We all know that there is something different this time about the web startup market. As I have written before, it costs next to nothing to get a service on the web (look at MyBlogLog as an example), the market is much bigger as broadband penetration has grown from 10% to 50% over the last 5 years, and I hope that we have all gotten more prudent with the amount of funding that startups initially need to get their service up and running. This cuts both ways as a lower barrier to starting a company means a lot more competition in each market. Given that, it is not surprising to me that a number of startups that have raised money over the last 12 months seem to be making the news in the blogosphere for laying off staff or even (GASP) going out of business. The timing seems about right - startups raise about 12-18 months of cash to hit some key milestones and then either go out for more funding, get acquired or go out of business. Until now, most of the news was centered around the first two paths. So it is inevitable that we will hear about failures especially as management teams and investors make the hard decision to pull the plug early rather than plod along. This also may mean that rationality is still with us as people understand that funding the 30th tagging site or 50th video site may not be the best use of capital.
If there are always going to be 1-3 winners in a space, then more competitors equals more failures. Combine this with the fact that this new resurgence of web startups is much more publicized and transparent than the first generation. So more startups and more news outlets and blogs means that we are only going to hear more and more bad news in 2007. That's ok. We have to remember that in the echo chamber of the blogosphere, this news of death and layoffs seems to reverberate quite loudly. Just because we hear about it and hear about it from more sources does not mean that the sky is falling. From my perspective, this is no different than the past. Startups are risky and a number won't make it but some will hit it big. In addition, startups have to be flexible and more often than not their business models will adapt once they are out in the market which means a layoff or two may happen.
This reminds of the scene from the movie Monty Python and The Holy Grail where the dead collector comes through town to clean up the streets. As he pushes his cart through the town, people start piling up dead bodies. However, one seemingly dead body claims he isn't dead. The same goes for web startups - we will see more bad news but that does not mean the market is over. It also doesn't mean that we shouldn't write about the failures as we can all learn from them.
Here is an excerpt from the movie:
The Dead Collector: Bring out yer dead.
[a man puts a body on the cart]
Large Man with Dead Body: Here's one.
The Dead Collector: That'll be ninepence.
The Dead Body That Claims It Isn't: I'm not dead.
The Dead Collector: What?
Large Man with Dead Body: Nothing. There's your ninepence.
The Dead Body That Claims It Isn't: I'm not dead.
The Dead Collector: 'Ere, he says he's not dead.
Large Man with Dead Body: Yes he is.
The Dead Body That Claims It Isn't: I'm not.
The Dead Collector: He isn't.
Large Man with Dead Body: Well, he will be soon, he's very ill.
The Dead Body That Claims It Isn't: I'm getting better.
Large Man with Dead Body: No you're not, you'll be stone dead in a moment.
Just to be clear, the fact that it seems like more and more startups are running into hard times does not mean that the market is in serious trouble. And while I believe the failure rate may be even higher in this go round, I also expect that the dollars lost per failure will be orders of magnitude lower than in the first Internet wave. When the 30th tagging site or 50th video site have hard times, that is not cause for alarm. What will scare me is if we start seeing more unproven startups raise significant amounts of first round capital at frothy valuations and spend it on Super Bowl commercials or if Google starts to hit the skids.
