I suppose we are three years into the boom of this cycle in tech, and 2011 has finally given us a few IPOs — Groupon, Zynga, Pandora, Angie's List, and LinkedIn. Others like Facebook, Twitter, and Yelp reportedly intend to go public in 2012. Investment continues to pour into startups, although there are signs that early stage investments are dropping slightly in favor of Series B and Series C investments into companies that are scaling to grow and eventually reach a liquidity event of their own. Some startups like Gowalla have hit the deadpool. Others like Hunch and ReadWriteWeb have modestly exited. And a wide array of others are fighting for their place in the world.
If you've read this blog for awhile or seen some of my posts on Mashable and other publications, you know that I've been critical of a vast majority of new products and services that have been invented in this cycle. But it isn't because I don't like the companies or their founders. Quite the contrary — I've interacted with many and like just about all of them personally.
The problem is that they all face the same underlying economic problem — for many, customer acquisition costs are significant but there is little/no lockin. At the end of the day, all of these businesses will have to face that core economic reality. If it looks like there is not a chance these business can overcome the customer acquisition problem and become economically viable, I get skeptical.
Interestingly, almost all the local/SMB plays have heinous customer acquisition metrics as reported by their S-1s and other financial statements. It's why Wall Street has not been kind to Groupon, Angie's List, et al.
As it happens in every boom cycle, a vast majority of us get intoxicated by the possibilities for both startups and newly-minted, publicly traded companies. But those very possibilities dominate our thinking — and we underestimate the risks and/or the costs associated with building audiences of loyal customers who won't migrate. From a purely economic standpoint, the migration/churn problem is just as bad as the acquisition problem.
I had an exchange with Robert Scoble yesterday on Google+ where we briefly debated this very issue. Robert is one of the better pundits out there, but in my view he's a tad optimistic because he thinks of the possibilities far more than the risks, alternatives, and customer acquisition costs.
I am perhaps the opposite — I think in economic terms and am influenced by the last tech bubble. People said the same thing about Priceline, vertical web sites like Pets.com and Living.com, Webvan, eBay, Amazon, etc. The economically viable ones survived. Those that were not died. Optimists and pessimists were both correct, as I'm sure they are now.
When projecting ahead and thinking of the survivors of this cycle, ask yourselves which properties are truly economically viable in the long-term. That's the only filter that matters.
It's why I continue to be bullish on Facebook — they're mainstream and habitual. Can they screw up? Of course. But the collective community of friends on Facebook makes it a part of our lives that is more or less impossible for us to leave. Path can challenge Facebook as it is more about "close friends", but they still have an uphill battle to climb to gain mass mainstream adoption.
In the 2nd part of this blog post, which I'll release in a few days, I'll talk about other winners I foresee… and the thing that I think all will have in common when it's all over.
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