steveblank.com/2011/03/18/new-rules-for-the-new-bubble -> steveblank.com/2011/03/18/new-rules-for-the-new-bubble/
The rules for making money are different in a bubble than in normal times. What are they, how do they differ and what can a startup do to take advantage of them? First, to understand where we're going, it's important to know where we've been. Paths to Liquidity: a quick history of the four waves of startup investing. com Bubble (1995-2000): "Anything goes" as public markets clamor for ideas, vague promises of future growth, and IPOs happen absent regard for history or profitability.
The reward for doing so was a liquidity event via an Initial Public Offering. Startups needed millions of dollars of funding just to get their first product out the door to customers. Software companies had to buy specialized computers and license expensive software. A hardware startup had to equip a factory to manufacture the product. Startups built every possible feature the founding team envisioned (using "Waterfall development,") into a monolithic "release" of the product taking months or years to build a first product release.
There was no repeatable methodology, startups and their VC's still operated like startups were simply a smaller version of a large company. The world of building profitable startups ended in 1995.
Netscape's IPO, there was suddenly a public market for companies with limited revenue and no profit. Underwriters realized that as long as the public was happy snapping up shares, they could make huge profits from the inflated valuations. For VC's and entrepreneurs the gold rush to liquidity was on. The old rules of sustainable revenue and consistent profitability went out the window. VC's engineered financial transactions, working with entrepreneurs to brand, hype and take public unprofitable companies with grand promises of the future. The goals were "first mover advantage," "grab market share" and "get big fast." Like all bubbles, this was a game of musical chairs, where the last one standing looked dumb and everyone else got absurdly rich.
bubble mantra of get "big fast" and "first mover advantage" demanded tens of millions more to create a "brand." The goal was to get your firm public as soon as possible using whatever it took including hype, spin, expand, and grab market share - because the sooner you got your billion dollar market cap, the sooner the VC firm could sell their shares and distribute their profits. Just like the previous 25 years, startups still built every possible feature the founding team envisioned into a monolithic "release" of the product using "Waterfall development." But in the bubble, startups got creative and shortened the time needed to get a product to the customer by releasing "beta's" (buggy products still needing testing) and having the customers act as their Quality Assurance group. The IPO offering document became the playbook for startups. With the bubble mantra of "get big fast," the repeatable methodology became "brand, hype, flip or IPO". com bubble collapsed, venture investors spent the next three years doing triage, sorting through the rubble to find companies that weren't bleeding cash and could actually be turned into businesses. Tech IPOs were a receding memory, and mergers and acquisitions became the only path to liquidity for startups. VC's went back to basics, to focus on building companies while their founders worked on building customers. Over time, open source software, the rise of the next wave of web startups, and the embrace of Agile Engineering meant that startups no longer needed millions of dollars to buy specialized computers and license expensive software - they could start a company on their credit cards.
Customer Development, Agile Engineering and the Lean methodology enforced a process of incremental and iterative development. Startups could now get a first version of a product out to customers in weeks/months rather than months/years. Social Networks and Mobile Applications, now reached 100's of millions of customers. Startups began to recognize that they weren't merely a smaller version of a large company. Rather they understood that a startup is a temporary organization designed to search for a repeatable and scalable business model. This meant that startups needed their own tools, techniques and methodologies distinct from those used in large companies.
Four Steps to the Epiphany and Agile engineering textbooks. Rules For the New Bubble: 2011 -2014 The signs of a new bubble have been appearing over the last year - seed and late stage valuations are rapidly inflating, hiring talent in Silicon Valley is the toughest since the last bubble and investors are starting to openly wonder how this one will end. Breathtaking Scale The bubble is being driven by market forces on a scale never seen in the history of commerce. And those customers may be using their devices/apps continuously. The revenue, profits and speed of scale of the winning companies can be breathtaking. The New Exits Rules for building a company in 2011 are different than they were in 2008 or 1998. Startup exits in the next three years will include IPO's as well as acquisitions. And unlike the last bubble, this bubble's first wave of IPO's will be companies showing "real" revenue, profits and customers in massive numbers. At the same time, acquisition opportunities will expand as large existing companies, unable to keep up with the pace of innovation in these emerging Internet markets, will "innovate" by buying startups.
Business Model Generation and the Lean Startup movement have become the playbook for startups. The payoff: in this bubble, a startup can actively "engineer for an acquisition." Here's how: Order of Battle Each market has a finite number of acquirers, and a finite number of deal makers, each looking to fill specific product/market holes. So determining who specifically to target and talk to is not an incalculable problem. For a specific startup this list is probably a few hundred names. Visibility During the the Lean Startup era, the advice was clear; While you still need irrational focus on customers for your product, you and your company now need to be everywhere and look larger than life. Show and talk at conferences, be on lots of blogs, use social networks and build a brand. In the new bubble PR may be your new best friend, so invest in it. Lessons Learned * We're in a new wave of startup investing - it's the beginning of another bubble * Rules for liquidity for startups and investors are different in bubbles * Pay attenton to what those rules are and how to play by them * Unlike the last bubble this one is not about selling "vision" or concepts.
March 18, 2011 at 6:36 am said: Indeed, there are big changes since the early 80's and the halcyon days of the latter 90's in terms of creating a successful company. The costs and efforts shifted from engineering and development, to marketing and sales. What has not happened is that VCs haven't caught up in how they allocate investments to reflect this change.
March 18, 2011 at 8:37 am said: Thank you for sharing all your experience and brilliant insight publicly. In your view, is there a type of PR you should an early startup should focus on first (word of mouth, local news, SEO) given the limited resource?
I'm observing that 1) there's a bubble, 2) if you don't agree don't do anything different, 3) if you do agree, think about what you would do different in a bubble, 4) I offer that in this bubble you need to build a real company, but that visibility is part of your exit strategy. The "built-to-flip" strategy would assume not focussing on users/revenue/business model.
March 18, 2011 at 12:49 pm said: Steve: I love your book and your focus on a process that iterates to find customers and solve customer problems. This is really a model of how to discover a business/model that would work across any of the waves of startup investing you list above. I don't see you make that distinction (maybe I missed it) but would ask you emphasize (or correct me) that your model stands above what you see as a next bubble period. I'd hate to see your model tainted as a "bubble machine" for bubble companies, which it certainly isn't.
March 18, 2011 at 2:45 pm said: S...
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