21 ms·

Why Facebook is killing Silicon Valley

214 points by czzarr 14y ago

sohels 14y ago
I don't necessarily blame facebook for this but it is true and hurting that today's innovation is all about so called 'social media'. Although it has its good implications, I feel its doing more bad than good to the society. Like the article, I don't blame VCs either. I just wish to see cars flying around before I die... and for that to happen, focus needs to be made on real world problems and not on what your friend's friend bbq picnic turned out.
nswanberg 14y ago
It's a catchy headline, but it would have been better titled "Why VC herding is killing Silicon Valley". Though even then he doesn't make a strong case for Silicon Valley being killed off by this behavior.
- psychiatrist11 14y ago
  i think he does; read my response later in the thread; startup conditions are miserable and the payoffs need to start justifying the poor conditions and life expenditures
nextstep 14y ago
I don't think "social media" will kill Silicon Valley. VCs are certainly interested in a quick return on investment that social media start-ups can achieve. However, most start-ups fail; for every lucky investor who got in early on Facebook or Zynga or Instagram, how many investors backed a different company that's had only modest returns? In general, the majority of VC money is placed in also-ran start-ups that don't generate the media attention of an outlier like Facebook. Most VCs aren't stupid. They know that not every social media company will earn 100 million in three years. Most will never earn that kind of money. However, a lot of VCs back projects they're passionate about, projects like renewable energy, cancer research, and many others. This article takes a complicated market (venture capital in SV) and makes sweeping generalizations.
dennisgorelik 14y ago
The reason behind killing of hardware/science businesses is that we are transitioning into The Matrix (based on Internet). So software that utilizes network effects is in really high demand. Update 1: Downvoting? I can't even guess your reasons for that. Update 2: Thanks for upvoting back. Downvoters still didn't give the explanation though. Update 3: Replaced "Unified Matrix" with "The Matrix" (movie).
- icebraining 14y ago
  I haven't downvoted you, but WTH does unified Matrix mean?
  - dennisgorelik 14y ago
    Matrix is a reference to "The Matrix" movie. I just dropped word "Unified". It does not really add value I think. BTW, I'm not joking about the Matrix. We are clearly on the way there and that's good.
    - psychiatrist11 14y ago
      The whole point of "The Matrix" is that we are already there. It's a good reading of human nature.
      - dennisgorelik 14y ago
        We are entering The Matrix, but we are not fully there yet. We need more tools to achieve better integration. That's why investing in social networking software is more important at this time (and therefore more profitable) than investing in other directions.
josefonseca 14y ago
So much bad publicity for Facebook today all over social media...
- talmand 14y ago
  I believe it's the IPO, it just got serious.
  - psychiatrist11 14y ago
    It's serious for everyone with skin in the game. Disclosure: myself included.
  - psychiatrist11 14y ago
    Disclosure #2: Whenever acting serious, probably not accurate.
- deleted 14y ago
  [deleted]
krschultz 14y ago
This really has little to do with Facebook and has everything to do with 'big startups' vs 'small startups'. Facebook changes how you interact with the acquaintances in your life. With or without Facebook, I'd keep in touch with my best friends. But Facebook keeps me in touch with some people I probably wouldn't otherwise know anything about. For better or worse, it really changes your relationship with those 'weak tie' friends. LinkedIn similarly changes how you connect with former co-workers. There is no way I could have kept up with all these people as they switch from job to job if the world still operatered on an address book I update myself. Obviously the iPhone was revolutionary. These three are all 'big startups/big ideas/disruptive innovation', (pick your favorite moniker). But the 1,000,000th iPhone app is not a big idea. The next Facebook game is not a big idea. Obviously there are some exceptions, but by and large these are just small fishing surfing on a big wave. Yet entrepreneurs and VCs are disproportionally investing their time and money into them. Is it easy money? Do they have a lack of imagination? I'm not sure but it seems like we all would like to see more money and talent going to the 'hard' stuff, whether that is material science, clean tech, biotech, AI, computer hardware, space technology, self driving cars, electric cars, etc etc. That said, it's not a bad thing if a lot of entrepreneurs hit singles right now on this wave, and set themselves up to hit a home run later on a bigger problem.
- iamwil 14y ago
  "But the 1,000,000th iPhone app is not a big idea. The next Facebook game is not a big idea. Obviously there are some exceptions, but by and large these are just small fishing surfing on a big wave. Yet entrepreneurs and VCs are disproportionally investing their time and money into them." Well, the assumption is that social is some sort of platform. You'd figure, now that we have some semblence of the relationships between people, we can build applications would wouldn't have been able to otherwise with it. It seems like that would be the case, wouldn't it? We often lament that our software treats us badly, usually due to social faux-pas a human wouldn't commit (like inviting your ex-girl to your wedding in a wedding invitation app). In the same way that when other products we have that sprouted other industries as a result. Cars(along with highways) helped made suburbs possible. The first apps for the personal computer probably seemed gimmicky (why would people want computers in their homes other than for recipes?), but people kept trying since it seemed like something should be there. So therefore, we see a lot of people trying. And it's true what Steve Blank said about VCs liking fast and big returns, but they can also only invest in what companies people start. There are also a disproportionate number of startups in that space. That said, there are a lot of copycats that haven't thought deeply on the matter and are just digging there just because that's where everyone else is digging. In addition, social/mobile seems easy to people to do. Everyone's a self-proclaimed expert because, "hey, I'm social and I use a smartphone!". Social/mobile is hard to get right. I believe it's just what innovation looks like. You're going to get patterns like this, where everyone's chasing after the same big and lucrative stuff (what someone else in their thread called #LowHangingFruits). Once it's exhausted (or seems like it is), people will turn their attention elsewhere.
talmand 14y ago
I have to wonder what some people, who should know better, are planning for the eventual software bubble bursting. Meaning, what's next? Lately it just seems that the big names in the industry right now are just hype machines that are not really innovating anything. It's more that they are riding the big wave started by others that's just about ready to crash on the beach.
