Fred Wilson—as in, the New York-based venture capitalist who bet on Etsy, Foursquare, Kickstarter, and Twitter—didn't make an investment last year. Roelof Botha, the prominent Silicon Valley investor who backed Instagram, Square, and YouTube, opted not to lead an A round. Paul Graham—as in, the guy behind the early-stage startup-mentoring program Y Combinator, which helped usher Airbnb, Dropbox, and Reddit into the world—decided that he would accept fewer than 50 companies into his winter 2013 batch of startups, 40% less than the class size the previous summer. Wilson took a stab at explaining his reticence in a blog post, when he wrote, "The wind that has been at our back for seven to eight years in consumer Internet is no longer there. It's tougher sledding and will likely continue so for some time to come."
Tech investors are notorious optimists. It's an occupational prerequisite, given that their success depends on hitting a fund-making home run amid dozens of groundouts. So when they exhibit caution, particularly after a good run and with no catastrophic event (yet) to freak them out, it's worth asking, What's going on here?
The answer is that no one knows anything right now—and the implications are significant for everyone from major players to startups, consumers, and investors. Big technical and financial questions loom: Which app platform will prevail? How well do mobile and social ads really work? Can we differentiate between innovations that are truly captivating and those that are fads? When examining the trends governing the industry, it's hard to escape the sense that uncertainty reigns.
The two titans of computing—Intel and Microsoft—have been supplanted in the post-PC era. The semiconductor company ARM is the "Intel of mobile," because its chips are better designed to deliver power without draining battery. And Apple's iOS and Google's Android operating systems are far more relevant than Windows.
But it's not that simple: We still don't know the full implications of mobile devices replacing desktops, nor can we tell whether Apple or Google will prevail as a clear winner in powering the mobile experience.
The app model has become more perilous with the rise of Android. Developers are forced to pick between it and iOS, or build the same app twice—to say nothing of producing versions optimized for iPads, Google's tablets, Kindles, and maybe even Windows Phone. Suddenly, the promise of apps as a low-cost, high-impact utopia for startups has dimmed—according to comScore, it was Google that published five of the U.S.'s top seven most-used apps for 2012.
With app stores overstuffed, the power has shifted uncomfortably to Apple, Google, and the tech press to create hits based on what they promote. The tech industry believes in the idea of meritocracy, so many are uneasy to see the app world's naked oligarchy. "When you combine the surplus of apps, the scarcity of consumers' attention, and a nonmeritocracy, it's deadly," says Chris Dixon, the longtime angel investor (he was an early Skype backer) who's now a partner at Andreessen Horowitz. "A lot of great apps don't get noticed."
Even when a startup does break through, it can be hard to be clear-eyed about its long-term impact. Many companies are asking users to change their behaviors in deep ways. Sharing-economy apps such as TaskRabbit, Airbnb, and SideCar depend on consumers embracing regular people to perform services once handled by specialists, be they hoteliers or cab drivers. Square wants you to pay for everything by telling the cashier your name rather than swiping and signing.
No doubt many people, myself included, find some of the ideas captivating. But these apps are quite foreign, and their use by a small group of tech-savvy urbanites may not be indicative of wider appeal.
Then there's the fickleness factor. Will the millions of people who flocked to Pinterest and Snapchat stick around? It feels that way now. But three years ago, one would have said that Groupon's deals had ushered in permanent changes to the way we live. As with that poster child for outsize expectations, many of today's innovators rely on external factors for growth. Pinterest, for one, has been heavily fueled by Facebook sharing, and Fab, the design-centric retailer, spends heavily on marketing. Turn off those spigots and does growth shut down, too? Ask Zynga what happened after Facebook decided its users didn't need to see all those FarmVille updates.
Finally, the cloud hanging over every other discussion: How will we make money from all this? "Nobody has a nonobvious new social business model that can scale," says Chi-Hua Chien, a general partner at Kleiner Perkins Caufield & Byers whose social investments include Klout, Path, and Twitter. "It's kind of like in 1996," when early Internet pioneers tried to figure out how to make money.
Chien, like other VCs I asked, believes the biggest social firms will find a way to make big money. But what if they don't? What if mobile and social software turns out to be popular, but only middling in terms of its ability to generate revenue? Not only does this dim the prospects of Pinterest, Snapchat, and Quora, but it also lowers Facebook's outlook and harms the acquisition market for all startups.
While acknowledging these concerns, every VC I spoke with sounded enthusiastic about 2013. One approach they're taking is backing companies like Dropbox that ameliorate the problem consumers face in using incompatible platforms, like having an iPad Mini and a Samsung Galaxy phone. "They solve the inconvenience of uncertainty by making your data available across all your devices," says Dixon.
Another promising market, Dixon says, might be the companies making tools for developers—for example, Andreessen Horowitz's $100 million bet on the source-code repository GitHub. It's an acknowledgment that development is not going to stop in these uncertain times, so the biggest opportunity may be to follow the gold rush mentality: "Let people mine for gold by making mobile games," Dixon says, "and we'll sell them pickaxes."
But there's a deeper reason, beyond blind optimism, that some VCs look fondly on the current uncertainties: It's in times like these that you see the biggest new innovations. As Chien says, "The best time to invest is when everyone else stops."
[Illustration by Jim Stoten]
A version of this article appeared in the April 2013 issue of Fast Company magazine.