A few weeks ago, I had the chance to go surfing off the coast of Waikiki. The waves there are perfect because they are just the right temperature and they are forgiving enough that I can get up on the board and have a great time, despite being pretty out-of-shape. I have always been inspired by the metaphor of surfing. On one hand, you are out in the ocean, paddling as hard as you can until you find the next wave. It’s up to you to pick the right one and control yourself and the board the best you can as you ride the wave into the shore. But there is also something vastly larger and more dynamic at work because every time you get up, the entire power of the ocean is behind you. That awesome power makes the entire experience possible.
Waves in the Technology Business
The metaphor of surfing has guided my framework for thinking about the tech business ever since I was writing programs for the Apple II and the original IBM PC in Junior High and later as an entrepreneur and now as an investor. In the digital world, rather than the forces of gravity and the tides and the water itself, the motive power comes from exponential technology factors such as Moore’s Law (which doubles the performance of computing every 18 months), as well as storage (which advances even faster), and networking connectivity (which is slightly slower). Because of these powerful forces, new waves gather in the tech business all of the time. Some waves are too small to be interesting. Some (like the PC revolution, client/server, the Internet, and social networking) are so big that they spawn entire new industries and companies that change the world. These waves guarantee that there will always be a new supply of innovative companies who push the technology industry forward. (As an aside, it’s not accidental that Ann and I decided to name our investment firm FLOODGATE)
Technology Waves: Overview
In my experience, every decade or so, we see a major new tech wave. When I was in high school, it was the PC Revolution. I made my career as an entrepreneur at the end of the client/server wave and in the early phases of the Internet wave. Today we are at the mass adoption phase of the social networking wave. I am obsessed with these technology waves and have spent a lot of time studying how they develop and what patterns can be observed. I’ve also had the opportunity to talk to some of the great founders and investors in the technology business to refine my thinking further. I am going to spend the rest of this post describing some of what I’ve learned and connecting these thoughts to why Roger and I believe the Hypernet/Hyperweb is the next great technology wave.
We have observed that these waves tend to follow a pattern. They start with infrastructure. Advances in infrastructure are the preliminary forces that enable a large wave to gather. As the wave begins to gather, enabling technologies and platforms create the basis for new types of applications that cause a gathering wave to achieve massive penetration and customer adoption. Eventually, these waves crest and subside, making way for the next gathering wave to take shape. (see the figure below)
In the recent social networking wave, broadband penetration created the infrastructure for billions of people to be always connected. Next came the enabling platforms from companies like Facebook, Twitter, and LinkedIn, who created the various types of social graphs and connection frameworks for people to socialize. This was followed by applications such as Zynga that took advantage of these underlying platforms and connections, along with business software companies like Bazaarvoice and Jive. A similar story could be told for every wave back to the PC revolution (which incidentally had infrastructure such as semiconductors and disk drives, enablers such as DOS, PostScript, and NetWare, and apps like Microsoft Office).
The Importance of Enabling Technologies
Another interesting feature of most tech waves has been that the enablers (Microsoft with DOS in PCs, Oracle with Relational Databases in client/server, Facebook with the social graph) have turned out to be natural monopolies. They appear just as the early infrastructure has been built and create a way to translate the new capabilities into a platform for applications that eventually reach very large audiences. Enablers are the special companies that convert the energy of a gathering wave into the opportunity for a new set of technologies to affect millions or even billions of people. There are very few companies that end up playing this critical enabling role, but the companies that win end up being massively valuable. There are many debates as to why this is true. My belief is that there are so few because the technology community needs to agree on a few standard platforms to build an industry that can achieve mass adoption, penetration and scale.
What It Means for Entrepreneurs and Investors
One of the other features of this metaphor that I like is that it provides a good framework for investors and entrepreneurs. For example, when I first arrived in Silicon Valley in 2005, many VCs were saying that consumer internet companies made no sense – that the dot-com bust proved that “you can’t make money with just a lot of eyeballs.” But what this analysis missed was that we were in the beginning phases of a new wave called Social Networking. The Internet wave had crested and a new wave was gathering. Since I was Angel investing with this framework in mind, my focus was to find the enablers of social networking (or what many called “web 2.0” at the time). Unfortunately I moved to California too late to invest in the Angel rounds of Facebook and LinkedIn. I wrongly assumed podcasting would be an enabler, but fortunately I invested in a podcasting company called Odeo, which became an incubator for Twitter. Twitter turned out to be one of the key winners in the enabling technology/platform phase.
