Is It 1999 All Over Again?

Yes – and No.

In a lot of ways, it does feel like 1999 all over again. Entrepreneurs are out raising money, venture capital is flowing, and more deals are getting done that have gotten done in a long time. Banks and attorneys report anecdotally that they are signing more lockup agreements than they have in a while. And just yesterday I read a plan that basically said “our competitor raised $25M so we think we can too.”

The investing environment is frothy and prices are expensive for Series B deals, especially those that are consumer facing. A lot of the frothiness in the late 90’s was generated by the venture community itself – deal after deal got done. And certainly there is once again a lot of money available.

There are four key differences from eight years ago, however. They are:

1) Widespread broadband
2) A much lower barrier to starting a company
3) Resurgence of the angel community
4) Immediate consumer adoption (or not)

Widespread Broadband

Broadband adoption has sky-rocketed. While the market crashed back in 2000 and 2001, broadband – and the Internet – took off. This enabled a huge set of applications to be delivered that involve streaming media, rich content.

It also means, simply put, that people spend a whole lot more time on the Internet than they did back in 1999.

Much Lower Barrier to Starting a Company

Just as importantly however is that the barrier to starting a company today is much lower than in the 1990’s. Just about everything you need is either cheap or free through hosted applications or open source.

Joomla and Drupal for community sites

Ruby on Rails and CakePHP for quick implementation
Gmail and Google hosted mail for domain specific email

Mantis for bug tracking

Wiki’s for collaboration

Google Apps for business applications
Amazon S3 for processor cycles and storage
Dedicated hosting available via lease

Google Checkout and Paypal for online payments

Off-shore development resources

Talk to web companies started even in 2004 and most of them still run a huge set of their own servers. Servers they have to maintain and that have to go on the balance sheet as a capital expense. Talk to web companies started in the last 18 months and most if not all of them lease dedicated servers or use Amazon S3.

People talk about the huge impact of open source and hosted services on business. But the even bigger impact is on the entrepreneurial community and the ease with which one can start a new company.

Immediate Adoption (or Not)

Distribution is now immediate through the Internet, and so too as a result, is adoption or lack thereof. As Paul Kedrosky pointed out, compare the speed of adoption of the Sony Walkman to that of the iPod. Adoption moves an order of magnitude faster now than 10 years ago – whether for consumer electronics or online offerings.

So you can build out an idea and test whether consumers – in the form of actual consumers or business customers – are going to adopt your offering a lot faster than you could in the last decade. Google Checkout and Paypal mean that just about anyone can take a payment online.

Angel Community Resurgence

Angels and small funds are back and a key part of the deal-flow process. This has always been the case, but in the last few years, angels and a select group of smaller, very early stage funds such as First Round Capital, O’Reilly Ventures, Omidyar, and the Founders Fund have emerged.
This provides a rich ecosystem for entrepreneurs by providing them with capital, hands-on expertise, and venture relationships. And it's great for venture capitalists, inundated with deal-flow due to the decreased barriers to starting companies.

Is It 1999 All Over Again?

Yes – and No. The key difference is that the user adoption experiment – that is, the process to determine whether a business customer or a consumer is going to use a new product – can be run faster and more capital-efficiently than eight or even three years ago.

It does not cost less to scale a company. But running the initial experiment, and trying out a number of ideas before settling on a specific plan is an order of magnitude faster and less capital intensive than it used to be. That drastically reduced opportunity cost is great news for both entrepreneurs and venture investors.