Do not bury internet-startups!

Не рийте могилу для інтернет-стартапів!

On the Internet, time and time again we may see “exposure of a plot” stories of internet-business grandees.

Article “The end of the internet startup” on the popular resource Vox gave rise to this phenomenon. This article tells us how by means of aggressive acquisitions (up to the coercion through dumping) and expansions into the adjacent markets, group of internet-companies, inclusive of Google, Facebook, Amazon steamrolls the internet-business in its top-profitable directions. So to say, precisely due to this, there was not a single solid startup for the last 13 years, and Facebook was the last such occurrence. The largest startups (among the later ones) as to the capitalization get a few percent of that Facebook, Amazon, Google have. However, it should be noted that the author of the article makes no cause-effect links, but just telling about obvious factors, and then arrives at sudden conclusion – it is the end of the era of internet-startups. But let’s puzzle out where do things stand as a matter of fact.

“Billy, where’s the money?”

To start with, we may say that it is rather silly to form up the entire conspiracy theory based on the life history of three companies. Tendency – is something that most people follow. To define the market vectors and trends making an example of three leaders – makes no sense at all. “Peak value”, “average body temperature in the patient room” and “tendency” – are quite different sort of things to try to combine them into one formula.

It is also pointless to pass judgements on startup prospects based on its capitalization

Those, who have not forgotten “dot-com crisis” of the early 2000s, when the companies with huge capitalization were dissolved by the dozens, know better what’s it all about. And currently, when you look at the dimensions of Google (after all, capitalization of Alphabet Inc., which is responsible for well-known search engine, is already exceeding $660 bln), it seems that nothing can give a push to such a giant. Indeed, its assets include not the search engine only, but the most popular mobile OS, the most popular world’s video resource – YouTube, and much more! But let’s recall that targeted advertising is the most profitable service of Google, which generates 90% of giant’s income according to the different estimates. So, as a matter of fact, Google – is large company operating in the field of advertising.

Targeted advertising generates 90% of all Google’s income

Google – is the company that attracts to its “customers” as more internet-users as it is possible, offering free storage for user data and documents, photos, contacts, mail, reviews of visited places, place of residence, work, leisure, messages from business correspondence in messenger, social network… In other words, everything that helps to identify the user and to sell him to the advertiser as the potential advertising consumer.

People prefer to idealize the stories of successful companies and to think up own success story for them. So, it’s easy to tell that “Google is profitable because it has Android, YouTube and all this too”, and it’s hard to imagine that YouTube video hosting, taken by the company 11 years ago for $1.65 bln, is still alive owing to subventions from contextual advertising of the search engine, which, like a draught horse, tows all the force of internet-giant, overgrown with dozens, if not hundreds, projects in search of at least one more such a profitable business line. It appears that with no success.

YouTube project is still an investment, and the longer it is invested, the longer it remains like that

Further, if you look at the history of this company through a broader lens, 5 years earlier for instance, you will be shocked once again: capitalization of this company stepped across the threshold of $100 bln… 10 years after its establishment. Another giant – “Amazon startup” – was established in 1994 and it reached threshold of $100 bln in 2011, when it turned 17! Facebook company is 13 years old now. Will we make forecasts as to its future powerful growth? I would not do it.

By the way, at the cost of what Facebook lives?

This startup, like Google, earns money by knowing everything about its users. Google and Facebook – are projects that advantage of the fact that that their customers share information with them, and they skillfully sell them as the advertising audience to those is ready to pay.

Google and Facebook trade in one article of merchandise, and there are no vacant positions on their market yet

Now, let’s recall what large internet-startup appeared most recently – before the entry into market of Facebook, Google and Amazon? The answer is simple: there were no such startups, because we have named all the biggest new internet-businesses of our times. And ever since they started to dominate on the market, the paradigm of the internet and internet-business has no significant shifts (the latest – rapid popularization of smartphones with touchscreen display from 2007 onwards).

Thus giants do not take off quickly, and it takes them decade or more to rise from zero to leadership position. But at what stage of takeoff Facebook is currently located? It’s anybody’s guess! But, beyond all doubt we shall not say that its strategy for the purchase of all competitors is winning – sufficient time has not passed yet for all the consequences from company’s management team to show themselves.

