Where Einstein Meets Edison

Pick a Platform. Pick a Market. Get Right to It.

Pick a Platform. Pick a Market. Get Right to It.

Jan 5, 2011

Just ten websites command 75% of all page views. Apple sells 70% of digital music; Amazon hawks 70% of eBooks. Google answers 63% of the world’s search queries. Twenty five ecommerce merchants collect 75% of ecommerce spend, up from 70% last year.[1,2,3,4]

Make no mistake, these statistics bear monopolistic hallmarks. Glancing through these market analyses, you may conclude the internet is devoid of opportunity for startups. But such figures belie reality. There has never been a better time to start a company for three reasons:

1.  Startups can market to hundreds of millions of users through new platforms;

2.  Elastic computing minimizes development costs and enables infinite scale;

3.  Financial markets are strengthening.

New Addressable Markets

Today, an internet entrepreneur may access a market tantamount in size to India with the click of a button. Facebook, Apple and Google’s distribution platforms serve one billion users collectively on F8, iOS and Android. These platforms vie for users by offering unique content created by developers. To gain share, platforms court developers with distribution tools and unfettered access to paying customers, simplifying go to market strategy.

Platform competition demands faster time to market for content. Platforms cannot afford to stall a potential competitive advantage with bureaucracy –  to great benefit for entrepreneurs. No longer must a startup raise capital to survive a twelve month distribution partnership negotiation followed by a six month implementation period. Instead, a two week review process expeditiously examines an application before it is released to hundreds of millions of users. If the application is unique and valuable, the platform will market the application in application stores like the Android market and the iTunes store. Free advertising slashes marketing costs for a product while driving massive adoption.

Once in the hands of customers, applications access billions of dollars of purchasing power freed by simple, 1-click payment options. 1-click payments multiply purchase conversion rates by eliminating painful credit card entry. Customers buy virtual goods, magazines and books on a whim. These systems also simplify cross-border and inter-currency transactions opening new markets. Startups do business in 190 countries on their first day without needing to worry about exchange rates or fraud. Facebook and Apple sell millions of prepaid cards both in the US and abroad, addressing underbanked consumers in the US and abroad. For these simplifications, the platform tax purchases at 30%.  Simple payments broaden the customer base and maximize purchases, enriching both the developer and the platform.

Elastic Computing

When an application succeeds, the backend infrastructure must scale to support a growing user base. Racking and stacking server blades is anachronistic. Replacing this expensive distraction, on-demand elastic computing seamlessly responds to spikes and swoons in user demand, supplying computation, storage and server management as needed – for pennies. Amazon charges ten cents for an hour of computation time. With elastic computing, startups can swap fixed costs for variable costs, reducing the necessary capital to launch and eliminating the risks of forecasting demand before launch.[5]

As a result of platforms and elastic computing, distribution costs are slashed, payment challenges are quashed and server headaches are soothed. Consequently, the minimum capital to launch a product plummets. And so does the cost of learning. With a small amount of money, entrepreneurs can launch, iterate and pivot many times as they search for product market fit.  When an entrepreneur builds a successful product, financial markets reward the company handsomely.

Markets Hungry For Growth

Venture backed IPO and M&A activity surged through third quarter of 2010, a response to the tremendous opportunity created by new distribution platforms and shrinking startup costs. In the first nine months of 2010, 445 US venture backed companies were acquired, generating $39.3B in proceeds and exceeding the 15 year M&A median by 31%, on annualized basis. The average company sold for $58M.   An active acquiror in 2010, Facebook declared 2011 the “year of the acquisition”, seeking to bolster their technologies and teams with at least 15 companies in 2011. Google, Apple and Zynga among others share this hunger for growth and innovation.  In total, these four acquired 22 companies in 2010.[6,7]

