Reflection: Why There Will Never Be A Startup (Bubble) Bust

[Pic by mysza831]

Just by reading TechCrunch every day you can’t help but wonder, “How the hell are there that many companies getting funded?” And that is just the tiny bit that is mentioned on TC. I shared that observation with my friend Alek, who jokingly (or not quite so) answered, “We’re in a Startup bubble :)”

That got me thinking on the issue. There are a million definitions about a bubble, but generally – “a situation where market prices are unsustainably high”[I don’t think there is such a word, but I got it from Wikipedia, so i guess there is]. Usually that happens as a result of overinvestment and development growth due to speculative inertia. Also, it is not explicitly stated, but a bubble is often associated with a Bust. As a matter of fact your are probably reading not because you want to know about the bubble, but because you are afraid of the Bust. But let me explain why there won’t be one.

I don’t need to bring too much data to convince you that Internet Startups are quite hot today. There is an army of angel investors that occupy the range of $0-$1mln along with VC’s that are targeting investments as low as $500,000. News sites keep coming up with brand new company names. Strange simplistic products become hits in an instant[away status products?]. Early stage venture capital companies like Ycombinator seem to be extremely popular lately. Applications grow in times each consecutive year. Even colleges have a standard practice of organizing competitions and funding the winner teams. Ladies and Gents, there is a gold rush if you haven’t noticed yet. But a Bubble & Bust? Nah. Because the internet market is like no other market:

There is a tremendous growth. Just like in real estate where developers build, people happily and readily buy, developers make more money and keep building. The one difference is – in the internet market new people just keep coming. No geographical area has such unbelievable influx of client??le. New people get hooked with bandwidth every second. People that have it increase their use of internet all the time because there is more stuff to do online. And more people means more developers and more products and more stuff to do. When does that end?? When supply of new people dries up. Not any time soon, I will tell ya that. Most of the internet users come for about 15 countries and total less than 1/2 billion. With more than 6.6 billion people there are quite a lot of future entries. With such dynamically increasing demand, how can this market be saturated?

Another interesting characteristic of the internet market is the movement speed of huge masses that can pick their belongings and move in a different building. Switching between products (email clients, social sites, tools, etc) can be done in incredibly short time by incredibly huge masses. Or for that matter adopt a new product/mindset. Think Gmail, YouTube, Friendster-MySpace-Facebook. That means new developments can target not only the tourists but also the locals. True, old buildings get tossed in garbage but so what? Owners made money, now it’s time for another venture or other entrepreneurs.

The third interesting thing is that the internet market sucks off the real world. Or should I try to present it better – is in symbiotic relationships with the real world. There is a constant addition of new ideas that are based on establishing the connection between the real world and the internet. Online TV, USPS online tracking, mp3 (players) and a gazillion other things are being now invented that make a wonderful bridge between the virtual and the touchable. With every new such feature fuels the internet, revamps the market and gives rise to other ingenious ideas. Net has catching up to do with real world and there’s plenty of opportunities for sucks off people and products from the real world.

It would seem naturally to make parallels with the Bubble in 2000. “If it happened then, it may happen now”, you would say. It’s quite different though – 2k was a flop because people realized the power of internet before the audience was ready. Huge speculation positions were taken while nobody believed in the Internet. Everybody jumped into making products that weren’t bad (and would probably have made money today) but the crowd was not convinced that internet will be part of their lives. Today, IT is not only a source of information, but a means of entertainment, and a medium for communication and social enterprises. The internet is becoming more and more an irreplaceable tool for almost everything. Before 2k it wasn’t so. As it happens very often – technology was ahead of mindset. Investors and entrepreneurs got burned. We now know the power of fire though, but we also know how to handle it.

Time IS going to come when there will be a slowdown due to the underdeveloped countries that can’t wire themselves. The big powers that could afford to wire themselves are doing it and when they are done things will indeed slow down. The Balloon will deflate but not Bust. The reason for this is that it has become tremendously cheap to build, scale, and maintain a product. If in the past the main investing players were VC’s with millions, today it is everybody that has an extra 10,000 or 100,000. That has huge implications on the Bubble effect because while before 2K valuing the market was based on few VC investments and few believers and a crazy amount of speculation about the future, today there is one source of information – the internet market. It is the ultimate measuring stick. It is composed of millions of businesses and small websites each of which has a pulse. We can measure that pulse and we can go in hibernate mode if needed. But we won’t default.

So my prediction is that Startup culture will keep growing healthily. It will also make deep changes our perception of careers. As the internet gets more integrated with the real world businesses and as those connections get systematized, it will become quite easy to start a regular business too, like never before. It will become much more common for people to have the mindset of business starters than company employees. No bubble, no bust – just growth, growth, growth.

PS external factors like World War or Net Neutrality, etc. not considered