Train Thoughts

When the bubble popped in 2000, that has come to be known as Web 1.0.  The companies that survived and some new ones that started were lean, used ajax technology, perhaps used open-source platforms and heavily incorporated social networking features became known as web 2.0.

Some people tried to coin web 3.0.  It felt trite and self-serving.  It was too early.  And.  Nothing dramatic enough had happened to create a marker for the industry to line up against.

This past week and weekend there has been lots of talk about how to handle the major economic issues that are facing startups.  Whether it is the collapse of the housing market and the credit markets drying up, or if it’s the new (like this week) valuations put on public companies that’s going to affect private company exits, it really doesn’t matter.  Because.  As an entrepreneur, there is nothing you can do about it. However, this is a defining moment.  One that will define the next generation of the internet because of the global economic issues that are facing all of us.

Here’s why.  Access to capital will decrease.  For really early companies, angels that just lost 20% of their net worth in the last week.  They are going to write less checks.  Second, VCs are going to spend more time on their existing portfolio and less on new investments. Also, as a consequence of the amount of capital it now takes to bring a web company to market, it became trendy to raise smaller funds. VCs that raised smaller funds will need to go and raise new funds sooner.  This may prove challenging to smaller funds that invest in the earliest of stages. The result will be less institutional investors for early stage companies.

Second, engineers are getting scared.  Some have been through one failed company already.  They read about the headwinds, and they will fly to secure jobs at large companies.  They think this will be a secure job with a dependable check.  This thinking is flawed - big companies will let go many people.  None the less, there will be a flight of workers to large companies.  At least they will try to get jobs at fortune 500 companies.  This is going to put more emphasis on cash compensation. What I think smart job searchers will do is look for companies that pay less wages.  This should be a sign that they are creating a sustainable cost structure.  But, they should focus on the equity portion.  A talented engineer should be willing to trade income for equity at a startup.  And startups should focus on people that understand the importance of conserving cash in exchange for equity.  Companies with frugal cultures will do better in the short and long term.

Third, it’s going to be tougher to get revenues for ad supported businesses.  It shouldn’t be a surprise that if earnings decrease, so will marketing budgets. Internet, video, and mobile are all going to slow.  Brand dollars that are difficult to get will become more difficult.  The performance advertisers are much more educated than they were.  They are going to focus more and experiment less.

I think we’ve learned a lot about what it takes to build a big business on the internet.  Here is what’s on my mind.

1.  Getting to scale.

2. Efficiency of people

3. Proving a business model that supports 1 and 2.

What’s the fastest and most practical way to get to scale. Is it rolling up, partnering, or even co-selling?  Can two or three companies be but together that reduces burn because of redundant people and creates product synergies that allows them to get to number 3.  Making money.  To make real money on the web it takes 1 and 2.  Massive scale and efficiency.  So, perhaps the next generation of the web will be a federation of services that work together.  They’ll bring scale by aggregating their users for reach as an example.  Perhaps they’ll work so close together that they will share offices and cut their rent in half.

This brings me to what I think the great opportunity right now.  Attitudes have been reset.  There is a sense of openess.  Now is the time for us all to work together.  To align our interest, put our egos aside, and find ways to be better together.