In Defense of Secrecy

In Defense of Secrecy

“We didn’t do anything wrong, but somehow, we lost.”

— Former Nokia CEO Stephen Elop

Over the last few years, as the lean startup methodology gained traction amongst the Silicon Valley and startup types, an interesting idea that runs contrary to how things have been done in the past took root — because the lean startup methodology encourages founders to quickly iterate and seek feedback, the implied assumption is that keeping secrets are bad. The lean startup methodology’s argument against keeping secrets is one that makes rational sense: the last thing founders should do is burn tons on capital on a product they’re building in a dark when they don’t even know if people are going to use it or not.

Because of the rise of Twitter, Reddit and platforms like those on the Internet, it’s now much easier than ever to solicit feedback, the thinking goes, so why not take advantage of it and seek feedback for whatever you’re working on?

Likewise, in recent years, the Valley and the startup community at wide has rallied against the idea of making others sign a non-disclosure agreement before sharing their ideas. This is a good thing. But I think the Valley at wide has tipped the scales too much on the side of transparency. When the scales are tipped too much on the side of transparency, founders are less likely to try radical experiments — indeed, ones that often make a much more significant impact in the world if and when successful than an idea based on a cycle of rapid but marginal iteration.

Before I go into defending secrecy (or at least, reclaim some semblance of a balance between secrecy and transparency), there are a few bad reasons why founders shouldn’t opt for secrecy over transparency: fear that someone will steal your idea, fear that someone else will beat you to the punch, fear that someone will patent your idea, etc. If you opt for secrecy because of these reasons, you’re putting yourself — and your company — at a disadvantage.

But there’s one scenario where secrecy should triumph transparency: if and when it allows you to run experiments you otherwise would feel uncomfortable, or embarrassed to tell people about. With any experiment, there is — or should have — a 50% chance of failing. Such failures tend to hurt the company’s image and reputation, and give an opening to the press to mock them, investors an excuse to pass on an investment, clients a reason to choose a competitor, etc. Therefore, a company, being fearful of these pitfalls, choose to do what is safe, and not experiment — but unknowingly, initiate their decline into irrelevance and obscurity. This is where secrecy can give founders and companies the room to experiment, without having to be accountable to those who are not immediately associated with the project.

For many, the fear of reputational damage is enough to err on the side of secrecy. Look at Amazon: the Fire smartphone was a very public and humiliating failure, one that Jeff Bezos was interrogated for in the press, on earning calls and on stages in conferences (a little inquisition, if you will). However, the Echo was a smashing success — and Amazon did the entire project in secret, spanning 1,500 employees over years of labor. Look at Apple: there’s a reason why (beyond showmanship) Apple guards its secrets zealously. For every iPhone or iPad that gets released, one can safely assume that there were a thousand failures that never made it out of the lab. Not making those failures public means not having to be accountable for them to irrelevant observers — thus speeding the learning and moving on process up much faster.

There’s another compelling reason why startups should try to keep their experiments secret, even after they release it: it helps them skip past the early-tech adopters crowd and get direct, honest feedback from other people (normal; lives outside of Silicon Valley) who would make up the bulk of their customer base. Furthermore, not knowing the identity of someone behind a product you’re using (this is different from the D2C e-commerce business model where such established relationships are advantageous; this works best for software products) allows you to provide more honest and crucial feedback — given how quick many startups are given birth to and dies, such feedback can often mean the difference between life and death (“talk to your users” is, after all, one of Y Combinator’s motto).

Ultimately, the purpose of a startup is to do more, with much less resources than would be normally available to achieve such results. The easiest way to do so would be to experiment radically (thus allowing the learning to happen non-linearly)— allowing one successful experiment (out of many embarrassing and failed ones) to contribute an outsized impact to the goal and mission of the startup. Startups — and the founders that lead them — can’t fulfill this mandate if they feel compelled to announce what they’re trying all the time, and have to answer for them. Many of these experiments will fail, but that shouldn’t stop founders from experimenting. A company that stops doing radical things — out of fear of being held unnecessarily accountable  — is one that is already on the decline, even if they don’t know it yet. And that is why secrecy is okay.

TL;DR: Secrecy allows you to fail quickly and learn from those failures without having to go through a parade of shame and humiliation. That is necessary to produce outsized returns. 