In late 2006, we decided that the enabling forces of social networking had already gathered and consolidated and began shifting our focus to applications that leveraged the connections that were being created by Facebook, LinkedIn, and Twitter. Examples of such companies we funded include Bazaarvoice, BranchOut, Chegg, MassRelevance, Modcloth, Socialware, Spiceworks, and many others. During this period of time, we saw many “Facebook-killers” or “Twitter-clones” or “LinkedIn for another segment” types of companies, but we passed on them because we thought that the enabling phase was over.
Why It’s Too Late to Start a Meaningful Social Networking Company
Today, we believe that it is too late to start a meaningful company in the social networking wave. When the cycle started to move from enablers to applications, it was a very good time for two reasons. First, it was late enough that companies could make a bet on a few platforms that had achieved scale and were likely to achieve much greater scale. But, it was also early enough that the map of the world had yet to be drawn for apps. This meant that companies could acquire users for much less money and monetize them better because there was less competition. These companies also had the opportunity to build network effects among their users and create sizable entry barriers, particularly in terms of scale and distribution strength.
The social networking application space is now very crowded. The wave is about to crest. There is more competition for users which means that the costs of acquiring users is increasing while the lifetime value of users for new products is under more pressure. This is a natural part of how a tech wave evolves. In the early days, there are very few “surfers.” There is plenty of room for everyone. But pretty soon, lots of people crowd to the same beaches and it’s just not the same. Anyone who surfs during a busy time in Santa Cruz has probably experienced a crowd of angry surfers acting territorial and saying “dude – get off my wave.” That’s what life is going to be like for new social networking startups going forward.
Some people will misinterpret this point. I am not saying that social networking is “dead” or that we are in a “bubble” or that the current crop of major social networking companies aren’t valuable. My business is startups and where the opportunities are to start meaningful game-changing companies in the future. Social networking will matter for sure. But entrepreneurs from this point on should look at it as a “feature” rather than the next great startup opportunity.
Enter the Hypernet
One of the reasons I am so excited about this point in time is that, in the last few years, the new infrastructure has been put into place for a major new wave. Roger and I think the new infrastructure combines the web plus cellular plus WiFi (which we call the Hypernet), combined with potential new user experiences that involve billions of nodes and millions of clouds (which we call the Hyperweb). We believe that these are the prime forces of a massive new gathering wave. In the next few years, a handful of entrepreneurs will begin to build the enabling platforms that define some of the great technology companies of tomorrow. We also believe that this wave will be much larger than the social networking wave because it has a larger hardware component to it. Generally speaking, when a wave has hardware components to it as well, there is an even larger ripple effect and the value multipliers are even stronger.
Part of my purpose in working on this blog is to find the startup founders who have unlocked a fundamental insight for how these enabling technologies and platforms might take shape.
- Technology waves are a powerful framework for entrepreneurs and seed investors who wish to start or invest in companies that have a chance to be extraordinarily valuable. In the future.
- Technology waves evolve along a pattern, starting with infrastructure, moving to enabling technologies, and then kicking off a phase of applications that take the wave to mass adoption. The key is to recognize what phase of the wave you are in and time your startup or investment strategy to align with its realities.
- The enabling technologies and platforms that win are natural monopolies There are a small number of them but they create massive value.
- Applications build on the enabling technologies and platforms that consolidate and take the technology of a new tech wave to he masses. The applications companies that win are those which wait long enough to make the right platform bets, but enter early enough that the map of the future is yet to be drawn.
- Social networking is the current Tech Wave, but it is shifting from a new cycle where there are opportunities to build big startups, to a mass-adoption phase where social networking is now a “feature” rather than uncharted territory.
- To borrow a quote from Wayne Gretszky, the best entrepreneurs “skate to where the puck is going.” Roger and I believe the puck is heading to the enabling technologies and platforms phase of the Hypernet and Hyperweb. We believe that some startup team right this minute is working on a project that will likely create a massive enabling technology or platform that powers the mainstream adoption of this new cycle.
If social networking can be thought of as a part of the ocean that is crowded with surfers, the Hypernet and Hyperweb is the opposite. Right now there are very few of us paddling together in the water. We are having a great time because we have seen conditions like these before. There is still room for a lot more people and we hope that those of you who are excited about these ideas will come join us!