

Ask YC: Supply & Demand for Startups - startingup

This is a bit of a devil's advocate thought, so bear with me. As the cost of starting up plummet to negligible levels, are we creating conditions for prices to follow? In an efficient, competitive market, that's what would happen. I noticed we are on to 1-2 start-ups a week from YC alone (which scares me a bit!)
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pg
Acquisition prices would decrease in proportion to supply of new startups if
the total amount of wealth created remained constant. But wealth doesn't
remain constant.

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startingup
Good point - start-ups do create new wealth. So I wondered - where does that
wealth come from? In the web world, it comes (ultimately) from the healthy
growth in user count, and the time they are spending on the web (which makes
them either more productive or entertain themselves better or both). The web
wealth also comes, to an extent, at the expense of some old wealth destroyed,
like newspaper, TV etc. Finally, some of the new web wealth is also the effect
of old web wealth being transferred - recent Yahoo acquisitions seem like a
case of this to me, because Yahoo itself is declining in value, but they keep
buying companies as they do so, effectively transferring their wealth to a new
generation of start-ups.

There is natural demand growth for start-ups due to these factors, which
manifest themselves as new acquirers springing up - as an example Google
wasn't a factor in the last bubble as an acquirer, and may be Facebook will be
very acquisitive soon.

So my question can be rephrased as: are we outrunning that demand growth in
terms of supply of start-ups? It seems to be so sometimes. And in a recession
demand growth could temporarily reverse too ...

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mdemare
You think of wealth as money. That's the wrong way to look at it.

Wealth is value added for people or companies. If you create a web-app that
saves a company money, then you've created wealth. The demand that companies
have for saving money is unlimited. The limits are on the supply side: Can you
think of a web app that saves a company money?

On the consumer side, it's basically the same. If you can save customers time,
or money, if you can entertain them, or educate them, or make their lives
better in any way, then you've created wealth.

Again, the demand for a better living through web-apps is unlimited. The
limits are on our side - how much can we deliver?

If you have really created wealth, step two is how to monetize it. That's
where Google and Yahoo come in. But that's another issue altogether.

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iamdave
Part of your question supplies the answer. True, costs may be becoming more
managable, and resources becoming more abundant, but as that happens you start
to run into issues with market saturation causing not just problems with
supply but with demand.

Economists and sociologists alike have long preached to the choir that too
much of one thing in a society can be bad for the big picture. Take for
example the problem with American Obeisity. The more buffet items a restaurant
displays, the more a person is likely to eat while negatively effecting their
health overall.

Make the parallel to these startups, social content sites are now a dime a
dozen, feed aggregators are everywhere (so much so that there are even
aggregators that aggregate other aggregators) and consumers find themselves
overwhelmed with the choices they have to make when selecting the simplest
problem they need to address. When this happens, people often opt not to do
anything and would prefer a direct fix through another means than to go and
experiment with what's new on the market. This is essentially why you see very
few startups aimed to address corporate interests where obviously the
potential to make money lies, but instead targets a much smaller sector of the
market (37Signals for example).

All of that said, prices and income potential for the startup in my opinion is
coming very close to reaching a stalemate, while supplies continue to grow,
demand is going to drop.

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pchristensen
Nah, the price of stale ideas and rehashes is very low. When there's a new big
idea and big success, it is very highly valued (look at Blogger, del.icio.us,
etc when they were released and bought vs now). The point of a startup is to
validate an idea in the market. A validated idea is worth _MUCH_ more than an
unvalidated one, but when you copy a validated idea, you're also competing
against the people that validated it, which brings a whole new set of
problems.

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andr
Two explanations:

1) The cost of starting Apple today would be much lower than it was two
decades ago. However, the cost and complexity of starting a computer company
that is truly groundbreaking by today's standards is just as high, if not
higher.

2) The cost remains constant, but the price of startups, as set by investors,
is actually getting higher. Anyone could make a Facebook in 1998 at
approximately the same cost (even though servers were more expensive), but no
one would have valued it at $15bn. Pricing would either go back down or the
change in economic thinking (i.e., advertiseming is more important than hard
cash sales) would become the standard.

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pchristensen
pg has written about this in one of his essays, but successful startups pay a
lot because a) it's hard to measure the impact of a good developer, and b) a
successful startup gives a market valuation on a small team. As long as BigCo
can't properly measure or evaluate developers, there will be an incentive to
get a proper valuation by doing a startup.

