Monday, March 14, 2011
Can We Ever Have Too Many Startups?
My recent post on the diatom bloom in the startup ecosystem prompted calls for me to dig deeper and provide more data. Far be it from me to disappoint!
Chris Tacy asked, are we seeing too many startups? It's a loaded question, but a good one.
My instinctive reaction is that it's always good to have more startups. When I was younger, and people asked me about the value of startups, I would ask them, "Who do you think will produce more innovation and value? Microsoft and its 40,000 employees, or 10,000 four-person startups?" (this was back when Microsoft had only 40,000 employees...and was still a widely admired company).
The answer, of course, is 10,000 startups. (I hope I'm not giving Dave McClure any ideas for his next fund....)
Yet the incredible recent explosion in startup numbers does give me pause--and not just because AngelList solicitations threaten to outpace Viagra ads in my inbox.
10,000 startups working on 10,000 different ideas is wonderful for innovation. 10,000 startups working on the same idea--not so much.
The reason that a diatom bloom is dangerous is that it's a monoculture that crowds out the rest of the ecosystem.
The danger we face with today's startup explosion is that we could end up in a situation where there are too many startups pursuing the same ends.
For example, just how many local deal sites do we really need?
And don't forget that even startups are still subject to the laws of supply and demand. If there is an excess of supply, the price drops accordingly. Too many startups pursuing the same market tend to compete away all the value in the market. It's hard to charge a fair price for your product or service if there are 10 other people trying to penetrate the market, and are willing to discount to get an advantage.
Startups are a force for good because they have proven over time to be the best vehicle for pursuing innovation. But not all startups are innovative.
We can never have enough startups that are pursuing unique solutions to important problems. But a profusion of "me-too" startups can actually damage the startup ecosystem by consuming the sunlight (funding, engineers) that would otherwise go to more unique and innovative startups.