Monday, August 01, 2011

Thoughts on bubbles and cycles

I was reading a post by Om Malik suggesting that our current bubble is about to burst, and it got me thinking about the former bubble and the times we are in today.

The bubble that peaked at the beginning of the millennium was marked by the transition of the web from a technology used to present content to a platform on which applications were built. People began using the web differently--they went from reading and watching to actually doing stuff. Companies emerged that built websites that allowed you to do things like manage your sales prospects and make purchases for digital and physical goods. There was no one single technology breakthrough that enabled this (although you could argue that J2EE and the app server was fundamental), but enough technology existed so a small team of reasonably skilled developers could implement relatively sophisticated web sites and apps. Once the bar was lowered on the true innovation and technical know-how required to launch a web business, the flood gates opened. And boy did it flood! Some of the businesses that emerged were pretty clever, but a lot were just plain stupid. Many had no basis for a sustainable business and relied on the heady buzz around all things web to gain momentum. That buzz fueled (and was fueled by) public and private investors who poured in absurd amounts of money to inflate the bubble. I count as friends a number of people who profited from this, but many more who did not.

During the bubble, I noticed the effect popularization of technology had on the make-up of the industry. People entered the tech arena from the edges, taking advantage of the growing surface area of the expanding sphere that had emerged. Companies where I worked prior to the bubble were made up of people who studied computer science in school and had been technologists their entire careers. Increasingly, I found myself working with people who had moved into technology from other areas, who had no previous tech experience but found themselves managing projects, designing websites, testing software, and promoting the capabilities we implemented.

I don't have any real insight on the web 1.0 bubble burst that you don't already know. Perhaps it was the realization by investors that even in a very optimistic world, many of these businesses were not sustainable. Expectations were beyond unrealistic, and investors made a bee line for the same flood gates through which they came. At the same time, our country was in sudden turmoil and the population in general had doubts about the future and withdrew from speculative investment and spending. When the burst occurred, many of the people that came into the industry from the outside were the first to leave (willfully or not). The icons that represented the era were now the butt of many jokes.

So here we are in a situation that many liken to those days ten years ago. The current bubble, in my estimation, is fueled by a few things. MySpace helped popularize a newish category of website that did a pretty good job of bringing in a population of users that had only used the web previously to shop and do occasional tasks. Social networks became an everyday habit for moms, dads, kids, grandparents and people wanting to hook up tonight. There were technological developments required to sustain this, like the ability to scale data-rich websites to ridiculous numbers of concurrent users, but these were mostly incremental developments rather than true breakthroughs. Many sites discovered their bottlenecks the hard way, and the successful ones quickly figured out how to cope. Cloud services made it easy for minimally-funded startups to build out a presence without any capital investment.

The other development that fueled the current situation is the advent of mobile. Smartphones and high-speed, affordable data plans let everyone interact on social platforms always. This isn't just a convenience, it opens up a whole new modality. Many clever applications of socal+mobile (and location awareness) have emerged, built by small teams of reasonably skilled developers. We are past the point where truly specialized knowledge is required to launch a business capitalizing on these capabilities. There are both clever and stupid ideas out there getting funded, even though experts are quick to point out that the IPO market and valuations pale in comparison to bubble 1.0. So this must be different, right? Investors demand to see revenue and a business model that sustains it, don't they?

The makeup of the industry, while still absorbing people from non-tech backgrounds, is more mature. The first bubble created career opportunities that dried up after the burst, but the underlying infrastructure in education and vocational awareness persists, so the character of the workforce doesn't seem as "green". People now have several years of experience doing jobs that didn't exist prior to bubble 1.0.

I anticipate there will be a peak and a fall of the current bubble. Maybe that time is now. I think that much of the gas of this bubble is the same that inflated the previous one (we are only human), but perhaps it isn't as volatile this time around. The technical underpinnings that helped fuel this round have broad applications, and the effect this technology has had on human behavior is profound. I imagine many businesses will cease when the this bubble deflates, and people I consider friends will be hurt. I trust those with aptitude, skill, and experience will quickly find new avenues for their talents. I hope sufficient real value has been created so even in a trough, new opportunities will arise quickly. I also don't expect this to be the last bubble I see in my career.

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