- randomdata 14y ago
  The software bubble has, arguably, burst twice before (dot-com, 2000; web 2.0, 2008). Assuming this bubble is no different, we'll just move on to the next ride. What that ride is - it is too soon to know. It'll be some project none (or few) of us have heard anything about yet.
  - talmand 14y ago
    I agree, these things tend to come at us in waves. I just wish we could see the light a little bit sooner so we can at least start speculating on what's next as opposed to rehashing the same hype over the same stuff. For instance, I would like to see more speculation on making web apps that behave like apps in the browser instead of being web pages that try to act like apps. But I guess the native apps on mobile devices is already addressing that plus the other usual suspects in the space that are trying their best with what we have now.
    - randomdata 14y ago
      My own personal prediction is that it will be something in the embedded space. Some interesting things are starting to happen there (see: the response to Pebble, Arduino, etc). But it is anyone's guess at this point. The people who are working on the next big thing, at this stage, don't even know it yet. These bubbles are born out of people exploring new spaces, with, once a market has been proven, everyone else jumping in to try to take control of that newly discovered space. I think these bubbles are apt to continue so long as new mass-markets for software continue to be discovered, and will continue to pop once a definitive leader for that market has been chosen.
kraemate 14y ago
We've become lazy. Its much easier building a photo uploader in php (aka facebook) than actually build something or put man on the moon.
- crusso 14y ago
  The funny thing is that the people making their money in software and entertainment: John Carmack, Elon Musk, Larry Page, James Cameron, etc... are the ones getting us to space and re-igniting the space program that the general population lost interest in funding a long time ago. http://www.cbsnews.com/8301-205_162-57419801/asteroid-mining-venture-backed-by-james-cameron-google-ceo-larry-page/ http://www.cbsnews.com/8301-205_162-57419801/asteroid-mining... http://www.armadilloaerospace.com/n.x/Armadillo/Home http://www.armadilloaerospace.com/n.x/Armadillo/Home http://www.spacex.com/ http://www.spacex.com/ I say: Let the people with big ideas and great implementation skills make all the money they can legally. They're the ones we want to fund so they can pursue new interests and create new markets.
  - spindritf 14y ago
    > the general population lost interest in funding a long time ago That's because the general population has been for a long time overpaying for not going to space https://scottlocklin.wordpress.com/2011/07/22/good-riddance-to-the-space-shuttle/ https://scottlocklin.wordpress.com/2011/07/22/good-riddance-...
    - crusso 14y ago
      Very true and that's an interesting article. The Shuttle Program is a great example of an idea that should have been allowed to fail. At very least (in YC terms), NASA needed to pivot hard much earlier on. The opportunity cost to mankind only existed because politicians and bureaucrats didn't get their funding and power from success at getting cargo and people into space economically and safely. They got it from overplaying their hands on past successes, diverting dollars to their constituencies and contractors to "bring home the bacon", and plain dumb government spending momentum. In other words, the incentive model of the Shuttle Program (and of NASA in general) was broken and no one with sufficient power ever did anything about it.
finneusbarr 14y ago
I think that the IPO crashing (as it appears to be doing) might have an effect on this. If the VCs see that even Facebook, the biggest of the social media sites, can't make money, they might shy away from sites like it and to more product oriented start ups.
crusso 14y ago
That article struck me as a bit of an extreme and luddite take on the current social networking trend. VC is chasing social networking right now because consumers are moving toward social networking vs other forms of entertainment. Some VC will make good guesses at the direction things are headed and make some money... some won't and will suffer the pain of being wrong. A lot of hype-sensitive VC will make the mistake of overplaying the social networking trend and that's a good weed-out mechanism in the economy of the Valley. It doesn't mean that funding for cancer drugs has stopped or even slowed down as a result. Even if you could attribute a slow-down of cancer funding to FB, it doesn't mean that funding for cancer drugs won't resurge and maybe increase after this trend subsides. Another thing to consider. The author mentioned Elon Musk as being one of the few sources of a "disruptive startup" in the last few years. Well where did Elon Musk get his money? Hint: not in the Space or Automotive industries. He is a brilliant guy who made money on the Internet then applied his problem solving skills and vision to other fields where he thought he could make a difference. Likewise, Facebook has converted a whole bunch of smart people into rich people in Silicon Valley. It's likely that some of them are going to take their money and apply it to new ideas in non-social-networking endeavors and we'll be referring to them years from now as innovators in those industries. Money flowing into Silicon Valley smart problem solvers is a good thing.
- johnrob 14y ago
  A quick way of summarizing your point: the invisible hand is working properly. It's telling us that 1 social investment today plus 5 science investments tomorrow is better than 1 science investment today.
apechai 14y ago
It's true in the short term that social and mobile trend chasing will be detrimental to investment in other areas of tech, but markets and VC returns will correct this over the longer term. Trend chasing and herding makes it harder to invest in the winners in a space at a reasonable valuation. If VCs invest in 100 social/mobile start ups at $100 million valuation and only 10 reach $1 billion, then the VCs on aggregate are break even. Also, a VC has a 1 in 10 or 1 in 100 shot of getting that big hit because there are so many 'me toos' in the same space. If a VC invests in the next spaceship, smartwatch (Pebble), or X less competitive field, there might be only 2 companies competing for that pie. So you have a 50% chance of picking the winner. The economics are also more compelling for less crowded fields because customer acquisition costs, talent hiring costs and other costs are cheaper. They're not being driven up by the other 100 'social networking / Instagram' start ups competing for the same resources. Your market share of revenue is also higher because you are sharing it with 1 or 2 other players, instead of 100. That makes the margins better for the the less crowded areas of technology. If you started a social or mobile company in 2005-2008, your customer acquisition cost was close to zero and engineers were cheap so that made each VC dollar go very far. You also didn't have to compete against 10 other companies for mind share in your space. That's not the case on social or mobile anymore. Some smart VC firm will invest in a hardware, biotech or (insert non social / mobile) start up and make a ton of money. Then all the money will chase that area and the cycle will repeat. The VCs which invested in the 'me toos' will lose money and lose assets.
