A History of Silicon ValleyTable of Contents | Timeline of Silicon Valley | A photographic tourHistory pages | Editor | Correspondence Purchase the book These are excerpts from Piero Scaruffi's book
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Sharks: the iPhone, Cloud Computing, Location-based Services, Social Games, and Personal Genomics (2007-10)click here for the other sections of this chapterThe Assembly Line Model of Startup FundingThe first boom of
Silicon Valley’s venture capital world took place in the mid-1980s when large
semiconductor companies needed money to build “fabs” (short for “fabrication
plants”). A fab is an extremely expensive project that requires hundreds of
millions of dollars. The age of one-man startups, though, did not require such
massive investments. The returns (as a percentage) could be even higher with a
much smaller investment. Unlike fabs, that need an accurate plan of
implementation, Web-based startups could adjust their functions in real time
based on user’s feedback. So all one needed to start a company was just a good
idea and a rudimentary website. Instagram, a company of 16 people, had 130 million customers when it
was bought by Facebook in 2012. At the end of the 2000s
it was getting so easy and cheap to start a company that the business of
funding companies was beginning to resemble an assembly line. When car
manufacturing became cheap enough, Ford built an assembly line and launched the
first mass-market car. Something similar was happening in Silicon Valley in
2010 in the business of manufacturing startups. Sometimes angels would invest
without even having met the founders in person. This logic was being
pushed to the extreme limit by a new generation of angel investors who were
sometimes barely in their 30s. The Google, Facebook, and PayPal success
stories, plus all the startups that they acquired (Google acquired more than 40
companies in 2010 alone), had created plenty of very young millionaires and
even some billionaires. They could comfortably retire, but it was “cool” to
become angel investors and help other young founders get started and get rich.
These new angels were “kids” compared with the veterans of 3000 Sand Hill Road.
Yet many of these kids felt that they could more accurately guess the future of
the world and jumped into the game passionately. Needless to say, these kids
tended to fund startups that were started by kids even younger than them. The mindset of both
investors and founders was very different from the mindset of investors and
founders of the 1980s. The credentials of a founder were often based on
popularity, not on a professional business plan. In fact, these new investors
“hated” the Wall Street type of founder. They loved, on the other hand, the
“cool” kid. The successful founder was someone who could create “buzz” on the
Internet about his or her idea, even if he or she had no clue how to monetize
that idea. It was, in a sense, the psychology of the high school transplanted
into the world of finance. The intellectual idealism of the early Internet was
being replaced by the subculture of high-school gangs (albeit one that abhorred
drugs and violence). The new angels, in turn,
were not professionals educated by Stanford or Harvard in the subtleties of
economics; they were former “cool” kids. They invested based on their instinct,
trying to guess who would become the next cool kid. To some extent the venture
capital business had always been a statistical game: you invest in ten startups
hoping that just one makes it big. But it had always been backed by some
(economic) science. It was now becoming pure gambling. The psychology required
from an angel investor was more and more similar to the psychology of the gambler
who spent the day in front of a slot machine in Las Vegas casinos. The
inception of this new kind of venture capitalism was commonly taken to be 2005,
when Paul Graham started Y Combinator
in Mountain View and incubated eight seed-stage startups. Another significant
change in the way startups are funded took place when the
"crowd-funding" website Kickstarter
launched (in 2008 in
San Francisco by day trader Perry Chen
, online music store editor Yancey Strickler
and web-designer Charles Adler 's New York-based music company ArtistShare :11.0pt;font-family:"Times New Roman"'>: raise money among
ordinary people to fund a (music) event. Kickstarter transferred the concept
into the world of the Bay Area startups with amazing success: by July 2012
Kickstarter had funded more than 62,000 projects that had raised more than 200
million dollars. Kickstarter got further help from the government when the JOBS
Act was enacted in April 2012: it made it legal for smaller investors to fund a
company and with fewer restrictions.
Kickstarter's main rival was Indiegogo, founded in 2008 by Wall Street analyst Danae Ringelmann with Slava Rubin and Eric Schell in New York.
Another formidable rival would emerge from San Diego in 2010, GoFundMe.
Last but not least, the
early adopters too were of a different kind than for previous generations of
products. The early adopter of an Intel product or of an Oracle product was a
multinational corporation. The early adopter of an Apple gadget was a
professional with a good salary, and typically a technology-savvy one. Now the
early adopter of a website (say, a social networking platform) was, instead,
just a kid himself. The early adopter was not paying anything to use the
“product” (the social networking platform). Therefore the profile of the early
adopters was, for the first time ever, disconnected from their financial status
and instead related to how much spare time they had and were willing to spend
on the Internet. The early adopters were typically very young. These “kids”
created the “buzz.” They established the credentials of a new platform. The
adult audience followed the trend set by a very young audience. |
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