

An Alternative Theory of Startups - apsec112

Over the past six months or so, I have developed an alternative theory of startups, in contrast to the Paul Graham/Y Combinator theory. Please feel free to critique (so long as you have evidence). Important points:<p>- The idea that people in small and mobile organizations, who get paid directly for their performance, can be far more productive than people in huge, bureaucratic organizations is not new; it is called "capitalism". Many people get confused on this point, because of all the politics surrounding the word, but the essence of Adam Smithian capitalism is <i>not</i> a few big companies with an oligopoly. It's small, individual businessmen and entrepreneurs competing amongst themselves, in an open and dynamic market where the best minds win. Capitalism allows people, through ownership of businesses that they found, to benefit when they make better and cheaper products, and that's why it's been so successful.<p>- Capitalism came into existence (roughly) during the seventeenth century in Britain, and later on in America and Western Europe. However, in the panic after the Depression, national governments began to seize unprecedented amounts of power, and pass tax laws that favored existing large companies over new entrepreneurs. Hence, we started to see large chain stores, restaurants, etc. replacing individual and family-owned shops. In 1900, it was extremely common for people to own their own businesses; I don't have hard numbers, but I would guess that maybe 10-20% of the population did. By 1960, it was more like 2-3%.<p>- During the 70s and 80s, the government passed numerous laws which started to favor individual entrepreneurs over large businesses again; eg., the lower capital gains tax, the breakup of state-owned monopolies like Ma Bell, deregulation, etc. Hence, we started to see a revival in capitalism, especially in the technology sector. The computer boom had already begun by that time, but what changed is that it was dominated by small companies like Apple and Microsoft, instead of large companies like IBM and Xerox, which in many cases actually did a lot of the technology development work but didn't follow up.<p>- What made the technology boom different from, say, the textiles boom or the automobile boom, was the extremely low capital cost required to enter the market. If you want to build a factory and sell cars, or textiles, or alarm clocks, you need millions of dollars in capital. However, many startups (Apple, Microsoft, Google, Dell) were started with very little in the way of money. This allowed for extremely rapid progress in the technology sector, as competence in business became a more important factor, relative to doing good deals with investors.<p>- In the post-Bubble era, computer technology has largely become a mature market. In any industry, shortly after the industry begins, there is a feverish wave of entrepreneurship and innovation. Shortly afterwards, the number of competing companies gets smaller and smaller through buyouts, mergers and failures, and eventually, after many decades, you have an effective oligopoly. For instance, shortly after the automobile was developed, there were a huge number of American car manufacturers, while by 1980 there were only three left. My guess is that the computer technology industry has now reached the stage where we'll see very few new big companies (Apples, Googles, Microsofts), and most startups will be smaller and will cash out by getting bought, instead of going public. There were at least a dozen billionaires created by technology companies founded from 1975-1985, and another dozen created by companies founded from 1995-2000, but only one that I know of after 2000 (Mark Zuckerberg). Most of "Web 2.0" has been absorbed into larger conglomerates, especially Google, rather than forming new conglomerates.<p>- Computer technology, because it is such an efficient and well-run industry, will always remain a relatively small percentage of the economy. This may sound counterintuitive, but the reasoning behind it is pretty simple. The average consumer wants some basket of goods, [A, B, C, D, ... ]. As he gets more and more of A for a cheaper and cheaper price, his desire for A starts to be satisfied, and he'll respond by spending less money on A and more on B. For instance, most of us nowadays spend very little money on spices, even though in 1500 spices were an extremely prized commodity, because our desire for tasty, spicy food has effectively been satiated and we see little need to buy more. We have seen this pattern many times before. For instance, over the past two centuries, agriculture became extremely efficient, with the result that it is now a tiny percentage of the economy (2-3%), because our desire for food has been satisfied. The clothing industry also became extremely efficient, with the result that it's now a small (&#60; 5%) percentage of the economy, because our desires have mostly been satisfied. On the other hand, health care and education, which are renowned for their inefficiency due to bloated government bureaucracies and politicization, have grown very rapidly as a percentage of the economy.
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pedalpete
Though I haven't read Adam Smith, it is my understanding that 'capitalism'
itself does not dictate or theorize about the size of businesses, but is
focused on the efficiencies of capital. A few of your points regarding
goverments favouring large companies seems slightly mis-guided (though it may
be more chicken vs. egg), but I believe it was the power of lobbyists to sway
politicians which gave big business these benefits. However I personally
believe that the lobbyist power exists due to a lack of organization on the
part of individuals. I understand the concern individuals have when businesses
get too much power, but lets not forget that the more powerful businesses are
most often made up of a large number of people (employees, shareholders, etc),
or are influenced by large numbers of people (customers, partners). Therefore
political organization should be able to alleviate many of these issues.

Great read though. You've got a great writing style.

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mixmax
Why don't you have a blog? I'd love to read more.

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apsec112
I do, but it was just launched a few days ago and it's not on Google yet:
<http://www.rationalfuturist.com/>

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sz
I understood your reasoning until the last point.

"because our desire for food has been satisfied."

what?

Similarly with clothing.

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apsec112
What I meant was, if you can buy 3,000 calories of food a day, you're not
really going to buy much more no matter how cheap it is, because there's no
point: your desire has effectively been satiated. Same thing with clothing:
few people with a hundred outfits would go out and buy a hundred-and-first
even if it was really cheap, because they already have all they want. I was
arguing that many aspects of the Web are already like this: sure, you can make
them better, but people are already satisfied enough that they won't pay all
that much more for a better version. Eg., suppose you spend four hours a day
on Reddit. Is a super-hyper-Reddit going to make you spend twelve hours a day,
or even eight hours a day? Probably not, because your desire for Reddit-ness
has already been satisfied with four hours a day.

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chromatic
> _... few people with a hundred outfits would go out and buy a hundred-and-
> first even if it was really cheap, because they already have all they want._

Aren't you assuming rationality from economic actors? Some people really enjoy
shopping. (Whether "some" is more than "few" I can't answer.)

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marshallp
That's not exactly new, that's mostly conventional wisdom in
economics/business theory.

Larry Ellison also believes software is a mature industry.

However, I think you and he are both wrong in that respect. Yes consumer
websites that allow you to communicate is mature, there's not much innovation
that can happen there.

However, information filtering, which is what google (search,adsense) and
amazon (recommendations) do is certainly not complete. They use data and
machine learning to do their work, but it's possible for a whole lot of people
to come along and get big niches in their space by human-designed mathematical
models.

An industry where this has already happened is in stock trading. 1- At first
there human stock pickers (yahoo directory), 2- then came along automated
machine learning, which they call statistical arbitrage (google), 3- and now
only human created mathematical models give a consistent edge.

If you look at coming industries like robotics and bioengineering, they're
just coming into the google-like machine learning stage (and there are
opportunities for software startups), and haven't even started the math model
stage.

So yes, if your only skill is building web applications, you're chances of
stardom are less than a decade ago, but incorporate more math into your
software and there are a lot of opportunities.

