The greening of The Valley, why sustainable companies matter.
Evan williams and Biz Stone have taken back Odeo from its backers to form part of a company focused on innovation through multiple products, rather than exit. It’s like a tech. startup version of the recent trend for private equity takeovers of public companies. But it could point to a better model for Internet startups – the model of normal companies like corner stores. Here’s why.
[update: The sustainable model is not new, it is the way that almost all companies outside of the bubble-prone technology world work, however, sometimes the bleeding obvious is worth pointing out. Venture backing should be for the exception – for the exceptionally rapidly growing.]The Exit Model
Every venture funded tech company is predicated on the idea of ‘exit’, the point where the company is sold to a bigger one or has an IPO, so that the investors see a return and move on.
This time round, in the 2.0 boom, there are almost no IPOs, and the exceptions, like Vonage, have been a disaster.
That leaves the second option, selling the company to a bigger one. Unlike during the dotcom boom, the big galaxies, Google, Yahoo, Ebay etc. are properly formed, and surely ready to suck in more stars.
This expectation has been fueled by three large success-story acquisitions, Myspace, Skype and YouTube.
However, only one of these companies is in the Valley, and 1 does not make a trend.
In addition, these are all-or-nothing plays. In a parallel universe, all three companies could have folded, leaving them in the same position as their numerous competitors. Their success was not planned and was very high risk. They are species that survived in a particular evolutionary niche that opened up, they were not ‘intelligently designed’.
If there is no trend for large acquisitions, this still leaves the smaller ones. Business week recently ran a headline about ‘Yahoo’s spending spree’, a spending spree of such wild abandon that it includes a single sub $10M acquisition in a year.
Many so-called acquisitions are glorified signing bonuses. They are the result of a finite employment pool where the galaxies have to compete with each other for stars, where the stars are the people not the product.
If the stars are the product, then, just like real galaxies, the Internet galaxies, are really good star factories. In fact the dirty little secret is that they are sometimes better positioned for product development than the startups. A single bowel movement from Google and out pops Google Calendar, wiping out the hopes of a multitude of Internet Calendaring startups like Trumba, in an instant.
Back to Yahoo’s one acquisition. Again, 1 does not make a trend.
If you can’t IPO or sell then what alternative is there?
The Sustainable Model
The alternative is to question the whole notion of exit and to build a real company.
When I was an architect, you didn’t set up a practice on your own to ‘exit’, you setup to build a company that made a profit and made products that made the environment a better place along the way – a sustainable enterprise. The whole idea of ‘exit’ in the context of building an architecture firm, or a legal or medical practice is preposterous.
The reason why tech. companies have fallen into the mindset of raise money and exit, ‘live fast and sell young’ is that they traditionally needed large amounts of capital, both to bootstrap and later to fuel growth. They needed to gain ‘market share’ dictated by quantitative things like price rather than intangibles such as good design . But that has changed.
What we are seeing now is the second phase of the Internet, what some people call web 2.0. In this phase the infrastructure and ‘platforms’ are in place, the freeways and toll bridges and shopping malls are there but there is an opportunity to build retail outlets that go in the malls. Some of these outlets may be JCPenney, and others may be Prada. The ‘exit’ model favors Penney over Prada.
The recent trend has been to keep the model of ‘exit’, but to raise less money. Wherever you turn now, there are flocks of ‘Angels’, from VCs that are downgrading to people with a few bucks extra after refinancing their real estate gain. But this is all still predicated on the idea of ‘exit’ – which just isn’t there.
The correct model for web 2.0 should be sustainable growth, its the Obvious Corp.
When you describe the Obvious Corp – as Evan Williams has, it sounds a bit like an incubator – you work on multiple projects and some may even get spun off, who knows. But this is not an incubator – incubators do not work for the founders, they work for the owners. Founders like to feel ownership of their ideas, and as much of their equity as they can keep.
Most importantly, incubators are still based upon the premiss of exiting. Apple Computer and Gawker Media produce multiple products but they are certainly not incubators, they are both sustainable – i.e. profit making companies that are based upon innovation rather than exit.
As the technology market matures, value added qualitative aspects such as good design will become more important, allowing mini versions of Apple to thrive – companies based upon product design and innovation rather than spreadsheets and MBAs.
I have started Venture backed companies, worked at an incubator and started non-venture backed companies. I have had more fun, produced more and made more money from the latter.
What is wrong with your exit model may be the model of exit itself, and a sustainable [i.e. normal] company like the Obvious Corp. may be the answer that is – obvious.