Startups a Safer Bet Than Behemoths

Former Slashdot editor ScuttleMonkey raises his voice from the great beyond to say that "TechCrunch's Vivek Wadhwa has a great article that takes a look at difference between startups and 'established' tech companies and what they each mean to the economy and innovation in general. Wadhwa examines statistics surrounding job creation and innovation and while big companies may acquire startups and prove out the business model, the risk and true innovations seems to be living at the startup level almost exclusively. 'Now let's talk about innovation. Apple is the poster child for tech innovation; it releases one groundbreaking product after another. But let's get beyond Apple. I challenge you to name another tech company that innovates like Apple—with game-changing technologies like the iPod, iTunes, iPhone, and iPad. Google certainly doesn't fit the bill—after its original search engine and ad platform, it hasn't invented anything earth shattering. Yes, Google did develop a nice email system and some mapping software, but these were incremental innovations. For that matter, what earth-shattering products have IBM, HP, Microsoft, Oracle, or Cisco produced in recent times? These companies constantly acquire startups and take advantage of their own size and distribution channels to scale up the innovations they have purchased.'"

Comments

Re:Tech innovator? WRONG!

[Concerned Onlooker]

"...and trots them out in shiny packages with pretty UIs."

I think you meant well-built packages and user-friendly UIs.

IBM is a safer bet than Twitter

[Anonymous Coward]

I'm an angel investor, so I can talk fairly competently on this subject.

Let's compare a well known behemoth (IBM) with a well known start-up (Twitter).

If I invest in IBM, I'm guaranteed a healthy return. Barring any major disaster, IBM will consistently return a profit on what I invest.

If I invest in Twitter, I'm not guaranteed a healthy return. My returns may be enormously higher than investing in IBM if the company is successful, and I might lose my entire investment if the company goes bankrupt.

This actually has some real world ramifications for me. The majority of my money is stored away in Corporate Bonds for major companies, because I know that I have a very low probability of losing the money and a very high probability of seeing at least a two to three percent return on my money every year. That's what makes behemoths a safer bet than start-ups. I only give about 15% of my assets towards start-ups at any time, because for the most part, I will break even in what I invest or lose about five to six percent of my investments.

I angel invest in companies for the fun and excitement of creating something, not because I want to make money.

Re:IBM is a safer bet than Twitter

[mcrbids]

I angel invest in companies for the fun and excitement of creating something, not because I want to make money.

And this, perhaps, is why you aren't making any money at it. See, when your neck is on the line, you'll do more to perform!

I am CTO of a small, rapidly growing company experiencing at least 100% growth this year. While we did have some private cash up front, it was a fairly small amount (less than $100k), otherwise our growth has been organic. And because we all eat from whatever our company makes, we've made damned sure to be profitable from the earliest point possible. We had to be lean to make it at first. My office was, for years, the study at home!

And this underlying emphasis on cost control and keeping the bottom line in focus has resulted in a company that has unbelievably good margins on extremely slim expenses. As we continue our exponential growth curve, our profit margins are very fat, even as our customer service is unparalleled, and our infrastructure takes the extra load with ease and crazy low administration costs. What's driving our growth isn't so much our marketing department as our happy customers and jaw-dropping feature set!

If you Angel-invest in companies as a hobby, you get hobby companies, and the very reason for your poor returns is your hobby-oriented approach. Companies at the Angel stage need strong guidance as well as cash. You want to succeed? Well, then, you'd better run really lean, really mean, and play for keeps! Aeron chairs don't even enter the equation until well AFTER you've paid off your Angels. Until then it's the $75 Office Depot "Executive leather" seat, when they are on special clearance! You don't "make a go of it" - you do whatever it takes. You really, really have to have a much better product that solves a real problem at 1/4 (or less) the cost of your competition, or you'll have a tough time getting enough oxygen to survive, and to achieve this result, you really can't do it halfway.

As a startup junkie / investor, my advice is for you to move on - anybody you "help" with your money you hurt with your passive attitude.

Re:IBM is a safer bet than Twitter

[Anonymous Coward]

True, angel investors often do it for reasons other than purely making money, but they definitely ARE trying to make money.

Not the original AC/AI, but...

There are two ways to make 5% over the long term.

Starting with $100, Player 1 invests in a bunch of bonds and maybe a small portion of it goes into an index fund. At the end of a year, he'll probably have about $105.

Player 2 invests $10 in 10 lemonade stands, 9 of which go out of business, but the last one returns him a ten-and-a-half-bagger, for pretty much the same $105.

One playstyle gives you 365 days a year to play golf, and if you're into golf, it's definitely the way to go. But if playing with technology or hearing neat ideas sounds like more fun than golf, then why not go the VC/AI route? (You'll still get some time on the course, but it'll be tax-deductible :)

But at the end of the game, both players will probably end up with about the same amount of money. If this were not the case, arbitrage would immediately *MAKE* it the case. (The worst example of this was the dot-com boom. All of a sudden, funding lemonadestands.com based on its click-per-eyeball metrics became more profitable than investing in actual businesses. Gazillions of dollars of funding showed up, funded all kinds of nonviable businesses, but most of that capital never returned to its investors. The money didn't vanish - it's just that during a gold rush, the real money was made by the companies selling picks and shovels and blue jeans.)

