New technology tends to come from new ventures—startups. From the Founding Fathers in politics to the Royal Society in science to Fairchild Semiconductor’s “traitorous eight”in business, small groups of people bound together by a sense of mission have changed the world for the better. The easiest explanation for this is negative: it’s hard to develop new things in big organizations, and it’s even harder to do it by yourself. Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk. In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes your company, you should quit now). At the other extreme, a lone genius might create a classic work of art or literature, but he could never create an entire industry. Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can.
Positively defined, a startup is the largest group of people you can convince of a plan to build a different future. A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think. This book is about the questions you must ask and answer to succeed in the business of doing new things: what follows is not a manual or a record of knowledge but an exercise in thinking. Because that is what a startup has to do: question received ideas and rethink business from scratch.
O UR CONTRARIAN QUESTION — What important truth do very few people agree with you on? —is difficult to answer directly. It may be easier to start with a preliminary: what does everybody agree on? “Madness is rare in individuals—but in groups, parties, nations, and ages it is the rule,”Nietzsche wrote (before he went mad). If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.
Consider an elementary proposition: companies exist to make money, not to lose it. This should be obvious to any thinking person. But it wasn’t so obvious to many in the late 1990s, when no loss was too big to be described as an investment in an even bigger, brighter future. The conventional wisdom of the “New Economy”accepted page views as a more authoritative, forward-looking financial metric than something as pedestrian as profit.
Conventional beliefs only ever come to appear arbitrary and wrong in retrospect; whenever one collapses, we call the old belief a bubble . But the distortions caused by bubbles don’t disappear when they pop. The internet craze of the ’90s was the biggest bubble since the crash of 1929, and the lessons learned afterward define and distort almost all thinking about technology today. The first step to thinking clearly is to question what we think we know about the past.
The 1990s have a good image. We tend to remember them as a prosperous, optimistic decade that happened to end with the internet boom and bust. But many of those years were not as cheerful as our nostalgia holds. We’ve long since forgotten the global context for the 18 months of dot-com mania at decade’s end.
The ’90s started with a burst of euphoria when the Berlin Wall came down in November ’89. It was short-lived. By mid-1990, the United States was in recession. Technically the downturn ended in March ’91, but recovery was slow and unemployment continued to rise until July ’92. Manufacturing never fully rebounded. The shift to a service economy was protracted and painful.
1992 through the end of 1994 was a time of general malaise. Images of dead American soldiers in Mogadishu looped on cable news. Anxiety about globalization and U.S. competitiveness intensified as jobs flowed to Mexico. This pessimistic undercurrent drove then-president Bush 41 out of office and won Ross Perot nearly 20% of the popular vote in ’92—the best showing for a third-party candidate since Theodore Roosevelt in 1912. And whatever the cultural fascination with Nirvana, grunge, and heroin reflected, it wasn’t hope or confidence.
Silicon Valley felt sluggish, too. Japan seemed to be winning the semiconductor war. The internet had yet to take off, partly because its commercial use was restricted until late 1992 and partly due to the lack of user-friendly web browsers. It’s telling that when I arrived at Stanford in 1985, economics, not computer science, was the most popular major. To most people on campus, the tech sector seemed idiosyncratic or even provincial.
The internet changed all this. The Mosaic browser was officially released in November 1993, giving regular people a way to get online. Mosaic became Netscape, which released its Navigator browser in late 1994. Navigator’s adoption grew so quickly—from about 20% of the browser market in January 1995 to almost 80% less than 12 months later—that Netscape was able to IPO in August ’95 even though it wasn’t yet profitable. Within five months, Netscape stock had shot up from $28 to $174 per share. Other tech companies were booming, too. Yahoo! went public in April ’96 with an $848 million valuation. Amazon followed suit in May ’97 at $438 million. By spring of ’98, each company’s stock had more than quadrupled. Skeptics questioned earnings and revenue multiples higher than those for any non-internet company. It was easy to conclude that the market had gone crazy.
This conclusion was understandable but misplaced. In December ’96—more than three years before the bubble actually burst—Fed chairman Alan Greenspan warned that “irrational exuberance”might have “unduly escalated asset values.”Tech investors were exuberant, but it’s not clear that they were so irrational. It is too easy to forget that things weren’t going very well in the rest of the world at the time.
The East Asian financial crises hit in July 1997. Crony capitalism and massive foreign debt brought the Thai, Indonesian, and South Korean economies to their knees. The ruble crisis followed in August ’98 when Russia, hamstrung by chronic fiscal deficits, devalued its currency and defaulted on its debt. American investors grew nervous about a nation with 10,000 nukes and no money; the Dow Jones Industrial Average plunged more than 10% in a matter of days.
People were right to worry. The ruble crisis set off a chain reaction that brought down Long-Term Capital Management, a highly leveraged U.S. hedge fund. LTCM managed to lose $4.6 billion in the latter half of 1998, and still had over $100 billion in liabilities when the Fed intervened with a massive bailout and slashed interest rates in order to prevent systemic disaster. Europe wasn’t doing that much better. The euro launched in January 1999 to great skepticism and apathy. It rose to $1.19 on its first day of trading but sank to $0.83 within two years. In mid-2000, G7 central bankers had to prop it up with a multibillion-dollar intervention.
So the backdrop for the short-lived dot-com mania that started in September 1998 was a world in which nothing else seemed to be working. The Old Economy couldn’t handle the challenges of globalization. Something needed to work—and work in a big way—if the future was going to be better at all. By indirect proof, the New Economy of the internet was the only way forward.