Spanish-born, Harvard educated professor and philosopher George Santayana was a prolific writer, known best for his many aphorisms. Perhaps one of his best-known soundbites is also one of his most frequently misquoted.
“Those who cannot remember the past are condemned to repeat it,” wrote Santayana in 1905 as part of his five-volume Life of Reason essay series.
It is fitting as we watch tech and FinTech stock market values plummet, capital dry up and a spate of full-on startup austerity programs rev up, the likes of which we haven’t seen in more than two decades.
I’m not the first person to write about the obvious comparison of the 2000 dot com crash to the great “Tech Wreck” of 2022.
But I am among the first to offer an analytical framework for explaining why so many startups — new and existing — might have more reasons to be optimistic than pessimistic about their futures.
The Past is Really Prologue
The year is 1996.
Fed Chair Alan Greenspan, in a speech to the American Enterprise Institute on December 5 that year, coined the term irrational exuberance. He used it to describe the economic risk of stock market valuations being so vastly distorted from business fundamentals. He posited that a market correction brought about by macroeconomic changes would force that alignment — and be sharp, severe and potentially long in duration.
At the time, it seemed like the usual gloom and doom from the Chief Dismal Scientist at the Fed.
After all, the U.S. startup scene was robust and booming on the back of the opportunity to commercialize the internet. The notion of entrepreneurship and starting a business was going gangbusters, and VCs had gobs of cash — thanks to low levels of inflation and easy access to cheap capital — to fund those aspirations. About any startup with a catchy name and a pitch about the internet got cash.
Ninety percent of those dollars went to chase eyeballs, to grow share. Making money would, in theory, take care of itself down the road. A profitable company was considered a sign that a startup wasn’t doing enough to grow fast — a risk that entrepreneurs also chasing the high multiples of an internet company didn’t want to take.
Sound familiar?
Between 1998 and 1999 457 internet startups went public.
In 1999, Morgan Stanley’s Mary Meeker revealed in her much anticipated internet annual report that the collective value of those internet stocks was $450 billion; their collective sales were $21 billion and their collective losses totaled $6.2 billion.
A year later, in March of 2020, Greenspan’s irrational exuberance chickens would come home to roost.
Between March of 2000 and October of 2002, the Nasdaq Composite stock index lost 78% of its value, and investors reportedly lost, on paper, some $5 trillion dollars. Half of the firms born in the dotcom era more or less immediately went up in flames. The rest had to refocus, shrink, figure out how to make money. Most never did and withered away or were bought for chump change by larger rivals.
Among those that survived the crash and the many economic cycles since are familiar names — Amazon, eBay/PayPal (remember, eBay acquired PayPal in 2002), Google, Microsoft, Qualcomm, Open Table and Priceline (both of which are now part of Bookings.com).
In 2001, only 76 startups went public.
Falling for the trap of “customers at any cost and profits at some date TBD” is what hobbled the startups that didn’t make it — or couldn’t get enough capital later to keep the lights on.
Another fatal error was building businesses on top of infrastructure that was nascent and unproven for both businesses and the consumers they were hoping to acquire as customers — as unproven as the business models in their pitch decks and IPO prospectuses.
(BTW, for a really interesting account of the dotcom crash and the evolution of Silicon Valley, I’d recommend Piero Scariffi’s The History of Silicon Valley. )
Infrastructure’s Brick Wall
What’s so wrong with ordering pet food online?
Absolutely nothing, if you ask Chewy executives, investors and customers today. Its 20 million customers order pet food, treats, pet meds and toys online and connect with a vet when needed using Chewy’s digital channels. The online brand that sold to PetSmart in 2017 for $3.35 billion saw its sales increase from $2.1 billion in 2017 to $3.5 billion in 2018, spun out and went public in 2019. Today, analysts say that its stock is undervalued.
Absolutely everything, if you asked Pets.com executives in 2000, two years after it first opened its online storefront.
Pets.com cratered that year — not because ordering pet food online and shipping it to people’s houses was a bad idea, but because the infrastructure needed to support online ordering didn’t exist at scale for consumers.
In 1998, only 9 percent of U.S. households had internet access at home. Those who did could access online content at the blistering speed of 800kbps.
The logistics infrastructure necessary to deliver the product efficiently and cost effectively for the business didn’t exist at scale either.
