1Mby1M Virtual Accelerator Investor Forum: With David Blumberg of Blumberg Capital (Part 4)

Sramana Mitra: I was actually reading last week’s Economist expose on superstars. Being a history buff, you may have already read this. Every time there is a major technological revolution, there’s this very disruptive period of 20 to 30 years when there’s a tremendous amount of startup activity and experimentation. Then, that period settles into an oligopoly.

Right now, we do have a bit of an oligopoly in tech. We have four or five companies that are in very dominant incumbent positions that are very difficult to compete with. The amount of data that Facebook has accumulated and the amount of precision with which they’re able to target ads is impossible to compete with. The only other people who have even a remote chance is Google because of their search and intent data capture.

If you look at the media industry, one after another, they’re all going out of business. Just recently, Mode Media had raised a lot of money. It had multi-billion valuation. I know the CEO very well. It didn’t work because the market has changed. This company has been around for almost 10 years. Today, I don’t think a media company, without that level of personalization, is going to make it. There’s a whole business model that is no longer viable for startups.

Here at One Million by One Million, any entrepreneur that comes to me who wants to monetize with ads, I tell them, “No, you’re not. That is a dead end.” We are at a cycle in information technology entrepreneurship where some significantly lucrative business models are going away.

The scenario that you described of large companies not able to keep up with their R&D and looking to the startup hinterland to do the R&D that they then acquire and access is one model of startups. But how many exits happen in one year? Startup activity right now is very high. I think it was 2013 or 2014. I don’t remember which year it was. 70,000 companies got angel-funded. That’s a lot of companies. It has actually gone down lately.

Worldwide, there’s a tremendous number of startups constantly coming up. There’s not just going to be enough exits for all these companies. If you don’t get early exit, then you’re going to have to grow this company at a very fast pace to fit the venture capital model of continuous financing and growing to sizable scale so that the company can have a public market exit. That path is becoming harder for a lot of companies because of the incumbent’s role being so extensive. These are my observations.

I’d like to hear what you are observing. How does this come together in your mind?

David Blumberg: I have three different points. I’ll start with your last point first. The Chamber of Commerce of the United States reported that in the last 20 years, about 400,000 new companies of all sizes were started. Some were venture-backed. 400,000 started and 300,000 died.

Since 2009, it has flipped. We have 400,000 created but 470,000 die every year. That is a bad sign. It’s partly due to the recession that is hopefully now ending. It’s not just that. I think we’re here killing the goose that is laying the golden egg of entrepreneurship with overregulation. I see it particularly in California where people are moving to Texas and other places that are less regulated. I see it in the general movement of population from the northeast industrial state to the southern state.

Also, moving across to other countries that have lighter regulatory burden. We’re starting to see France legislate 35-hour work week. People started to move out of France. Government regulation favors the big company. It’s not a friend of the startup. That’s one point. The second point is I want to take a little bit of an exception to your point. I don’t disagree about this punctuated equilibrium theory where you said there’s innovation for 20 to 30 years and then states of oligopolies.

I would remind us all of Nokia’s dominant position just a decade ago. Everyone thought it was the king of mobile telephony. They event extended to media and content creation. Today, they’re gone. Look at Yellow Pages before Google. Yahoo! was there before Google.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With David Blumberg of Blumberg Capital
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