tytso 14y ago
Perhaps it would be fairer and more accurate to say that startups that require relatively smaller amount of capital (i.e., software based startups that can use Amazon EC2) are killing startups that are much more hardware intensive and thus require more capital, and typically a longer time horizon before success or failure can be declared? Of course, that's not as sexy a headline...
dasil003 14y ago
> But what’s great for making tons of money may not be the same as what’s great for innovation or for our country. The article fails to make the distinction between companies actually making money versus frothy investors climbing all over each other driving up valuations. Of course Instagram doesn't help my case, but that's just the knock-on effect of Facebook's valuation. Whether you want to call it a bubble or not, what's going to happen over time is that the amount of actual money in social will start to be revealed. Once the winners such as Facebook and Twitter squeeze the most attention they can out of the public, and once public privacy expectations (and laws!) settle, and their monetization stabilizes, then the upside of "social" is going to disappear and the funding will dry up overnight. At that point the value of individual attention will be much better understood than it ever was in the golden age of television advertising, and "social" will just be the refinement of the advertising industry. VCs will then start looking for the next big thing in other areas. Sure Facebook might be disrupted down the line, but it's gonna take a decade just like it almost took Facebook a decade to get where it is today, and in the meantime they're not going to be making any more Instagram-level purchases.
drumdance 14y ago
He refers to finding cures for cancer as a Big Idea, but has any IT investor ever invested in such a thing? I believe Kleiner Perkins does biotech, but most others stick to specific niches. IOW I don't think the money that went to Facebook would go to life sciences. I think it would just go to other IT startups.
- MartinCron 14y ago
  Bill Gates and Paul Allen have both put serious money into life sciences.
  - unfortunat 14y ago
    yep. gates has enabled research that simply would not get done otherwise because it is not viewed as being a good candidate for development. that is, vaccines. but i don't think he's looking for a return in monetary terms. he's looking for results of a different kind. and that's the difference. now, the question to ask is whether the investors that enable these sv startups have enough capital that they could fund projects to get non-monetary results, even if it means they might take a loss. that's why things like spacex and such are different. it's not just about the money. the worst part of this facebook ipo is it is totally unnecessary. they do not need the capital to carry the facebook idea forward. there is no reason they need to pass the risk on to the public. when you invest in facebook you do so for one reason only: a financial return. facebook contributes little to society. it's technology that makes the contribution. this is hard for some people to process. but you can take away facebook and technology still remains. everything that we are doing with facebook is still possible. the network effect is still there.
arturadib 14y ago
There is nothing wrong with #LowHangingFruits. They can be just as good as harder-to-get fruits, and one would be silly not go for them first. And it's not just social media that's low-hanging in the Valley -- that'd be an oversimplification. It's also the plethora of in-your-face B2B and B2C opportunities, thanks to the pervasive connectivity of business and individuals (which unlike the 90s is very real this time). If you walk around America visiting businesses and industries you get a sense of how rudimentary most processes are, and how amenable they are to software automation. Companies like Square and OpenTable are examples of non-social ventures that are disrupting markets. Of course it's not science, but who cares? They are innovating and disrupting just the same. I say go build your apps, whether social, B2B, etc. Find those low-hanging opportunities first. All signals say Go: connectivity is increasing; devices are selling like bananas; software companies are making real revenue; and most opportunities are yet to be exploited. And in parallel to all that let the government/large risk takers support more pie-in-the-sky ideas, and when the opportunities are depleted let's refocus and aim higher. But there's nothing wrong with enjoying a delicious fruit without having to climb trees.
- psychiatrist11 14y ago
  when you climb a high tree you have a vantage point over your competition. yet it would be inappropriate to deem the botanical landscape analogous to the "low hanging fruit" metaphor.
shmerl 14y ago
Those who want to monetize on the social networks *(the way FB does it) are in the wrong. Growing privacy disrespect will backfire on them soon enough.
- psychiatrist11 14y ago
  Or in a "bishop" maneuver, another company comes out with video tracking and renders privacy a property of "the past" and FB, Google, MSFT, and anyone else with pending anti-trust suits - to make out like kings!
christianbryant 14y ago
I would over-simplify this by saying true innovation is being killed by popular social media in general. The real reason for pointing to Facebook and similar sites is that, popular media focuses all its attention on these sites, and so, then, do investors. But why isn't extreme tech cool? Why can't groups like SpaceX get the same wave of investors and popular media support that an app like Twitter can get? In particular, I think project like SpaceX need to be better supported and more visible so the level of quality embedded in their processes is as high as possible. "Give the people what they want" is fine, but what if they don't know what they want? What if, more than yet another way to splash pictures of their dog in a dress across the Internet, they really want to see experience their web browser in full immersion VR? Or fold their computer into the shape of a pocket map after their done teleconferencing with Tokyo? I love my LAMP as much as the next guy (though my P has been more R(uby) of late), but come on, simple isn't always better, and that goes for code as well as ideas. That's my beef. Not with Facebook or Twitter specifically, but with the continued support of mundane ideas rather than ideas that will put us into other solar systems, or computing at the quantum level.
- randomdata 14y ago
  Investors/media/most people are not leaders. Facebook and the social space is interesting right now because it is already a proven business model, so everyone is trying to take their last piece of the pie before it becomes an established industry. Nobody has really showed the promise of making millions flying to space yet. When they do, money and media attention will start to flow in that direction and everyone will start fighting for their share of that market pie. Nobody cares about the idea, just how much money it is going to make them. Right now, it is unknown if you will ever make money going to space. It wasn't that long ago that some brave people were making social networking websites that nobody cared about or wanted to invest in.