Distribution inefficiencies at the first and last mile meant consumers had to wait too long to get Fido’s dog food and pet treats. Consumers found it cheaper, faster and easier to buy food and supplies for their pets by driving to their local pet store.
It’s a similar story for Webvan and its online grocery ambitions in 2001.
Webvan was founded in 1996 by Louis Borders with ambitions to be the largest online grocery delivery operation in the U.S. Three years later when Webvan made its first delivery to consumers living in San Francisco it had raised roughly $400 million from investors to build out warehouses, buy trucks and fine-tune its intelligent ordering technology.
See my interview with Louis Borders: Brands and Mass Market Retailers Are in a ‘100 Year War’ That Could Unseat the Reigning Titans
It was big news in 1999 when George Shaheen left his $4-million-a-year post as CEO of Anderson Consulting to become the CEO of Webvan and take it public. In November that year Webvan’s IPO was priced at $15/share, valuing it at $4.8 billion. That year, Webvan reported sales of $395,000 (and no, that is not a typo) and losses of $50 million, according to SEC filings. At the close of business its first day of trading, Webvan was valued at more than $7 billion.
Two years later, Webvan would shut down. Between 1999 and 2002, it would lose $800 million of investor capital. Many blamed Webvan’s crash and burn on a lack of supermarket experience by the executive team, a bad business model (being a grocery store with too many fixed capital costs) and rapid expansion into new product categories and new markets chasing market share.
But like Pets.com, Webvan’s consumers lacked access to critical internet infrastructure at home that would deliver demand, at the same time that the company was shackled by a distribution, product strategy and infrastructure too costly to build and support.
Fast forward a few years to 2012 and the launch of Instacart, which innovated online grocery ordering using the grocery stores as their customers. The Instacart model matches grocery stores with consumers who want to shop them, including those consumers who shop at stores online that are too inconvenient to drive to in the physical world. The grocery store gets the sale, the consumer gets the convenience and Instacart leverages its investments in payments, commerce and logistics to build share.
With the benefit of 2020 hindsight, one of the things that Pets.com and Webvan could have used was the gig economy model to solve their last mile problem. But even if they had been smart enough to invent the idea of drivers with spare time to create a dense network of local delivery people, the technology wasn’t there either. That model required drivers with smartphones and a fast internet connection and GPS tracking. In 1998 mobile phones weren’t smart or connected to the internet.
The Lessons of the Startup Class of 2008-2010
Fast forward a few years to 2007, 2008, 2009 and 2010.
In the midst of a challenging economic environment called the Great Recession, a whole new crop of startups emerged. Each saw the opportunity to leverage mobile, data and the cloud to build new businesses and business models on top of new technology introduced right around that same time.
The launch of the iPhone and the iOS operating system in 2007, and its App Store in 2008 — and Google with the Android operating system and its Play Store in 2009 — set in motion a wave of innovation that would make phones smart by connecting them to the internet. For the first time, apps began to blur the lines between the physical and digital worlds.
It would take about two years, until about 2010, for enough consumers with smartphones to reach critical mass and ignite as more app developers built more apps for the many more consumers who bought and used those phones to access the internet.
Startups like Braintree (2007) and Stripe (2010) created the infrastructure necessary for app developers to easily build mobile apps and process payments.
Square’s innovation in 2009 and iZettle’ s innovation in 2010 weren’t as much the dongles and devices that turned smartphones into POS terminals as the business models that upended traditional merchant acquiring models and allowed taxi drivers and independent businesses to accept card payments.
Uber’s innovation in 2009 was as much about the magic of ordering a car service and making payments invisible via their app at the end of the ride as it was mastering the logistics and payments infrastructure necessary to power (and later leverage) a gig network at scale.
Airbnb, in 2008, innovated in much the same way for homeowners eager to monetize that spare bedroom in their house and to launch the concept of the sharing economy at scale.
Other businesses would see the opportunity to innovate at the intersection of online commerce, payments and logistics in an effort to make the mobile experience better for the consumer — and to make the unit economics of distribution for the sales made from that experience more sustainable for the businesses delivering it. This remains one of the most promising opportunities for entrepreneurs today.
The 2022 Wake Up Call
It’s easy to see why so many believe the so-called 2022 Tech Wreck bears more than a passing resemblance to the dotcom crash of twenty-two years ago.
