October 12, 2007
“Early enthusiasts become evangelists, and mix with fellow community members creating converts who, in their turn, continue the evangelizing and convert other members into activists or, at least, passive and uncritical supporters. Of course, each convert testifies to the truth of validity of the original proposition, meaning that the converted reinforce and re-enthuse the original early enthusiasts (and each other). Social dynamic dynamics of this type are easily able to elevate a conjecture or a bit of gossip into hard truth or an indisputable fact in the minds of community members. The outcome is likely to be a bubble of enthusiasm, one that may actually exaggerate the appeal of the new market out of all proportion.”
No, its not about RubyOnRails (or?) - the above quotation come from brilliant book “Fast Second - How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets”, which was shortlisted as finalist of Financial Times Book of the Year 2005.
The idea presented in this book is simple - smart companies are waiting for the new market to become dominated by so called “dominant design” - and decide to invest only when they recognize that particular market has stabilized, and both consumers/users and producers learned how to use/produce the technology everybody wants. In short, its what Robert Murdoch was trying to do, when he bought MySpace, but unfortunately, from where we are now, it seems MySpace wasn’t so dominant design after all…
The above quotation, describes the early stage of new market colonization - when a new market see a vast amount of entrants, all of which believe that only their idea is the right one, and only their product will make hundreds of millions of dollars. The problem is, they are the only one who really believe so, and even worse - their ideas, although interesting and original, usually struggle to reach break-even point, and generate enough incomes to stay afloat. Nevertheless, precisely because the market is so new and so hot, there’s vast amount of cash available from various VCs and investors, who are willing to put it into even wildest ideas of the “new market entrants”, in order to be the first who find that holy grail of the new market - a “dominant design” which will eventually wipe out almost all of the competition, and grant them thousands of % of return.
By now, you probably guesses already I’m talking about web startups and the situation which we have in 2007. Tens of web startups are getting ridiculous financing in Series A, B or C investments. Hundreds or even thousands of others are desperately looking for their chance to “get a few millions of investments” as well. But the problem is - only a handful of those, really make any money. Within last 3 weeks, I spoke with several web startups looking for financing and the story was always the same “the idea is great, we need 2-3 years, and only then we will generate hundreds of millions - therefore what we need is couple of millions to stay afloat for those 2-3 years”.
Are you kidding me? WHERE IS THE MONEY? If it doesn’t make any money for 2-3 years, if it can’t reach break-even - what’s the point in investing? Doesn’t it make much more sense to wait for the first dominant design to appear on the market, and invest only then - even if that would mean we get 10% not 80% of the company?
”Whatever the logic that channeled vast quantities of equity and venture capital into companies that showed no signs of generating revenues, it was eventually exposed for what it was.”
The above is from the same book - and no, its not about web startups scene in 2007. Its about Internet bubble of end of 1990s. If you remember those days, honestly, do you recognize any similarity between then and now?