I have been having an online discussion with my friend Andrew Badera, who wrote the initial “idea = 1% execution = 99%” posting on the NextNY mailing list that I blogged about last week. His position is that execution is worth far more than ideas. We have been going back and forth in the comments of that article, and in the process I realized something I think is significant enough to elevate to a blog post.
The sorry state of tech entrepreneurship is not a failure of execution, but a failure of ideas. In the last four or five years, the Web 2.0 market has seemed explosively successful. But I would say that from an economic perspective it has been a failure. Because at the end of the day, a market cannot be judged by how much VC has been raised, but by how much actual revenue the companies are making either independently or after acquisition, as parts of larger companies.
The truth is that as it relates to generating revenue, Web 2.0 has been a bust. This is intuitively obvious, but unfortunately I don’t have any hard statistics to back it up. But the clearest indicator is that startups are not being acquired. If the best of the best were accretive to earnings for the acquirer they would be. The idea that the raft of social media companies with no revenue model was going to somehow “figure revenue out later” after building up large audiences of free users has, I think been debunked. Web 2.0 is old enough that there should be way more companies making lots of money.
Which brings me back to the idea vs. execution argument. In the Web 2.0 era, there have been lots of excellent entrepreneurs. The failure of the overall market is not because no entrepreneurs are executing, but because they are, by and large, trying to execute bad ideas. We are currently living through the fallout of that. Yes the overall economy is obviously bad, but this trend is not a new one. It has been clear for at least a year and probably longer.
What the Web 2.0 market actually confirms for us is that bad ideas cannot be overcome with excellent execution. Otherwise we would be seeing lots of hugely profitable social media startups. The proof is in the (lack of) profit.
Monday, October 6, 2008
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11 comments:
Just because they aren't being acquired doesn't mean they aren't successful (or profitable)...in fact, if you are running a company, having a good time, and making money/paying the bills...why would you want to sell or be acquired?
I think the 'best' metric is how many are shutting down or swimming in the deadpool? Those are clearly not making money.
But I don't think it's a fair or valid assumption to say just because something isn't acquired it's a failed or bad idea/business...as long as it's still living and breathing, there's no reason to think it's not making money (not too many businesses stay open for a long period of time without money to support themselves - be it VC, revenue, whatever; they all need money to live).
Kevin,
"as long as it's still living and breathing, there's no reason to think it's not making money (not too many businesses stay open for a long period of time without money to support themselves - be it VC, revenue, whatever; they all need money to live)."
There are definitely reasons to believe that most of the companies in the web 2.0/social media space are not making money. And acquisition in the aggregate, although not the specific, is a *great* way to judge whether an overall market is making money.
Fred just posted this morning on the related topic of the question of Free vs. Paid: http://snurl.com/44b7b
What matters most in my opinion is the strength of the business model of a startup rather than its ability to generate cash right away. I'd contend for example that Facebook and Twitter have stronger business models, hence long term prospects than LinkedIn even though LinkedIn has a clearer path to revenue.
The 3 questions every entrepreneur and investor ought to constantly ask themselves are: what's the value I'm creating? what is my ability to extract this value? what am I doing to prove it?
If twitter has a stronger business model than twitter, could you tell me what it is? Perhaps I am mistaken, but I always thought "business model" meant "way to make money". I much prefer $100M/yr (linkedin) to $0/Yr (twitter)
Hank, no question that LinkedIn's current revenue model is stronger. LinkedIn's problem is that aside from its data, the platform has no real value, and whatever its revenue, it stands an API or export mechanism away from being swept. Any attempt by LinkedIn to increase the stickiness of their platform has been a resounding failure so far.
Twitter on the other end is the stickiest, borderline addictive, platform I know. It is already creating value for individuals as well as businesses. Its ability to pinpoint topical context, time and location provides amazing marketing power (as an analysis tool for marketers as well as a communication platform). I don't know of Twitter's plans to extract this value but I could foresee several ways they could go about generating revenue - advertising and paid for subscription for business users being the obvious ones.
So I'd bet on Twitter over LinkedIn any day...
The biggest problem is that all of these entrepreneurs have only half baked ideas and they're getting funded. I'm not in those pitches but I find it hard to believe so many investors would say "yes" to funding a social start up that didn't have a revenue plan built in. But, that's exactly what seems to have happened. This is good news to me since my social start up has revenue generation built it. Does that mean I'll get more investment for a lower equity stake?
Here is where web 2.0 will actually make money...when you have ultra small shops (1-50) individuals running a site/service in the cloud. All the bloat in many startups reminds me of web 1.0, the bubble is bursting again.
Those that remain lean can afford to stay afloat via ad revenue and may never be multi millionaires (except Markus Frind), but, can run a big ship for a long time quite comfortably.
I'm not on the mailing list so I apologize if this was already mentioned.
The notion of “idea = 1% execution = 99%” is a long standing one that dates back to Thomas Edison in 1932: "Genius is one per cent inspiration, ninety-nine per cent perspiration."
Visiting Edison's lab in Dearborn, MI (where Henry Ford eventually moved the lab) shows his lifelong work and repeated success set on this fundamental belief. He in turn set up the essential model of inventor/entrepreneur that companies in the tech industry (among other similar industries) follow to this day.
Whether or not we are talking about the web, invention should always start out with that initial idea, and then be followed up extensively with solid execution and exploration. To me the exploration is part of the 99% - figuring out how to make the idea work. This of course comes from my own understanding of this quote within the context of my own experience, so I can't claim to be objective in my view.
The problem I see is that many people take the plunge without thinking their idea through. That spark of "inspiration" doesn't have the chance to be fleshed out so that it can be fully explored, but is instead dropped into the lap of the company that would eventually buy them out.
Response too lengthy for a comment:
http://flipbitsnotburgers.blogspot.com/2008/10/re-hank-williams-how-much-is-idea-worth.html
Correction...
The biggest indicator is companies aren't profitable.
Hank,
I know this is a little late, but I just read about Xing, an EU Web 2.0 company that has been somewhat successful, has revenues and a real business model (Freemium) that allowed it to IPO in 2006.
In no means is this post meant to debunk your thesis; rather when we have to look to the EU for a success story it highlights the lack of meat in our homegrown Web 2.0 firms.
The posting that lead me to this nugget:
http://econ204.blogspot.com/2008/10/xing-pioneer-of-web-20.html
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