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The debate as to whether or not Silicon Valley is in a bubble might be missing the point. We might better ask if the fundamental principles of tech investing are shifting as technology becomes more of a consumer phenomenon. For all the talk of the long tail, the big money is in sites and services that capture a large user base. So how does venture capital and angel investing change to support this model? And should it?
Success in this realm isn’t like success in the old-school Silicon Valley world of building chips or enterprise software. The product still matters, but the audience isn’t the few tech- or business-savvy experts at a large company who evaluate your wares for a multimillion-dollar deal. Today it’s about selling to a billion people on Facebook, hoping enough of them will give you a click, a tweet, or five minutes of their time to be monetized in the form of ads.
Maybe if you’re good, you can build a business selling apps, but the game is still driven by hits. The Internet has become a wasteland of lame-duck startups and acqui-hires that couldn’t make it to the next level in popularity. The winners are those that rise to platform status—and it seems that for many segments of the Web, much as in The Highlander, there can be but one. Facebook has won out in social networks while Foursquare is hoping to be the darling of location. Meanwhile the battle plays out for a mobile-commerce site, as well as a winner in travel, gifts, gaming (where there may be more than one), and so on.
An Inc. magazine profile on the differences between founders at one startup highlights the change occurring in tech investing. The article, which details the relationship between the two founders of Turntable.fm, is worth a read. Billy Chasen is the programmer who built the site, while Seth Goldstein is the deal maker. The startup they founded has stopped growing and the profile explores that—and their relationship—as they try to tackle the plateau.
Tucked inside the story is a quote that has me wondering if Silicon Valley has moved from developing and promoting real technology to pimping the next hot Web service. If so, what does that mean for startups and investors? “Goldstein’s latest read is simple: Coders are the new rock stars,” says the story. “Twitter’s Jack Dorsey and Facebook’s Mark Zuckerberg built sites that attract crowds of millions, but they don’t completely understand how they did it—and neither does the money backing them. It’s not as if they do market research. So venture funds now bet on hackers the way record labels bet on rising pop stars, hoping that someday soon, they will make something wild, new, and insanely lucrative.”
Hints of this abound. The difficulty in getting a series-B round unless your startup is the Next Big Thing is something I have covered. Then there is the rise of celebrity investors in tech that help push a product. And there’s the influx of brogrammers who code, work out, and live a lifestyle that seems incongruous with building a startup, unless you view them as part of the product being sold to investors and consumers.
None of this is to say traditional tech investment in the Valley has gone by the wayside. There are still hardware-, software-, and data-oriented startups that can raise money and aren’t trying to sell to the masses. For the most part, they follow a different trajectory. Sure, a little celebrity-founder worship sneaks over (witness the love affair with Martin Cassado of Nicira), but it’s generally business as usual, at slightly higher valuations.
Celebrity and the search for the big hit doesn’t get you through the days when the going gets tough. Or as Union Square Ventures’s Fred Wilson so eruditely puts it: “So if you are doing the startup game for money, and lots of it, you are in for a plate full of frustration. It must be for more than that.”
Which has me thinking that not everyone is pumped about this hit-maker mindset. Even those who stand to benefit.
Also from GigaOM:
Supporting Startup Growth With the New Recruiting Ecosystem (subscription required)