SPECIAL REPORT TECH STARTUPS January 18th 2014 A Cambrian moment 20140118_SRStartups.indd 1 07/01/2014 12:38 SPECIAL REPORT TECH STARTUPS A Cambrian moment Cheap and ubiquitous building blocks for digital products and services have caused an explosion in startups. Ludwig Siegele weighs its signicance ABOUT 540M YEARS ago something amazing happened on planet Earth: life forms began to multiply, leading to what is known as the Cam• brian explosion. Until then sponges and other simple creatures had the planet largely to themselves, but within a few million years the animal kingdom became much more varied. This special report will argue that something similar is now hap• pening in the virtual realm: an entrepreneurial explosion. Digital start• ups are bubbling up in an astonishing variety of services and products, penetrating every nook and cranny of the economy. They are reshaping entire industries and even changing the very notion of the rm. Software is eating the world, says Marc Andreessen, a Silicon Valley venture capitalist. This digital feeding frenzy has given rise to a global move• ment. Most big cities, from Berlin CONTENTS and London to Singapore and Amman, now have a sizeable 3 Creating a business startup colony (ecosystem). Be• Testing, testing tween them they are home to 4 Venture capitalists hundreds of startup schools (ac• From leafy to lofty celerators) and thousands of co• working spaces where ca ein• 5 Accelerators ated folk in their 20s and 30s toil Getting up to speed hunched over their laptops. All 6 Building companies these ecosystems are highly inter• Rocket machine connected, which explains why internet entrepreneurs are a glo• 8 Business communities bal crowd. Like medieval jour• All together now neymen, they travel from city to 10 The dark side A CKNOWLEDGMENTS city, laptop not hammer in hand. A few of them spend a semester with Founder’s blues This report beneted from the help, Unreasonable at Sea, an accelerator on a boat which cruises the world insights and scholarship of many while its passengers code. Anyone who writes code can become an en• 11 Hardware startups people. Special thanks are due to Jon Bradford, Daniel Isenberg, Hussein trepreneuranywhere in the world, says Simon Levene, a venture capi• Hacking Shenzhen Kanji, Simon Levene, Reshma Sohoni, talist in London. 13 Platforms Irving Wladawsky•Berger and the Here we go again, you may think: yet another dotcom bubble that is Ewing Marion Kau man Foundation. Something to stand on As well as those mentioned in the bound to pop. Indeed, the number of pure software startups may have text, the author would like to thank peaked already. And many new o erings are simply iterations on exist• Anil Aggarwal, Neil Allison, Lea Bajc, ing ones. Nobody really needs yet another photo•sharing app, just as no• Alice Bentinck, Konrad Bergström, David Berlind, Jackson Bond, James body needed another site for pet paraphernalia in the rst internet boom Chan, Matt Cli ord, Sarah Cochrane, in the late 1990s. The danger is that once again too much money is being Jeremy Conrad, Simon Devonshire, pumped into startups, warns Mr Andreessen, who as co•founder of Net• Janice Fraser, Fadi Ghandour, Stefan Glänzer, Florian Heinemann, Björn scape saw the bubble from close by: When things popped last time it Lasse Herrmann, David Hornik, took ten years to reset the psychology. And even without another inter• Darian Ibrahim, Josh Jarrett, Sean net bust, more than 90% of startups will crash and burn. Kane, Saul Klein, Ted Kurie, Loic Le But this time is also di erent, in an important way. Today’s entrepre• Follow our coverage of startups at Meur, David Li, Je Lynn, Christophe Economist.com/business•nance/ Maire, Mariana Mazzucato, Ann neurial boom is based on more solid foundations than the 1990s internet startups Mettler, Lesa Mitchell, Allen Morgan, bubble, which makes it more likely to continue for the foreseeable future. Michael Moritz, Max Nathan, Andrew A list of sources is at Neely, Andrus Oks, Tim Rea, Slava One explanation for the Cambrian explosion of 540m years ago is that at Economist.com/specialreports Rubin, Dane Stangler, Garry Tan, that time the basic building blocks of life had just been perfected, allow• Gwendolyn Tan, Marc Ventresca, ing more complex organisms to be assembled more rapidly. Similarly, the An audio interview with Christian Weiss, Albert Wenger, the author is at Henrik Werdelin, Ray Wu, Zafer basic building blocks for digital services and productsthe technologies Economist.com/audiovideo/ Younis and Niklas Zennström. of startup production, in the words of Josh Lerner of Harvard Business 1 specialreports The Economist January 18th 2014 1 SPECIAL REPORT TECH STARTUPS 2 Schoolhave become so evolved, cheap and ubiquitous that they can be easily combined and recombined. Some of these building blocks are snippets of code that can