As tech companies get richer, is it 'game over' for startups?
As tech companies get
richer, is it 'game over' for startups?
Young firms struggle to
compete as deep-pocketed companies like Facebook and Amazon clone products and
consolidate their power
The leading tech companies
are making it harder for startups to attract investment.
Olivia Solon Friday 20
October 2017 05.00 EDT Last modified on Friday 20 October 2017 15.17 EDT
Facebook has been
breathing down the neck of the group video-chat app Houseparty for over a year.
The app, developed by the San Francisco startup Life On Air, has been a hit with
teenagers – an audience Facebook is desperate to woo.
After months of sniffing
around its tiny competitor and even inviting the team to its headquarters last
summer, Facebook launched its own group video chat tool within Messenger in
December 2016. In February, it invited teens to its headquarters to quiz them,
in return for $275 Amazon cards, on how and why they used video-chat apps. By
July, Facebook was demonstrating a Houseparty clone, Bonfire, to employees and
by early September the app launched in Denmark.
Franklin Foer: 'Big
tech has been rattled. The conversation has changed'
“They see we’re having
traction,” Sima Sistani, co-founder of Houseparty, told the Wall Street Journal
in August. “That’s why we’re pushing so hard.”
Pushing hard might not be
enough when you’re going up against some of the world’s most powerful companies
keen to cling to their empires.
Startups drive job
creation and innovation, but the number of new business launches is at a
30-year low and some economists, investors and entrepreneurs are pointing their
fingers at big tech.
For one thing, the deep
pockets and resources of companies like Facebook, Google, Amazon and Apple –
with a combined value of almost $2.5tn – make it increasingly difficult for
startups to compete or attract investment.
“People are not getting
funded because Amazon might one day compete with them,” said one founder, who
wished to remain anonymous. “If it was startup versus startup, it would have
been a fair fight, but startup versus Amazon and it’s game over.”
Even multibillion-dollar
startups like Snap, Snapchat’s parent company, struggle to compete against
these tech titans.
Like Houseparty, Snap was
nipping at the heels of Facebook. At first, Facebook played nicely, making an
offer to buy Snapchat – a strategy that worked with Instagram and WhatsApp. When
that failed, Facebook cloned all of Snapchat’s features, awkwardly at first but
relentlessly and with the resources of a $510bn company, until Snap’s potential
slice of the advertising market shriveled to a sliver.
While there’s a clear
correlation, it’s hard to say for sure whether concentration of money is the
cause or effect of the startup decline. On one hand, the existence of fewer new
startups makes it easier for incumbent firms to accumulate more power. However,
as industries become more concentrated, it also raises the barriers to new
entrepreneurship, choking off innovation elsewhere in the marketplace.
“They are financing the
next generation research at a scale that no one else can afford,” said Tomasz
Tunguz, a venture capitalist, citing Google’s experimental projects Loon
(balloon-powered internet), Fiber (high-speed internet) and Waymo (self-driving
cars). “They are playing in big markets, making big bets. Historically, that’s
been the domain of startups.”
As those companies get
more powerful and staff salaries get higher, there’s even less of an incentive
for workers to leave and set up on their own, which used to be a common pathway
for entrepreneurs. If they do leave, the endgame is often to be acquired by
their previous employer rather than grow large enough to compete with it.
“If your strategy from the
outset is to be acquired by Google, that’s just fueling consolidation,” said
Ian Hathaway, an economist at the Brookings Institution.
Jonathan Frankel was
thrilled when Amazon’s investment arm funneled $5.6m into his startup Nucleus
after a year of discussions. He was less thrilled when, a year later, Amazon
launched its latest voice-controlled device, the Echo Show: an almost perfect
clone of the Nucleus product.
Nucleus was an Alexa-powered
tablet computer that focused on video conferencing and communication, with a
plan – that Amazon’s investment arm would have seen – to move into other areas.
When the Echo Show launched, it too focused on communication, the core of
Nucleus’s vision, instead of other key features like e-commerce or connected
home elements.
Frankel, who declined to
comment for this piece, was furious, telling Recode earlier this year: “Their
thesis is what our thesis was: communication is that Trojan horse to get those
devices throughout the home and throughout the extended family’s home.
“The difference is, they
want to sell more detergent; we actually want to help families communicate
easier.”
These kinds of tactics
have rattled investors, some founders said, making it harder for startups to
raise money even if they’re in an adjacent market – particularly those skirting
Amazon and Facebook.
A venture capitalist
confirms this, describing Amazon’s launch of an almost identical product as a
“very, very strange coincidence”.
“At the end of the day,
Amazon could be theoretically in nearly any consumer business in the world,” he
said, adding that he was frequently in meetings where investment decisions are
informed by the question: “Can Amazon do that?”
“Amazon can do anything,”
he noted.
It’s not just a problem
within the tech industry. Since 1980, the share of companies less than a year
old has almost halved – from 15% of companies to just 8.1%, according to Census
Bureau data. The total number of startups formed in 2015 (the last year
surveyed) was 414,000 – a huge drop from the pre-recession figure of 558,000 in
2006.
“It’s been a persistent
and fairly precipitous decline,” said John Dearie, the founder of the Center
for American Entrepreneurship, an organization set up to address the decline.
“The reason why this is so troubling is that new businesses account for
virtually all new job creation and account disproportionately for disruptive
innovations.”
“It’s not a coincidence
that at a time when the startup rate is in a long-term decline, the economy has
not grown at 3% or better,” said Dearie. “We are in a growth emergency.”
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