  - christianbryant 14y ago
    Sad but true.
psychiatrist11 14y ago
Here's my (illogical, emotional) reading of the article -- or shall i say, media piece: The invisible theme of the article is that Facebook's stock is down today, about 12%; Facebook employees won't be able to cash in for at least 28 more days; It's a timed media piece with an invisible point that FB won't recover; and why should someone accept a slavery contract (Startup Employment) if they aren't going to be paid a king's ransom (>= what the ibankers are making)? Thus $FB kills silicon valley and makes wall street that much more attractive. disclosure: I'm bullish $FB and bet it's likely to recover, although status in such uncertain climates only comes from short-term coups. So I may make 12% on my investment over a 28 day time frame, but at what cost? I look like a fool and am used like a tool in the media circus clown show. It's not worth it, but I'm not strong enough to bet otherwise.
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omaranto 14y ago
The title is misleading, the piece seems to be about how Facebook is killing Silicon Valley (according to the author), not about why they're doing it. :)
pg 14y ago
I see no sign of the trend he describes. And if it were happening I'd see it. But I don't find myself telling startups preparing for Demo Day "you guys are building important technology, so you'll have an uphill battle with investors, but you other guys have a social startup, so you'll have it easy."
- sblank 14y ago
  Hmm. Selection bias perhaps? How many medical devices, nano materials, chemical sensors and life science, etc. startups applied to the last Y-Combinator cohort? The hundreds of hard science teams I see every year don't send you applications.
  - pg 14y ago
    We started out specializing in software, so we rarely get these types of applications. But you can build important infrastructure using software (indeed, most of the examples you give are largely or mostly software). And the companies we fund that are building such things do not have a harder time raising money than the companies building social apps.
  - brlewis 14y ago
    The hundreds of hard science teams I see every year don't send you applications. Maybe some of them should. Sure, the direct experience of most of the YC partners is web-centric, but they're connected enough in SV that YC might be a big benefit, especially if any of those teams are amenable to a 3-month build cycle.
- socratic 14y ago
  Is that what Blank is arguing though? I remember listening to your office hours at TC Disrupt, when you were talking to the guy from Omniplaces. You said: "This is commercialized research? Ouch. It’s often a solution in search of a problem..." (Of course, that was part of a broader commentary about how the startup shouldn't be competing with Google in search, which I don't necessarily disagree with.) But I think that's what he's talking about. Sun, Google, Cisco, Akamai, VMWare, and a variety of other technology companies came fairly directly out of commercialized university research in systems, databases, networking, virtualization. Are there YC companies that are commercialized university research? Such companies at the very least seem very different from companies like Airbnb which seem like they evolved from a consumer problem rather than innovative technology. What's more, it seems like basing investing decisions on current consumer behavior and problems seems much more sensible than doing so based on technology, which is what Blank seems to be arguing and what you seemed to be arguing at Disrupt. http://techcrunch.com/2011/09/12/tc-disrupt-office-hours-with-yc-partners-paul-graham-and-harj-taggar/ http://techcrunch.com/2011/09/12/tc-disrupt-office-hours-wit...
kfk 14y ago
You can't complain people are choosing the best combination of risk and profits on investments. You can complain if people have bad information about risk and/or profits on investments, but that problem usually is easily solved with a bubble burst. And data missing, I just don't believe all the money is going into software...
erehweb 14y ago
Part nobody seems to be mentioning is government intervention. This doesn't have to be at the level of government picking individual companies. A carbon tax would make renewable energy sources more attractive and spur investment in the sector.
ticks 14y ago
The trend for that graph appears to hint at one wave abstracting and building on top of the previous wave (especially in the later stages). So I guess the next wave has something to do with the abstraction of social media and using it to build new technologies and services? If that were to be true then Facebook, Google Plus, Twitter etc. are all destined to become social media service providers - that is, high level utilities.
socratease 14y ago
I guess he means you can only sell so much smoke before people get smart. I'm bullish on the internet as a medium, and teaching people how to use it, not Facebook or other "companies" selling smoke. If Facebook ceased to exist tomorrow, I could still keep in touch with all my Facebook friends. That's because I have their email addresses. And there are now easy ways to move big files outside of email. We can use VOIP. We can stream big data to each other with today's bandwidth. It's all possible because of the advance of technology. (Not because of Facebook.) When people know how to use the internet properly to do the things they do using Facebook (share photos, etc.), peer to peer, then we can get on with solving "real problems". Apple and Facebook and others are not educating the population how to use computers and the internet. As far as I'm concerned they are not solving a problem. They are perpetuating it for their own benefit. Keep users dumb, track everything they do, feed them ads and try to sell them stuff. We have internet savvy kids whose only thought is "What's the business model?" Maybe there is none. Why should Wikipedia exist? What purpose does it serve? We do not have to keep users dumb and feed them ads to move forward. Hardware is cheap, software is free, connectivity is cheap, bandwidth is cheap. Let's use the internet to help solve real problems, not pretend that keeping users dumb and showing them ads is getting us there.
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jrosenblatt 14y ago
But of course the "newly monied social media entrepreneurs" will "invest in their dreams." Many already are. Dreams like space exploration and reforming education seem to be shared by a lot of entrepreneurs today. After we make money from easier-to-start startups, we can be like Musk and Thrun...
sakopov 14y ago
I am still astonished at the fact that we even have SpaceX all while VCs are throwing money away to fund photo-sharing concepts to make photo-sharing easier than scratching an itch on your ass. I'm just amazed that there are wealthy people out there who haven't yet stooped down to the level of social-media rats and decided to fund projects of such astronomical proportions. P.S. I want to hug humanity right about now.

