06:17 AM

The Problem Of Scale: Building The Next Big Silicon Valley Company

I spotted this recently from CB Insights: 67% of Tech M&A Exits in 2013 Went to Early-Stage Startups

The headlines may obsess over the WhatsApps and Twitters of the world, but the reality is most venture-backed startup exits are smaller and far from being unicorns. According to CB Insights data, 2013 saw 67% of tech startups exit after either the seed or Series A stages. 

CB Insights says that, "A portion of those went to acqui-hires of startups hitting the Series A Crunch" but it also shows that the majority of startups didn't see a future for themselves as independent companies. Or, that they would be able to grow to a sufficient size that allows them to be sustainable businesses.

This is very bad news for Silicon Valley and the rest of the world because it implies that there is no way to get to sufficient scale for young companies. Innovation will be squandered and trampled by the incumbent scale players: Google, Facebook, Oracle, IBM, Microsoft, Amazon, etc.

That's why we see huge investments being made in startups that seem to be well positioned to be the giant in their field because it can kill competitors or funding for new competitors.

I often read articles about the fragility of Google, for example, to the next great search engine that comes from three people in a garage. But this is nonsense. It doesn't matter if a better search engine is developed because Google can monetize it far better than anyone else. It'll either buy it, or partner with it, or copy it.  Similar is true for the other giants in their sectors.

It means innovation cannot easily escape the process of acquisition, which is quite destructive and often results in the original business dying, or being closed; sometimes through design but more often through mismanagement.

It would seem a good strategy for entrepreneurs to immediately start a copy-cat startup when an acquisition is announced because it's unlikely that the acquirer will manage to keep the business going, and there's probably a large customer base that resents the acquirer and would gladly jump to an independent and more focused service.

If scale is the only factor for success then Silicon Valley innovation is in trouble. Scale doesn't require any smart business strategy it simply means that size matters when little else does.

Size is not a level playing field. How can competition arise and thrive?