It is true the stock market crash of 2008 decimated venture backed IPOs by 95%. However, dollars raised in IPOs rebounded, growing at a 77% compound annual growth rate. 2010 saw 400% more IPOs than 2009 on average raising $72M and $3.4K in proceeds, very encouraging signs for fast growing companies. As Bill Gurley, partner at Benchmark, argues, the challenge for the IPO market is a supply problem: there simply aren’t enough great companies to satisfy investor demand. 2010 IPOs have appreciated 81% since offering, a unambiguous cry for more.[6,8]

One wrinkle in the financial markets may be venture capital itself. VC fund raising contracted nearly 40% since 2007 to $12B in 2010. The 30 year median of annual dollars raised by venture firms is about $26B. However, this median distorted heavily by the bubble years. In the 1980s, firms raised $42B across ten years. In the 1990s, $137B and in the 2000s, $317B with $84B raised in 2000 alone. In 2010, investors committed $12B to venture funds, roughly equivalent to the 1990 average – more than enough to sustain thousands of new startups each year.  Additionally, fund raising is a trailing indicator of sector health rather than a leading one. Fueled by innovation and strengthening financial markets, venture funds’ returns will improve, driving additional capital into the asset class, as was the case in the boom of 1987 and the bubble of 2000. There is plenty of venture capital to be had.[6]

Challenges for Entrepreneurs

As barriers to entry ebb and the reward for the successful companies increase, competition will surely materialize. To succeed, startups will need to erect competitive barriers to entry of their own whether those are proprietary technology, exclusive distribution mechanisms, strong brands, switching costs, or economies of scale. These barriers of entry will replace those eliminated by distribution platforms and cloud computing.

Additionally, startups must hone the skills necessary to serve new markets made addressable by distribution platforms. 450M Chinese use the internet, more users than people in the US. India’s 750M mobile phones subscribers grow by 20M per month. 70% of Facebook’s users are outside the US. Localization is the first step of a mile long journey to succeed in these markets. Competing with local incumbents and upstarts requires local market expertise, skillful advertising and deft partnering.[9,10,11]

Lastly, as more entrepreneurs try their hand, competition for talent will only increase. Hiring from the same pool, large incumbent technology companies have demonstrably increased compensation. This winter, Google granted a 10% raise to all employees for retention. Facebook pays engineers more than any other technology company in the valley. In this competitive environment, entrepreneurs must paint compelling visions of great success to win talent.[12]

2011: The Year of the Entrepreneur

In 2011, the entrepreneur’s optimism is warranted. Massive addressable markets, cost-effective computing and an increasingly friendly exit environment are all evidence that there is an ocean of opportunity looming before you.

So, pick a platform. Pick a market. Get right to it.

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Sources:

[1] Compete via Wired: http://www.wired.com/magazine/2010/08/ff_webrip/all/1 

[2] NPD: http://www.cultofmac.com/npd-apple-selling-70-of-digital-music-in-u-s/44819

[3] Amazon: http://www.huffingtonpost.com/2010/08/03/amazon-we-have-70-80-perc_n_668971.html

[4] Comscore: http://techcrunch.com/2010/11/01/comscore-q3-e-commerce-spending-up-9-percent-to-32-billion/

[5] Amazon: http://aws.amazon.com/ec2/#pricing

[6] Dow Jones VentureSource, VentureOne, Redpoint Analysis

[7] Dow Jones: http://blogs.wsj.com/venturecapital/2011/01/04/google-lost-groupon-but-still-tops-most-active-acquirer-list/

[8] Bill Gurley: http://abovethecrowd.com/2010/11/15/silicon-valleys-ipo-anxiety/

[9] China State Council Information Office: http://seattletimes.nwsource.com/html/businesstechnology/2013824591_btchinainternet03.html

[10]  TRAI: http://www.mobilephone.co.in/201012/70-indians-use-mobiles.html

[11] Facebook: http://www.facebook.com/press/info.php?statistics

[12] Glassdoor: http://www.geek.com/articles/news/facebook-beats-google-on-salary-and-employee-satisfaction-20101119/

 

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