Startups, Beware “The Next Big Thing”
In 2007, Groupon took in the first million dollars of what would ultimately be $1.4B of venture capital, raised with ambitions of reshaping shopping. For a while, it looked like group buying, social commerce, daily deals, or whatever you call the practice of time-limited sales paired with social pressure was really going to change buying behaviors in a big way. In the space of four years the category exploded:
- Groupon became the fastest startup in history to reach a billion-dollar valuation.
- Founder Andrew Mason appeared on the covers of Forbes and Wired.
- Google offered $6B to buy Groupon even though it had no clear connection to any aspect of the search giant’s business.
- Not to be outdone by Google, Amazon invested heavily in LivingSocial.
- Shockingly, Facebook copied the idea as well.
- A slick business book about Groupon, and the phenomena it generated, was published and blurbed by the likes of Andrew Ross Sorkin and Tony Hsieh.
- Hundreds of VC-backed daily deal sites sprung up focusing on every geography, vertical, and buying gimmick you could imagine. So many startups were founded in this space that multiple daily deal aggregators got VC funding!
- Poorly conceived SuperBowl commercials were aired.
- Groupon went public and at its peak commanded a $16B market cap.
“Social shopping” wasn’t a platform in the way mobile is, but everyone in tech started thinking about how it would transform their market.
The business model just didn’t work very well. Brunch spots broke under the stress of baking beignets at bargain basement prices. Daily deals turned out to be a great ad platform for indoor skydiving facilities and escape rooms, but that’s not the kind of business that changes commerce — It’s the kind that trades for 2X profits.
There was a flash sale on GRPN stock that saw its value drop by 85%. LivingSocial died a lonely death. The clowder of copycats screeched their last.
It wasn’t a total washout.
- Zulilly IPO’d and was quickly acquired by QVC.
- Wish has adapted the model and currently holds an $8.5B valuation.
- Coupang, the Korean alternative to Amazon, commands a $5B valuation, though they thrived after pivoting into a full-stack ecommerce model.
- Even after all the drama, Groupon is still around and has a $2.4B market cap.
Many of these companies were and are successes. They may have fallen short of outrageously high expectations, but the model worked in some specific contexts. It just wasn’t a generally applicable approach and a lot of startups paid the price for chasing a trend that didn’t materialize. The real loss is the years of effort wasted by entrepreneurs blindly chasing after the “next big thing.”
The media’s incentives are different than startups’
Why did Groupon get overhyped? The media has to drive an exciting narrative every day. The problem is, truly disruptive innovations don’t come along often. Interesting but ultimately marginal developments are oversold.
For instance, in 2015, following in the wake of Facebook’s acquisition of Oculus, Time Magazine declared that “Virtual reality was about to change the world.” Three years later, we’re still pawing at glass like morlocks. And when VR does arrive, there’s a good chance it’ll primarily be a video game accessory rather than a general purpose computing platform to rival smartphones.
Personal Robots. Gamification. Wearables. These were all proclaimed as the “Next Big Thing” by major news outlets. Good businesses can be built in any of these areas, but in retrospect, they did not become broadly lucrative trends.
Today, “voice” is touted as a disruptive platform, but at present, it looks more like a new UI layer for Apple and Amazon services than a technology that will launch a hundred startups.
These reporters aren’t purposefully misleading people. They’ll make bad predictions in much the same way VCs will make bad investments. It’s the job of founders to look at these trends critically and to remember that boring ideas may be deadly to reporters, they can be fabulously lucrative to founders.
Startup who chase after these trends often find themselves stumped by “The Platform Paradox.”
For the record, VCs also have a role in this, hyping your startups is part of the gig, but they also pay a heavy financial penalty when their companies go belly up.
The solution? Embrace the use case
The same year Groupon got started, Peter Gassner raised $3M dollars to fund Veeva, a vertically-focused (and very boring) CRM-style SaaS solution for life science companies. Its launch was little noted by the tech press. The product’s ability to streamline communication between pharma companies and clinical research organizations didn’t herald the arrival of any new tech paradigms. Incubators didn’t create special purpose funds to spawn imitators.
However, many life sciences professionals thought it was the best startup in the space since Emil Erlenmeyer got into the flask making business and were willing to pay accordingly. Veeva went public a couple years after Groupon and today it’s worth over $10B. Considering Veeva only raised $7M in total venture capital, it is easily one of the most successful tech IPOs of the last half decade.
Groupon was sold as a paradigm shift in ecommerce that would ripple through the broader economy. Veeva was “just” a well-conceived B2B product for a niche market. It turns out niches hold riches.
Don’t believe the hype
As David Frankel wrote, “By the time there is a special purpose VC fund devoted to a trend, it is probably too late to build a meaningful company in that space.”
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Keep an eye on macro trends, but employ them in the service of a specific use case for a specific kind of customer. Technological fads come and go, but human use cases are durable and can be exceedingly valuable.