Guest Commentary: We’re very clearly in a new tech bubble now. Valuations, funding rounds, recruitment incentives are already remarkably similar to what we saw 10 to 12 years ago.
But the first bubble, the days of Pets.com, HomeStore, Kozmo.com and shooting gerbils out of cannons on Super Bowl Sunday, that was different. The primary objective then was to build a real business, the next Amazon.com. Take the business public and keep growing. The idea was to go it alone.
That’s not the case now.
If what we’ve seen over the past few months continues, this bubble is about R&D. Startups are less concerned about making money, and more interested in selling to a larger company that no longer needs to invest to develop that innovation for themselves.
It’s not a bad thing. Far from it. Startups, founders and their backers want a happy ending. Those dollars either come from paying customers, the market (via a public offering) or an acquisition. Money is money.
But if you think about this from the buyer’s point of view, it makes even more sense. Companies like Microsoft, Google, HP and Salesforce.com invest billions of dollars in hard and soft costs to develop new technologies, new innovations, new opportunities to engage and monetize current and future customers.
Those who have worked in R&D, or have taken multiple ideas or products to market, know that the success rate of innovation is quite low. Big companies will, effectively, waste tens if not hundreds of millions of dollars on ideas and prototypes and concepts that never see the light of day or make a dollar in revenue (let alone margin).
If I’m that big company, today’s startup community is my new R&D, my new incubator.
One thousand garages working for me. And I don’t spend a dime until I see something I like. Will I pay a multiple on what it would have cost to build that innovation myself? Absolutely. But this cost is still a small fraction of what it would have taken to fund the myriad projects to come up with that innovation ourselves.
I look at local companies such as Picnik and Gist, acquired by Google and Research In Motion respectively. Those buyers could have developed these services themselves, but at what cost? In how much time? With what kind of distraction to their core, currently-revenue-producing priorities?
The money flowing from VCs to these start-ups recently looks breathless without this context. But smart VCs have figured out this dynamic as well.
This is not a universal driver of all new businesses, of course. Plenty are and will become successful, stand-alone businesses. The next Amazon, the next Salesforce.com. But if this premise is true, there’s little mystery as to why we’re back in a bubble.
Where do I sign up?