In America, Silicon Valley is supposed to be a place where a couple of guys in a garage or a dorm room can start companies that change the world. It happened with Apple and Microsoft in the 70s, Amazon, Yahoo, and Google in the 1990s, and Facebook in the 2000s.
However, the 2010s seem to be suffering from a startup drought. Sure, yes, different people are still establishing startups. But, if you really look at it, the last major tech startup success, Facebook, is 13 years old. Every entrepreneur hopes to start the next big thing, but sometimes the trial and success don’t go as planned.
If the Internet could speak with one voice, it would probably groan “oh, not again!” That’s because every raving success story about Internet startups is tempered by dozens more that crashed and burned in a sea of wasted money, bad ideas, or unfulfilled hype. So what’s going on? In a recent visit to Betapitch Cairo, a global startup competition initiated by Betahaus, I posed that question to several technology executives and startup creators while having conversations on different subjects.
They told me that today’s technology giants have become a lot more savvy about anticipating and seize threats to their dominance. They’ve done this by aggressively expanding into new markets and by acquiring potential rivals when they’re still relatively small (read: Facebook has acquired WhatsApp, Instagram, Oculus, and God knows what’s next.) And, some others say, they’ve gotten better at controlling and locking down key parts of the internet’s infrastructure, closing off paths that early internet companies used to reach a mass market. Let’s get more into that.
The tech OG’s won’t stop acquiring other companies
What many don’t know is that Mark Zuckerburg’s strategy to shift his focus on mobile apps, and going on a shopping spree by buying standalone companies, was originally based on a marketing model first acclaimed by Google. In 2006, Google paid $1.65 billion for YouTube, a site that has grown into the number one internet video streaming destination. Most important, Google bought a little-known mobile software company called Android in 2005, laying the foundation for Google’s eventual dominance of smartphone operating systems.
These acquisitions proved to be hugely significant. One ranking shows WhatsApp and YouTube as the internet’s top social networks after Facebook. Instagram is next on the list if you ignore Chinese sites. If these companies had remained independent, they easily could have emerged as major competitors to Google and Facebook. Instead, they became one more piece of the Google and Facebook empires.
The competition doesn’t go easy on every tech company that remains independent
Let’s take in this section one of the most popular social apps into consideration: Snapchat. Snapchat CEO Evan Spiegel, for example, turned down a $3 billion acquisition offer from Mark Zuckerberg in 2013.
Facebook has hit back hard and responded by building its own version of many Snapchat features. Facebook-owned Instagram introduced its own version of the Snapchat’s popular stories feature last year, and within six months Instagram stories had more daily users than Snapchat itself. You’re probably one of these people who now (or always have) preferred using Instagram over Snapchat like me.
Instagram has also introduced many versions of Snapchat filters, which allow people to take whimsical rabbit-ear and dog-ear selfies. Worries about competition from Instagram has put downward pressure on Snapchat’s stock.
Simply put, you don’t mess with a lion and not expect it to bite you back viciously.
Modern technology startups need enormous funding for them to stay alive
Classic internet startups like Yahoo, eBay, Google, and Facebook were able to launch with modest amounts of money and reach profitability within a few years. By the time Zuckerberg founded Facebook in 2004, it didn’t cost very much to run a website, even one with millions of users. So Zuckerberg was able to reach profitability quickly, and as Facebook continued to grow, the site became massively profitable, giving the company plenty of money to spend on acquisitions or new initiatives.
But recent years have been different.
As investors have realized how profitable dominant technology companies can become, they’ve been willing to pour more and more resources into ensuring that their startups are the ones that dominate their market. And that, ironically, has made it more difficult for anyone to reach profitability.
That’s the situation in the ride-sharing market, where companies like Uber and Careem are competing ferociously to prove themselves better than anyone else. At the same time, other small startups launched on Android and iOS, like Swvl and PQ, have absolutely no place in the game. Most users in Cairo only have Uber and Careem installed on their mobile phones because they have proven themselves in the market so greatly to the point that other startups fail to expand and will most likely cease to exist.
So while the technical costs of building an online service are cheaper than ever, it has become common for companies to spend thousands and thousands of cash on advertising to get their app or service in front of potential users.
In conclusion, as a result, an industry that used to be famous for its churn and potential is starting to look like a conventional monopoly controlled by a handful of big companies whose throne on top of the startup industry looks increasingly secure. That’s how the market is right now.
Disclosure: My desire to establish my own startup after graduation is still enticing, though.