New Rules for the New Internet Bubble


We’re now in the second Internet bubble. The signals are loud and clear: seed and late stage valuations are getting frothy and wacky, and hiring talent in Silicon Valley is the toughest it has been since the bubble. The rules for making money are different in a bubble than in normal times. What are they, how do they differ and what can startup do to take advantage of them?

First, to understand where we’re going, it’s important to know where we’ve been.

Paths to Liquidity: a quick history of the four waves of startup investing.

  • The Golden Age (1970 – 1995): Build a growing business with a consistently profitable track record (after at least 5 quarters,) and go public when it’s time.
  • Bubble (1995-2000):Anything goes” as public markets clamor for ideas, vague promises of future growth, and IPOs happen absent regard for history or profitability.
  • Lean Startups/Back to Basics (2000-2010): No IPOs, limited VC cash, lack of confidence and funding fuels “lean startup” era with limited M&A and even less IPO activity.
  • The New Bubble: (2011 – 2014): Here we go again….

1970 – 1995: The Golden Age

VC’s worked with entrepreneurs to build profitable and scalable businesses, with increasing revenue and consistent profitability – quarter after quarter. They taught you about customers, markets and profits. The reward for doing so was a liquidity event via an Initial Public Offering.

Startups needed millions of dollars of funding just to get their first product out the door to customers. Software companies had to buy specialized computers and license expensive software. A hardware startup had to equip a factory to manufacture the product. Startups built every possible feature the founding team envisioned (using “Waterfall development,”) into a monolithic “release” of the product taking months or years to build a first product release.

The Business Plan (Concept-Alpha-BetaFCS) became the playbook for startups. There was no repeatable methodology, startups and their VC’s still operated like startups were simply a smaller version of a large company.

The world of building profitable startups ended in 1995.

August 1995 – March 2000: The Dot.Com Bubble

With Netscape’s IPO, there was suddenly a public market for companies with limited revenue and no profit. Underwriters realized that as long as the public was happy snapping up shares, they could make huge profits from the inflated valuations. Thus began the 5-year dot-com bubble. For VCs and entrepreneurs the gold rush to liquidity was on. The old rules of sustainable revenue and consistent profitability went out the window. VCs engineered financial transactions, working with entrepreneurs to brand, hype and take public unprofitable companies with grand promises of the future. The goals were “first mover advantage,” “grab market share” and “get big fast.” Like all bubbles, this was a game of musical chairs, where the last one standing looked dumb and everyone else got absurdly rich.

Startups still required millions of dollars of funding. But the bubble mantra of get “big fast” and “first mover advantage” demanded tens of millions more to create a “brand.” The goal was to get your firm public as soon as possible using whatever it took including … Next Page »

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Steve Blank is the co-author of The Startup Owner's Manual and author of the Four Steps to the Epiphany, which details his Customer Development process for minimizing risk and optimizing chances for startup success. A retired serial entrepreneur, Steve teaches at Stanford University Engineering School and at U.C. Berkeley's Haas Business School. He blogs at Follow @sgblank

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