Platt Perspective on Business and Technology

Internet companies, the new-old economy and the mainstreaming of innovation

Posted in in the News, macroeconomics, startups by Timothy Platt on September 27, 2009

Yesterday I wrote that I would be starting a new category: “in the news” with a next posting today, and I am doing that and also adding a “macroeconomics” category as well. The New York Times news story that prompted me to do this is a piece by Brad Stone appearing in the Friday, September 25, 2009 issue (Section B, page 1) titled “Twitter Appears Set to Raise $100 Million, Valuing It at $1 Billion”

A logical question would be one of why I would pick this of all new stories to do this with. I have a few reasons and some of them connect into why I decided to set up an “in the news” category in the first place. First, this story connects with a number and variety of issues that have had a great deal of impact on society as a whole, including the issues and controversies revolving around the “new” economy, how technology innovation is reported and Internet-related technology in particular, and what types of criteria might in some way correlate with a startup or early stage succeeding and significantly. This story connects into all that and more and it raises some important questions. So I started this blog category as a forum for what might be considered current business and technology news analysis and here is my first try at that here.

I want to start by stepping back to early-stage Google, and before that to the first true dot-com bubble. As a disclaimer on that, I have to divulge that I developed quite a collection of dot-com tee shirts (as well as a variety of other handouts) from startups of that type and vintage from before the big fall, and I did have dealings with a fair number of these new Internet companies on one issue or other. I did, however give most of the toy-like items away about as soon as I got them and I have divested myself of most of my once impressive “dead dot-com tee shirt collection” with only a couple of the more interesting entries left. On the other hand, I did not buy any early stage Google stock so I am not entangled with them either. I will add that I do not own any of Twitter and I do not work for them either.

First the pre bubble dot-com companies: everyone who went through that knows the hype on the street was that the old world of economics and the old rules for valuation appraisals and for business analysis did not hold anymore. No, in the new, improved fast paced world of the Internet, a great idea was all it took, and even perhaps an idea that would not even be looked at if it did not come with that Internet panache. Think selling bulk dog chow online with shipping expenses that would have to be covered, in competition with the same brand from that discount supermarket just down the street. Details like developing a rigorous business model with detailed financials and plans for monetization, and a clear idea as to how profit would be generated that took into account business expenses – that did not apply. This all did, of course apply and the dot-coms that tried doing without found out as they headed over the edge of a cliff. I still remember one Web development-oriented business that had its rooms in back, hidden away, unpainted rooms behind a hotel that argued as a selling point for their viability and strength that they held their meetings in the hotel bar. And yes, they had a pool table too (and not just in that bar but in their own “office suite”)!

I am sorry as looking back on this I do know these people were sincere and they did have real visions and hopes for changing the world and for the good. They just did not know how to develop a business out of their ideas and for many of them even if they had really good ideas to start with. So we went through the bubble and every learned a lot of lessons, and certainly the angel investors and venture capital crowd did. Among other things, a lot of VC learned to insist that they get to pick the CFO if they are going to invest their money, unless the current team setting up a new company meets their standards of rigor and professionalism for that. (Flash forward – think the current discussions/arguments over adding/restoring regulation and oversight in the financial markets et al after our recent/current recession hit us.)

Then an interesting thing happened – Google. A lot of new and bold, revolutionary/breakthrough Internet startups start to bubble up towards the surface and especially in the immediately post-bubble years they had to be able to withstand a lot more scrutiny than they would have pre-bubble-burst. And they suddenly had to meet much more rigorous standards as a potential business if they were to get anywhere too. But Google came along and it seemed to grow and grow in listed valuation and in spite of the fact that even with 18 month technology generations, it was impossible to even begin to predict when and if this company would offer a monetizable product or service and turn a profit. Some people worried out loud that this was just a repeat of what got us into that bubble in the first place, some saw potential for vast future profits and a tremendous first mover advantage for creating and capturing long term market share, and some simply tried to stay out of the way. And Google did finally really take off, generate profits, pass the break-even point and launch toward outer space in the revenue generation curves. And it did this by means that no one imagined when this company was initially being infused with all that starter capital and positive name recognition – like pay per click.

Now we see Twitter and the argument is that this is going to be the next Google, defying the curse of the failed dot-com zombies and destined to create whole new realms of wealth and good fortune. And this brings me to the core question that I could not get out of my head as I read this excellently written New York Times piece.
• How can you tell if a startup or early stage is going to be that next big thing?

I add that into this post with some choice quotes from the Times article in mind:
• “Twitter could even find a business model for itself if it were to buy one of several start-ups devoted to helping Twitter presence and monitor how their brands are being discussed.”
(This will sound old-fashioned but it seems to me that it would make more sense to develop a business model and a solidly constructed foundation as a business before heading for the stratosphere as a business success, and that this should come from within – not as something developed through an acquisition of a strategic asset. But I add that this comment also misses a key observation, just like the quote it connects to does.)
• “But close followers of Twitter do not sense that the company is in any great rush to prove itself as a profitable venture”
(It could be said that I really took this quote out of context and I freely admit I did – read the full story and you will see that. But a lack of anything like a real business plan or formulation as to what would constitute a monetizable product or service within the Twitter offerings, or a plan/timetable for reaching a point where revenue and profits could be generated … that does not sound like business or economics as usual, but more like the old “new economics” of the pre-bubble-burst days. And once again, I see this comment as being valid but missing a key point, that the article and arguments behind that surrounding text I did not quote here, do not address either.)

So what is this point? A valid, comprehensive answer to that would resoundingly answer that question I started with and offer a real litmus test for wading through the hype and hope. I have a list of criteria and benchmark tests in mind here and having now passed the 2X posting size mark I am going to continue this story and share my draft list tomorrow in a next segment to continue this posting.

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