Business As Usual In The New Silicon Valley

Now here is one spectacular tale. A company, with little PR or marketing, grows in just a handful of years to connect half a billion people around the world through a simple messaging app. The company gets acquired for a hefty sum; in this case, the largest sum ever in the history of venture-backed startup acquisitions. Billionaires and millionaires are created almost out of thin air.

And yet, the story is so banal.

There were, of course, interesting threads in this particular version of the tale. We have a thread about immigration and secret police forces behind the Iron Curtain. We have a rags-to-riches tale of a founder moving from food stamps to the uppermost strata of wealth. Andwe have a story about rejection and later finding the ultimate redemption. But beneath these human-interest stories lies a far more simple message: the Silicon Valley of the past, which developed the awesome technology we use everyday, is simply dead. And it isn’t coming back.

My friends in Palo Alto and Mountain View have often groused to me about all those social media companies up in San Francisco. I can still hear the echoes in my head of the “idiots” who “waste their time” building social networking apps, instead of working on deeply technical products in areas like in-memory databases, advanced wireless technologies, or genetic analytical tools. There was, of course, always an air of intellectual superiority in these discussions, which is now deeply ironic, since those same social networking companies are now getting acquired for billions, while my friends are still grinding at their products.

Venture capitalists have long ago discovered that social media is where the money is. Facebook remains the largest technology IPO of all time, and WhatsApp is the largest venture-backed acquisition of all time. And they are hardly exceptional. In the last few years, we have had Twitter, Tumblr, Instagram, and Viber, with more potentially on the way (Snapchat, Whisper, maybe even Secret). WhatsApp’s acquisition is simply business as usual in today’s Silicon Valley.

The attraction of these kinds of startups is not just their enormous exits though, but also their risk profile. Communications apps are not particularly challenging products to manage, given that their features haven’t changed all that much in the last two decades. They don’t require a lot of recruiting, since engineers enjoy scaling advantage given that these products have such limited features. The messaging category is evergreen, because there is always going to be a novel way to communicate or a new device that needs its core communications app. And these products have definitional virality that makes user growth practically free.

For VCs, these companies are like shots of cocaine. And we need our next hit.

In all honesty, how can a founder of any “hard technology” startup look a VC in the eye and talk about the benefits of working on a difficult challenge when the money can be made so easily somewhere else? I know founders trying to solve cancer, improve medical records, develop next-generation databases, and invent new 3D-printing tools who have had an enormously difficult time finding backers for their startups. Yes, there are VCs and others who will invest out of interest, but they are few and far between, particularly in later funding rounds where financial performance is prime.

Historically, we are walking in new territory. Just take a look at the earliest investments of prominent VC firms. Kleiner Perkins’ earliest investments included Genentech (which pioneered recombinant DNA technology) and Tandem (which developed fault-tolerant computers for finance). Sequoia Capital’s included Apple (which invented the personal computer), Cisco (which developed network routers), and Atari (which popularized video games). All of these were smash hits, and helped define entire product categories.

One of the problems here is that the cost of building a great company has increased – approaching an average of $200 million for the typical $1 billion valuation business. Why embark on a project with prodigious levels of technical risk and work and then end up making fewer returns?

In this way, I am distinctly reminded of Hollywood, where the creativity of the big studios has taken a back seat to remakes of popular franchises. Have you seen the top 20 highest-grossing films of all time? Sixteen of them are sequels or part of multiple movie franchises, almost all of them from the last decade. Hollywood has tended to become more conservative with blockbusters due to the ever-increasing costs of bringing a feature film to market. Sound familiar?

But there are other lessons to glean from WhatsApp’s acquisition than just how quickly companies can make billions in the communications space. For all the talk of design in Silicon Valley, it is interesting how little WhatsApp paid attention to such flourishes.

Its logo is boring, its name uninteresting, and its basic chat theme quite unappealing. In some ways, WhatsApp is more typical of the Silicon Valley of the past than the current incarnation that is obsessed with pretty pixels. Even more, the WhatsApp team appears to be dominated by engineers who actively shunned the limelight and focused on pure utility. That focus is perhaps why they had an 11-digit offer in the end.

While the classic Silicon Valley may have died, it doesn’t mean that innovation is going to just disappear. On the contrary, I think that Silicon Valley’s addiction to these sorts of companies offers the best hope for other regional innovation hubs like Austin or Boulder to thrive. There are wide markets out there that are underserved due to the way that the Valley conducts its business, and any one of these markets could form the basis for a strong startup ecosystem.

For Silicon Valley though, we have to take a moment and pause at this achievement. Even in a world of clones, WhatsApp was far and ahead of the pack. The team has built something truly remarkable, with a product roadmap that will be interesting to watch over the coming years. Now let me open XCode and get going on that email app.