Research shows we may be at the end of the startup era

startup era

By Mark Schaefer

About a year ago, I wrote a blog post that went against the grain. At a time when everybody was ga-ga over Snapchat I predicted that Facebook would eventually dismantle them. I wrote:

  • Snapchat has no meaningful intellectual property. There is nothing really stopping Facebook (or the apps they own like Instagram, Messenger, or WhatsApp) from copying anything they do.
  • Facebook already owns the hearts and minds of marketers. As Facebook responds to the Snapchat challenge they will be able to better serve advertisers and monetize more quickly.
  • Facebook has virtually unlimited resources. They have more engineers, more money and more technology than Snapchat can imagine. Snapchat is going up against Goliath.

As Facebook aggressively “Snap-ifies” their properties day-by-day, it appears that I was correct in this forecast … but I’m sad about that. We are watching this amazing startup become copied piece-by-piece (largely because they refused to be swallowed up by Facebook in 2015).

Will Snapchat survive? Yes, in some measure. But they are losing both advertisers and users to Instagram and it seems unlikely they’ll be able to out-innovate Facebook for long-term success. Snapchat will probably become a marginal niche network like Twitter.

The message here seems to be … join the big company or die. And, as it turns out, this is exactly what is happening on a large-scale in America today.

End of the startup era?

I’ve been thinking about how much more difficult it is today to grow a small company into a big one. The most dominant mega-companies are now on a continuous hunting mission to either destroy or acquire meaningful startups. In fact, the idea that we live in a start-economy is rapidly becoming a myth.

Here in the U.S., we pride ourselves in being a nation driven by entrepreneurs and small businesses. But the facts don’t bear that out any more.

startup era

We are becoming a nation of employees working for large companies, often very large ones.

Huge companies dominate American economic life well beyond employment. They ring up a disproportionate share of sales for goods and services, both to consumers and to other businesses.

Scale alone isn’t bad. It can bring substantial efficiencies. National cellular providers can spare customers the complexity and expense of roaming charges.

At the same time, as big companies become bigger, they reinforce one another — “scale needs scale.” Big retailers prefer big distributors. Big manufacturers need big suppliers. Why would anyone take a risk on a start-up as a key supplier if you don’t have too? At the end of the day, people are risk averse, they make decisions that won’t get them fired.

The future of disruption

Over time, economists say, nimble new companies should form to challenge sprawling incumbents. As entrepreneurs, we revel in this dream of disruption, but it’s happening at a slower pace.

Young firms often fail or are absorbed by existing giants and business formation has slowed. In the past 12 months, Google alone has acquired 20 small companies including QuikLabs, Eyefluence and Urban Engines.

startup era

Another compelling fact pointing to the startup slowdown: There were 294 tech startups that raised $50 million apiece in 2014 and 2015, according to the Wall Street Journal. Almost three quarters of those companies — 216 — have neither raised money nor been acquired since the end of 2015. Startups tend to raise funding every 12 to 18 months.

I think part of this new economic reality is due to the fact that companies are more sensitive to their vulnerability to disruption than they were five or 10 years ago. For example, we see blue chip companies like Ford making proactive moves into alternative transportation modes (as they should).

Recently I interviewed the CTO of Dell EMC John Roese for a new podcast project called Luminaries (check it out!). I asked him if companies could rely on predictive models to tell where disruption could occur, and he said they could. Smart companies today can use algorithms to help them protect their flanks from disruptors.

For the past few years I have been playing around with this idea — what will eventually disrupt Facebook? After all, don’t all great ideas and companies eventually meet an end? I’m coming to the uncomfortable conclusion that the next Facebook will be Facebook as it continually absorbs, adapts … and sometimes copies … its way into the future.

In a New York Times editorial, Jonathan Taplin argues that the biggest tech giants should be considered monopolies, and that it’s time to break them up:

In just 10 years, the world’s five largest companies by market capitalization have all changed, save for one: Microsoft. Exxon Mobil, General Electric, Citigroup and Shell Oil are out and Apple, Alphabet (the parent company of Google), Amazon and Facebook have taken their place.

They’re all tech companies, and each dominates its corner of the industry: Google has an 88 percent market share in search advertising, Facebook (and its subsidiaries Instagram, WhatsApp and Messenger) owns 77 percent of mobile social traffic and Amazon has a 74 percent share in the e-book market. In classic economic terms, all three are monopolies.

We have been in a glorious era where disruptive little fish could eat the big fish. Is that time coming to a close? What are your thoughts?

Some of the data and insights for this post came from a Wall Street Journal article entitled Why you probably work for a giant company. I have subscribed continuously to the WSJ since I was 21 years old and I encourage you to subscribe too to support their journalistic mission.

