New rules for the new Internet bubble

March 17, 2011: 11:01 AM ET

We're now in the second Internet bubble. Here's how to survive it.

By Steve Blank, contributor

We're now in the second Internet bubble. The signals are loud and clear: Seed and late-stage valuations are getting frothy and wacky, and hiring talent in Silicon Valley is the toughest it's been since the dotcom bubble. The rules for making money are different in a bubble than in normal times. What are they, how do they differ and what can startups do to take advantage of them?

To understand where we're going, it's first important to know where we've been:

  • The Golden Age (1970-1995): Build a growing business with a consistently profitable track record (after at least 5 quarters,) and go public when it's time.
  • Dotcom Bubble (1995-2000): "Anything goes" as public markets clamor for ideas, vague promises of future growth and IPOs happen without regard for history or profitability.
  • Lean Startups/Back to Basics (2000-2010): No IPOs, limited VC cash and lack of confidence fuels "lean startup" era with limited M&A activity.
  • The New Bubble: (2011- 2014): Here we go again….

Over the last decade, entrepreneurship has come a long way. In the Lean Startup/Back to Basic era it was understood that a startup is a temporary organization designed to search for a repeatable and scalable business model. The concepts of the Agile + Customer Development entered the lexicon as startups learned how to build for success.

Now the rules for building a company are changing again.

Startup exits in the next three years will include IPOs as well as acquisitions. And, unlike the last bubble, this bubble's first wave of public offerings will be companies showing "real" revenue, profits and customers in massive numbers (think Facebook, Zynga, Twitter, LinkedIn, Groupon, etc.).

But, like with all bubbles, these early IPOs will attract companies with less stellar finances, the quality IPO pipeline will diminish rapidly and the bubble will pop. At the same time, acquisition opportunities will expand as large, existing companies, unable to keep up with the pace of innovation in these emerging Internet markets, will "innovate" by buying startups. Finally, new forms of liquidity will emerge such as private-market stock exchanges for buying and selling illiquid assets (e.g., SecondMarket, SharesPost, etc.).

Today's startups have all the tools needed to take advantage of the exit window, due to their short development cycles and abilities to rapidly adopt customers. These are the rules they should keep in mind:

Order of Battle: Each market has a finite number of acquirers, and a finite number of deal-makers, each looking to fill specific product/market holes. So determining who specifically to target and talk to is not an incalculable problem. For a specific startup this list is probably a few hundred names.

Wide Adoption: Startups that win in the bubble will be those that get wide adoption (using freemium, viral growth, low costs, etc.) and massive distribution (i.e. Facebook, Android/Apple App store). They will focus on getting massive user bases first, and let the revenue follow later.

Visibility: During the Lean Startup era, the advice was to focus on building the company and avoid hype. Now that advice has changed. Like every bubble, this is a game of musical chairs. While you still need irrational focus on customers for your product, you and your company now need to be everywhere and look larger than life. Show and talk at conferences, be on lots of blogs, use social networks and build a brand. PR may be your new best friend in the new bubble, so invest in it.

Lessons Learned

  • We're in a new wave of startup investing – it's the beginning of another bubble
  • Rules for liquidity for startups and investors are different in bubbles
  • Pay attention to what those rules are and how to play by them
  • Unlike the last bubble this one is not about selling "vision" or concepts
  • You have to deliver. That requires building a company using Agile and Customer Development
  • Startups that master speed, tempo and pivot cycle time will win

Steve Blank is the author of "The Four Steps to the Epiphany," which details his customer development process for minimizing risk and optimizing chances for startup success. A retired serial entrepreneur, Steve teaches at Stanford University, U.C. Berkeley's Haas School of Business and Columbia. His book and a longer version of this story can be found at www.steveblank

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