214 points by czzarr 14y ago

I don't necessarily blame facebook for this but it is true and hurting that today's innovation is all about so called 'social media'. Although it has its good implications, I feel its doing more bad than good to the society. Like the article, I don't blame VCs either. I just wish to see cars flying around before I die... and for that to happen, focus needs to be made on real world problems and not on what your friend's friend bbq picnic turned out.

nswanberg 14y ago

It's a catchy headline, but it would have been better titled "Why VC herding is killing Silicon Valley". Though even then he doesn't make a strong case for Silicon Valley being killed off by this behavior.

psychiatrist11 14y ago
i think he does; read my response later in the thread; startup conditions are miserable and the payoffs need to start justifying the poor conditions and life expenditures

nextstep 14y ago

I don't think "social media" will kill Silicon Valley. VCs are certainly interested in a quick return on investment that social media start-ups can achieve. However, most start-ups fail; for every lucky investor who got in early on Facebook or Zynga or Instagram, how many investors backed a different company that's had only modest returns? In general, the majority of VC money is placed in also-ran start-ups that don't generate the media attention of an outlier like Facebook. Most VCs aren't stupid. They know that not every social media company will earn 100 million in three years. Most will never earn that kind of money. However, a lot of VCs back projects they're passionate about, projects like renewable energy, cancer research, and many others. This article takes a complicated market (venture capital in SV) and makes sweeping generalizations.

dennisgorelik 14y ago

The reason behind killing of hardware/science businesses is that we are transitioning into The Matrix (based on Internet). So software that utilizes network effects is in really high demand. Update 1: Downvoting? I can't even guess your reasons for that. Update 2: Thanks for upvoting back. Downvoters still didn't give the explanation though. Update 3: Replaced "Unified Matrix" with "The Matrix" (movie).

icebraining 14y ago
I haven't downvoted you, but WTH does unified Matrix mean?
- dennisgorelik 14y ago
  Matrix is a reference to "The Matrix" movie. I just dropped word "Unified". It does not really add value I think. BTW, I'm not joking about the Matrix. We are clearly on the way there and that's good.
  - psychiatrist11 14y ago
    The whole point of "The Matrix" is that we are already there. It's a good reading of human nature.
    - dennisgorelik 14y ago
      We are entering The Matrix, but we are not fully there yet. We need more tools to achieve better integration. That's why investing in social networking software is more important at this time (and therefore more profitable) than investing in other directions.

josefonseca 14y ago

So much bad publicity for Facebook today all over social media...

talmand 14y ago
I believe it's the IPO, it just got serious.
- psychiatrist11 14y ago
  It's serious for everyone with skin in the game. Disclosure: myself included.
- psychiatrist11 14y ago
  Disclosure #2: Whenever acting serious, probably not accurate.
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krschultz 14y ago

This really has little to do with Facebook and has everything to do with 'big startups' vs 'small startups'. Facebook changes how you interact with the acquaintances in your life. With or without Facebook, I'd keep in touch with my best friends. But Facebook keeps me in touch with some people I probably wouldn't otherwise know anything about. For better or worse, it really changes your relationship with those 'weak tie' friends. LinkedIn similarly changes how you connect with former co-workers. There is no way I could have kept up with all these people as they switch from job to job if the world still operatered on an address book I update myself. Obviously the iPhone was revolutionary. These three are all 'big startups/big ideas/disruptive innovation', (pick your favorite moniker). But the 1,000,000th iPhone app is not a big idea. The next Facebook game is not a big idea. Obviously there are some exceptions, but by and large these are just small fishing surfing on a big wave. Yet entrepreneurs and VCs are disproportionally investing their time and money into them. Is it easy money? Do they have a lack of imagination? I'm not sure but it seems like we all would like to see more money and talent going to the 'hard' stuff, whether that is material science, clean tech, biotech, AI, computer hardware, space technology, self driving cars, electric cars, etc etc. That said, it's not a bad thing if a lot of entrepreneurs hit singles right now on this wave, and set themselves up to hit a home run later on a bigger problem.

iamwil 14y ago
"But the 1,000,000th iPhone app is not a big idea. The next Facebook game is not a big idea. Obviously there are some exceptions, but by and large these are just small fishing surfing on a big wave. Yet entrepreneurs and VCs are disproportionally investing their time and money into them." Well, the assumption is that social is some sort of platform. You'd figure, now that we have some semblence of the relationships between people, we can build applications would wouldn't have been able to otherwise with it. It seems like that would be the case, wouldn't it? We often lament that our software treats us badly, usually due to social faux-pas a human wouldn't commit (like inviting your ex-girl to your wedding in a wedding invitation app). In the same way that when other products we have that sprouted other industries as a result. Cars(along with highways) helped made suburbs possible. The first apps for the personal computer probably seemed gimmicky (why would people want computers in their homes other than for recipes?), but people kept trying since it seemed like something should be there. So therefore, we see a lot of people trying. And it's true what Steve Blank said about VCs liking fast and big returns, but they can also only invest in what companies people start. There are also a disproportionate number of startups in that space. That said, there are a lot of copycats that haven't thought deeply on the matter and are just digging there just because that's where everyone else is digging. In addition, social/mobile seems easy to people to do. Everyone's a self-proclaimed expert because, "hey, I'm social and I use a smartphone!". Social/mobile is hard to get right. I believe it's just what innovation looks like. You're going to get patterns like this, where everyone's chasing after the same big and lucrative stuff (what someone else in their thread called #LowHangingFruits). Once it's exhausted (or seems like it is), people will turn their attention elsewhere.

talmand 14y ago

I have to wonder what some people, who should know better, are planning for the eventual software bubble bursting. Meaning, what's next? Lately it just seems that the big names in the industry right now are just hype machines that are not really innovating anything. It's more that they are riding the big wave started by others that's just about ready to crash on the beach.

