After The Gold Rush

The startup gold rush of the last ten years is over. Sorry. Those hordes of ambitious entrepreneurs still stampeding to the Bay Area in the hopes of building their Minimum Viable Product, getting into Y Combinator, and growing their app into the Next Big Thing–they’re already too late. That era is behind us. It was a good run, even a legendary one, but it is over. Time for the new new thing.

Does that sound premature and apocalyptic? Maybe not. Over the last few months a slew of smart people have been sounding warning signals, identifying the half-dozen consonant factors bringing this epoch to an end:

• Over in The Information, the Lessins argue that “the period where tech startups can readily disrupt larger tech companies is ending for a simple reason: Today’s tech behemoths aren’t the lumbering giants of yesteryear. They are leaner and meaner and more competitive precisely because they have co-opted the same technologies startups used to attack them” and so “until there is another fundamental technology disruption, the window of opportunity for startups is limited to more traditional markets with less competitive players.”
• Ev Williams expands on this: “in every maturing market, over time, value moves up the stack. The auto industry used to be filled with startups… Then it got incredibly hard and expensive to enter the game. A certain class of tech companies used to be about technology, mostly. Then they were about technology + design. Now they need to be about tech + design + marketing/distribution … I fear we are in an increasingly big-company-tilted world.”
• Om Malik concurs: “The LinkedIns and Tableaus will lose much more than the giants, and the giants will continue to turn the screws, leveraging their positional, financial, and operational advantages. They will continue to win even as investors lose… And startups will face the worst conditions: less capital, worse valuations, very strong entrenched Internet giants dominating in all important markets.”
• In a separate New Yorker piece, Om notes: “Most competition in Silicon Valley now heads toward there being one monopolistic winner,” though he later tempers this to examples of battles between two or three companies … but no more than that.
• The always great Ben Thompson expands on that winner-take-all theory in a recent Stratechery post: “Digital advertising is becoming a rather simple proposition: Facebook, Google, or don’t bother … I think the recent chill in valuations and fundraising are about coming to terms with the fact that a lot of those unicorns are in the same boat as Facebook and Google’s advertising competitors: they have already missed out … In some respects it is tech’s own inequality story: the average and median company and startup will increasingly bifurcate.”
• I’d add, myself, that the more the startup ethos — MVP, “disrupt,” etc — becomes conventional wisdom, the less effective it is. The day we reached a consensus that “startups will define the future” was the day it ceased to be true. Innovations rarely come from mindsets adopted by the mainstream; you can’t be revolutionary when everyone else is trying to be revolutionary in exactly the same way. Ten years ago, founding / joining a small tech startup was an odd and even subversive thing to do. Nowadays, for a certain cohort, it’s almost a kind of finishing school.
• Also: many if not most of the great startups of the last decade have piggybacked on the global rise and promulgation of the smartphone, which created not one but dozens of gargantuan new markets–and whole new kinds of markets–where none previously existed. Uber, Whatsapp, Instagram, Snapchat, etc. (To say nothing of mighty Apple.) But that once-in-a-generation event is over. Almost all of those markets are now fully populated with many warring competitors, few of whom will triumph.
• Meanwhile, VCs, most of whom have always been herd beasts, have been rattled by all of the above factors; and because they are (mostly) herd beasts, they will flee en masse to (perceived) “safe” investments — meaning that things that actually do differ from the startup status quo, things which are actually new and weird and therefore potentially truly disruptive, will find it ever harder to get funding and support.

YES. Cannot believe how many VCs suddenly say they aren't taking meetings or doing deals. Ridiculous! https://t.co/vc5guR9G3Y

— Michelle Tandler (@michelletandler) February 24, 2016

So should we all close up shop and go home? Of course not. That would be crazy. We have never lived in a more technologically exciting time. We’re developing amazing new ways to steal data. We’re building functional bipedal robots. We’re gene-editing T-cells to fight cancer. Look at the MIT Technology Review‘s 10 Breakthrough Technologies For 2016.

(Granted, Moore’s Law is in trouble, but it takes time for the uses of exponentially greater computing power to filter out into other fields; it often happens much later, via unpredictable emergent properties. Even if and when Moore’s Law grinds to a halt, it won’t much affect our overall rate of technological progress for years to come.)

It’s not that all startups are doomed. This is a matter of degree and proportion, not an absolute. As the pendulum swings back to larger organizations, they will take over a noticeably greater share of innovation — and innovative markets — than we have seen over the last decade. We’re witnessing that already with deep learning (Facebook, Google) and self-driving cars (Alphabet, Tesla.)

Startups still have their advantages: clarity and purity of vision, instant decisionmaking, the ability to move fast and pivot on a dime. I’m sure occasional startups will still emerge from left field to conquer the world. But for the foreseeable future, as the odds against them get longer, and the competition fiercer, it will happen less and less.

Again, we’re seeing that already. In 2011, Y Combinator’s poster-child alumni were — already — AirBNB, Dropbox, and Stripe. Can you think of any Y Combinator companies from the last five years as well-positioned today as those Big Three were then? Maybe Instacart, if their unit economics work. That’s it.

Meanwhile, as the Lessins and Malik argue, the big tech dinosaurs, rather than graciously dying out, have evolved defense mechanisms against those vicious little startup mammals–and they have their advantages too. Unlimited resources. Metcalfe’s Law. Economies of scale.

What’s more, as software eats the world, one side effect is that rewards accrue nonlinearly to those with the best software. This in turn leads to power-law outcomes; a few big winners…and a whole lot of losers.

So what’s a poor startup to do, if we are transitioning into a new bleak world where the gold mines run dry?

• Move into new fields that have not (yet) gone through this transition. Tech giants may have adapted (somewhat) to the startup threat, but there are other fields — healthcare, for instance — still trying to adjust to last decade’s technology. These will remain fertile ground for some time yet.
• Similarly, go into fields which are still so young that they have not yet consolidated. Bitcoin / blockchain / decentralized systems are still in their gangly antisocial adolescence. Everyone agrees that AR and VR will be huge, but the VR/AR equivalent of cinematic storytelling — and all the tools it will require — has yet to be defined. You’ll soon be able to implant tiny computers into massive numbers of physical devices for a dollar a pop; that’s a whole new field of possibility that never existed before. What are its ramifications?
• If you’re building a smartphone app, or a web service, or, God help you, some kind of new social network, accept that your app/site/network will not live on the homescreens / bookmarks of hundreds of millions of people worldwide. Those positions are taken. The odds against that kind of breakout consumer success were always astronomical, but now they’re astronomical squared. Aim to build apps for use by (the diminishing number of) specific industries and communities who are not yet well served.
• …or, you know what? Ignore my rules, make your own, and adopt “Never tell me the odds!” as your mantra. If you are building something which is genuinely extraordinary, that’s always the right answer. This is about distribution and prevalence of outcomes, not an absolute rule for everyone. But don’t kid yourself. The iron is no longer white-hot; the window of maximum opportunity has closed; the gold rush is over.