I was chatting with Hank Williams today about startups and the evolving venture capital landscape and he pointed me to Judy Estrin‘s upcoming book “Closing The Innovation Gap.” I guess I just added another title to my ever-growing, impossible-to-catch-up-with reading list. Or I can just go for the Cliff Notes version:
“In some ways, we have the problem that it looks like innovation is flourishing, but too much of it is short-term, incremental innovation,” she said.
Ms. Estrin acknowledged that innovative ideas still appear all over Silicon Valley. But, she said, the technologies at the root of new products like Apple’s iPod or the Facebook social networking service were actually developed several decades ago. If entrepreneurs do not continue to develop groundbreaking technology, she said, the valley would be in dire straits in another decade. She compared the situation to a tree that appears to be growing well, but whose roots are rotting underground.
I would tend to agree with the incremental innovation observation, although I also tend not to say that everything new in high-tech has been done before because it all goes back to 0s and 1s and, hence to John Atanasoff. I’ve talked and written that nowadays it is both the best and the worst of times to be a high-tech entrepreneur…
If you want to build and quickly flip a business there has hardly been a better time outside of frothy bubbles (melancholic sigh). You don’t need to innovate at the category level–you can be a fast follower instead and innovate at the feature level. Technology is cheap. Small amounts of medium-risk capital are plentiful from sources such as angels and first round specialists. Modern distribution and business models (viral, ad-supported, freemium to name a few) help you get to proof points of scale quickly. Then one of the big guys, which have consolidated in the past few years, grabs you for a few tens of millions. It’s a great payday for everyone involved.
I don’t think there is anything wrong with this model of entrepreneurship. I may differ from Judy on that–I’d have to read the book to know for sure. I don’t think building companies to flip them is good or bad. There is no value judgment. It just is what an entrepreneur wants to do. That said, this is not the model of entrepreneurship that I’m interested in helping foster because, like Judy, I believe that we need more startups to aim big, to try to change the world and leave a lasting mark. Not because of ego but because technology, used the right way, is a great positive force. Because it is more fun that way. Because the hard problems are the ones worth solving (or, even better, are the ones worth figuring out how not to have to solve).
Which brings me to the bad news. I think we are in one of the worst times for entrepreneurs to start high-tech businesses that want to get really big because of two factors:
- The barriers for competitive entry have been significantly reduced. Remember the cheap tech, easy capital and the benefits of fast following? Add to that the fact that most intellectual property doesn’t mean that much in high tech anymore. Then add the dual edge sword of fast scaling through new distribution and business models because fast scaling also means that someone can leapfrog you just as fast.
- The exit possibility frontier has been fundamentally altered. The consolidation of big players on both the consumer and enterprise side means not only that there are fewer buyers but that most acquisitions are tuck-in, “roadmap extension” acquisitions as opposed to category-creation, new market entry acquisitions. In this type of environment, a buyer may prefer to acquire not the market leader but a smaller company that is easier to absorb and integrate.
BTW, I’m not ready to put the blame at the foot of VCs unwilling to fund big innovation. I know that my partners at Polaris Venture Partners as well as dozens of other VCs from top-tier firms have plenty of desire to fund very big ideas very early. (Partnering with entrpreneurs to start new companies from scratch is what I’m 100% focused on these days.) Some young firms looking to raise their second or third funds may be looking for quick exits to demonstrate ability to generate returns but top-tier VCs who’ve successfully raised 5-10 or more funds can afford to be true to their respective investment strategies and bet big.
So, while I wish the best of luck to the entrepreneurs aiming for the quick flip, I salute the ones who are bucking the trend and trying to build big businesses of lasting value in the face of increasing competition and more limited exit options.