I think it's fair to say that this analysis applies better to web/app companies. There's just a fundamental problem with raising (and burning) millions trying to grow a site for inbound marketing, or an app for dating, or what have you, even though these are great ideas and things that people want:
You likely won't be able to generate real revenue on something whose value is so immediately replicable or replaceable.
There needs to be a caveat to "build something people want": there has to be some barrier so that others can't compete so easily. Customer and market understanding is one, and that's certainly helped. But again, the replication model, which will drive down profits for everyone, kicks in. Technical superiority is a possible solution, but most web/app products simply wouldn't benefit from this because their functionality is trivial.
Of course, there are exceptions. Unicorns. Things like Whatsapp, Twitter, and Salesforce come to mind. Obviously their initial products were replicable, but the winner-takes-all network effects (and eventual "platform dynamics") create that lock-in. For every one of them, 1000s of similar companies fail. The problem is when VC money is chasing those 1000s of likely-to-fail-I-might-do-it-too companies. They're more likely to fail than laundromats, but they're burning millions in an attempt to be those "winners". Easier than investing in clean energy though.
Fundamentally, as a society we need some technical advancement to create meaningful economic growth. We can't just keep advertising and selling the same stuff to each other. When a sector is running dry on innovation opportunities (i.e. webs/apps) maybe it's time to look elsewhere. Or stick around and wait for unicorns. Meh.
For now though, how people want to misappropriate (in my opinion) their money is their choice, as long as most of this doesn't get dumped on John Smith from The Public like it did in 2000.
> Fundamentally, as a society we need some technical advancement to create meaningful economic growth
Fundamentally, as a society we need a social+economic advancement that allows society to continue to function in the absence of growth.
Farms don't need growth to produce food. Power plants don't need growth to produce energy. Construction companies don't need growth to build houses. There is no good reason why the wheels should come off our economic system in the absence of growth.
The fact that the wheels do come off in the absence of growth is a bug. Plain and simple. We need to fix the bug rather than "working around" it by trying to produce unending growth.
Capitalism, like cancer, can't be avoided. Economics is more like the laws of physics than a game of Monopoly: you can't really opt out of it because it simply describes the way things "want to" work (people competing for scarce resources).
Unlike cancer, I suspect that if we're sufficiently clever we can figure out a way to manage the symptoms in perpetuity.
So you think some "we" can be clever enough to manage economics but some "we" (perhaps same, perhaps different) can't be clever enough to manage cancer. Bummer.
Truth is, it is not their money. They are borrowing it at low rates. The most important point is that the private capital is fuelled by cheap public money. When that money dries up, so will the funding for the startup scene.
Could you explain to me the funding chain a little better? From what I understand, VCs raise money from "Limited Partners", but I never understood who those guys were and how they got their money. Pension funds and such?
You got it: Pension funds, endowments, foundations, union retirements funds, rich families, anybody who has a lot of money and wants to diversify into a high-risk, high-return fund.
They basically trust smart people, who have presumably succeeded at this in the past, to pick more net winners than losers and earn a return on their money.
You likely won't be able to generate real revenue on something whose value is so immediately replicable or replaceable.
There needs to be a caveat to "build something people want": there has to be some barrier so that others can't compete so easily. Customer and market understanding is one, and that's certainly helped. But again, the replication model, which will drive down profits for everyone, kicks in. Technical superiority is a possible solution, but most web/app products simply wouldn't benefit from this because their functionality is trivial.
Of course, there are exceptions. Unicorns. Things like Whatsapp, Twitter, and Salesforce come to mind. Obviously their initial products were replicable, but the winner-takes-all network effects (and eventual "platform dynamics") create that lock-in. For every one of them, 1000s of similar companies fail. The problem is when VC money is chasing those 1000s of likely-to-fail-I-might-do-it-too companies. They're more likely to fail than laundromats, but they're burning millions in an attempt to be those "winners". Easier than investing in clean energy though.
Fundamentally, as a society we need some technical advancement to create meaningful economic growth. We can't just keep advertising and selling the same stuff to each other. When a sector is running dry on innovation opportunities (i.e. webs/apps) maybe it's time to look elsewhere. Or stick around and wait for unicorns. Meh.
For now though, how people want to misappropriate (in my opinion) their money is their choice, as long as most of this doesn't get dumped on John Smith from The Public like it did in 2000.