I’ve been in the start-up space for over 15 years and have helped launch at least six tech companies, half of which have been acquired for, or are now worth, well over $100M. One thing they had in common is they were all products or services focused on the web space, like online advertising, internet performance, network storage, and digital asset management. These are products companies need when success is all about scaling. Scaling awareness, speed, performance, or data storage. Companies need these things when their customers have scaling needs of their own. Consumers want to search faster, process more data, do more creative things with the content they find, create more content, and publish and share with more people.
1999 and 2000 were crazy years when fledgling start-ups with no revenue were getting bought for millions, investors couldn’t throw money at start-ups fast enough, and unproven companies celebrated epic IPOs. No sooner had the industry recognized and labeled their own frenzie as the “dot com boom” than it came crashing down. First to go were over-valued e-commerce sites like Pets.com, which raised $82.5 million in an IPO in 2000 and collapsed nine months later. eToys raised $188 million in its IPO the same year and died 16 months later.
Next to topple were the businesses that relied on those sites, like Exodus Communications, a major data center provider (both eToys and Pets.com were customers). I worked for Exodus for a year after they acquired the start-up I worked at for $280 million about a year after we launched. Exodus stock split 5 times in 2000 and then they filed Chapter 11 (twice!). Like a domino effect , the impact eventually worked its way back to the source and affected investors. Skittish venture capitalists scaled back their early-stage investments and began to demand more from start-ups looking for funding (silly stuff like revenue, a real business model, and a seasoned team).
Throw a deep recession on top of that and the world of start-ups suddenly got very conservative and serious. Many really cool companies with innovative ideas died on the vine because they couldn’t get funding and didn’t have the revenue to self-fund. Entrepreneurs went back to corporate life for a paycheck and venture capitalists used their funds to save existing portfolio companies instead of looking for new ones. But things are looking up.
Facebook’s acquisition of Instagram marks the beginning of another tech boom and is evidence that both investors and consumers are optimistic enough to start refeeding their appetites for innovation. And once again, it’s all about scalability. So how do you take scalability to the next level and top the last decade? Think cloud-based storage, mobile apps, content creation, big data, and platforms that leverage the vast influence of millions on social media. Instagram satisfies enough of these categories to claim a billion dollar price tag, yet still has no revenue. This is a huge signal that the market is confident enough to risk putting potential first and revenue second. Since start-ups are all about risk, this makes right now a very exciting time for entrepreneurs!
Start-up history is paved with defining moments and Facebook’s acquisition of Instagram is definitely one of them.