SXSW 2016 3Mark Schaefer is the chief blogger for this site, executive director of Schaefer Marketing Solutions, and the author of several best-selling digital marketing books. He is an acclaimed keynote speaker, college educator, and business consultant.  The Marketing Companion podcast is among the top business podcasts in the world.  Contact Mark to have him speak to your company event or conference soon.

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  • Samantha

    Very insightful, Mark. So do you think that it is inevitable that the most successful small businesses will always get “eaten by the big fish” once they reach a certain level of growth? Do you think that there will be a new wave of entrepreneurs who will resist acquisition by these larger entities – is there any motivation for them to do so?

  • NEVER!!!! HA!

    Seriously, disruption occurs with new and different thinking to deliver value (more or alternative) to the masses. SnapChat, as an example, is a “feature” that augments something larger, not at all disruptive. Twitter has missed more of these opportunities than I can count. Uber (although I hate them) was innovative and disruptive. So yes, truly disruptive companies eventually become behemoths if / when successful. But, without the original innovative start-up, that behemoth would not exist. There are many, many more examples of this (think Whatsapp and their peers who capitalized on the shift to private communications). Facebook, Google etc are no different. Not many years ago, they were scrappy innovative start-ups. They will continue to acquire so to that end we may find many will end up working for big companies as a result.

    This is just the natural evolution of business. Always has been, always will be.

    To give up on start-ups will only cause those big players to become stagnant. As an example, the majority of Facebook or Google acquisitions have been to add value when something came at them from left field and scaled so fast they couldn’t catch up (think Microsoft and Hotmail). That said, every so often and Uber or AirBNB comes along………… those who change the rules of the game (true disruption). And often, big companies will spend so much time protecting the old model (think Blackberry) they get tanked.

    So, joining a big company is a definite strategy but only when you add value to it, not truly compete with it. And it’s the true competition factor (not the me too) that ultimately creates new and disruptive value. Disruption comes from many angles. For a big “Mouse Trap” manufacturer, their growth opportunity is expanding the mouse population. So, to beat them, It’s not just
    about being a better mouse trap but perhaps eliminating mice altogether. Big
    companies tend not to eat their young and leave major gaps for extreme
    and innovative opportunity.

    May favorite example is David and Goliath.

    And, I totally agree with Jonathan Taplin. We saw this in the early 1900s and again now. For similar reasons that existed then, we need to avoid putting too much economic and technical power in the hands of too few. Ultimately those “few” become very stagnant and hurtful to the consumer they are designed to serve.

  • I think that tension has always been there Samantha. For many companies, their GOAL is to be bought. That’s the big payday. But the downside is, there is almost a cash-out culture going on in some ways and these tech titans are becoming monopolies. It’s funny — I have been worried about these monopolies for some time and in the last few weeks there have been quite a few publications expressing those concerns. Thanks for your comment!

  • Thanks for the amazing commentary Steve. Will be so interesting to see how this plays out!

  • I echo your sentiment on Snapchat. When they were getting big, I had the same thought – which is that they don’t really offer anything meaningful and don’t have an IP that’s valuable enough for the market. From an advertising standpoint, I feel that their solution is something that only massive brands will adopt (like Coke and Walmart) – but for smaller marketers and brands, they’ll never fin a way to meaningfully connect with the Snapchat platform from an advertising and ROI perspective. Especially in a time where advertisers are being harassed for ROI, dumping five to six figures on Snapchat with nothing to show for it, forget about it. Their recent 7-11 news got me excited until I read the specifics of the mechanics and I rolled my eyes at it.

    But the bigger picture here about start-ups, that’s an interesting one. It’s easy enough to talk about “start-ups” that disrupted travel (Uber) and hospitality (Airbnb), but I feel that after these bigger and broader industries have been disrupted, it’s time for the niche industries and the smaller industries to be disrupted. Case in point, advertising agencies and independents. Massive agencies like Ogilvy and DDB are finding it hard to compete on a local level with independent agencies that are able to provide the agility and the movement that bigger agencies can only dream of. They’re easier and better to work with. That industry is still clambering for a winner, and while independents definitely do sell to bigger agencies (because they reach a point after which they can’t really scale) – there are many that are holding their ground, refusing to sell because they like the flatline they’re at and the work they’re doing.

    Video advertising and production is another industry that’s undergoing some pressure right now. When working with production houses one gets a quote for $25,000 for a one-minute video, and a pair of freelancers come promising (and showcasing) a similar output for $10,000 that’s much quicker and easier because their overheads and fringe costs are nothing – you find yourself wondering how long the big production houses are going to be around for, and when those one-off $200,000 productions are going to stop for them as well, or go to a more consolidated offering.

