I believe we’re going to look back in 2-5 years and realize that we’ve been in a once a decade boom for internet & software startups.
It doesn’t feel much like a boom actually. The macroeconomy has been stuck in a tepid recovery in the US, a period of decelerating growth in emerging markets, and a double dip recession in much of Europe. In the tech sphere, a good bit of air was let out of the tires when the hype around some consumer-facing internet companies proved transitory. Remember when Groupon and Zynga were each going to be worth $20-30B? Facebook’s IPO was obviously a debacle, and in the private investment sphere valuations from the seed through late stage have declined for the most part from their peaks in late 2011 through early 2012. And of course the US government is shutting down today…
But if you look past all the reasons why it doesn’t feel like a boom, you start to see some compelling evidence:
- Ubiquitous Computing (aka Mobile) Surge is in Full Swing - Again at NextView we think of this computing platform wave as ubiquitous computing rather than simply “mobile”. But we’re now 5+ years into the hardware cycle for smartphones and 3 years into the cycle for tablets. Software revenue trails hardware slightly and ad revenue always takes a couple years to shift, but even here the results are astounding. Facebook will do $7-8B in revenue this year, essentially none was from mobile ads last year and now >40% of their ad revenue is from mobile ads.
- Cloud Computing Strength Accelerates - “Cloud” gets thrown around as much as mobile without really parsing the underlying trends. At the application layer you have a massive shift of on-prem software going SaaS, a trend started over a decade ago with Salesforce but accelerating dramatically in recent years across nearly every software category (HR – Workday, Marketing – Eloqua, Marketo, Marin Software, ExactTarget, Engineering/IT – Rally Software, ServiceNow). At the infrastructure level companies are creating all stuff which will power cloud-based applications and services and keep them secure.
- IPO Market Is Strong - All the companies I just mentioned in cloud computing have gone public within the last 12 months. In September 2013 alone there were 6 tech IPOs (FireEye, Ring Central, Violin Memory, Applied Optoelectronics, Benefitfocus, and Covisint). The last two weren’t traditional VC backed startups, but rather growth equity and a corporate spin out, but nonetheless innovative tech companies are clearly being welcomed by the public markets again. And of course Twitter filed confidentially for their IPO in September.
- IPO Market Is Rational - I say now is a boom and not a bubble, because crucially all of these are rational businesses with significant revenue (typically $100M+ annualized, if not substantially more), strong growth rates, and profitability or at least a clear path to it. This is not ’98-99 when pre-revenue companies were IPO’ing. And as I’ve mentioned valuations in the private investment sphere have largely rationalized in the last 12-18 months.
- More Ways Than Ever to Raise Startup Capital - Plenty has been written about AngelList’s new funding & model (good summary here), as well as crowdfunding more broadly. But it’s clear that the capital needed to launch a software-based business has never been lower, and there’s more ways than ever to obtain that capital.
This boom will play out over a longer time frame, and perhaps a little slower than the ’95-00 boom & bubble cycle. Maybe the current boom started 12 months ago or 18 months ago but we’re still pretty early in. I’m not a Pollyanna either… the business cycle hasn’t been eliminated and the process of creative destruction means for every startup that becomes a big business, many more will die and some existing giants will wither.
But in my mind there’s little doubt we’re in a tech boom, and just as the last boom didn’t feel self-evident until ’98 or ’99 I suspect this one may not until 2015 or 2016. The US government last shut down in 1995 and 1996. It’s purely a co-incidence of course but in ’95 Netscape went public, regarded by many as the seminal moment of the last tech boom, and in ’96 Yahoo went public followed by Amazon in ’97 and eBay in ’98. So don’t lose sight of the tech boom that’s underway now amid all the rest of the news…
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