be copied free from the internet, along with easy•to•learn pro• gramming frameworks (such as Ruby on Rails). Others are ser• vices for nding developers (eLance, oDesk), sharing code (GitHub) and testing usability (UserTesting.com). Yet others are application programming interfaces (APIs), digital plugs that are multiplying rapidly (see chart 1). They allow one service to use another, for instance voice calls (Twilio), maps (Google) and payments (PayPal). The most important are platformsser• vices that can host startups’ o erings (Amazon’s cloud comput• ing), distribute them (Apple’s App Store) and market them (Face• book, Twitter). And then there is the internet, the mother of all platforms, which is now fast, universal and wireless. Startups are best thought of as experiments on top of such platforms, testing what can be automated in business and other walks of life. Some will work out, many will not. Hal Varian, Google’s chief economist, calls this combinatorial innovation. In a way, these startups are doing what humans have always done: apply known techniques to new problems. The late Claude Lévi•Strauss, a French anthropologist, described the pro• cess as bricolage (tinkering). Technology has fuelled the entrepreneurial explosion in other ways, too. Many consumers have got used to trying inno• vative services from rms with strange names (which, unavoid• opportunities in becoming an entrepreneur. That signals a cul• ably, will abound in this special report). And thanks to the web, tural shift. Young people see how entrepreneurship is doing information about how to do a startup has become more acces• great things in other places and want to give it a try, notes Jona• sible and more uniform. Global standards are emerging for all than Ortmans of the Ewing Marion Kau man Foundation, things startup, from programming tools to term sheets for invest• which organises an annual Global Entrepreneurship Week. ments, dress code and vocabulary, making it easy for entrepre• Lastly, startups are a big part of a new movement back to neurs and developers to move around the world. the city. Young people increasingly turn away from suburbia and move to hip urban districts, which become breeding grounds for Invent yourself a job new rms. Even Silicon Valley’s centre of gravity is no longer Economic and social shifts have provided added momen• along Highway 101but in San Francisco south of Market Street. tum for startups. The prolonged economic crisis that began in Describing what sorts of businesses these startups engage 2008 has caused many millennialspeople born since the early in would at best provide a snapshot of a fast•moving target. In es• 1980sto abandon hope of nding a conventional job, so it sence, software (which is at the heart of these startups) is eating makes sense for them to strike out on their own or join a startup. away at the structures established in the analogue age. LinkedIn, A lot of millennials are not particularly keen on getting a a social network, for instance, has fundamentally changed the real job anyway. According to a recent survey of 12,000 people recruitment business. Airbnb, a website on which private own• aged between 18 and 30 in 27 countries, more than two•thirds see ers o er rooms and ats for short•term rent, is disrupting the ho• tel industry. And Uber, a service that connects would•be passen• gers with drivers, is doing the same for the taxi business. So instead of outlining what these startups do, this special Awesome 1 report will explain how they operate, how they are nurtured in Web services accelerators and other such organisations, how they are • Apple store apps, m nanced and how they collaborate with others. It is a story of APIs*, ’000 Amazon active sites, m technological change creating a set of new institutions which 12 3.0 governments around the world are increasingly supporting. Startups run on hype; things are always awesome and 10 2.5 people super•excited. But this world has its dark side as well. Failure can be devastating. Being an entrepreneur often means 8 2.0 having no private life, getting little sleep and living on noodles, which may be one reason why few women are interested. More ominously, startups may destroy more jobs than they create, at 6 1.5 least in the shorter term. Yet this report will argue that the world of startups today of• 4 1.0 fers a preview of how large swathes of the economy will be or• ganised tomorrow. The prevailing model will be platforms with 2 0.5 small, innovative rms operating on top of them. This pattern is already emerging in such sectors as banking, telecommunica• 0 0 tions, electricity and even government. As Archimedes, the lead• 2008 09 10 11 12 13 ing scientist of classical antiquity, once said: Give me a place to Sources: Apple; Netcraft; Programmable web *Application programming interfaces stand on, and I will move the Earth.