Blog: There Aren’t Enough Startups
In the past few months, I’ve read more than a few articles about the proliferation of startups invading the world. This “epidemic” started in Silicon Valley and has spread around the world, hooking its viral tentacles into silicon alleys in New York, D.C., Berlin, Dubai and beyond.
Grave predictions of another bubble have invariably ensued, with haunting resurrections of 2000 and 2001, where the only possible outcome of this exuberance being some kind of non-specific crash.
I’m not so sure I agree. I look around from my perch in Emeryville, a thriving little startup satellite to Sand Hill Road, and I see something different. I actually think there aren’t enough technology startups … and that what The Economist recently called a new “Cambrian explosion” is actually only the beginning.
It’s quite simple: supply and demand. Have a look at the past six to 12 months of strategic and financial exits of some of the more successful tech startups, and the financing round numbers. The valuations are high—really high—like record summer temperatures in January high.
|“Why the extraordinarily high valuations? Quite simply, the demand for innovation is MUCH higher than the supply, and both sides of the equation are cresting at the same time.”|
Let’s look at a few examples:
- Google buys Nest for $3.2 billion.
- PayPal buys Braintree for $800 million.
- Facebook buys WhatsApp for $19 billion.
- Stripe valued at $1.75 billion.
- Uber valued at over $40 billion.
The list goes on and on. To be fair, these business all were well on their way to scale, if not already there. But why the extraordinarily high valuations? Quite simply, the demand for innovation is MUCH higher than the supply, and both sides of the equation are cresting at the same time.
Let’s start with the demand side. If you look at large corporations, you’ll find conditions that make buying a lot easier than building:
- A huge demand for innovation
- An inability to efficiently innovate on their own
- Too much cash on their balance sheets and lots of high valued stock to throw around (note the 21 percent/79 percent cash/stock ratio of the Facebook-WhatsApp deal)
Now let’s look at the supply side. On one hand, a set of powerful dynamics are driving the proliferation of new startups: an entirely new technology infrastructure (see Amazon Web Services), a whole generation of engineers pouring out of undergrad programs, crowdfunding, APIs, open source, Lean Movement, etc.
“There is a war coming soon. The arms merchants of the cloud and a new wave of developers armed with APIs are going to cause massive technology disruption. And APIs are the ammunition fueling this change.”
Yet despite there being a ton of new tech companies in the mix, very few get out of the starting gates and even fewer actually get a viable product to market. It’s getting to a real product-market fit, scaling operations and distribution, and building an efficient, motivated culture beyond a few guys in a garage that’s incredibly hard and incredibly rare. Incubators like 500 Startups and Y Combinator have figured out how to get startups to reach product-market fit in record time and with record low capital. But getting to scale takes just as much time and just as much money as it always has.
Meanwhile, getting anything new done in a big company is also incredibly rare. Put those two factors together, and you get a very hungry beast, willing to pay a lot of money for whatever food it can find.
If the ‘startup to scale’ ratio doesn’t change anytime soon, then we need a LOT more startups at the top of that funnel. Or, let’s consolidate forces and get those companies who have a chance to scale everything they need.
Whatever happens in the public equities markets this year, expect to see the fight for scaling startups getting even richer. At last check, there’s more than $1 trillion of cash and treasury stock locked and loaded on corporate balance sheets—and that’s just in the Fortune 100.
In Blogs & Viewpoints, prepaid and emerging payments professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed are not necessarily those of Paybefore.