Ask YC: Supply & Demand for Startups
This is a bit of a devil's advocate thought, so bear with me. As the cost of starting up plummet to negligible levels, are we creating conditions for prices to follow? In an efficient, competitive market, that's what would happen. I noticed we are on to 1-2 start-ups a week from YC alone (which scares me a bit!)
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Acquisition prices would decrease in proportion to supply of new startups if the total amount of wealth created remained constant. But wealth doesn't remain constant.
Good point - start-ups do create new wealth. So I wondered - where does that wealth come from? In the web world, it comes (ultimately) from the healthy growth in user count, and the time they are spending on the web (which makes them either more productive or entertain themselves better or both). The web wealth also comes, to an extent, at the expense of some old wealth destroyed, like newspaper, TV etc. Finally, some of the new web wealth is also the effect of old web wealth being transferred - recent Yahoo acquisitions seem like a case of this to me, because Yahoo itself is declining in value, but they keep buying companies as they do so, effectively transferring their wealth to a new generation of start-ups.
There is natural demand growth for start-ups due to these factors, which manifest themselves as new acquirers springing up - as an example Google wasn't a factor in the last bubble as an acquirer, and may be Facebook will be very acquisitive soon.
So my question can be rephrased as: are we outrunning that demand growth in terms of supply of start-ups? It seems to be so sometimes. And in a recession demand growth could temporarily reverse too ...
There is natural demand growth for start-ups due to these factors, which manifest themselves as new acquirers springing up - as an example Google wasn't a factor in the last bubble as an acquirer, and may be Facebook will be very acquisitive soon.
So my question can be rephrased as: are we outrunning that demand growth in terms of supply of start-ups? It seems to be so sometimes. And in a recession demand growth could temporarily reverse too ...
You think of wealth as money. That's the wrong way to look at it.
Wealth is value added for people or companies. If you create a web-app that saves a company money, then you've created wealth. The demand that companies have for saving money is unlimited. The limits are on the supply side: Can you think of a web app that saves a company money?
On the consumer side, it's basically the same. If you can save customers time, or money, if you can entertain them, or educate them, or make their lives better in any way, then you've created wealth.
Again, the demand for a better living through web-apps is unlimited. The limits are on our side - how much can we deliver?
If you have really created wealth, step two is how to monetize it. That's where Google and Yahoo come in. But that's another issue altogether.
Wealth is value added for people or companies. If you create a web-app that saves a company money, then you've created wealth. The demand that companies have for saving money is unlimited. The limits are on the supply side: Can you think of a web app that saves a company money?
On the consumer side, it's basically the same. If you can save customers time, or money, if you can entertain them, or educate them, or make their lives better in any way, then you've created wealth.
Again, the demand for a better living through web-apps is unlimited. The limits are on our side - how much can we deliver?
If you have really created wealth, step two is how to monetize it. That's where Google and Yahoo come in. But that's another issue altogether.
The real limits are economies of scale. If more and more people leave big companies to do startups, big companies may be forced to raise their salaries. Google might pay a smart hacker far more than the hacker would make on average in a startup, because Google can leverage the hacker's talents across its enormous user base.
Economies of scale are based on transaction costs versus measurement costs ( http://en.wikipedia.org/wiki/Theory_of_the_firm ). Transaction costs have declined dramatically with improvements in IT infrastructure, but measurement costs have changed relatively little. In fact, measurement costs in knowledge industries are very high. Thus I expect startups will continue to become more popular.
It is true that specific technologies saturate. Browser based AJAX may run its course in a few years, but there will be new platforms to replace it.
Economies of scale are based on transaction costs versus measurement costs ( http://en.wikipedia.org/wiki/Theory_of_the_firm ). Transaction costs have declined dramatically with improvements in IT infrastructure, but measurement costs have changed relatively little. In fact, measurement costs in knowledge industries are very high. Thus I expect startups will continue to become more popular.
It is true that specific technologies saturate. Browser based AJAX may run its course in a few years, but there will be new platforms to replace it.
to add to that, wouldnt the increase in supply of startups, also drive up the quantity of startups bought out, but not necessarily the willingness to purchase them, thanks to the equilibrium price coming down.. But this is assuming a perfectly competitive market. With only short-number of buyers, this may not necessarily be the case!
