July 31, 2012, 5:14 PM —
Most of you remember the '90s and the era of fast-moving, easily-funded Internet companies. You may remember that era fondly, or perhaps not so fondly, depending on whether you managed to bank some cash before your dotcoms went bust. But if we look back through all the hype of the period, the dotcoms that crashed because they had weak business plans or were just plain bad ideas, and the still inconceivable free flow of venture capital to those same bad ideas, a lot of good did come from it. Not all companies that rose during that era went bust, and those that are still here have made a major contribution, both to the economy as a whole, and to the state of Internet technology and commerce. All things in balance, it was a net gain.
Having been there to experience it first-hand, one thing to remember is that at the beginning, nobody knew what "dotcom boom" was. There were just a lot of people starting up Internet companies, and a lot of money following those people. There was innovation. There were a lot of 19-year-old kids from Stanford becoming paper millionaires. It was exciting, but only a handful of people at the beginning really knew what was going to happen and just how big it would get.
Today, we're at a similar junction. There are several factors in play, all coming together to form a "perfect storm" that will create something much bigger, and today, only a handful of people realize what is coming, but it would be useful to pay attention to those who do. And what's even more interesting, is that it's not going to be just the whiz-kids from Harvard and Stanford this time around. The world of Internet business is becoming democratized.
So what's going on that will change everything? It's not just one piece, it's four big trends that will change how people start businesses, who starts them, and what types of businesses they start. These are, geographic irrelevance, lower cost for infrastructure and lower barrier to entry, a permanently changed business model that facilitates outsourcing and the launch of small service-oriented businesses, and lastly, equity-based crowdfunding to spread the money around. Here's a quick look at all four of these components:
1. The long recession that started in 2007 may be over, but the recovery is slower than any other recovery in history. Some say we may even be on the verge of a double-dip. But every cloud has a silver lining, and the long recession and slow recovery has permanently changed how large companies do business. The "lean and mean" focus on downsizing, outsourcing and automation is not going away, it has been permanently ingrained into the corporate mindset. Now I'm not saying if you're the one getting the axe it's not devastating, but the upside is that those jobs that are being downsized don't disappear. Tasks still need to get done, and large companies turn to small, often startup, providers to offer them. Increasingly, there are more of these providers around today, stepping up to pick up the slack. Everything from network management, to security, to telecom management and even soft functions like marketing are still getting done, they are just getting done by third party startups rather than in-house.
2. One reason that these startups are able to complete these tasks is because of the enhanced level of connectivity that has been delivered by the cloud. Cloud computing has reached mainstream acceptance, its security is largely unquestioned, and its robustness has been proven. A big company for example, doesn't have to have an on-premise PBX (and a person to run it); they can have a hosted IP PBX running in a third party data center somewhere and managed by a separate company. That's just one example out of hundreds. What this means too, is that not only is the connectivity there to make this third-party service business possible, it means it can take place from anywhere. You don't have to choose providers that are close by, or even in the same state. This fact also means that those entrepreneurs who are launching these third party startups have just as good a chance at success if they're in the middle of an Iowa cornfield, or in the heart of Silicon Valley. It no longer makes a difference.
3. The third factor is that the cost of launching an Internet-based startup has decreased dramatically. In the '90s, it took millions of dollars, and not just for the slick offices with basketball courts and gourmet coffee bars in the break room. They had to build out data centers from scratch, development was tedious and easy development platforms were not yet available, and of course, since they had to be in someplace like San Jose, California, the cost of office space and cost of living was high. Today, a few hundred dollars a month gets you a virtual data center in the cloud. Development platforms, and platform-as-a-service, is flourishing and maturing quickly. And, with B2B marketplaces popping up all over, it's easy to be a small service provider in the middle of nowhere, and get contracts with companies all over the country.
4. The final piece of the puzzle is equity-based crowdfunding, as passed by the recent JOBS Act in April. Despite frequent news headlines about big venture capital deals, most entrepreneurs just don't have the connections, and only a small percentage of deals offered ever get funded. Crowdfunding will allow many more small but innovative tech businesses to see the light of day.
It's going to be an exciting couple of years. Watch for some incredible innovation and exciting startups to come out of nowhere.