randomdata 14y ago
The software bubble has, arguably, burst twice before (dot-com, 2000; web 2.0, 2008). Assuming this bubble is no different, we'll just move on to the next ride. What that ride is - it is too soon to know. It'll be some project none (or few) of us have heard anything about yet.
- talmand 14y ago
  I agree, these things tend to come at us in waves. I just wish we could see the light a little bit sooner so we can at least start speculating on what's next as opposed to rehashing the same hype over the same stuff. For instance, I would like to see more speculation on making web apps that behave like apps in the browser instead of being web pages that try to act like apps. But I guess the native apps on mobile devices is already addressing that plus the other usual suspects in the space that are trying their best with what we have now.
  - randomdata 14y ago
    My own personal prediction is that it will be something in the embedded space. Some interesting things are starting to happen there (see: the response to Pebble, Arduino, etc). But it is anyone's guess at this point. The people who are working on the next big thing, at this stage, don't even know it yet. These bubbles are born out of people exploring new spaces, with, once a market has been proven, everyone else jumping in to try to take control of that newly discovered space. I think these bubbles are apt to continue so long as new mass-markets for software continue to be discovered, and will continue to pop once a definitive leader for that market has been chosen.

kraemate 14y ago

We've become lazy. Its much easier building a photo uploader in php (aka facebook) than actually build something or put man on the moon.

crusso 14y ago
The funny thing is that the people making their money in software and entertainment: John Carmack, Elon Musk, Larry Page, James Cameron, etc... are the ones getting us to space and re-igniting the space program that the general population lost interest in funding a long time ago. http://www.cbsnews.com/8301-205_162-57419801/asteroid-mining-venture-backed-by-james-cameron-google-ceo-larry-page/ http://www.cbsnews.com/8301-205_162-57419801/asteroid-mining... http://www.armadilloaerospace.com/n.x/Armadillo/Home http://www.armadilloaerospace.com/n.x/Armadillo/Home http://www.spacex.com/ http://www.spacex.com/ I say: Let the people with big ideas and great implementation skills make all the money they can legally. They're the ones we want to fund so they can pursue new interests and create new markets.
- spindritf 14y ago
  > the general population lost interest in funding a long time ago That's because the general population has been for a long time overpaying for not going to space https://scottlocklin.wordpress.com/2011/07/22/good-riddance-to-the-space-shuttle/ https://scottlocklin.wordpress.com/2011/07/22/good-riddance-...
  - crusso 14y ago
    Very true and that's an interesting article. The Shuttle Program is a great example of an idea that should have been allowed to fail. At very least (in YC terms), NASA needed to pivot hard much earlier on. The opportunity cost to mankind only existed because politicians and bureaucrats didn't get their funding and power from success at getting cargo and people into space economically and safely. They got it from overplaying their hands on past successes, diverting dollars to their constituencies and contractors to "bring home the bacon", and plain dumb government spending momentum. In other words, the incentive model of the Shuttle Program (and of NASA in general) was broken and no one with sufficient power ever did anything about it.

finneusbarr 14y ago

I think that the IPO crashing (as it appears to be doing) might have an effect on this. If the VCs see that even Facebook, the biggest of the social media sites, can't make money, they might shy away from sites like it and to more product oriented start ups.

crusso 14y ago

That article struck me as a bit of an extreme and luddite take on the current social networking trend. VC is chasing social networking right now because consumers are moving toward social networking vs other forms of entertainment. Some VC will make good guesses at the direction things are headed and make some money... some won't and will suffer the pain of being wrong. A lot of hype-sensitive VC will make the mistake of overplaying the social networking trend and that's a good weed-out mechanism in the economy of the Valley. It doesn't mean that funding for cancer drugs has stopped or even slowed down as a result. Even if you could attribute a slow-down of cancer funding to FB, it doesn't mean that funding for cancer drugs won't resurge and maybe increase after this trend subsides. Another thing to consider. The author mentioned Elon Musk as being one of the few sources of a "disruptive startup" in the last few years. Well where did Elon Musk get his money? Hint: not in the Space or Automotive industries. He is a brilliant guy who made money on the Internet then applied his problem solving skills and vision to other fields where he thought he could make a difference. Likewise, Facebook has converted a whole bunch of smart people into rich people in Silicon Valley. It's likely that some of them are going to take their money and apply it to new ideas in non-social-networking endeavors and we'll be referring to them years from now as innovators in those industries. Money flowing into Silicon Valley smart problem solvers is a good thing.

johnrob 14y ago
A quick way of summarizing your point: the invisible hand is working properly. It's telling us that 1 social investment today plus 5 science investments tomorrow is better than 1 science investment today.

apechai 14y ago

It's true in the short term that social and mobile trend chasing will be detrimental to investment in other areas of tech, but markets and VC returns will correct this over the longer term. Trend chasing and herding makes it harder to invest in the winners in a space at a reasonable valuation. If VCs invest in 100 social/mobile start ups at $100 million valuation and only 10 reach $1 billion, then the VCs on aggregate are break even. Also, a VC has a 1 in 10 or 1 in 100 shot of getting that big hit because there are so many 'me toos' in the same space. If a VC invests in the next spaceship, smartwatch (Pebble), or X less competitive field, there might be only 2 companies competing for that pie. So you have a 50% chance of picking the winner. The economics are also more compelling for less crowded fields because customer acquisition costs, talent hiring costs and other costs are cheaper. They're not being driven up by the other 100 'social networking / Instagram' start ups competing for the same resources. Your market share of revenue is also higher because you are sharing it with 1 or 2 other players, instead of 100. That makes the margins better for the the less crowded areas of technology. If you started a social or mobile company in 2005-2008, your customer acquisition cost was close to zero and engineers were cheap so that made each VC dollar go very far. You also didn't have to compete against 10 other companies for mind share in your space. That's not the case on social or mobile anymore. Some smart VC firm will invest in a hardware, biotech or (insert non social / mobile) start up and make a ton of money. Then all the money will chase that area and the cycle will repeat. The VCs which invested in the 'me toos' will lose money and lose assets.