Ignore Silicon Valley’s advice about ideas and execution

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TL;DR: Screen Shot 2016-07-26 at 1.53.42 AM


Spend enough time in Silicon Valley and you will hear the phrase (or some variation thereof) “ideas are cheap, execution is the only thing that matters” hundreds, if not thousands, of times. It’s one of those phrases easy enough to throw around while still sounding somewhat sophisticated and intelligent. Most of the time, the person giving the advice don’t have much to back it up with, because here’s the truth: great ideas paired with poor execution can almost always succeed, while the inverse simply isn’t true.

So here’s a contrarian idea to keep in mind next time someone tells you that your idea is worth nothing if you can’t execute it perfectly: they’re wrong.

By now, you have probably heard about the hype surrounding Pokémon Go. The idea is a great one: mix light augmented reality with an all-time beloved classic game, and allow people to download the game directly into the smartphones they already have. The execution, however, by all accounts, was an utter disaster. The game is buggy as hell, buttons work erratically and inconsistently, sign-up takes way too much time and effort (and is insecure too), servers are unpredictably unstable and a planned international rollout had to be killed to prevent the servers from melting down. Yet, by any measure, the game had been (and still is) an astounding success.

Less than two weeks into launching the game, Pokémon Go has surpassed Twitter’s daily active users count and is rapidly closing in on Snapchat’s. Daily active user estimates for the game range between 9.55 million (Recode estimate) to 21 million (SurveyMonkey estimate). By now, the game has become a social and cultural phenomenon… despite having botched the execution. As technology analyst Ben Thompson writes, “Pokémon Go is a useful reminder that the actual quality of an app or its associated services often has little or nothing to do with success.”

There are a number of other apps in recent history that crystalizes the thesis of this post: that ideas do matter, and often times, even more so than execution. A recent example that comes to mind is the Down to Lunch app, which has captured the interests of college students all over the country, as well as the attention of Silicon Valley’s venture capitalists. When the app first launched, it only had one button for one functionality: to notify your friends that you’d like to hangout. No mechanism to invite friends, options to choose the hangout’s purpose (lunch, dinner, drinks, homework, etc.), integrate with Facebook’s social graph, etc. Just one button, with one purpose.

As Nikil, one of the co-founders of DTL said in his own words, “it was SUPER ghetto in the beginning.” But that didn’t stop thousands of kids around the country from downloading the app – because the idea was great enough that the subpar execution did not hinder its viral growth.

On the flip side, pairing a mediocre product with the best execution has never, and will never, work in the long term. There’s only so much oxygen you can prop a bad product up with before it flames out on its own. It’s like expecting the best salesmen in the world to sell a mediocre product: sure, there’s no doubt that a few customers can be persuaded to purchase the product, but those sales will eventually stop once the customers realize they’ve been fleeced. A great recent example of this is the struggles of Rocket Internet, a company that specializes in ripping off other startups’ ideas and business models and exporting them to different international markets.

By any standard, the folks at Rocket Internet are execution machines – they’ve incubated and spun out hundreds of copycat startups.* If anyone in the world has refined and perfected the execution playbook, it is the mercenaries at Rocket Internet. Yet, a recent article in the Wall Street Journal reported they’re struggling to flip a profit on many of their ventures. As it turns out, many of these ripped-off ventures have horrendous unit economics – so it doesn’t matter that they have the best team in place to execute… if the product/venture/business model is shitty, then it’s already on the path of failure. It is possible, in the bull market, to disguise these ventures with bad product and great execution as good companies with “organic” demand, but as the tide recedes, the truth can no longer be ignored: the emperor has no clothes.

This entire post is, of course, not to say that execution doesn’t matter at all. There are a few startups with great ideas/products that have gone bust because of a failure in execution. So, execution matters. But not as much as having a great idea – because if what you’re building is fundamentally great, then odds are, people will be willing to overlook most (if not all) of the shortfalls in execution.

*From the WSJ article on Rocket Internet’s troubles and how it rips off other companies’ ideas: “On the top floor of its seven-story headquarters, employees monitor tech startups world-wide for businesses to copy. When an idea is approved, Rocket assigns marketers, engineers and managers. As the business develops, it moves down floor-by-floor, eventually making it to the ground level, where managers start to look for offices outside the building.”

Startups are sinking. Will Facebook drown because of them?

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One thing is no longer arguable among Silicon Valley observers: a time of reckoning has arrived for startups. Many startups, whose growth has been fueled not by profits, but by venture capital dollars, will fail – not because they don’t provide good services or because their platforms don’t fundamentally make our lives better, but because they’re inherently bad businesses, with no hope of ever turning a profit. The unit economics, for many of these unicorn startups, just do not – and will not – work out.