There are other indicators, except for capitalization

For instance, income. According to this criterion our e-businessmen lag far behind the companies operating in other fields. Apple is the only one showing the sustainable growth and holding the 9-th position in the world ranking of the most profitable according to the results of the year. Notwithstanding that Amazon also shows positive dynamics, it holds only the 44-th position in the world ranking. Google and Facebook with their rather modest income indicators are certainly out of the ranking.

There are no “juniors” among top five world’s major companies: Apple (41 year), Google (19), Microsoft (42), Amazon (23), Facebook (13)

Let’s imagine that Facebook was not interested in one of those dozens of internet-startups that were absorbed by it during its growth. Let’s have a look at one of them. Let’s assume that this is Instagram. Think it over, when and how Instagram could come to payback level, without being “under the wing” of such a monster of targeted visual advertising like Facebook? What capitalization level would this startup reach? Would it become a competitor to Facebook? When and how would it get in IPO?  The answers to all these questions are quite obvious, and one shall not consider that independent startups, having become part of huge corporations, lost something. Rather on the contrary.

But, with the Facebook success in mind, internet-startups and their assistants from the world of finances, are trying to travel the path of the giant in a prompt manner, to lay the foundation, to inflate startup with investments, to introduce it to stock market – and then everything else can go to hell. And currently a lot of people believe that significant financial injections for new startups at their early stages are needed. By comparison, in days past it was possible to grow startup nearly with no financial base.

What do you think? Where would Instagram be in the long run, if it had not been bought by Facebook?

Well, I would like to remind to the one, who has forgotten: Mark Zuckerberg got his first powerful investments in Facebook when his website even did not get one million of users. Microsoft bought 1,6% of shares in exchange for $240 mln in 2007 when there were about 50 mln of users in it, in other words software giant paid approximately $5 for each user. This is a “huge injection” to quite a risky business, isn’t it? I recall: Facebook lives, grows and even starts to bring money from advertising – it all became known to us only post factum. At that time, 13 years ago, no one knew whether the social network would become successful… And in 2012 Facebook passed the IPO stage, when its asset included more than a billion users (whom the advertising could be sold).

No one will become a new Facebook

It is obvious that no one will manage to repeat the success of “exemplary internet-startup”. And not because that the entrance to the IPO stage – can not and should not be a goal in itself. This will not happen if for no other reason than it is impossible to be “Facebook-2”, like at that time Facebook did not become “Google-2”, which, in its turn, did not become “Microsoft-2”, for instance. Replication of such stories, establishment of such companies – these phenomena, that are similar to tectonic shifts, – is simply impossible.

Among other things, accruals concept is operating here: trend or technology appears, network of related businesses is being created with it, in which, gradually, by way of collapses, jumps and acquisitions, several leaders are starting to show up. All major integrated systems, in the wake of rising, are getting more resistant to small crises that occur more and more seldom, and their vibration amplitude is getting progressively smaller. And if the “market is established” it could mean that key shift is not far off, and this means that many businesses will collapse, and new market players will slice and dice the remainders.

And, perhaps, even today one of those internet-startups has already originated (and it is well-known to us). And for some reason or other this startup has not yet become huge, predominant in the market and did not turn the world upside down yet. But one thing may be said for certain – it will not be the social network like Facebook, not the search engine like Google, and not internet-store like Amazon. It seems that we shall not expect that new grandee will emerge in the next 12 months – not enough time has passed yet for the market place to be formed for it. And according to market fractality principle, the longer such internet-startup does not become successful – the bigger it eventually will be and the bigger effect it will has on us.

Indeed, initially (or even for many years) the next internet-startup may not seem “the very same”, but in course of time, when it shows all its features and turns the planet upside-down, all the analysts, who currently predict the death of this movement as a matter of principle, will then agree that emergence of this startup was predicted and even expected, and the future upturn of the world – was foreseen by them.

Therefore, let’s not bury internet-startups yet

This book has too many unread pages, in which plot will have even more twists then the “Game of Thrones” does, when all the leading characters disappear some day, and dark horse becomes the pack leader.



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