tytso 14y ago

Perhaps it would be fairer and more accurate to say that startups that require relatively smaller amount of capital (i.e., software based startups that can use Amazon EC2) are killing startups that are much more hardware intensive and thus require more capital, and typically a longer time horizon before success or failure can be declared? Of course, that's not as sexy a headline...

dasil003 14y ago

> But what’s great for making tons of money may not be the same as what’s great for innovation or for our country. The article fails to make the distinction between companies actually making money versus frothy investors climbing all over each other driving up valuations. Of course Instagram doesn't help my case, but that's just the knock-on effect of Facebook's valuation. Whether you want to call it a bubble or not, what's going to happen over time is that the amount of actual money in social will start to be revealed. Once the winners such as Facebook and Twitter squeeze the most attention they can out of the public, and once public privacy expectations (and laws!) settle, and their monetization stabilizes, then the upside of "social" is going to disappear and the funding will dry up overnight. At that point the value of individual attention will be much better understood than it ever was in the golden age of television advertising, and "social" will just be the refinement of the advertising industry. VCs will then start looking for the next big thing in other areas. Sure Facebook might be disrupted down the line, but it's gonna take a decade just like it almost took Facebook a decade to get where it is today, and in the meantime they're not going to be making any more Instagram-level purchases.

drumdance 14y ago

He refers to finding cures for cancer as a Big Idea, but has any IT investor ever invested in such a thing? I believe Kleiner Perkins does biotech, but most others stick to specific niches. IOW I don't think the money that went to Facebook would go to life sciences. I think it would just go to other IT startups.

MartinCron 14y ago
Bill Gates and Paul Allen have both put serious money into life sciences.
- unfortunat 14y ago
  yep. gates has enabled research that simply would not get done otherwise because it is not viewed as being a good candidate for development. that is, vaccines. but i don't think he's looking for a return in monetary terms. he's looking for results of a different kind. and that's the difference. now, the question to ask is whether the investors that enable these sv startups have enough capital that they could fund projects to get non-monetary results, even if it means they might take a loss. that's why things like spacex and such are different. it's not just about the money. the worst part of this facebook ipo is it is totally unnecessary. they do not need the capital to carry the facebook idea forward. there is no reason they need to pass the risk on to the public. when you invest in facebook you do so for one reason only: a financial return. facebook contributes little to society. it's technology that makes the contribution. this is hard for some people to process. but you can take away facebook and technology still remains. everything that we are doing with facebook is still possible. the network effect is still there.

arturadib 14y ago

There is nothing wrong with #LowHangingFruits. They can be just as good as harder-to-get fruits, and one would be silly not go for them first. And it's not just social media that's low-hanging in the Valley -- that'd be an oversimplification. It's also the plethora of in-your-face B2B and B2C opportunities, thanks to the pervasive connectivity of business and individuals (which unlike the 90s is very real this time). If you walk around America visiting businesses and industries you get a sense of how rudimentary most processes are, and how amenable they are to software automation. Companies like Square and OpenTable are examples of non-social ventures that are disrupting markets. Of course it's not science, but who cares? They are innovating and disrupting just the same. I say go build your apps, whether social, B2B, etc. Find those low-hanging opportunities first. All signals say Go: connectivity is increasing; devices are selling like bananas; software companies are making real revenue; and most opportunities are yet to be exploited. And in parallel to all that let the government/large risk takers support more pie-in-the-sky ideas, and when the opportunities are depleted let's refocus and aim higher. But there's nothing wrong with enjoying a delicious fruit without having to climb trees.

psychiatrist11 14y ago
when you climb a high tree you have a vantage point over your competition. yet it would be inappropriate to deem the botanical landscape analogous to the "low hanging fruit" metaphor.

shmerl 14y ago

Those who want to monetize on the social networks *(the way FB does it) are in the wrong. Growing privacy disrespect will backfire on them soon enough.

psychiatrist11 14y ago
Or in a "bishop" maneuver, another company comes out with video tracking and renders privacy a property of "the past" and FB, Google, MSFT, and anyone else with pending anti-trust suits - to make out like kings!

christianbryant 14y ago

I would over-simplify this by saying true innovation is being killed by popular social media in general. The real reason for pointing to Facebook and similar sites is that, popular media focuses all its attention on these sites, and so, then, do investors. But why isn't extreme tech cool? Why can't groups like SpaceX get the same wave of investors and popular media support that an app like Twitter can get? In particular, I think project like SpaceX need to be better supported and more visible so the level of quality embedded in their processes is as high as possible. "Give the people what they want" is fine, but what if they don't know what they want? What if, more than yet another way to splash pictures of their dog in a dress across the Internet, they really want to see experience their web browser in full immersion VR? Or fold their computer into the shape of a pocket map after their done teleconferencing with Tokyo? I love my LAMP as much as the next guy (though my P has been more R(uby) of late), but come on, simple isn't always better, and that goes for code as well as ideas. That's my beef. Not with Facebook or Twitter specifically, but with the continued support of mundane ideas rather than ideas that will put us into other solar systems, or computing at the quantum level.

randomdata 14y ago
Investors/media/most people are not leaders. Facebook and the social space is interesting right now because it is already a proven business model, so everyone is trying to take their last piece of the pie before it becomes an established industry. Nobody has really showed the promise of making millions flying to space yet. When they do, money and media attention will start to flow in that direction and everyone will start fighting for their share of that market pie. Nobody cares about the idea, just how much money it is going to make them. Right now, it is unknown if you will ever make money going to space. It wasn't that long ago that some brave people were making social networking websites that nobody cared about or wanted to invest in.
- christianbryant 14y ago
  Sad but true.