Part of your question supplies the answer. True, costs may be becoming more managable, and resources becoming more abundant, but as that happens you start to run into issues with market saturation causing not just problems with supply but with demand.
Economists and sociologists alike have long preached to the choir that too much of one thing in a society can be bad for the big picture. Take for example the problem with American Obeisity. The more buffet items a restaurant displays, the more a person is likely to eat while negatively effecting their health overall.
Make the parallel to these startups, social content sites are now a dime a dozen, feed aggregators are everywhere (so much so that there are even aggregators that aggregate other aggregators) and consumers find themselves overwhelmed with the choices they have to make when selecting the simplest problem they need to address. When this happens, people often opt not to do anything and would prefer a direct fix through another means than to go and experiment with what's new on the market. This is essentially why you see very few startups aimed to address corporate interests where obviously the potential to make money lies, but instead targets a much smaller sector of the market (37Signals for example).
All of that said, prices and income potential for the startup in my opinion is coming very close to reaching a stalemate, while supplies continue to grow, demand is going to drop.
Economists and sociologists alike have long preached to the choir that too much of one thing in a society can be bad for the big picture. Take for example the problem with American Obeisity. The more buffet items a restaurant displays, the more a person is likely to eat while negatively effecting their health overall.
Make the parallel to these startups, social content sites are now a dime a dozen, feed aggregators are everywhere (so much so that there are even aggregators that aggregate other aggregators) and consumers find themselves overwhelmed with the choices they have to make when selecting the simplest problem they need to address. When this happens, people often opt not to do anything and would prefer a direct fix through another means than to go and experiment with what's new on the market. This is essentially why you see very few startups aimed to address corporate interests where obviously the potential to make money lies, but instead targets a much smaller sector of the market (37Signals for example).
All of that said, prices and income potential for the startup in my opinion is coming very close to reaching a stalemate, while supplies continue to grow, demand is going to drop.
Nah, the price of stale ideas and rehashes is very low. When there's a new big idea and big success, it is very highly valued (look at Blogger, del.icio.us, etc when they were released and bought vs now). The point of a startup is to validate an idea in the market. A validated idea is worth MUCH more than an unvalidated one, but when you copy a validated idea, you're also competing against the people that validated it, which brings a whole new set of problems.
Thanks for your response. I often wonder if increasing supply means prices will fall so low - for example, get hired in a big company, and bring your code free, as a reverse-sign-on bonus. A little disturbing to think about ...
Before someone jumps in and points out there has always been death of start-ups, the YC companies are quite good, and quite plenty (with even more coming ...) which is what raised the supply-demand concern.
Before someone jumps in and points out there has always been death of start-ups, the YC companies are quite good, and quite plenty (with even more coming ...) which is what raised the supply-demand concern.
Two explanations:
1) The cost of starting Apple today would be much lower than it was two decades ago. However, the cost and complexity of starting a computer company that is truly groundbreaking by today's standards is just as high, if not higher.
2) The cost remains constant, but the price of startups, as set by investors, is actually getting higher. Anyone could make a Facebook in 1998 at approximately the same cost (even though servers were more expensive), but no one would have valued it at $15bn. Pricing would either go back down or the change in economic thinking (i.e., advertiseming is more important than hard cash sales) would become the standard.
1) The cost of starting Apple today would be much lower than it was two decades ago. However, the cost and complexity of starting a computer company that is truly groundbreaking by today's standards is just as high, if not higher.
2) The cost remains constant, but the price of startups, as set by investors, is actually getting higher. Anyone could make a Facebook in 1998 at approximately the same cost (even though servers were more expensive), but no one would have valued it at $15bn. Pricing would either go back down or the change in economic thinking (i.e., advertiseming is more important than hard cash sales) would become the standard.
pg has written about this in one of his essays, but successful startups pay a lot because a) it's hard to measure the impact of a good developer, and b) a successful startup gives a market valuation on a small team. As long as BigCo can't properly measure or evaluate developers, there will be an incentive to get a proper valuation by doing a startup.