Thinking About Tomorrow

Fred Wilson is worried. He thinks that the internet industry is headed for a rough patch. He says this is a gut feeling, but coming from Fred a gut feeling can't be discounted.

I agree with Fred about the cyclicality of the venture industry. Startups start, get funded and get traction. Imitators follow. At some point, the best few in each category go public or are acquired, most of the rest fail or go sideways. This has started.

In the past month I've had many people approach me about starting companies much like those recently acquired. These entrepreneurs are looking at recent exit valuations. But the opportunity is gone. Being part of the first wave is usually pretty critical. If you're not, then you can't just compete with the early companies, you need to displace them. This requires a revolutionary change in product, not just improvement.

When startups fail, they tend to fail in tranches, soon after the choice few are acquired or go public. This is not driven by the larger economy, it's driven by the disappearance of exit opportunities, and thus funding, for these money-losing firms.

In a nutshell, here's what is and will be happening:

1. Large companies can't see where growth in their core businesses is going to come from;
2. They invest in the best of the entrepreneurial ventures, paying whatever it takes, hoping to create growth;
3. Other entrepreneurs see the crazy valuations and start me-too companies;
4. After a year or so, the acquirors realize they overpaid;
   
5. Both the companies that weren't acquired in the first go-round and the me-too companies find no buyers;
6. Investors, realizing that valuations will not be what they hoped, either fold or offer down rounds, effectively killing off the company;
   
7. Meanwhile, entrepreneurs that are focussed on disrupting the way things are done rather than on a quick exit are starting companies that will be the Tacodas of2012.

The answer isn't to worry about eventual failures, it's to encourage startups that aren't at all like the success stories of today. If you're an entrepreneur, don't start an ad network now, don't start a behavioural targetting company now. I can't even tell you what to start now: if I could tell you, then it would be something not to start, if you know what I mean.

If you start something I haven't even thought of, then you've got a shot.