    My view on this is unfortunately limited to the industry I’m in which is why I can provide commentary that’s grounded in reality on it, but I’m sure other industries are seeing the same. The smaller work, the more niche work that people need more of and are unfortunately being charged a fair bit for and are still sticking to old timelines are seeing smaller and quicker players coming into it. I wonder what someone in an industry like manufacturing or retail or construction thinks about this, would be fascinating to hear what processes and operations for them are being disrupted there.

  • I see the same thing. I recently had lunch with an exec from a big agency and he was lamenting the business they were losing to the smaller agencies. How do you fight back, I asked. He said, “well, for starters, we need to stop charging people $1,000 every time they make a change to their website.”

    There are three interesting things going on here. First, to be an effective agency today, do you really need a tower in Manhattan with all that overhead? This is a core reason smaller firms can win. Second, the core business of ad agencies — campaigns — is sliding into obsolescence. There has to be a vast cultural change here. One brand manager told me she was sick of working with her agency because she needed social media connection and every solution came back to her as an ad.

    Finally, there is the matter of general disruption. As you say, there are loads of small competitors nipping at the heels of the large firms. But is the ad industry really being DISRUPTED or iterated? I think it is time for an “Uber of advertising” to figure things out. I’m not as close to the industry as you are but I don’t see that happening yet. It seems like a bold player could use technology and crowd-sourcing to create a global “hive” of low-cost creativity and research.

    And as always, thank you for the amazing, amazing content. You are a wonderful thought leader Avtar and I hope to get over to Asia to meet you soon!

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  • Hey Mark! I couldn’t help but smh when I read the line about Snap becoming the next Twitter. I was rooting for the little guy.

    I thought anticompetitive laws were supposed to protect the little guys in some cases… But the giants are clever, and they have clever lawyers that position them as broadcasters that sell advertising (which is a much broader industry) instead of the monopolies they are.

    This hurts because I have a few startup ideas of my own… hmm, I know there’s a way in. Or maybe I just need an in and a quick out. I think the solution is to stay quiet and when you’re too big to go unnoticed, partner with Goliath. This is exactly what Google did with Apple (although that didn’t end well).

    It may be the end of the start-up era as we know it, but I’m thinking there’s always a way in. Startups just have to be watchful and look for secrets the sometime complacent giants overlook.

    My assessment.

  • I guess I missed this post, but it’s a great one, thanks.

    I’m very nervous about the long term influences of horizontally integrated monopolies becoming vertically integrated in the online space – I know those aren’t the most accurate terms for it but I’m just referring to this apple/amazon/google/facebook model of growth, where after gaining majority market share in their core profit models, expanding to compete in other areas is their only move to keep growing, and what’s scary is that they’re getting really good at it.

    And not to sound too disgruntled about it, I’m all for capitalism, but this stuff is contributing to economic instability through marginalization of essentially, poor people, who with automation are going to be even more screwed and grow as a population as time goes on.

    I think it started with the FCC getting severely defunded in the 80s, with more deregulating now, the fact that we don’t have a strong independent but federally funded media source like the BBC, the spin major corporations can put out to control conversations, and the mega funding behind large lobby groups, it all just points to a wider wealth gap, all things that will make starting up very hard. And as an aside the only reason we have these mega investments in startups, is because all these ultra wealthy guys don’t have anything to do with their money now that

    As soon as we don’t have a free and open web I think we’re really going to be in big troubleee. But I also really like dystopian stories so maybe it’ll be kinda neat to watch it all unfold.

  • I think as long as people have ideas and dreams there will be startups. But will there be another startup that dominates in social media? No. Search? No. Whatever Amazon does? No. These are becoming monopolistic platforms. However, there is plenty of money to be made at the margins and using tech to disrupt less historically technical areas.

    To have a hope of making to the other side and truly becoming a “unicorn,” you either need some IP and the legal fund to protect or of a huge influx of cash to scale at an insanely rapid rate. Difficult in either case.

  • Really interesting perspective. The thing that stands out for me is that we sort of have this myth about the startup economy that is going down the tubes. Personally, I think that’s important and I don’t know what could revers it unless it is a lot of weird regulations. I’m convinced that our government leaders (at least in the US) have no idea what is going on in the tech world or even understand it enough to ask the right questions. Thanks for the superb comment sir.

  • Ha! A fellow fan of dystopia!

    Back in business school, there was always the case study in the law course about the “benevolent monopoly” and why Alcoa broken apart in the 1950s. One of the longest court cases in US history.

    I really don’t see the difference between the monopolies that are occurring today and the what happened back then. When a company has 80 percent share of anything it’s time to take a hard look at reality!

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