Like then, over the last couple of years, too much capital chased too many startups into areas where the barriers to entry were very low and the great race to capture eyeballs drove the cost of customer acquisition to unsustainable levels for everyone — including established businesses competing for eyeballs against well-funded startups.
Like then, business models are shaky, and sustainable only as long as VC checkbooks plow money into their bank accounts to build share — and until recently, with very little pressure to find a path to profitability in a timeframe relevant for investors.
Like then, startups with pitches about “the next big thing” of web3, crypto, NFTs and the metaverse got the dollars and the hype. And just like then, the challenge facing this crop of innovators is building all sides of a platform from scratch — the regulatory compliance and emerging technology and payments infrastructure, the use cases, the business model, the consumer and business base, and the value proposition to capture the critical mass needed to ignite and scale their businesses at a profit. That takes time, and most platform businesses fail to ignite in a timeframe that is relevant for the business or their stakeholders.
Like then, VCs are tightening their purse strings and shifting focus to profits and away from growth at all costs, abruptly leaving founders and CEOs figuring out how to do more with less. They aren’t the only ones.
CIOs are said now to prioritize projects with proven business cases, according to an article published in the June 26 issue of the Wall Street Journal. The article suggests that proof-of-concept projects will be backburned in favor of those with a more immediate here-and-now return.
That sounds like nothing but bad news for the many startups hoping to get distribution and traction from the companies who once took their calls and were willing to throw a few bucks their way to play around with emerging tech that doesn’t have a recognizable path to profit and scale for their business. That could dampen their enthusiasm for spending time, money and resources on projects related to web3, metaverse, crypto and even the blockchain — the science experiments many traditional companies have been keeping an eye on — which might soon find their way to the chopping block.
2022’s Green Shoots
It’s not all doom and gloom. From an innovators’ perspective, 2022 may have much more in common with the 2008 Great Financial Crisis than the crash and burn days of 2000.
That’s because unlike the dotcom era startups, today’s companies can and have leveraged existing technologies that work and are improving rapidly to bring great ideas to life. Their investments in building on top of that tech will help companies solve the important problems facing them over the next few years as the macro-economic headwinds create uncertainty for their business and their customers.
For most businesses, that means doubling down on the investments made over the last several years in the digital economy.
Today, according to PYMNTS’ research involving more than 15,000 consumers in 11 countries, only 27 percent of consumers’ day-to-day transactions are powered by or enhanced with an internet connection — even though it’s inevitable that every encounter that a consumer has in the physical world will, in some way, be enabled by software and a device which connects to the internet. There’s a lot of work just to get more people online doing something — and to make the experiences online better by embedding payments into those flows and interactions seamlessly across channels.
Read the research: New 11-Country Study Shows Digital Transformation Has Reached Only 27% of Full Potential
Businesses will recognize that bringing the digital and physical worlds together doesn’t require abandoning the physical world and living in the metaverse. That integration of the digital and physical is happening today as innovators make it possible for doctors to use robotics and connected devices and 5G to perform telesurgeries thousands of miles away. The diffusion of 5G will spawn even more use cases across many industrial sectors.
For startups, this means assessing how their business solves a problem that businesses or consumers face now — or could.
The Glass Half Full
Like 2000, many startups with undifferentiated products or services and shaky business models will fail. The curse of cheap capital is often the formation of many “me too” businesses that compete for customers with lavish incentives but don’t create a better alternative that keeps them sticky. We will see the thinning of that herd accelerate.
There are still many reasons to remain optimistic. 2022 and 2000 are different, and for two big reasons that should give any innovator cause for optimism. (And who doesn’t need a dose of that these days?)
With a very few exceptions, in 2000, the business frameworks for measuring success (based on grabbing share) were ill-designed and badly thought-through.
In 2022, the platform business model, ignition strategies and optimal pricing are well-developed and backed by empirical evidence. They are the foundation for the FIT framework that analytically measures the impact of friction, time and inertia on any new market opportunity.
See also: Using FIT Framework to Drive Success in a Digital 3.0 World
In 2000, there was a mismatch between the good ideas that entrepreneurs had and the technology, infrastructure and readiness to support the ideas, along with the assumptions about how quickly those ideas would get traction.
In 2022, there’s an enormous array of real-world problems that entrepreneurs are, or could, tackle with technology that exists and is improving rapidly — along with all of the new opportunities to add value to existing digital experiences.
And of course, in 2000, there was no PYMNTS, and none of my advice. 😊
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