Industry Downturn?

Yesterday, I talked about how I thought the acquisition of tech companies by Google, Microsoft and Yahoo! could be good for the end user (so long as competition remains strong). My thoughts are now turning to whether it's healthy for the industry as a whole and, especially, for innovation.

Having survived the dotcom bubble and subsequent crash, I've been considering how our current climate compares to the late '90s. Start-ups are two-a-penny, and huge amounts of venture capital are flowing around Silicon Valley and beyond. Some of these ventures, such as Joost (rasied $45m) appear to have a strong business model and revenue stream, and I think they'll succeed. Others, such as Meebo (just raised $9m to go with their $3.5m first round of funding) are entering a crowded market, with less chance of success. And there are many like them. Funding of Web 2.0 startups last year approached $1bn. I haven't heard of half of them.

The obvious difference between the dotcom boom and bust of the late '90s is that, back then, companies grew as quickly as they could - and were invested in at equal speed - in the hope of a bumper IPO. This time round, at least so far, there don't seem to be many IPOs, and perhaps the main hope or aim is to be bought out by one of the major players. I can easily imagine Meebo being bought by, say, Amazon, or maybe by eBay to complement their Skype acquisition. Or maybe not. But these start-ups are bound to run out of greater fools some time.

The big question is: what happens next? I'm no financial expert (obviously!), but I would've thought the appetite for funding start-ups would gradually reduce as the chance of a buy-out gradually decreases. The value of the big players shouldn't be affected as their business models don't rely on funding. If the volatile stock market remains unaffected, the "markets" can't crash and hopefully the tech market can remain buoyant. The only people that lose money are the VCs.

I'm probably wrong about all this and would welcome being corrected by someone more knowledgeable about how these things work.

But an interesting question remains; does the changing climate damage innovation? Michael Arrington - founder of TechCrunch and therefore highly influential and well informed - has just published this breathless attack on the industry. This is a surprising and important article, and it's well worth reading the comments which follow too.

Now, I'm not based in Silicon Valley, but I don't think innovation will starve just because there is money out there. Maybe the atmosphere does suck - and certainly Arrington's crying CEO story is a little alarming - but so long as there are people at the grassroots playing with and improving technology it really doesn't matter whether the market is up or down. All you need is a computer and an idea - everything and everyone else is on the web. And if we see less look-ma-I-built-this-website-in-ten-minutes-using-Flex start-ups, that can't be a bad thing.

There is one more interesting question (sorry!). If a geek has a truly great idea, and manages to get it into the public domain during a financial recession, won't he or she need funding to build the infrastructure around it, to make it grow and fuel adoption? Maybe. I expect if the idea is really any good, then the big boys will be sniffing round pretty quickly. Which in turn would interest the VCs again. Maybe this is just one big cycle?

What do you think?