One of the more memorable exhibitions at 2010’s Venice Architecture Biennale was from OMA (Office for Metropolitan Architecture), the firm founded by well-known Dutch architect Rem Koolhaas. The exhibit opened by noting, “The rise of the market economy has meant the end of the architect as a credible public figure. Since Philip Johnson in 1979, no architect has appeared on the cover of TIME magazine. ‘Starchitects’ accepted a faustian bargain where they became more prominent, but their role less significant.”
In other words, architecture’s prior ambitions to bring ideological visions of utopia to the public have been replaced by a more purely commercial and egotistic architecture, vehicles of conspicuous consumption designed to impress rather than to serve the public interest. We all remember being awed by Herzog and de Meuron’s “Bird’s Nest” Stadium unveiled with the Beijing Olympics in 2008, but may not have heard that crushing maintenance costs and a general lack of post-Olympics purpose for the iconic building has tarnished its reputation with locals. Meanwhile, local governments facing economic decline look to architecture hoping to invoke the “Bilbao effect,” named for the tourism boost brought to that city by Frank Gehry’s Guggenheim project.
It is a dynamic that reflects a broader movement of the modern world toward short-term thinking and commercialization, and we should not be surprised to find that it applies equally well in business. In the fashion world, for example, H&M and ZARA have perfected the process of designing for the moment, with the latter in particular having created a real-time feedback system from store to design center to warehouse–all created to respond to demand reflected by the day’s sales–that is the stuff of Harvard Business School case studies. In contrast, Tomas Maier, hired in 2001 as head designer of luxury boutique Bottega Veneta, eschewed the marketing-fueled It-Bag ethos of the late 1990s for a commitment to quality and function. His Cabat bag, featuring the label’s signature intrecciato weave, was understated, timeless, and durable. Maier led a revival of the brand, taking the beleaguered company from the brink of bankruptcy to an 800% sales increase through 2011, by sticking to his convictions that quality matters.
Staunch capitalists will roll their eyes at the suggestion that companies would exist for any other purpose than to maximize profit, but ask any entrepreneur what makes him willing to take the risks involved in starting a new company. Most answers will involve more than a profit motive, though that’s a big part of it. More than that, entrepreneurs want to “make a dent in the universe,” with lofty goals of advancing society through innovation and excellence. Such ideals, these “foolish” and “hungry” upstarts believe, lead to the creation of products and services worth paying money for, in a way that is smarter, more efficient, and often more conscientious. Yes, building a startup is an opportunity to create fortunes, but it is also a chance to do things right or to do things better.
If you’re clever and willing to put your neck on the line with an idea worth pursuing, you have the chance to build a company that brings together the unique combination of value creation, profit-making, and idealism: this is the promise that has led hundreds of entrepreneurs to leave safe, comfortable jobs in the pursuit of something greater.
But something’s happened over the last twenty five years to shift that balance, and todays’ entrepreneurs have reduced their visions. Today’s startups are designed for quick consumption: identify a niche business missing from the product portfolios of the major technology giants, and put together a business plan with an “exit strategy” to be acquired by Google or Microsoft within five years. Andy Grove, Intel’s founder and a man of great vision, bemoans this mentality: “Intel never had an exit strategy. These days, people cobble something together. No capital. No technology. They measure eyeballs and sell advertising. Then they get rid of it. You can’t build an empire out of this kind of concoction. You don’t even try.”
Grove touches an interesting aspect of the startup climate today, which is the lack of need for capital, but he may not be completely justified in tying this to the exit mentality; in fact, the opportunity to build meaningful businesses without outside investment means founders have more options than ever in how to grow their business, including sticking with them for the long haul. That this is even possible is due to two major factors: near-zero startup costs, especially for software and Internet-based companies, and the waning relevance of the traditional venture funding model.
The phenomenal returns earned by VC investments in Silicon Valley’s early days had led to a tremendous influx of capital as university endowments, pensions and other institutional investors sought to get a piece of the wealth . By the late 1990s, the Internet land grab was in full swing and entrepreneurs found investors ready to throw a lot of cash at the Internet to try to make sense of it.
A lot of money was lost, of course, and both VCs and entrepreneurs were forced to retrench. The years 2001 to 2004 were a pruning time, but fortunately people had realized the great power of the Internet for enabling widespread, dispersed collaboration. YouTube, Flickr, and Digg represented this phenomenon on the consumer Internet side; these companies, rather than selling content, created environments for users to share their own. Software companies without access to capital took a similar approach with the open source development model, which allows talented engineers to develop, test, and feature-manage their offerings without up-front resources. Developers offered their software for free, and in exchange users told them what to build and what to fix, and in many cases sent the code for it themselves. Thus one of the traditional functions of a venture investment – that of funding product definition and development – had been replaced by the power of crowd-sourcing.
