Opening the valve

For quite some time I’ve been a strong opponent of the notion that we are in a new dotcom bubble. While there has indeed been a significant raise in the starup investments and valuations, my position has been based on the facts that this time the things are a bit different: there is only a handful of companies getting seemingly insane valuations, and none of them are available to the public market.

However, today I have ran into a few articles discussing the plans of the SEC to loosen the rules that define who can invest in non-public companies and how. And if these plans become reality, I am willing to bet that this will very soon lead to a new tech bubble, which might pop even stronger then the Y2K one…

For one, startups are inherently risky, but the media is emphasizing the most successful ones, and the public perception is that one can make a fortune on the right ones, like the current media darling Facebook. So when the gates are opened and the public is allowed to invest there will be a rush, which will create a bubble effect we have all seen ten years ago. But this time it will be even worse, as the private companies are not required to have as many disclosures and reports as the public ones, so it will be almost impossible to have the right information. It is safe to predict the it will end up with a lot of small investors blowing up their savings on the gold rush of overblown valuations.

Second, one of the greatest effects of current rules is that most of the funds available to startups are the “smart money”, i.e. they come with experienced investors (VCs and angels) who add quite a lot of value besides the cash itself. Small-time investors mostly don’t have that added value, and the money is usually not enough, as we could have learned on the Diaspora’s case. In fact, we will most likely have the least experienced founders seeking funding from the least savvy investors (as those with experience will by definition have better access to mentors and investors), and without the guidance they will be more likely to fail, taking their investors with them.

Third, even though there is a lot more money available today, there is still some kind of filtering process before the startups are funded. Hell, even Yuri Milner doesn’t throw his money blindly to anyone who knocks on his door – he has relegated the process to the Y Combinator team, who have so far proven that they can pick the best teams. But unsophisticated investors don’t have the skills to pick the wheat from the chaff; instead they have only one tool to help them decide: social proof. And as they mostly don’t have direct access to the experienced pundits, they need to use a proxy, which is the mass media; and we all know how accurate its reports on startup valuations are. So it comes down to only two kinds of companies they will shoose to invest into: either the booming behemoths everyone is talking about, like Facebook or Groupon; or, failing that, any small seed-stage startup dabbling in the field which is hot in the news these days, be it social media, mobile, geolocation or whatever.

And lastly, one of the worst situations a startup can find itself in is to have more money than it needs. (And I’m talking about investment money, not revenue; the latter is a good problem, and when you get there you’re not really a startup anymore.) This is something we have seen in late nineties, when the bubble was at its height, with money being blown on expensive cars, designer chairs and weekly parties. A startup thrives when it has just enough money to scrape it through, and overfunding makes it sluggish and drowsy.

So I believe that the last thing we need is making funding for startups easier, especially if that means involving a wide audience of unsophisticated investors. I’m still certain that we are not in a real bubble yet, but these new regulations will certainly mean opening a valve to the air tank which will blow it up. And this time it might be even worse than the last.

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There are no ideas

Earlier today, while reading some comments on a post on Hacker News, I had a revelation: ideas, and in particular business or startup ideas, don’t exist. They are just a figment of our imaginations.

An eternal debate has been raging for decades, with those who believe that the business idea is the root of all innovation and progress in business and technology pitted against those who are saying that the idea, while mildly relevant, is completely secondary to its execution, which save a bad idea if done correctly, or spoil a good one if done badly.

But when you think of it – what are the makings of a successful business? There are numerous ways to analyse one, of course; but I’m sure we will all agree that we can isolate three general elements:

  1. The product is the actual thing that is being sold to the customers and is bringing revenue to the company. It doesn’t have to be an actual physical product – it may be a piece of software, a service, anything that gives enough value to someone’s life that this someone is willing to pay money for it.
  2. The way this product is actually produced – which could be called its quality or, if you wish, the execution – is another element, separate from the first one. We may have two functionally identical products, but one can easily be better than the other: will last long, will operate smoothly and without delays, etc.
  3. And the third element, which rounds up our little group, is the market: a more or less clearly defined group of customers which might share different qualities, but the most important one is that they are (at least in theory) interested in our product.

As we can see, there is no idea. So how is it that there are so many debates about something that doesn’t exist?

Actually, I lied a bit – there is something we might call “an idea”, lacking a better word, but it isn’t anything concrete or specific. Most generally, what most people call “an idea” is in reality a more or less vaguely defined combination of the above elements.

In other words, an idea is a concept of a certain product, executed in a certain way, for a certain market. For example, many countries have recently seen a slew of Groupon clones – i.e. the same product and the pretty much same execution as Groupon, only for different markets. Or, applications like The Daily are a known product (a publication) for an old market, only with a new execution (on the iPad).

It’s quite difficult to come up with a truly novel idea, i.e. something that innovates in all three areas. Luckily that isn’t necessary, since it is usually enough to differentiate in only one to gain a significant competitive edge. But often one isn’t enough – while the Groupon clones can work because their model is basically local, previous stabs at local Facebook clones have invariantly failed, since their differentiation – local language – was easily defeated by the original Facebook.

