Bubble or paradigm shift?
I’ve finally decided to write my two pence on what’s become quite a bubbly discussion in itself: are we in another tech bubble?
Let me start by saying rather controversially that first I think this is the wrong question to be asking. Great companies have emerged out of bubbles as we’ve seen in the Web 1.0 phase. Yes there were a lot of failures, busts and losses in early 2000’s; but what we forget is that there have also been big winners whose collective gain outstrips those losses. Companies like eBay, Amazon and Cisco all came out of the first tech bubble and have proven to have strong and sustainable businesses which are still growing. So focus on what YOU are doing not what the herd is doing I say.
And what is a bubble anyway? There are tonnes of text book definitions which ultimately focus on technical definitions like valuation. Are things over-priced and is there too much liquidity being pumped in a sector or asset class? To me these are the wrong definitions. We are at the onset of a paradigm shift (which I explain below) so almost by definition existing valuation models will be wrong, So for me multiples being high means very little. What it comes down to is people getting ahead of themselves and investing in things they don’t fully understand or appreciate – and why? Because someone else is. “Oh I have to jump on this bandwagon…everyone’s doing it” That’s what leads to irrational exuberance .
Admittedly that is in part taking place so yes I have no doubt that some investors and entrepreneurs will end up getting burnt by virtue of just following the herd: investing in things that make no sense to them because others are or on the flip side entrepreneurs setting up businesses with no fundamentals because they know they can get funding. However, the importance of a paradigm shift is that it totally raises the cap on the upside in a space for those who do have the right fundamentals. Which of course means the demand supply equation rebalances.
Lets take the past two paradigm shifts as a case study. In the 80s nobody knew or even comprehended how big the PC market would become. Microsoft went public in 1986 just 11 years after it’s founding for $640million and then rose to £300 billion market cap from which it only fell below past 2008. I would therefore argue the public markets failed to appreciate the size of the industry. The same happened in the 90s with the next paradigm shift i.e. the internet: Cisco went public for $230m, eBay for $300m and Amazon for $440m. Yet they all rose to become multi billion corporations. Nobody appreciated how big the internet would be.
I think the same is happening now– very few people are appreciating how big the social revolution will be. For me Web 2.0 was just a buzzword that got people prematurely excited. A paradigm shift starts when an idea becomes big enough to change people’s lives. And for that you need a player big enough to drive that change and make the market. That player did not exist in social till now: Facebook.
So what is the shift in practical terms? Facebook is still seen by some as just a network of people sharing photos. But when you look past that the power of Facebook and the social revolution at large is that its slowly transforming a web that’s linked together through pages of static content all hyperlinked with one another – which forms the foundation of searchability in a search-driven web as we’ve known it to date – to a web that’s interlinked through people. People and their connectivity with one another will form the new nodes of the webs information architecture and we will be able to navigate and find information based on that connectivity and the information we build around it. Instead of page-driven information and connectivity we are moving to people-driven information and connectivity. Facebook has already matched Google in traffic and is stealing visitor time from the rest of the web at a very fast pace. People are shifting to this new architecture faster than we know.
Google of course does knows it and is right to be scared. Hence the recent (pathetic in my view) attempt to counter Facebook through their “+1” app. Translation: “we’re in trouble”.
So what does this mean for the rest of us? Well, one way to look at it is this: just as when Google launched there was a whole ecosystem built around searchability both on-site (ie search being the main means of exploration) and off-site (i.e. Google being the primary source of user acquisition spurring a huge SEO industry around it) I think the winners of the next paradigm are those who embrace social. And I am not talking about simply advertising on Facebook. But rather deeply embedding social dynamics into the core of their product. Search will give way to serendipitous exploration driven from our social connectivity which will in turn become the defacto route to market online.
This is more complicated than it sounds: social dymanics on the web is still maturing and fast evolving and in many ways as much a black box as Search Engine Optimisation was back when Google launched. The winners will be those who really understand the social behavior and the underpinning psychology of their users and use that to truly innovate by baking it into the DNA of their application and the user experience it governs.
For sure working with Facebook to that effect will be likened to working with Google to make your site searchable i.e. impossible. But I think Facebook has already shown signs of being a much more open company that has embraced the developer community and has in fact allowed (although possibly will never do so as willingly in the future) companies to become really large by building on top of it, like Zynga. Just as you need one big player to drive a paradigm shift that player then becomes the root of all evil as they become defensive and protective of their monopoly and start becoming ‘for the users’ instead of ‘by the users’. This is an innate challenge in platform businesses that we’ve seen in Microsoft, Google and no doubt in Facebook.
Its been said that powerful organizations develop a mind of their own that is often detached from that of their people and their leaders and behave like stand-alone beasts in an ecosystem that poses an innate threat to them by virtue of its innate power to regenerate and strip them of their power. And that’s when the next paradigm shift comes.
What that will be and when will it happen I don’t know but for now I’m pretty convinced that history is now repeating itself: we are not yet fully appreciating the impact the social web will have on us so the seemingly extortionate valuations of LinkedIn and Facebook are in my opinion if anything on the low side. In parallel with what’s said above, consider that Facebook is valued at about half that of Google and you’ll see why.
That said: I do think there’s a frenzy around the fringes driven by people who don’t fully undertsand or appreciate the driver of this paradigm shift or perhaps more cunningly use it to capitalize on the euphoria and make a quick buck. Some will and some will be caught in a trap. But the real drivers of social like Facebook and LinkedIn and those who are truly embracing it of which (naturally☺) one is my company PeoplePerHour.com will be game changers beyond what we are imagining right now. So for them I say “no bubble”, I say “paradigm shift”.
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