Venture investments were still made in open source software (OSS) companies like MySQL, JBoss, and SpringSource, but rather than being used to develop product, funding allowed OSS companies to “double down” on their growth and massively hire to accelerate market awareness and customer acquisition in a way that organic open source growth could not. Money was used in the battle for developer hearts and minds and to reach business decision makers who required high-touch, high-cost sales and marketing efforts. But the fundamentals for most of these companies were solid, grounded in actual users applying their software to real world scenarios, and most could have continued growing into healthy independent businesses without capital, albeit at a slower rate and with risk of competition.
This second wave of investment ended abruptly with the 2008 recession, with key investors like Sequoia Capital famously ringing the alarm bells for its portfolio companies on the coming recession. But the benefits of crowdsourcing and the OSS model for the strongest companies meant that they could grow without capital. At the same time, innovation continued and Internet tools reached another stage of maturity with the development of web analytics and marketing automation tools. Anonymous downloads and website visitors could now be engaged interactively, helping sales teams identify promising leads and accelerate sales cycles. The mystery of marketing was replaced by quantifiable metrics and refinable, repeatable business processes.
Other enablers quickly developed during this period. Amazon.com cleverly figured out that the computing infrastructure for their retail operations could be micro-leased to the wider business community, including entrepreneurs. World-class processing, storage, and network infrastructure became commodity services “in the cloud” that no longer required up-front investment into physical servers and leased co-location space.
Apple, Google, Salesforce, and Facebook also created a goldmine of opportunity by creating well-defined application platforms that opened up huge potential markets for entrepreneurs. Today, bedroom iPhone app developers can realistically expect to become successful in a meaningful way without the headaches and risks associated with a traditional venture investment. The independence, creativity, and excitement of entrepreneurship now have a much lower barrier to entry.
All of this happened during a period in which the nature of venture capital fundamentally changed. Funds had increased in size due to the success of venture investments in the early 90s, and even after the bust of 2001, funds were larger than their pre-1995 historical average. With more money to manage, investors increased the size of their investments. Early-stage investments of $5 million to $10 million were less attractive than later stage investments in the $25 million to $50 million range, which might require the same amount of management but garner greater returns, often at reduced risk. Even with early stage investments, small companies got much bigger capital injections than they needed, thereby upping the ante for success and sometimes leading to premature expansion and unnecessary exposure to risk.
In effect, two opposing forces have come into play, reducing the relevance of investment capital. On the one hand, the maturation of the Internet (and our understanding of it) has given entrepreneurs a number of ways of creating software businesses that reach wide audiences with very little up-front cost. On the other hand, VC appetite for risk has dampened and the amount of money being managed has increased, thereby making it less attractive for companies needing small cash amounts.
What this all means is that a wider range of entrepreneurs can be successful than ever before without outside investment. Game-changers like Intel or the biotech or clean energy leaders of the future will continue to require investor capital, but a mobile game developer or popular blogger can create value using commodity resources. This lower barrier to entry means more companies with reduced scope and narrower relevance will thrive, and as many more of them are created, behemoth entities will co-exist with (and do well to foster) eco-systems of companies. Amazon and eBay have their retailers, Apple and Google their app developers, and YouTube its content creators. Like cells in an organ, some of the individual members will thrive and others will die off but the eco-system as a whole will grow as long as it’s healthy overall.
These ecosystems will make their impact collectively. Instead of a single company employing 100,000, we may see several thousand related companies employing 10 to 100 people each. Apple, Google, and the other platform providers will vie for the devotion of innovators; to win, they will have to keep growing the value of their platforms and the services they provide.
For investors, these developments are already changing the way they need to do business. The role of so-called super-angels in the funding process is increasing in importance, with startups looking for smaller injections that allow more retention of ownership. Founders will have more sway as investment increasingly becomes optional and as more choices become available to them. VCs may choose to align with talented “serial entrepreneurs” with track records for writing addictive mobile games or popular web properties. Instead of simply providing management advice, recruiting assistance, and high-level introductions, they may take on the functions of an incubator, providing shared infrastructure and services for app developers.
For the idealist-entrepreneur who wants to make a difference, there are more ways than ever to do that—with or without capital. And as the most ambitious among the visionaries discover whole new eco-systems to create, their impact will be substantiated by the hundreds of people who are empowered by that vision to build something great that they wouldn’t have been able to before.
We turn again to Venice 2010, which may tell us something about this kind of future. Japan’s Pavilion featured a meditation on Tokyo, that great cauldron of creative energy and re-invention. The Japanese capital was likened to a living, breathing organism, where successive waves of development have seen individual buildings razed and replaced with great frequency, yet within an urban framework that harmonizes the entire metropolis. The architecture is temporary, even disposable, but the city itself, in its spirit and energy, lives on in relentless permanence. Its strength is in its diversity.
Likewise, we can look forward to an economy built on a network of companies that as a collective make us more resilient against the devastating repercussions of inevitable economic cycles than when we depend on those considered “too big to fail.” The companies may stay small, and individual companies will come and go, but that timeless American spirit of innovation, self-determination–and making dents in the universe–will find its sure way forward.
[Image: Flickr user Scottish Government]