Why are startups hot now? Not because the economy is good or because the startup ideas people are having are particularly good, but because risk seeking investors are trying to shove capital anywhere they can.
After the crash of 2008 lots of avenues (created by Wall Street post Financial Modernization Act) to invest this capital were closed, and the growth of the startup scene, particularly the NY startup scene, is a direct result of this. Couple this with a real negative interest rates and you have a nice long boom period where startups are the best thing going for investors who are getting free money (via negative interest rates) to gamble with.
Why will this continue? Exactly the same reason why Yahoo is still in business and why Microsoft is still profitable. There is tremendous room for innovation, growth, and all the improvements associated with those things.
Soon joe.sixpack@yahoo.com will wake up and start demanding more and more web innovation, and the void will be filled by startups doing clever, lucrative, disruptive things. I personally can't believe that anyone can tolerate using Yahoo for anything... and I'm stunned that people tolerate 2 hour battery life Android phones, Windows Vista, etc. The problems (areas for improvement) are far deeper than most tech-savvy people (such as on HN) can imagine, and the population (thanks mostly to Facebook) is slowly waking up to what it actually wants to do online.
To borrow the OP's metaphor, we're in the very early dawn of a beautiful, early spring day, etc. This will occur at least until the cost of borrowing increases substantially.
Also, anyone who thinks we have an information economy in 2011 will look back in a few decades and laugh.
This is a good point, the meta comment is that post 2008 a lot of changes were put into place snd so this 'crash' has different things going on than the last 'crash'. Its this action, where the system responds to booms and busts which makes predicting the future from past events difficult at best, and completely non-useful typically.
I have talked with folks who have investment capital that is 'stuck' which is to say they have money they have allocated to the 'high risk' portion of their portfolio and yet fewer options for investing it. And while YC is a startup incubator, I also see it as a VC incubator. I would expect some of the folks who are successfully investing small amounts into a bunch of companies will begin to want to make slightly bigger bets and that will push them out of YC into a more VC like situation.
The original article's message that things go in cycles, and you need to be able to deal with that, is spot on. And in times of high volatility only the folks who have that sort of risk/reward profile that startups offer want to play (the more conservative investors are worried that their 'moderate' risk capital is at risk and so they double down on those bets taking all their high risk capital off the table). More startups chasing fewer dollars, means a more competitive environment. But that being said, startups take time to get from concept to launch, cycles take time to go from down to up. The absolute best time to start a company is just before the end of the winter.
I concur with your counter-argument. I'll add that one of the reasons we've seen such a huge increase in startup activity and entrepreneurship in the last 4-5 years is the fact that getting a startup from an idea to an Internet scale web service costs practically nothing now.
4-5 years ago a startup (like iLike) had to spend millions up front on server and infrastructure costs. Then the ongoing opex costs for serving millions of users were huge.
This has shifted radically. $150k is TOO much money for many ideas and the opex costs have continued to plummet.
In fact, it could be argued that any sort of economic contraction could increase the rate at which these costs decline, further enabling great ideas to get traction via startups.
Unfortunately this is also going to mean that a lot of the impatient money that has been chasing a quick buck in housing and clever financial derivatives is going to pour into tech startups and make it hard to distinguish the good ideas from the bad.
The other comments are really spot on (Yc as a VC incubator and cost being almost neagative except for the opportunity cost that get it back to zero),
But the most often overlooked point is the fact that, thanks to the "almighty facebook", an previously unbelievable share of the world population is now trained and ready to use interface tools that belonged until know the geek realm.
The barrier to user adoption for software as been reduced to zero: anyone is ready to use software as long as it feels a need.
I'm particularly struck by your point about the negative interest rates. The message in recent weeks is a strong commitment not to let interest rates rise, and I believe to keep these interest rates low, the FOMC is intervening in the bond auctions to sop up any slack in demand. I believe they are inflating to finance this, which means that the cycle will continue until a change in policy at the Fed.
Bernanke's term lasts until 2014, if he isn't re-appointed. He might change direction, but this would be going against his history and his beliefs.
You've identified that there's a big, cheap money spigot. The policies are in place to ensure that spigot sticks around for awhile. It will flow into every place it looks like it can get a return above inflation, and that includes high risk situations and various forms of carry trade.
Eventually, this will force inflation rates up enough that people can't ignore it, and as always, there will be a price to pay. But I don't think we're close to that yet.
It's like 2001 all over again, only this time it won't be houses but something else (and startups will benefit like they did between 2002-2007).
If joe sixpack is still watching jersey shore italy, listening to lady gaga, eating mcdonald, drinking starbucks, playing medal of honor 4, watching spiderman 5, what makes you think they'll do anything but use facebook, amazon, google, microsoft?
A few years ago joe sixpack was watching jersey shore italy, listening to lady gaga, eating mcdonald, drinking starbucks, playing medal of honor 4, watching spiderman 5, but he did start using facebook, amazon, google, microsoft when products/services from these companies appeared.
Why are startups hot now? Not because the economy is good or because the startup ideas people are having are particularly good, but because risk seeking investors are trying to shove capital anywhere they can.
After the crash of 2008 lots of avenues (created by Wall Street post Financial Modernization Act) to invest this capital were closed, and the growth of the startup scene, particularly the NY startup scene, is a direct result of this. Couple this with a real negative interest rates and you have a nice long boom period where startups are the best thing going for investors who are getting free money (via negative interest rates) to gamble with.
Why will this continue? Exactly the same reason why Yahoo is still in business and why Microsoft is still profitable. There is tremendous room for innovation, growth, and all the improvements associated with those things.
Soon joe.sixpack@yahoo.com will wake up and start demanding more and more web innovation, and the void will be filled by startups doing clever, lucrative, disruptive things. I personally can't believe that anyone can tolerate using Yahoo for anything... and I'm stunned that people tolerate 2 hour battery life Android phones, Windows Vista, etc. The problems (areas for improvement) are far deeper than most tech-savvy people (such as on HN) can imagine, and the population (thanks mostly to Facebook) is slowly waking up to what it actually wants to do online.
To borrow the OP's metaphor, we're in the very early dawn of a beautiful, early spring day, etc. This will occur at least until the cost of borrowing increases substantially.
Also, anyone who thinks we have an information economy in 2011 will look back in a few decades and laugh.