Losing the IPO option has encouraged more acquisitions.
Source: Flickr user mikeleeorg
There have been plenty of important moments in the history of the online world. From the initial Arpanet connection in 1969 to the development of the web in 1990, to the release of Mosaic in 1993, the story of the Internet is littered with great firsts.
But the most formative moment of all wasn’t a first — it was a last. This time 10 years ago, the Nasdaq — inflated by the dotcom boom — discovered its summit before beginning a sudden and dizzying plunge towards reality.
The crash meant that billions of dollars — trillions, even — were wiped out in days. Thousands of entrepreneurs saw their paper fortunes come tumbling down around them as the irrational valuations applied to the dotcom world became painfully transparent, even to true believers. It’s a moment that everybody who was involved in the Internet business remembers starkly. But a decade on, have we really learned anything?
The landscape has certainly changed since then. The crash, along with a number of other factors such as the recent economic crisis and Sarbanes-Oxley, has made stock market flotations much harder. That might disappoint startup entrepreneurs, but it makes today’s web industry market more rational than its predecessors.
Underpinning this, there’s also more emphasis today on making sure that the fundamentals of an Internet business are stronger. Most startups are obsessed with monetization, even if they don’t like to admit it. The skepticism bred by the crash means that it is much harder for a company like Pets.com — which sold its basic product at a huge loss in order to try and win market share — to exist today. Even companies that have been criticized for not having a business model — most notably Twitter — are open to scrutiny and appear to put a great deal of time and effort into developing revenue.
Nobody would argue that basing a business on fiscal reality is a bad thing, but this newfound conservative approach has also had negative effects. Jason Fried, the co-founder of Chicago-based application house 37 Signals, drew plenty of sharp looks last year when he characterized the sale of Mint.com — a hotly-tipped finance startup — to Intuit as “the next generation bending over.”
Acquisitions kill innovation, he argued. He could just as easily have said they kill ambition.
Why? Today’s real-time, social web companies are still largely funded by venture capital, but without the option of an easy IPO on the cards, acquisitions are the only way for investors to get the sort of returns they need.
Founders, meanwhile, have learned that it is better to cash in sooner rather than later. Taking a company to the next stage requires giving up substantial amounts of equity. Why spend five years building your company up so that you can get 10 percent of a $300 million acquisition when you could get 50 percent of a $30 million acquisition today?
Indeed, those who came out of the crash ahead argue that it is important to cash in at the right time.
Mark Cuban, who turned himself into a genuine billionaire during the 1990s boom through the well-judged sale of Broadcast.com to Yahoo, told me last week that he succeeded because he played the cards he had in his hand — not the cards he wished he had.
“I was fortunate enough to be part of a great company that got whisked away in the frenzy,” he said. “I was also fortunate enough to recognise the difference between a company and a stock.”
The crash taught us a lot about what happens when the balance between risk and reward is wrong, but fast forward 10 years and the scales may be just as lop-sided in their own way.