Welcome to the end of the startup bubble
/Because of the rate at which technology and new developments can move (thank you, Gordon Moore), we see new “stuff” cropping up all the time. As that’s been happening, we’ve spent the better part of two decades deifying founders, from the PayPal Mafia to Zuck. You toss in shows like Silicon Valley and guys like Evan Spiegel ending up with $1 billion and Miranda Kerr via an app where one of the most popular features is making yourself a dog, and you’d probably assume we live in this amazingly entrepreneurial, start-up world.
We did, but we don’t necessarily still live in it.
Let’s run down a few facts before we get into the repercussions.
Entrepreneurship’s decline: Per Brookings research, it’s actually at a three-decade low. Because it’s hard to explicitly define “entrepreneurship,” one metric was the rate of firm exit and entry. Look at these numbers from 1978 to about 2012:
An increase in bureaucracy: Back in 1988, Peter Drucker wrote an article for Harvard Business Review predicting that in 20 years, average organizations would slash management layers by 50 percent and managerial ranks by 70 percent. In fact, the opposite has happened -- pound your chest about Uber, Amazon, and disruption as much as you want, but the fact is we’re living in one of the most bureaucratic periods of American history. To wit:
Between 1983 and 2014, the number of managers, supervisors, and support staff in U.S. organizations grew 90%. All other occupations grew about 40%.
In addition, consider: in 1993, 47% of all private sector employees worked in orgs with more than 500 people on the payroll. In 2013, that was almost 52%. Same vein: The 1995 Fortune 500 companies employed a total of 20M people; the 2015 companies on that list employed 27M people.
Startup funding is drying up: Examples of this are seemingly everywhere -- Fintech (i.e. disrupting banks) had been considered a recent darling of startup funding, but even their numbers are crashing. Around 150 companies earned valuations of $1B in recent years, which created something of an arms race in terms of VC spending. Now the cost-trimming race is replacing it. In the first quarter of 2015, VCs did roughly 1,085 deals at $13.7B. The first quarter this year? 969 deals to the tune of a little over $12B, or an 11 percent drop-off.
Luke Taylor, a finance professor at Wharton, chimed in with this:
“They should absolutely be worried,” says Taylor. “There’s a lot of uncertainty right now about how hard it will be to raise VC money in the future. Most of these companies will run out of cash and shut down if they fail to raise VC financing.”
What does all this mean?
Well, The Wall Street Journal is already calling this “the beginning of the Silicon Valley hangover.” One of the issues at play here is some startups getting funding they absolutely didn’t deserve, or what funder Bill Gurley refers to as the phenomenon of “dirty term sheets.” When you combine huge paper valuations with high burn rates and low levels of IPOs + mergers and acquisitions, you essentially created a massive culture of greed. We’ve seen this in enterprise for years with the rising of CEO salaries at the expense of average workers, and now, almost two decades after the first tech bubble popped, greed might help pop it one more time.
That video above is a discussion between Gary Vee and James Altucher about “the 1%” and how to reframe entrepreneurship. Gary Vee is a little bit of a different case because he came up via the wine industry, and that’s not typically a place you’d see a lot of venture capital money. But as he argues in the (cool animated) video, “there’s way too many 20, 40, and 60-year olds who think they need to make a billion per year to be successful.” That’s leading to people chasing VC money all over America, when in reality entrepreneurship and company-building has always been a very individual, relationship-driven process.
Hopefully that’s the next wave of this situation: if startup money continues to dry up, the ideal result is a handful of companies driven by good product/service/customer experience and building organically get into the hands of key investors. Those companies blossom. We’ll see less unicorns, but we’ll be inverting our current culture of greed into a culture of smart business management.
For me, the problem is this: if money is everywhere and people are willy-nilly tossing it around, well, that’s hardly going to encourage some newb out of B-School or with a great coder friend to actually understand the highs and lows of managing a business. When a different wave hits in 3 years, 5 years, or whenever, those well-heeled companies will be pushed right off a cliff.
In that way, it’s probably for the best that startup funding and entrepreneurship seem to be in decline. While a Presidential candidate might never mention the real landscape out there, choosing instead to discuss how driven we all are to succeed, the fact is that the world of getting money and making money is as different now as at almost any time in American history. But hopefully our overreach on greed will lead us to an era of smart business decision-making.
See the original LinkedIn blog post here.
Bryan O’Rourke is an entrepreneur, advisor, contract executive and investor. He has presented as a keynote speaker at industry and corporate conferences on four continents and is widely published and quoted in periodicals like Inc. Magazine, the Wall Street Journal and the New York Times. Examples of some of Bryan's presentation content can be found here. Bryan recently contributed to a book with other European thought leaders Growing The Fitness Sector Through Innovation . He will be presenting at IHRSA's upcoming European Congress in October in Spain and at 2016 ChinaFit / IHRSA China Management Forum from November 15th - 18th in Changsha, China. He and his partner Robert Dyer are writing a book 9 PARTNERSHIP PRINCIPALSTHAT CAN HELP CHANGE THE WORLD, set to be released at the end of 2016. Visit http://www.bryankorourke.com and connect with him https://twitter.com/Bryankorourke Snap Chat Bryankorourke and https://www.instagram.com/bryankorourke/ .
