Raining on the Silicon Valley parade

Here’s a good one. A month ago a guy called David Sacks sold Yammer, the social-networking-for-enterprises company he founded four years ago, to Microsoft for $1.2 billion. Mr Sacks then withdrew to spend some time with his money. But boredom got the better of him and so the other day he logged into his Facebook account and wrote this:

“I think Silicon Valley as we know it may be coming to and end. In order to create a successful new company, you have to find an idea that (1) has escaped the attention of the major Internet companies, which are better run than ever before; (2) is capable of being launched and proven out for ~$5M, the typical seed plus series A investment; and (3) is protectable from the onslaught of those big companies once they figure out what you’re onto. How many ideas like that are left?”

Now if there’s one thing that gets the digerati of the Valley into a stew it’s any suggestion that their Wonderland might one day cease to exist. So Mr Sacks’s little squib provoked a veritable storm of outrage, scorn and refutation. The response was such as to cause him to qualify his original speculation. “Human creativity has not changed”, he conceded,

“and there will always be new ideas and opportunities. But the question is, how many of those opportunities will be captured by startups versus incumbents? It seems like a statistical fact that when you go from virtually no incumbents to multiple well-run incumbents, an increasing percentage of opportunities will be captured by the latter. That’s the point I’m making about Silicon Valley — we may not be running out of ideas, but we might be running out of big new companies.”

I was pondering this and wondering where to begin (just for starters, had he never heard of Kodak, Microsoft, Clayton Christensen and the Innovator’s Dilemma?) but then I checked again and there was Marc Andreessen, one of the smartest guys in the Valley, rebutting Sacks, and doing it better than I could in a series of snappy bullet points:

  • There are only a few competent incumbents.
  • Each of those incumbents can only do so many new things before you get B and C teams screwing up.
  • Startups continually drain talent out of the incumbents, further impairing their ability to continue to innovate.
  • As the incumbents become more powerful, they increasingly prioritize stability over change — Peter Thiel’s argument — betting on incumbents over time equals bettting against technological change.
  • Innovator’s Dilemma — incumbents tend not to cannabilize themselves through disruptive innovation not because they are poorly run, but precisely because they are well run.
  • Precisely.

    (If you’re interested, TechCrunch has a much more extensive list of the comments provoked by Mr Sacks’s pessimism.)