A Cambrian Moment

Click here to load reader

  • date post

    17-Oct-2014
  • Category

    Business

  • view

    522
  • download

    0

Embed Size (px)

description

ABOUT 540M YEARS ago something amazing happened on planet Earth: life forms began to multiply, leading to what is known as the ŒCambrian explosion. Until then sponges and other simple creatures had the planet largely to themselves, but within a few million years the animal kingdom became much more varied. This special report will argue that something similar is now happening in the virtual realm: an entrepreneurial explosion.

Transcript of A Cambrian Moment

SR1

January 18th 2014

S P E C I A L R E PO R T

TECH STARTUPS

A Cambrian moment

20140118_SRStartups.indd 1 07/01/2014 12:38

'HFFRANRNM3GDRD@QBGENQ

6G@SCNDRHSS@JDSNRTOONQSRTBG

HLLDMRDC@S@RSNQ@FD

!$33$16 8'4 6$(.BD@M2SNQ23.1 &$2823$,,@RRHUDQD@CVQHSD@AHKHSX@MCRB@K@AHKHSXENQAHFC@S@

3NEHMCNTSLNQDOKD@RDUHRHSDMSDQOQHRDGT@VDHBNL

1ABOUT 540M YEARS ago something amazing happened on planetEarth: life forms began to multiply, leading to what is known as the Cambrian explosion. Until then sponges and other simple creatures had theplanet largely to themselves, but within a few million years the animalkingdom became much more varied.

This special report will argue that something similar is now happening in the virtual realm: an entrepreneurial explosion. Digital startups are bubbling up in an astonishing variety of services and products,

penetrating every nook andcranny of the economy. They arereshaping entire industries andeven changing the very notion ofthe rm. Software is eating theworld, says Marc Andreessen, aSilicon Valley venture capitalist.

This digital feeding frenzyhas given rise to a global movement. Most big cities, from Berlinand London to Singapore andAmman, now have a sizeablestartup colony (ecosystem). Between them they are home tohundreds of startup schools (accelerators) and thousands of coworking spaces where caeinated folk in their 20s and 30s toilhunched over their laptops. Allthese ecosystems are highly interconnected, which explains whyinternet entrepreneurs are a global crowd. Like medieval journeymen, they travel from city to

city, laptop not hammer in hand. A few of them spend a semester withUnreasonable at Sea, an accelerator on a boat which cruises the worldwhile its passengers code. Anyone who writes code can become an entrepreneuranywhere in the world, says Simon Levene, a venture capitalist in London.

Here we go again, you may think: yet another dotcom bubble that isbound to pop. Indeed, the number of pure software startups may havepeaked already. And many new oerings are simply iterations on existing ones. Nobody really needs yet another photosharing app, just as nobody needed another site for pet paraphernalia in the rst internet boomin the late 1990s. The danger is that once again too much money is beingpumped into startups, warns Mr Andreessen, who as cofounder of Netscape saw the bubble from close by: When things popped last time ittook ten years to reset the psychology. And even without another internet bust, more than 90% of startups will crash and burn.

But this time is also dierent, in an important way. Todays entrepreneurial boom is based on more solid foundations than the 1990s internetbubble, which makes it more likely to continue for the foreseeable future.One explanation for the Cambrian explosion of 540m years ago is that atthat time the basic building blocks of life had just been perfected, allowing more complex organisms to be assembled more rapidly. Similarly, thebasic building blocks for digital services and productsthe technologiesof startup production, in the words of Josh Lerner of Harvard Business

A Cambrian moment

Cheap and ubiquitous building blocks for digital products andservices have caused an explosion in startups. Ludwig Siegeleweighs its signicance

A C K N O W L E D G M E N T S

CONTENT S

This report beneted from the help,insights and scholarship of manypeople. Special thanks are due to JonBradford, Daniel Isenberg, HusseinKanji, Simon Levene, Reshma Sohoni,Irving WladawskyBerger and theEwing Marion Kauman Foundation.As well as those mentioned in thetext, the author would like to thankAnil Aggarwal, Neil Allison, Lea Bajc,Alice Bentinck, Konrad Bergstrm,David Berlind, Jackson Bond, JamesChan, Matt Cliord, Sarah Cochrane,Jeremy Conrad, Simon Devonshire,Janice Fraser, Fadi Ghandour, StefanGlnzer, Florian Heinemann, BjrnLasse Herrmann, David Hornik,Darian Ibrahim, Josh Jarrett, SeanKane, Saul Klein, Ted Kurie, Loic LeMeur, David Li, Je Lynn, ChristopheMaire, Mariana Mazzucato, AnnMettler, Lesa Mitchell, Allen Morgan,Michael Moritz, Max Nathan, AndrewNeely, Andrus Oks, Tim Rea, SlavaRubin, Dane Stangler, Garry Tan,Gwendolyn Tan, Marc Ventresca,Christian Weiss, Albert Wenger,Henrik Werdelin, Ray Wu, ZaferYounis and Niklas Zennstrm.

