The "Startup Cambrian Explosion"
November 20, 2011
In 2011 the overall investments by Angels have for the first time exceeded the total investments by A round venture funds, the "Startup Cambrian Explosion" driven by a combination of hype from Facebook, Twitter and other successful startups combined with the highest unemployment in the 18-35 year old professional in 70 years and glut of Angel money chasing the next big exit has resulted in thousands of new startups being launched nationwide.
With the explosion of cheap cloud based services and API infrastructure of hundreds of Web 2.0 platform companies it now costs less than $100,000 to launch a full beta service on the web or a mobile platform, thus the barriers to a product launch have been cut by 90% from where they were 10 years ago.
Many of these services have managed to get over 1,000,000 users in less than 12 month with NO marketing, relying entirely on their social network and the extended social graph to create a chain reaction of subscription and adoption which in turn drives free but valuable feedback which drives iteration and improvement of the service. The best startups of the past 5 years have emerged successfully scaling this model.
These young companies still need capital and so an ecosystem of angel investors have sprung up in all major cities to take pieces of such companies and bet on their future. All such investors hope to be part of the 3:30:300 explosion which came to symbolize the level of valuations startups can expect if they can deliver the hockey stick growth Venture capitalists are looking for at the Seed, A and B rounds.
The unseen and devastating part of this explosion is the inevitable death of the vast majority of these startups as they try to leap from the seed stage to the A round safety of Venture funding. Like the gazelles trying to cross the Mara river in the Serengeti many will perish but the strongest and fastest will make it to the other bank of the river and continue the journey of life.
In this chasm of A round death is where fast iteration and constant pivoting separates the leaders from the followers. In the words of Steve Jobs "Innovation distinguishes between a leader and a follower" the best startups win by fast innovation and we all know what happens to the followers.
The problem facing all of these survivors is that there is not enough "A round ramps" on the other bank of the river to receive all these new gazelles. They all think they are destined for greatness. Only the top stars will be able to leap over the rest of the herd to safety in the ranks of the few A round investors who still have dry powder to fund new startups.
These survivors are nurtured and supported with A round funding, recruitment and networking and as long as they continue to scale on the hockey stick they can quickly join the ranks of legends like Groupon and EBay which are the two fastest growth companies in history. If they fail to deliver they will not receive the coveted B round and may be even abandoned as less and less capital is available to fund fewer success stories at ever higher valuations.
The "Startup Cambrian Explosion" is everything we experienced in the 2000 bubble but it is 10x bigger in absolute numbers. Natural selection now works much faster and in a much more brutal way. New startups die within months and their teams scatter to help others bet for the fences with new ideas. It is not uncommon to meet twenty something coders who have already been on the teams of five or even ten startups.
I continue to learn new lessons in this new boom as both a founder and angel investor in more than 50 companies, I can say that is it harder than ever to figure out which companies will make it and what is a good investment at any stage of the game. But it is fascinating game which I love.