We're in the midst of an "entrepreneurial explosion," according to a Tech Startups report from The Economist. The good news is these businesses are built on solid technological building blocks.
Netscape pioneer turned Silicon Valley investor Marc Andreessen wrote in The Wall Street Journal in August 2011 that "software is eating the world."
Over the next decade, writes Andreessen, more and more industries will be disrupted by software. Why now? Because 60 years into the computer revolution, and 20 years after the advent of the internet, "all of the technology required to transform industries through software finally works and can be widely delivered at a global scale."
Ludwig Siegele, the main author of The Economist's January 2014 Special Report on Tech Startups (PDF), calls it an "entrepreneurial explosion." Digital startups are "bubbling up" in many economic sectors, with a wide array of products and services. "They are reshaping entire industries and even changing the very notion of the firm."
Critics may be waiting for the bubble to burst, but this time it's different from the dot com euphoria of the late '90s. Both Andreessen and The Economist believe the present global startup movement rests on more solid foundations.
A Cambrian moment
The Economist likens this entrepreneurial explosion to the "Cambrian explosion" that took place approximately 540 million years ago. Earth's fauna became much more differentiated, going from simple organisms to more complex animal species in a short span of several million years.
A possible explanation is that "the basic building blocks of life had just been perfected, allowing more complex organisms to be assembled more rapidly."
Likewise, the technological building blocks for digital firms have now become "so evolved, cheap, and ubiquitous that they can be easily combined and recombined."
Those building blocks are many, and the most important of them are "platforms": hosting services (the cloud), distribution services (app stores) and marketing venues (social media). The ultimate platform, they argue, is the Internet, which has become "fast, universal, and wireless."
Startups can be thought of as "experiments on top of such platforms," and they are doing, according to the report, what humans have always done: "apply known techniques to new problems."
Disruption, disruption, disruption
And that, dear reader, may very well reshape our world.
Building on Andreessen's prediction in The Wall Street Journal, The Economist's report states "software (which is at the heart of many of these startups) is eating away (my emphasis) at the structures established in the analogue age."
Predictions are hard, especially about the future, but the Tech Startups report makes a striking one: "the world of startups today offers a preview of how large swathes of the economy will be organized tomorrow." The dominant model will become "platforms with small, innovative firms operating on top of them," a trend already in play in such sectors as banking, telecommunications, and even government.
With the core building blocks—open-source software, cloud computing, and social networks—now well-established and functioning, new startups can easily combine and come up with new services, allowing for "endless permutations."
The shape of IT today, claims the report, is like an inverted pyramid, and a rather flat one at that: "the bottom, where economies of scale rule, is made up of just a few powerful platforms," while "the top, where creativity and agility are at a premium, is becoming ever more fragmented."
And as software continues to merrily munch away, more industries will take on this inverted pyramid shape, according to Philip Evans of Boston Consulting Group. The report states Evans calls these "stacks": industry value chains with large platforms at one end and a diversity of modes of production at the other, "from startups to social enterprises and communities to user-generated content."
The credit card industry has long operated as platforms, whereas other verticals will have to adapt. Deloitte's John Hagel predicts that companies will either have to become a platform, or transform themselves into "agile ecosystems, complete with startups and accelerators."
Case in point: Coca-Cola is launching nine accelerators in places such as Berlin and Istanbul. The Economist writes, per Hagel, the initiatives "will change the understanding of what constitutes a firm."
They predict that in the future big business, and even government, will act as platform managers and curators of ecosystems.
Business schools, says the report, came about in the 19th century to provide skills that weren't being taught elsewhere. Accelerators are playing a similar role in the 21st century digital movement, acting as schools for startups.
Accelerators are also building on a previous dot.com model: the incubator, which give startups a home and support, but didn't always get the "fledglings" to leave the nest.
Paul Graham, a former software engineer who started Y Combinator in 2005, chose a different format for the first accelerator. While participants have to be in Silicon Valley for the program, the firm itself "is not much more than an assembly hall" in the Valley, where they gather for weekly dinners, listen to speakers, and talk with Graham and the firm's partners.
According to the website f6s, there are roughly 2,000 accelerators worldwide. Not surprisingly, the strongest brands are in the United States: Y Combinator is the biggest, followed by Techstars, AngelPad, and 500 Startups. In addition, most accelerators were founded after 2010, making an assessment of their effectiveness a challenge.
Silicon Valley can be called the original (and most successful) entrepreneurial ecosystem. The Economist report states that recently entrepreneurial communities have begun where young people want to live: Berlin, London, Boulder, Colorado, and I would add Tel Aviv. But with its large market and access to venture capital, "America is still the destination of choice for founders the world over."
The term ecosystem to describe economic clusters has been in use for two decades. Daniel Isenberg of Babson College believes that ecosystems consist of "domains": markets, policy, and culture. Others believe they are made up of stakeholders, who provide talent, finance, and infrastructure.
"In some ways," states the report, "ecosystems can be seen as exploded corporations." That is, venture capital firms are the finance department, law firms are legal counsel, universities provide R&D, and so on.
With software eating the world, we may very well see lots of exploded corporations.
Read the The Economist's Tech Startups report (PDF) for actionable information and scads of useful analysis.
Also read on TechRepublic
- Glossary: Startup and Venture Capital terms you should know
- How to choose a great co-founder for your startup
- Speed wins the startups game, according to entrepreneur Howard Tullman
- The dark side of venture capital: Five things startups need to know
- Startups: How to know when it's time to IPO
- How Aaron Levie and his childhood friends built Box into a $2 billion business, without stabbing each other in the back