A list of sources is at

Economist.com/specialreports

An audio interview with

the author is at

Economist.com/audiovideo/specialreports

SPECIAL REPORT

TECH S TAR TUPS

The Economist January 18th 2014 1

3 Creating a businessTesting, testing

4 Venture capitalistsFrom leafy to lofty

5 AcceleratorsGetting up to speed

6 Building companiesRocket machine

8 Business communitiesAll together now

10 The dark sideFounders blues

11 Hardware startupsHacking Shenzhen

13 PlatformsSomething to stand on

Follow our coverage of startups at

Economist.com/businessnance/startups

2 The Economist January 18th 2014

TECH S TAR TUPS

SPECIAL REPORT

2 Schoolhave become so evolved, cheap and ubiquitous thatthey can be easily combined and recombined.

Some of these building blocks are snippets of code that canbe copied free from the internet, along with easytolearn programming frameworks (such as Ruby on Rails). Others are services for nding developers (eLance, oDesk), sharing code(GitHub) and testing usability (UserTesting.com). Yet others areapplication programming interfaces (APIs), digital plugs thatare multiplying rapidly (see chart 1). They allow one service touse another, for instance voice calls (Twilio), maps (Google) andpayments (PayPal). The most important are platformsservices that can host startups oerings (Amazons cloud computing), distribute them (Apples App Store) and market them (Facebook, Twitter). And then there is the internet, the mother of allplatforms, which is now fast, universal and wireless.

Startups are best thought of as experiments on top of suchplatforms, testing what can be automated in business and otherwalks of life. Some will work out, many will not. Hal Varian,Googles chief economist, calls this combinatorial innovation.In a way, these startups are doing what humans have alwaysdone: apply known techniques to new problems. The lateClaude LviStrauss, a French anthropologist, described the process as bricolage (tinkering).

Technology has fuelled the entrepreneurial explosion inother ways, too. Many consumers have got used to trying innovative services from rms with strange names (which, unavoidably, will abound in this special report). And thanks to the web,information about how to do a startup has become more accessible and more uniform. Global standards are emerging for allthings startup, from programming tools to term sheets for investments, dress code and vocabulary, making it easy for entrepreneurs and developers to move around the world.

Invent yourself a job

Economic and social shifts have provided added momentum for startups. The prolonged economic crisis that began in2008 has caused many millennialspeople born since the early1980sto abandon hope of nding a conventional job, so itmakes sense for them to strike out on their own or join a startup.

A lot of millennials are not particularly keen on getting areal job anyway. According to a recent survey of 12,000 peopleaged between 18 and 30 in 27 countries, more than twothirds see

opportunities in becoming an entrepreneur. That signals a cultural shift. Young people see how entrepreneurship is doinggreat things in other places and want to give it a try, notes Jonathan Ortmans of the Ewing Marion Kauman Foundation,which organises an annual Global Entrepreneurship Week.

Lastly, startups are a big part of a new movement back tothe city. Young people increasingly turn away from suburbia andmove to hip urban districts, which become breeding grounds fornew rms. Even Silicon Valleys centre of gravity is no longeralong Highway 101but in San Francisco south of Market Street.

Describing what sorts of businesses these startups engagein would at best provide a snapshot of a fastmoving target. In essence, software (which is at the heart of these startups) is eatingaway at the structures established in the analogue age. LinkedIn,a social network, for instance, has fundamentally changed therecruitment business. Airbnb, a website on which private owners oer rooms and ats for shortterm rent, is disrupting the hotel industry. And Uber, a service that connects wouldbe passengers with drivers, is doing the same for the taxi business.

So instead of outlining what these startups do, this specialreport will explain how they operate, how they are nurtured inaccelerators and other such organisations, how they are nanced and how they collaborate with others. It is a story oftechnological change creating a set of new institutions whichgovernments around the world are increasingly supporting.

Startups run on hype; things are always awesome andpeople superexcited. But this world has its dark side as well.Failure can be devastating. Being an entrepreneur often meanshaving no private life, getting little sleep and living on noodles,which may be one reason why few women are interested. Moreominously, startups may destroy more jobs than they create, atleast in the shorter term.

Yet this report will argue that the world of startups today offers a preview of how large swathes of the economy will be organised tomorrow. The prevailing model will be platforms withsmall, innovative rms operating on top of them. This pattern isalready emerging in such sectors as banking, telecommunications, electricity and even government. As Archimedes, the leading scientist of classical an