Let me give you my thoughts (again).
In the ‘old technology’ world – personal computers, LAN networking products, microprocessor chipsets – each market sector had a few companies employing thousands of people to implement the design, the manufacturing and the marketing of technology products.
Some of the reasons for this:
- it was difficult and complex to develop and manufacture a hardware/software product
- there was no real outsourcing model available for design and manufacturing
As a consequence of only having a few companies, end users could quickly understand the offerings and chose from a small universe. Not many more companies were added over the 10-15 year timeframe unless we saw a different distribution model or an additional technology niche.
- We only added two PC companies – Dell and Gateway – because of a different distribution model.
- We only added a few chip companies (e.g. Vitesse, PMC, Broadcom) because of an edge in a new technology such as DSP or communication-specific processors.
In the touted ‘new technology’ world – mainly software only – we literally have thousands of software companies with only a few people. Some of the reasons for this:
- there is an explosive easy to use tool set to develop software products
- there is an even more available outsourcing model to have a product created by someone else
The early direction of the Internet (1996-1999) was essentially a highjacking driven by the American past time: entertainment (including shopping). Consequently, we had an explosion of dotcoms chasing this segment. It was easy to have an ecommerce ‘concept’ shown on a screen using HTML or XML.
Most of the people behind these sites lacked solid business experience and failed to implement any solid business infrastructure. Further, in most cases, there was no technology differentiator – since they were written along the same metaphors and the same tools – and plentiful venture capital funding substituted for commercial revenue.
The result of this Internet explosion is that users are totally overstretched to understand (and even find) the offerings and therefore are unable to choose the right from the wrong. The problem of marketing is overwhelming, and real marketing talent is more rare than ever.
This problem of oversupply is also now evident in the B2B space. Call it consolidation – or whatever – but I predict that in every vertical business or industry sector we will have a handful of Internet software companies left standing (so much for eternal employability). Just another testimony to oversupply.
Witness what is going on in the space of web based construction (bidding) Internet companies. There were more than 150 sites more or less doing the same thing. Some of them from soup to nuts, some of them very focused. Even the more successful ones – like Aymerik Renard’s Bidcom.com – are forced to merge. Call this scale economics or whatever, the fact remains that we will see only a few left.
What does this all mean for Upstart’s current portfolio companies? In my opinion, most of them – if any at all – will not see an IPO scenario for reasons including clout & size, specificity, and uniqueness. The good thing though is that all of them (opentable.com ???) have at least a decent amount of valuable technology, which can mean something to somebody else (bigger). Because of our size we might be a bit handicapped in influencing the ‘harbouring’ of these companies into somebody else. Last money talks!
The real beneficiaries of Internet technologies will be any (including brick & mortar) company striving for improvement in its business process. The winners will be found among the providers of the tools these users will chose and some network product providers (helping to improve the Internet network itself).
What does this all mean for Upstart Capital’s future portfolio companies? Well, we need to do a lot more careful tracking of opportunity.
Source: Michael Spindler