The future of Web browser

But really, what is the point of Web browser?

Originally, it’s purpose was to format and properly display the documentation which used HTML to mark it up. The first browser – sir Tim’s World Wide Web – didn’t even support images, and tables weren’t introduced until years later.

Over years, browser has grown from a simple publishing tool to a powerful platform for delivering server-based applications. But even now, with ajax and CSS and jQuery and HTML5, it’s still struggling to keep up with the native applications in terms of user interface, performance and interactivity…

It’s funny, really. The Web has brought a revolution, providing standards that allowed anyone to produce network-distributed applications with relatively little effort. Its standards are simple to understand and implement, and they require no tools apart from a text editor.

But when it comes to full-scale applications, the browser still leaves a lot to be desired. Its first disadvantage is that you still need to send the whole user interface along with the data, creating a large overhead. There are some advantages for browser-based applications – like no need to update all the client software – but even that is on one side solved by services like AppStore and on the other made moot by the constant upgrade of browsers.

In my opinion, the browser is going the way of the command-line interface. It will always be here (there is console even in Windows 7), but it will be used less and less, only for those who need to quickly set up an Internet-based application or as an entry point to a larger company.

However, we will see more and more native applications for all platforms which will present a nice interface to the user but will heavily rely on a Web-service powered communication with the main service. The best example for that are all the Twitter clients (which are according to some research used by 85% of all Twitter users), which have no other purpose but to serve as a front-end to Twitter. Many Web sites have developed native clients for their data – mostly for iPhone and other mobile devices, but increasingly there are ones for the desktop as well (and devices like iPad arguably start to erase the difference).

What has happened to innovation?

Previously, a “technology startup” meant a company founded in order to develop and build a great new technology. Just look at the original startup – Fairchild Semiconductor – or later famous examples like Cisco, Apple or Google – all of them were created to work for years without profit, even without customers, on building and testing some new technology before turning it into a product.

Nowadays, everyone expects startups that are somehow miraculously profitable from day one – as Daniel Markham nicely puts it in his post The Startup Racket. In other industries it is normal for a long time to pass between founding of the company and its profitability – I was shocked when I heard that in pharmacy and biotech it’s quite normal that a company even goes public sooner than turning profit. And it makes sense that in IT those times will be much shorter – but I never expected they will all but evaporate.

VCs are looking for “traction” and profit before considering investing – but where is the R&D supposed to happen? Just look at the hottest current startups: Facebook, Twitter, Foursquare, Dropbox… While they have a ton of users, none of them is really innovating; they’re using existing Web and mobile technologies and stretch them to the brink. Perhaps it’s not completely fair to assert that they’re not innovating – it’s just that tere’s very little technological innovation going on; what we have is confined to usability, social aspect of applications and the like.

But I still think that at one point we’ll have to start inventing again.

Is there a Moore’s law for bandwidth?

We all know about the Moore’s Law: in 1965, the Intel’s co-founder Gordon Moore has stated in a paper that the number of transistors which can be placed inexpensively on an integrated circuit has doubled approximately every two years (since 1958), and made a prediction that this trend will continue for about a decade. Surprisingly, this assertion generally holds true even today, over half a century later – and it’s expected to continue at least until the physical limits of miniaturization are reached (but, with the advances in quantum computing, it might continue to hold if we replace the word “transistors” with a generic term “logic units”).

However, I’m curious if there is anything comparable to Moore’s Law with relation to the Internet bandwidth – let’s formulate it as “the speed at which an average person could inexpensively access the Internet at will”. Is there any research which tells us how did that kind of bandwidth increase over the years?

Expandable hardware

The company Bug Labs is building a modular set of hardware devices which can be plugged in to each other to create a larger set with a number of features. However, I don’t think this is where the future lies.

Instead, what is needed is a generic, open protocol for transparent interconnection and data transfer between various hardware devices, regardless of the manufacturer or the included modules. The best way to achieve that is wireless communication, so the only required module should be a WiFi controller.

With this, we could connect our iPad to our microwave oven, or our car alarm to our Twitter account, and with the right software they would communicate perfectly, enhancing each other.

Why iPad might fail

When we look at Apple’s past successes, we see a recurring theme: each time Apple made a hit when they entered an existing market with a product that was more elegant and fun to use than most of the current players. That happened with the Apple ][, then the original Macintosh and of course the MacOS X revival; that also happened with the iPod and of course the iPhone.

On the other hand, each time Apple launched something new, going into new territories, their product was received poorly and it failed. Just remember Lisa, Newton and AppleTV (the latter is arguably not a failure, but has not been a raging success either).

On the future of iPad and tablet PC

  1. The iPad will motivate other manufacturers to produce similar devices. They will mostly be generic, PC-compatible computers in (more or less) cool-designed cases (although none will match iPad in production quality).
  2. Most techies will prefer those generic devices over iPads (apart from those in for a really hard challenge, who will try to make iPad run Linux or othe generic OS).
  3. On the other hand, iPad will become nowhere near a success of iPod and iPhone.