Re:IBM is a safer bet than Twitter

[Anonymous Coward]

Even so, start-ups and tiny companies are generally great for returns, it's that GP's strategy is lousy for making money with them. He should either be heavily invested in start-ups with a very diverse portfolio, or he probably shouldn't invest in them. He needs to diversify heavily in order to improve the odds of landing those rare companies that succeed wildly and compensate for the many losers. Or he can do what I did, and invest in micro-cap mutual funds; as a group, they've performed better than any other fund I own and done better than my portfolio of individual stocks.

Why would they want to innovate?

[khasim]

Real innovation means that their existing products no longer sell because everyone buys the innovative product.

So why would an established company scrap their existing investment?

What they want is something new enough to be interesting ... but not different enough to threaten their cash cows ... that supplements their existing product line.

Apple is great at that. Look at the iPhone. New iterations of their existing product that never threatens their laptop / desktop computer segment. But can supplement it and works well with it.

It is only the startups that don't have an existing investment to threaten that will take the real risks.

Which is why software patents are bad. They allow the existing companies to sue the startups and limit the innovation.

Re:Andriod

[valeo.de]

They bought the company that invented the Android platform back in '05, sure. Are you really saying that in the last five years they've done absolutely nothing innovative with the platform though? I'm not saying they have (my knowledge of Android isn't as vast as my knowledge of the underlying tech, like the Linux kernel), but just because they bought the start-up that created the platform initially, doesn't mean they shouldn't get credit for all the work they've done since.

What!?

[Anonymous Coward]

I'm sorry, did we wake up in 2010 and forget the last 30 years of software development? Google continues to reinvent itself and encourage innovation, did we all forget what life was like back when Altavista was your best bet for a search engine? Did we forget that huge improvements in storage, artificial intelligence, and data mining have brought the world together with technologies like instantaneous automatic translation between a few dozen languages? The last 10 years have seen some of the most impressive free software ever released, and they're a giant corporate sponsor... Is someone living under a rock?

Re:Apple and the others...

[fast turtle]

iPod: Reduce the buttons, polish the interface. Integrate seamlessly with iTunes. Made a user experience that was superior to anything else out there. Push for reasonable prices on content. Fought for and eventually won DRM free content with the publishers.

That's not Inovation, that's simple refinement. There is absolutely nothing Inovative about any Apple Products. Even the ][e wasn't inovative. It simply used existing tech in an interesting manner.

I'm sorry to say it but Apple does very little inovating of hardware. Where they tend to be very effective is seeing what the user wants and giving it to them.

And iTunes was bought too...

[ruiner13]

http://en.wikipedia.org/wiki/SoundJam_MP iTunes was not an apple innovation either...

Re:IBM???

[TheRaven64]

I'd say the output from T J Watson includes more innovation than Apple and Google combined, and that's just one of IBM's research centres. Microsoft Research also does a lot of innovative work, but the company seems to be very bad at turning it into shipping products. Some of the software transactional memory stuff coming out of MSR in Cambridge is amazing - almost enough to persuade me that I don't hate Haskell...

What is Innovation?

[zmaragdus]

All this discussion and debate over innovation begs a question (perhaps in true Socratic style): what is innovation?

There are products being released every year that one-up their predecessors in terms of features, appeal, and usability. Is this innovation? To some extent, I would admit that it is a form of innovation; ideas are being created and (re)combined to produce new and (sometimes) wonderful things.

At the same time, it is my opinion that none of this "Apple vs Microsoft vs Google vs {fill in the blank}" is truly groundbreaking innovation. What technology has been produced that has fundamentally altered the way the world works? Some of the things that come to my mind when that question hits are the printing press, electricity, the telephone, manned flight, wireless communications, the integrated circuit, and the internet.

What technology has been invented/produced recently (say, a decade or so) that has made such a fundamental shift as these? (Honestly, if you can think of one, please post a reply. I'd love to hear your opinion)

Re:What is Innovation?

[Anonymous Coward]

What technology has been invented/produced recently that has made such a fundamental shift as these?

Things take time to form a 'fundamental shift'.

Not until the last 10 years have wireless communications, the integrated circuit, and the internet come together into a widespread consumer device that will let you use the internet as you would at home.

Do you remember being able to use your cellphone in the 1990s to look up things to do around a new city, and guide you there with GPS?

Re:What is Innovation?

