Like many people in our industry, I have been watching with growing discomfort Facebook getting beaten up on the public markets, including yesterday’s new $17.729 low. Regardless of the reason (the company remained private during its phase of hypergrowth, nobody reading the S-1, etc.) and leaving aside the borderline silly hunt for a culprit (Zuck is immature, the CFO badly overestimated demand, NASDAQ botched the IPO, etc.), the point is that the darling of an entire industry, the most prominent of all emerging internet franchises, the one that epitomized social media at its most powerful, ended up colliding with, and so far losing to, the cold cynicism of public markets.
The ripple effects are starting to be felt throughout the industry, as they trickle down the ecosystem. Evernote for example announced last week that it was going to delay its IPO until at least 2015. Further down the chain, anecdotal evidence around me seems to indicate that VCs are being increasingly cautious and picky when evaluating consumer internet plays (broadly defined: social, local, mobile, etc.), particularly when there is not a very apparent business model in place or in the works. I’m not sure if it’s the end of an era just yet, but the Facebook IPO that was supposed to create a brand new virtuous circle (Facebook buying a bunch of startups, and Facebook millionaires angel investing in hundreds of others) is so far proving to have the exact opposite effect on the industry.
While nobody is thrilled about what is happening, I hear two types of “rationalizations” around me:
- It’s not entirely bad that things cool off a little bit — there are just too many startups being created in those consumer areas, too much angel and VC money floating around, valuations that don’t make sense, not enough technical talent to support the whole thing, etc
- As an industry, we’ll all be fine because things have been heating up on the enterprise tech side. Public markets have been much more accepting of the enterprise tech plays (Splunk, ServiceNow, Palo Alto Networks all did very well in their IPOs). For every Instagram, there seems to be a Nicira type acquisition. Box.net and its young CEO are the object of the type of hype (and investor funding) typically reserved to successful consumer plays. The combination of the cloud and big data trends has many commentators excited. Some see the beginning of a 20 year cycle of innovation in enterprise IT.
The first point is complex and would deserve its own post (hopefully sometime soon). As to the second point, as much I’m a big fan of enterprise tech and agree that it’s probably where the action is going to be in the next few years, the above fails to reassure me, as I just don’t see an enterprise tech boom developing independently from a strong consumer internet sector, long term:
- Enterprise tech does not have the gravitational pull of the consumer internet. Because you can touch it, feel it, experience it, everyone can relate to the consumer internet. And because it is very visible, the young entrepreneurs who succeeded at it not only made fortunes in a short amount of time, but became pop culture icons in the process (complete with movies, Gap ads, etc.). Rightly or wrongly, this has created all the excitement around tech that we now take for granted. Some of it perhaps led to unwanted attention (not sure that, as an industry, we need Justin Bieber to be angel investing, as much as I’m a fan…), but arguably this has drawn into the industry a lot of talent and money that has lifted all boats. What happens when this interest subsides? Enterprise tech sorely lacks sex appeal: it is complicated, obscure, behind the scenes. You pretty much can’t be an outsider to the tech industry and come up with a good idea. If exciting consumer tech projects stop being funded, will Wall Street techies still continue to migrate to startups? Will hundreds of thousands of people will still feel an urge to learn to code? Will the broader public still care about tech?
- Consumer internet companies have been driving, or at least influencing, innovation in enterprise IT over the last few years – whether it is actual technology (Amazon pioneering cloud computing, Google/Yahoo/Facebook/LinkedIn being driving forces in big data, etc.), the way enterprise tech is consumed by employees (social enterprise, Bring Your Own Device, etc.) or the way it has been sold to enterprises (freemium plays that bypass the CIO). What happens to this phenomenon, long term, if consumer internet is no longer driving innovation?
- Consumer internet companies have proven to be great early customers of enterprise tech startups. Of course, you could argue that this “startups selling to other startups” does not make sense because at the end of the day it’s all funded by VC money. But the reality is that every enterprise tech startup needs early customers, and many consumer internet startups have proven to be more willing to use new, bleeding edge technologies – the hope being that, once an enterprise tech startup has a few success stories with startups under its belt, it makes it easier to “graduate” to Fortune 500 companies. When the internet bubble burst in the early 2000s, consumer tech companies went down first, but enterprise tech startups soon followed, because many of them essentially lost a chunk of their customer base. Could the same phenomenon occur today?
The stabilization of the Facebook stock price is hugely important for our entire industry. Tech blogs, true to form, are overall wildly optimistic and blame it on Wall Street “not getting it” (Techcrunch covered yesterday’s new low as a buying opportunity), but smart entrepreneurs, VCs and involved parties seem to be doing everything they can to stop the blood bath (see Fab’s Jason Goldberg post here, for example), as they fully measure the severity of the issue.