Orbit Change Conversations

Strategy+Business has an interesting article on “Lessons of the Last Bubble”. One provocative finding of the study is that the…

first wave of the dot-com revolution suffered from too little entry, not too much. The hype-happy phase of the bubble created a land-grab mentality, with early entrants seeking to control the high ground rather than continue exploring. And, when the bubble burst, new explorers could not get the funding to start a new expedition of the remaining uncharted territory. Had the fall not been so dramatic, more firms could have sought to productively exploit the new terrain.

The underlying data is interesting. Apparently the five-year survival rate of companies seeking venture funding in 1999 was 48%. This is higher than the survival rate of 39% for independent restaurants open for three years starting 1996. That is, “a form of business with a very measurable market, using cooking technology that has existed for decades or more, failed 61 percent of the time. By comparison, the failure rate of Internet-based businesses tapping unknowable market opportunities with an unproven technology platform seems far more tame.”

So the real problem wasn’t too many startups. It was that VCs encouraged a herd instinct. And why did that happen? Because everybody was captivated by the “get big fast” strategy. The article is particularly critical of this strategy. It points out that Wal-Mart achieved its scale over a very long time…

Sam and Bud Walton opened the first Wal-Mart in 1962, but only after Sam had spent a dozen years running five-and-dime stores for the Ben Franklin chain. Eight years later, in 1970, Wal-Mart went public with $44 million in sales from 18 stores. It also opened its first distribution center that year. Sam Walton expanded much more slowly and only after proving the profitability of the small-town discount store strategy. [In contrast,] Webvan tried to grow rapidly while struggling with the complexity of a highly automated business model and uncertain demand. Even though the model might have proven advantageous over time — with more experimentation — the “get big fast” thinking created a risk profile that was simply too extreme.

In summary, the article favors lots of little experiments that send the herd in many different directions. That’s the best way to avoid a bubble. But is that going to happen? No. It predicts that new bubbles in nanotechnology, renewable energy (I agree with this; see this post), BPO services (I’m not sure I agree with this!) and RFID tagging are already forming.