Startups? Silicon Valley? SHELDONVILLE? It's the dotcom bubble again!
Profits? Don't be so narrow-minded...
There has probably never been a better time to launch a startup in Silicon Valley. In fact, it’s the dotcom boom era all over again.
Venture capital money is washing over the land from San Francisco to well south of San Jose, along with waves of intelligent people and the easy accessibility of near unlimited reach and computing power via the cloud.
In the past year alone, 451 Research estimates that venture capital funding in excess of $8bn was raised by startups – and about one in four of these deals was first-round funding.
There is almost certainly another boom on the way, and it is also just as likely, in my opinion, that there will be another tech bust to follow it. We won't worry about the investors, they will do OK – they always do – let's worry more about what this pending boom will deliver, and where, like the last, it may well sell us short.
1 million NON-PAYING subscribers can't be wrong
Last time round, many of the startups measured success by website visitors or potential throughput of one sort or another based on spurious and wildly over-optimistic expectations. This time around is no different, it's maybe a bit more honest but no less spurious in the final calculation. Startups are raising millions, generating valuations in billions all the while haemorrhaging money – a look at the marketing automation niche alone reveals over $5bn in acquisitions in the past year.
This time round the "freemium" model is back in a big way, and early-stage startups report hundreds, thousands and in some cases millions of "customers" within months of launching. How active or committed any of these customers are to the product or service is not easy to ascertain, but one thing we know for sure is that they are not paying for these services. There are some notable exceptions and I don't want to tar everyone with the same brush – but it’s a generality that stands up to some analysis.
Ironically, though, the thing I have come to learn is that this is not a Valley full of con artists; in the main they genuinely believe in their businesses and absolutely believe that scale is all and that technologists can solve every problem.
One of the most common phrases you hear is "You can't argue with the data" or "1 million subscribers (albeit paying nothing or next to nothing) can't be wrong". Think Snapchat, Twitter, Instagram etc. Of course neither statement is true; you can absolutely argue with the data and 1 million people, as history constantly reminds us, can be spectacularly wrong, repeatedly.
Right, so what's the REAL problem here?
So what is it that's going wrong and what is it, exactly, that I worry about? After all, it's not my money invested in these firms.
I have been visiting regularly and indeed lived for a short while in Silicon Valley since the late 1990s, and 70 to 80 per cent of the firms I research are based in the general California Bay Area. It is a place I tend to describe to folk as a bubble. It is of course a beautiful bubble and a strong community, but, although it thinks that it is a part of the real world, it secretly also believes itself to be apart and superior to the rest of the world – privately I call it "Sheldonville".
There are few of us in the technology community that are unfamiliar with the character of Dr Sheldon Cooper from TV's The Big Bang Theory. He has become the poster boy for all things geeky and scientific, we laugh at his inappropriate reactions, and the complete belief he has in the primacy of science and logic in a messy world full of people driven by emotions rather than data. He resonates in our community because whether we can all relate to him.
To be sure without being a bit nerdy, techie and anal you wouldn't survive long or be very happy in the intellectually demanding, detailed and progressive world of high tech. But it gets worrying when, like Sheldon, we lose touch with the real world and instead believe our own cosseted world to be the norm.
Tech is evil, mmkay
The cultural ADHD of the Valley and this latest group of heavily funded tech startups is selling us all short and doing us a disservice. The rest of the world is in deep recession, one that has produced high unemployment and vast swathes of people working long hours for very low pay; people facing political upheaval and with ecological damage running rife (aren't I the cheery one today?). But in the Valley they create technology that at worst helps to perpetuate those situations, and at best does little to help change it.
The near perfection of Sheldonville is not the real world; the real world is in need of vast improvement. But in the Valley we all too often see software and services designed and built that make great sense to those developing them, to their peers in the Valley and to Valley investors – but virtually none to anyone outside. The Valley builds technology for those that have the latest Android or iPhone, who work from home, create documents, do "knowledge" work, who work on "projects" with remote teams, who want smart cars and smart homes. In other words: they build products for themselves and their friends in the Valley. In the real world, however, 99 per cent of us just don't live like that.
Drag them into the real world and make them work for us
It will never happen (and it makes me sound way too much like my late father and his calls for the return of National Service for comfort), but I can't help but think that future Valley technologists would be well-served spending time at the coalface. Maybe even a actual coalface or a quarry, on a farm, in the loading bay of a supermarket, with a road maintenance crew, shadowing workers in the justice system, spending time with hospitality workers. Working with real people doing real jobs in the real world.
If they did, they would see how technology has impacted those worlds both for the better and for the worse. There they will often see downtrodden people working hard to circumvent poorly considered technology just to get the job done, having to "work with" technology that hinders rather helps their work. They would see exactly why investors often see seemingly guaranteed winners fail after the first few furlongs post-IPO.
Putting the actual users of the products aside, there has never been a better time to start up a tech firm in Silicon Valley. In the next two to-three years we will likely see some spectacular IPOs, along with a rash of acquisitions, and many fortunes made.
We will also see huge turbulence and change as the "traditional" world of IT and brick-and-mortar business is once again challenged and in some cases successfully overturned, by new business models, the power of the cloud and crowd, and with new ideas and ambitious upstarts. All of this will almost certainly be followed by a delayed realisation that much of it was (unintentionally) smoke and mirrors.
Even so, the romantic in me can't help but wish for something good to come of it all. ®
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