner, into their product mix. Clearly, money helps but isn’t the sole prize in partnerships. The real opportunity for startups is the chance to design for scale, and for big businesses, it’s a chance to experiment outside of the confines of what can be a siloed organization.
- Acquisition. An outright acquisition can happen with any stage startup, bought and either folded into the larger business or just simply discontinued by the parent company. Yahoo CEO Marissa Mayer has spent over $1B purchasing various stage companies across multiple product verticals, including Tumblr and Summly. But there have been some surprising acquisitions, too. In a twist, Harry’s, a 10-month old shaving startup, spent $100M to acquire an old razor factory. The positives are fairly similar for both sides: press coverage, access to innovative technologies, products and people. If you consider the alternative of building a team or product from scratch, acquisitions can be an appealing option.
These deeper, symbiotic relationships show that many startups have moved past the old us-against-them mentality to embrace new initiatives and models that may help explain why this time around, their businesses are stronger than they were in the heady days of Web 1.0. It’s encouraging that startups have moved beyond their role as muses, inspiring big businesses to innovate and embrace disruption. And, it’s clear that big businesses have become beacons, lighting the way for startup success through sustainable growth. This mutual mentorship is transforming how we make products and redefining how we do business, with everyone able to explore models that fit their needs.