When will the startup bubble burst?

In one of the SXSW presentations I sat in the presenter asked for a show of hands from those who were there from a corporation. About a third of the hands in the room went up. When she asked who was there from agencies, another third of the hands went up. “How about start-ups,” she asked? The remaining third put their hands up.

Now, there were around 300,000 people at SXSW so that’s roughly 100,000 start-ups present.

A venture capitalist (VC) I met last year told me about how the economics have changed around tech start-ups in the past few years. Whereas Series A funding used to be in the region of $5m and take three-five years to prove a commercial return, today they can do that with around $1.5m and 18 months – a much shorter and cheaper cycle.

What does that mean? It means roughly three times as many funded start-ups.

So what’s the anatomy of a start-up, I thought to myself. Maybe I could get some of that?

The more I dug the more alarmed I became.

Surely they can’t all be like those entitled-not-so-bright 20-somethings portrayed in the reality show Start-Ups: Silicon Valley from Mark Zuckerberg’s sister, Randi? Surely they are not all the parody portrayed by Start-Up Guy?

http://www.youtube.com/watch?v=LMmdl4VltD4

Oh yes they are. Be afraid, people. Be very afraid. According to a few VCs I’ve met the failure rate of a tech start-up is about 95% (this compares to small businesses at about 20%). So what are these people doing?

The prognosis from a few clients I’d spoken to at SXSW about the start-ups they’d met was pretty scary. As one remarked their “business idea” was a feature buried five layers deep in Tumblr, because well, nobody uses it. Awesome.

Another I heard about in New York was hilarious. This group had got Series A funding of $1.5m for their visual captcha technology (an alternative to those annoying type what you see security internet logins). On launching their alpha version it was hacked – and their business idea killed inside of 20 minutes.

Months of work – dead in 20 minutes. What’s even funnier is they then instantly got on the whiteboard of the company’s boardroom they were camping out in to come up with another business idea quick-smart. I’ve since learnt this is standard practice and there’s even a name for it. It’s called “pivoting” and is seen as a positive thing.

Have we all gone mad?

Is this the 5 per cent of potential winners who are betting big with someone else’s money on the chance they might make it big like Mark Zuckerberg? Or do they even care if it ever becomes a business if they can flip it for a quick million first? Is there really a huge cohort of 20-somethings out there pursuing their start-ups with their “Angel” as a means to avoid the “workforce” they don’t believe in anymore? Have they found the alternative to working for the man?

Maybe I’m just an old fart. I don’t get it. I can’t multi-task and I can’t write algorithms. But I do think it’s a bubble.

Certainly that’s clear though from talking to some friends in Silicon Valley. No question some will make it; most won’t but the funding bubble is self-perpetuating and there’s no shortage of wealthy tech angels with millions looking to fund the next big thing. They’re getting in before the VC’s who are also lining up to fund their part.

Question is, when will it burst?

Andy Bateman is the global CEO of The Leading Edge.

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