These startups are bound to sink. But the damage might not be contained to the individual companies. If history is any indication, then these companies might just bring Facebook, the de facto social network of the 21st century, down with them.

At the height of the dot-com bubble, Yahoo! was worth $128 billion. Less than five years later, the company’s market cap shrank to less than 10% of that – just a mere $10 billion.

What happened?

As it turns out, the advertisers fueling Yahoo!’s hyper growth were not traditional, decades-old businesses, as you might expect to see in print/TV ads. They were, instead, venture-backed businesses themselves, who decided that Yahoo! was a valuable enough partner and growth engine for them to pour tens, or even hundreds, of millions into the company’s advertising business. When these dot-com venture-backed (although some of them did IPO, they were more or less worthless) businesses imploded, so did Yahoo!’s main revenue stream. And with that, Yahoo! drowned along with those crappy businesses.

While Facebook’s new products and ventures are exciting and all, Facebook still makes all of its money through a familiar revenue stream: advertising. Now, we’re facing a rather steep correction in Silicon Valley – or as Kholsa Ventures’ Keith Rabois puts it, “the price of oxygen has increased”. VCs are getting increasingly selective as to which companies they’re extending their life lines to – and companies without a clear path to profitability are going to be left out to dry. This acute pullback in VC money is something most startups have yet to experience, and with this sudden and abrupt change, many would have to change their growth acquisition strategy. They can no longer spend as much money buying growth on Facebook, which, until now, has been the most brainless (or logically straightforward, depending on how you view it) tactic that a company looking to juice their numbers could execute.

This loops Facebook into the vicious cycle: less VC money equals less money to pursue aggressive growth, which equals less money to dump in the easiest channel to buy growth and user acquisition (read: Facebook), which equals to a slow at first, then rapid decrease in Facebook’s revenue stream from these venture-backed startups. Eventually, this equals to Facebook’s market value plummeting.

This confluence of events: a cooling demand for private technology stocks, the tightening of many startups’ user acquisition costs to ensure that everything they do can be proven out in the customers’ lifetime value, and the unwillingness for VCs to back new businesses (preferring to deploy remaining capital to keep startups they’ve previously backed afloat) will tank Facebook’s stock.

There are two reasonable oppositions to this view: 1) Yahoo! imploded because their user base left them; the same could happen to Facebook if and only if their user base left them too and, 2) Venture-backed startups will be the death of Facebook if and only if it has a huge, unrecoverable exposure to these sort of companies.

Then there’s also the view that Facebook simply wouldn’t sink, for the same reasons Google, another advertising business, wouldn’t. That’s flawed: there are some startups out there who have raised tens of millions but do not have a single person on their teams who have any experience placing ad campaigns on Google. The incredible ease with which someone can place an ad on Facebook makes it leaps and bounds a more attractive platform for newer startups when compared to Google… But this ease may also have increased its exposure to these venture-backed startups. But I digress.

The first opposition view, that Facebook’s user base would not leave them the way Yahoo!’s did, is rather presumptuous, and confuses Facebook’s pervasive reach for its users’ loyalty.

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Facebook (and Facebook-owned Instagram) is still in the lead here, but by no means should it be impossible to envision a future whereby a new startup overtakes Facebook’s reach and popularity (check out Snapchat’s bar in the spring of 2014 vs. Facebook’s, and then compare the companies’ 2015 bars). Unlike other businesses where incumbents are slowly disrupted and overtaken in decades-long processes, social media companies posses the (dis?)advantage of having a growth structure that is both asymmetric and exponential.

More simply: find me someone less than 18 years old today who still finds Facebook an important site to check on a daily basis and I’ll show you someone who hasn’t been exposed to the wave of new social media apps from just the last year alone.

The second opposition point makes, in reality, a whole lot of sense: Facebook will only drown when other startups sink if it has a huge exposure to these startups. And so the question is: does it?

Sheryl Sandberg has avoided that question every time she’s been asked it.

But in the fourth quarter, Facebook’s biggest advertiser was Wish. A startup that has taken in $578.8 million from investors.

So, does it?

How do you build a Tencent for the West?

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Today, in China, Tencent functions as a door to the Internet: it often is the very first app people download when they get a smartphone. It connects them to banking services, games, e-commerce sites, taxis/ride-sharing services, hotel and flight booking services, and much more. This metaphorical door manifests itself in real life in the form of a messaging app with more than 1.2 billion active users (2014 numbers).

