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Think Twice Before Starting a Company
I sent a tweet out last week that resulted in some healthy debate:
“three years ago, I was telling everyone I met to start companies. These days, I’m telling everyone to think twice”
Of course, it’s not fair to give general advice like that. But what I meant was, 3-5 years ago, when I met someone who was thinking about starting a company, my bias was one of action. Today, my bias is one of caution.
What’s changed? Couple thoughts:
1. First, part of my perspective is just driven by my natural instincts to be counter-cultural. When there seems to be a lot of hype around an area or activity, I find myself pretty un-attracted to it. Bill Sahlman has a wonderful chart he shows students about the trends in the industries that HBS students tend to flock to, and the subsequent performance of those industries. When a surge of students start pursuing an area, you can almost predict that a crash is coming. I can tell you that the surge of HBS students pursuing startups right now is at a new high.
I also tend to be attracted to founders who do are also contrarian. I invested in David Vivero when he started RentJuice several years ago, before the trend in entrepreneurship in business schools was “hot”. A couple years later, when most business school students were starting daily deal sites or fashion companies, we invested in Fred Shilmover who was building a company focused on business intelligence for SMB’s. Not that great companies can’t be started right in the thick of a hot and crowded category. But it’s much easier to identify authentic entrepreneurs going after non-obvious opportunities.
2. The short term realities of starting a business are currently less favorable, in my opinion. Sure, there is more availability of seed capital in the past, although if you watch carefully, you will notice that most of the elite seed funds have slowed down their pace considerably over the last 12 months. But even still, the pace of new startups in the internet space is very high. More volume has lots of repercussions, but it’s most simply just harder to stand out in all aspects of one’s business. Hiring is ridiculously tough, and pools of talent and diffused across many companies. Getting media and PR attention is tough, because there are hundreds of companies pitching the same people and trying to get them to tell their story. End users are getting inundated with more and more options, making it tougher to get traction. We mainly read about the outliers of companies that are taking off, but it’s really easy to forget that 99% of startup efforts fail. Plus, even the companies like look like overnight successes are actually many many years in the making, often going through several near death experiences.
3. I’m increasingly of the thought that we are in a place in the innovation cycle which isn’t particularly favorable to a) founders with limited prior startup or founding experience and b) founders without a deep tech background. I won’t get too deep into this now, but I see the world very similarly to what Mike Maples and Roger McNamee are articulating in their excellent blog. In many ways, we are at the end of one innovation cycle and at the beginning of a new one. At the tail end of the last cycle, much of the innovation occurred at the application layer, which on balance is a bit more hit-driven and presents more of an opportunity for less experienced and less technical founders to build something that gets broad adoption. But given that we are in the relatively early stages of this new innovation cycle (the “hypernet” or whatever it should be called) more opportunity will be found (in the short term) in enabling technologies and platforms. And on balance, I think those types of businesses have a deeper technical component, and tend to lend themselves a bit more to founders that are more experienced.
So, those are my quick perspectives. To summarize: I am increasingly cautioning folks thinking about taking the startups plunge to think twice. I’m concerned about 1. Founders who are not contrarian but following the masses, 2. The hightened practical challenges of starting a business due to the difficulty of standing out, and 3. That we are at a stage in the innovation cycle that is not favorable to less experienced and less technical founders.
In my next post, I’ll share some thoughts on what I think would be worth doing instead, if you really are gung ho about entering into the entrepreneurial game (which I hope everyone is!).