[GeckoAddict]

What technology has been invented/produced recently (say, a decade or so) that has made such a fundamental shift as these? (Honestly, if you can think of one, please post a reply. I'd love to hear your opinion)

I think the problem with this statement is that we genuinely don't know if certain things are just a fad or if they are truly world-shifting. For example, the internet was up and running in what, the early 60's? But it wasn't really until the 90's that it grew with such wide adoption and with world-changing implications. So it would have been difficult to say in 1970 if it would revolutionary because we didn't really understand the potential and impact it would have. Same goes for the telephone, LCD panels, or dozens of other technologies that have taken decades to develop.

Re:100% Garbage

[PrecambrianRabbit]

Completely agreed. I really like Apple's products, but to say they're the lone innovators is complete crap. Their industrial and human/computer interface design is certainly innovative, and that's what makes their products so nice to use, but just because it's the most visible form of innovation doesn't make it the only.

I'm also incredulous at the statement that Google Maps was an incremental innovation. Surely people remember mapping websites pre-Google Maps, where you got served a basically static image, you couldn't drag around the map, zooming in and out was a high latency operation, the level of detail was always wrong, the maps were always too tiny, etc. etc. Before Google Maps I hated online maps, and Google Maps changed that instantly.

Sure, you could call it incremental, because, hey, it's pretty easy to imagine a piece of mapping software, but Google actually made it work, and that was worthwhile. Apple's innovation is really in a fairly similar vein: designing an excellent user interface for a fairly easy-to-imagine functionality.

Re:Screw this guy

[jo_ham]

Take a look at the way the markets that those products occupy changed after their introduction - the iPod was not the first or the most feature-rich mp3 player, but it took a small, gradually growing market and bust it wide open. The iPhone did the same thing: not the first smartphone by long, long chalk, but the first one that was genuinely great to use and similarly turned the smartphone market from a niche into a huge open field that everyone wants to participate in.

They drive trends, and create markets. Look at the original iMac. Look at how many companies copied it. Look at the current iMac (the flat panel one) and consider how current PC makers have also tried to do something similar - Dell's machines that fix to the back of the monitor stand in a crude "iMac-like" way to reduce the computer's footprint are a prime example of this (and move us away from towers/mini towers and desktops).

The iPad is one of those ones that is still up in the air; as a reinvention of the tablet market, I think it is succeeding - just look at the state of tablets before iPad, and now look at the upcoming crop of tablets are are going to "take on" the iPad in a market that now exists for them that wasn't there before. Whether this market is actually sustainable in the long term is another question entirely, but there is no doubt that there is (right now) a market for the iPad (they can't make them fast enough) AND a market for a competitor to the iPad (for example, something running Android). The same is true for the smartphone: the vast and growing market for Android devices owes a large part of its success to the iPhone's ignition of the smartphone market as a whole, formerly dominated by business users with blackberries.

Innovation is not always solely about "I invented this thing that has never been seen before" - it is almost always "hey, here's a new take on something we've all been doing before, but we think is a bit better".

People were going to the movies for years when the VCR came out, and the studios cried out that they were going to die with home taping, then quickly realised that "home cinema" would be a lucrative market, so the movie rental business was born. Hardly pure innovation in the strictest sense: "it's watching a movie.... in your home!" (it's buying music...... on the internet!"), but it was a good idea, and one that people quickly took to.

Apple, for all their faults, are very good at spotting markets - they did it with the iMac, the iBook, the iPod, the iPhone and now are trying again with the iPad (which is more an extension of their efforts with the iPhone and iPod Touch).

Re:Oh puh-leeze.

[Sycraft-fu]

Ya the iPhone fans love to forget about Blackberry. Comparisons are always "The iPhone shipped more than any single Android phone producer!" and so on. The Blackbeery is just not mentioned. RIM has long been top of the smartphone market, though unlike what the GP tried to imply, it was not niche.

Also there's Symbian. People forget that while many Symbian phones might not be "proper" smartphones in every sense of the word, they are effectively smartphones and foten sold as such. Take something like the Nokia E70. Like many Nokia phones doesn't get the kind of hype in the US as some others but it sold well here and abroad and it is a smartphone in every way that matters.

I think part of the problem is that many Apple fans seem to be unaware of something until Apple does it. When people are doing it before, they don't pay any attention. So when Apple does it, that is the first they notice it. Then everything that comes after Apple is trying to "copy Apple" in their minds. Often it turns out that's not at all the case.

The iPad is another example. Tablets have been around for a long time. We have some old ass tablet PCs at work that now hang on the wall and show MRTG and Nagios because they aren't useful for much else. They just never caught on. The iPad seems to be catching on better, and perhaps so will other new tablets. However it isn't an innovative idea, it is just perhaps an idea that now the technology exists to make work well, and make it worthwhile.

That isn't to knock devices that are successful and just evolutions/iterations of what is already there. Most consumer devices are. I'm quite happy with my HDTV and there is nothing at all innovative about it. It is just a good collection of technologies, some of them quite old, that does what I want for a good price. It needn't be innovate, just quality. However fanboys, in particular Apple fanboys, seem to have this need to convince themselves that the products they use are new to the world.