psychiatrist11 14y ago

Here's my (illogical, emotional) reading of the article -- or shall i say, media piece: The invisible theme of the article is that Facebook's stock is down today, about 12%; Facebook employees won't be able to cash in for at least 28 more days; It's a timed media piece with an invisible point that FB won't recover; and why should someone accept a slavery contract (Startup Employment) if they aren't going to be paid a king's ransom (>= what the ibankers are making)? Thus $FB kills silicon valley and makes wall street that much more attractive. disclosure: I'm bullish $FB and bet it's likely to recover, although status in such uncertain climates only comes from short-term coups. So I may make 12% on my investment over a 28 day time frame, but at what cost? I look like a fool and am used like a tool in the media circus clown show. It's not worth it, but I'm not strong enough to bet otherwise.

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omaranto 14y ago

The title is misleading, the piece seems to be about how Facebook is killing Silicon Valley (according to the author), not about why they're doing it. :)

pg 14y ago

I see no sign of the trend he describes. And if it were happening I'd see it. But I don't find myself telling startups preparing for Demo Day "you guys are building important technology, so you'll have an uphill battle with investors, but you other guys have a social startup, so you'll have it easy."

sblank 14y ago
Hmm. Selection bias perhaps? How many medical devices, nano materials, chemical sensors and life science, etc. startups applied to the last Y-Combinator cohort? The hundreds of hard science teams I see every year don't send you applications.
- pg 14y ago
  We started out specializing in software, so we rarely get these types of applications. But you can build important infrastructure using software (indeed, most of the examples you give are largely or mostly software). And the companies we fund that are building such things do not have a harder time raising money than the companies building social apps.
- brlewis 14y ago
  The hundreds of hard science teams I see every year don't send you applications. Maybe some of them should. Sure, the direct experience of most of the YC partners is web-centric, but they're connected enough in SV that YC might be a big benefit, especially if any of those teams are amenable to a 3-month build cycle.
socratic 14y ago
Is that what Blank is arguing though? I remember listening to your office hours at TC Disrupt, when you were talking to the guy from Omniplaces. You said: "This is commercialized research? Ouch. It’s often a solution in search of a problem..." (Of course, that was part of a broader commentary about how the startup shouldn't be competing with Google in search, which I don't necessarily disagree with.) But I think that's what he's talking about. Sun, Google, Cisco, Akamai, VMWare, and a variety of other technology companies came fairly directly out of commercialized university research in systems, databases, networking, virtualization. Are there YC companies that are commercialized university research? Such companies at the very least seem very different from companies like Airbnb which seem like they evolved from a consumer problem rather than innovative technology. What's more, it seems like basing investing decisions on current consumer behavior and problems seems much more sensible than doing so based on technology, which is what Blank seems to be arguing and what you seemed to be arguing at Disrupt. http://techcrunch.com/2011/09/12/tc-disrupt-office-hours-with-yc-partners-paul-graham-and-harj-taggar/ http://techcrunch.com/2011/09/12/tc-disrupt-office-hours-wit...

kfk 14y ago

You can't complain people are choosing the best combination of risk and profits on investments. You can complain if people have bad information about risk and/or profits on investments, but that problem usually is easily solved with a bubble burst. And data missing, I just don't believe all the money is going into software...

erehweb 14y ago

Part nobody seems to be mentioning is government intervention. This doesn't have to be at the level of government picking individual companies. A carbon tax would make renewable energy sources more attractive and spur investment in the sector.

ticks 14y ago

The trend for that graph appears to hint at one wave abstracting and building on top of the previous wave (especially in the later stages). So I guess the next wave has something to do with the abstraction of social media and using it to build new technologies and services? If that were to be true then Facebook, Google Plus, Twitter etc. are all destined to become social media service providers - that is, high level utilities.

socratease 14y ago

I guess he means you can only sell so much smoke before people get smart. I'm bullish on the internet as a medium, and teaching people how to use it, not Facebook or other "companies" selling smoke. If Facebook ceased to exist tomorrow, I could still keep in touch with all my Facebook friends. That's because I have their email addresses. And there are now easy ways to move big files outside of email. We can use VOIP. We can stream big data to each other with today's bandwidth. It's all possible because of the advance of technology. (Not because of Facebook.) When people know how to use the internet properly to do the things they do using Facebook (share photos, etc.), peer to peer, then we can get on with solving "real problems". Apple and Facebook and others are not educating the population how to use computers and the internet. As far as I'm concerned they are not solving a problem. They are perpetuating it for their own benefit. Keep users dumb, track everything they do, feed them ads and try to sell them stuff. We have internet savvy kids whose only thought is "What's the business model?" Maybe there is none. Why should Wikipedia exist? What purpose does it serve? We do not have to keep users dumb and feed them ads to move forward. Hardware is cheap, software is free, connectivity is cheap, bandwidth is cheap. Let's use the internet to help solve real problems, not pretend that keeping users dumb and showing them ads is getting us there.

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jrosenblatt 14y ago

But of course the "newly monied social media entrepreneurs" will "invest in their dreams." Many already are. Dreams like space exploration and reforming education seem to be shared by a lot of entrepreneurs today. After we make money from easier-to-start startups, we can be like Musk and Thrun...

sakopov 14y ago

I am still astonished at the fact that we even have SpaceX all while VCs are throwing money away to fund photo-sharing concepts to make photo-sharing easier than scratching an itch on your ass. I'm just amazed that there are wealthy people out there who haven't yet stooped down to the level of social-media rats and decided to fund projects of such astronomical proportions. P.S. I want to hug humanity right about now.