How much of our current capex starvation is due to having nothing worthwhile to buy? What role does or should innovation play in product/service evolution? Why are startups and VCs failing to move new things, as we’ve always expected them to? Even some of the best VCs seem to have issues. Now, we’re hearing that startups are having to raise more and more money through additional rounds or borrowing because there’s little IPO opportunity or chance of being acquired.
I’ve been involved with VCs and startups for decades, and the truth is that the process has almost always looked a bit cynical and manipulative to me. To a degree, the VC model is based on the notion that few startups will manage a successful exit, so you have to make a boatload on those that do. To a degree, the whole scene has been driven by hype—”buzz” as they’d put it—and often multiple VCs will fund startups in the same space to make it look like a wave is developing. To a degree, analysts have often been engaged and paid with founder shares, which makes them hardly objective. You get the picture.
The notion of startups is way more honorable than the execution has tended to be. A startup does things that incumbents would not do, for fear of undermining their own sales. The idea is that startups take the risks, and in their IPO or acquisition they validate the concept that launched them. Of course, that assumes they’re one of the lucky winners. If not, then VCs look elsewhere for a success.
There have been good periods in the VC/startup model, periods when investment actually targeted stuff with a high probability of success, but even in those periods the model may suffer because the market isn’t offering real exit opportunities. We’re in such a period now, a period when tech IPOs aren’t seen as desirable. That tends to influence acquisitions too, and so at high level, we are where we are today because of that IPO starvation.
But why are we in such a period? The best answer to that, I think, is that the buzz opportunity and exit potential after roughly the year 2000 shifted from basic computer and network technology more to OTT concepts like social media. The reason is that that new space was easier, matured quicker, and offered VCs a greater return potential. OTT startups were, and still are, a major factor in the success of cloud computing. You get some developers, build some social application, lease cloud capacity to host it, play it up in the media to attract fad-oriented consumers, wait a couple months, and exit.
Not only has what I’d call the “social media target” sapped VC funding for real technology products, it’s created a mindset that focuses relentlessly on exiting, meaning the expectation of instant gratification. Tech products require several years to build toward a realistic exit, and careful alignment of the product with an opportunity. And if you want an IPO, you have to expect revenues, which isn’t impossible to get quickly on an ad-sponsored OTT play but is a major challenge for new hardware.
Then there’s the “ecosystem” problem. In the past decades, the major progress points aligned with the introduction of a transformational product, but the last of those peaked over two decades ago. I think the challenges these days relate to the complexity needed to create a transformation. You have to advance multiple technologies to build a transformation, and no VC is going to fund something that broad, that risky.
Finally, there’s the challenge of the credible partner. We’ve seen, in the open-model movement in both networking and IT, a tendency for openness to end up being dominated rather than promoting diversity. Remember the old sayings “Nobody ever got fired for buying IBM”, or “Cisco”? A product or technology aimed at making a business case rather than at promoting consumer fads needs a credible supplier. Who made the promise to the buyer, who they can sue if there’s exaggeration or falsehood, is just as important as what the promise was. What’s a startup’s promise mean to a career-conscious executive making a product decision? You can guess. Maybe not zero, but surely something small enough to demand an enormous upside in ROI to compensate for the risk.
What this means, I think, is that transformational changes in networking and computing are less likely to be made by startups, because right now the VCs aren’t of the right mindset to realize the opportunities. So does tech stall out? Arguably that’s what’s happening today, but progress delayed is opportunity penned up, and sooner or later it will break out. The questions are how and who, and there are multiple possibilities.
First, and least-likely, is that the VC community will get smart and rethink what they promote and how they do it. I don’t think that there’s much (if any) ecosystem smarts in the VC space, and I don’t think they’ll lead the charge here. Instead, they’ll jump in when someone else takes the lead.
Second, there’s the “internal startup” or spin-out. A giant vendor does a skunkworks project that could be disruptive, spins it out as independent, and reabsorbs it if it looks like it’s turning out well. Cisco has done this, but the model is hard to apply unless there’s a singular focus, a product that somehow realizes and drives ecosystemic progress.
Third, there’s my favorite, the M&A justifier. When a vendor, a public company, makes a big acquisition they’re under pressure from Wall Street to justify it with increased profits. Often the acquired company isn’t in exactly the same business, as was the case with Broadcom/VMware and HPE/Juniper, which is encouragement to look for concepts that broaden the company’s initiatives by magnifying the symbiosis between the parties in the M&A, meaning creating an ecosystem.
I hope this last potential source of innovation pans out, because I have little hope for the first two. I think it’s clear that, unwittingly, the market has fallen into a “there are only low apples on the tree, and they’re all picked” mode, where lack of new productivity paradigms has desensitized people into a cost-managed rut. At some point, do we lose our capacity to innovate? I hope we don’t find out.