For the longest time, VCs and industry observers have wondered why no one has attempted to build the Tencent for the West — a single platform (preferably messaging) that opens up to an enormous, money and attention sucking ecosystem. Facebook comes the closest to this vision, but even they have fallen short of what Tencent has achieved.

Why?

There are a few reasons that come to mind: infrastructure, socioeconomic and radical demographic differences. But the biggest reason of all, for better or worse, has got to do with something that cannot be quantitatively measured or easily changed: culture.

China, governed by the Communist Party, never had the opportunity to build a robust advertising and media infrastructure. Out of fear that these technological mediums could accelerate the propagation of ideas that threatens the Communist Party’s ideology and rule, the government in China has, for the longest time (and they still do) kept innovation in these mediums to the bare minimum — even if the opportunity cost is huge to their citizens.

The priority for the Party is the ability to maintain a stronghold over its citizens, not ensure that they have access to the latest technological innovations. So from day one, if a business decided to go digital, they had to find a revenue stream that was not subsidized by advertising. Realistically, there’s only one other alternative: to get money directly from the consumers, either through e-commerce sales or commissions from sales to third-party partners.

From day one, businesses in China have internalized the mindset that in order for them to survive, much less thrive, they would have to rely on their customers opening up their wallets.

Now, contrast this with how consumer mindset is in the United States. We expect anything and everything online to be completely free of charge, unless we’re making a purchase for a physical good. We expect songs, movies, apps, services and news to be available to us without any charge. If there’s a charge, we find a way around it either by torrenting, circumventing paywalls or gaming the system. Hell, we don’t even want to pay a comparatively small charge in exchange for gaining free information: viewing ads. Previously, the mentality goes something like this: if you don’t want to pay for (nonphysical) goods and services on the Internet, there’s a little trade you can make… you can watch/click on an ad that takes up a small fraction of your time, and you’d get the product without cost. But since the advent of ad-blockers, we don’t even feel the need to view ads. It’s not like the New York Times or the Wall Street Journal is going to shut down tomorrow if I turn my ad-blockers on.

So in the West, because of how robust, complex and intelligently we’ve build our advertising networks to be, we expect to be able to receive (nonphysical) goods and services online without having to open our wallets, ever.

If Tencent were to replicate the way it operates in China and offer their services to customers in the United States tomorrow, there’s a huge chance that they will fail. As it turns out, building a messaging or gaming app alone is simply not enough to create the necessary inroads to build that proverbial door.

Not without a radical change in culture, at the very least.

TL;DR:

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vs. 

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Source: KPCB’s Internet Trends 2015 Report

There’s no other way to put it: Apple failed

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Steve Jobs treated every Apple event like an Apple product: masterful, deliberate, and often times, surprisingly delightful. Every act in a Steve Jobs presentation was calculated to maximize the audience’s attention and joy. No one doubted that the products Jobs was going to unveil in each event was going to be anything less than great… but they were there to see him unveil it, because the audience knows that the act of unveiling the product is as great, if not greater, than the products themselves.

But yesterday’s Apple event, where the company showed off a smaller iPhone and iPad and some new Watch bands, was anything but a Jobs-like presentation. There’s no other way to describe the event: it was boring.

Absent was a visionary product.

Absent was a “one more thing”.

Absent was any excitement in Apple’s product roadmap.

I’d go as far as to argue that the event yesterday was pointless; Apple could have achieved the same objectives with the simple distribution of a press release. While people went to a Jobs presentation to see a show, which came with all the theatricalities one would expect, people who saw yesterday’s event saw nothing more than a typical company presentation unveiling new products to keep Wall Street happy. Until now, Apple had been anything but an ordinary tech company.

At the end of the day, let’s be real: what Apple, and all other soulless tech companies, are releasing are nothing more than slabs made out of glass, metal, plastic, and silicon with screws. It’s all that it is, and it’s all that it will ever be. But deep down, we believe that Apple is giving us more, and we believe so because we see the way they talk about those products in their events. They believe in the magic of their products to change and transform lives. That magic did not appear yesterday.

And then there’s another glaring problem — a problem that goes beneath the surface of just the presentation. The naming problem. Years ago, I argued that Apple’s iPad line was getting increasingly fragmented, and that the company should work to consolidate the line. Well, that hasn’t happened. Instead, when customers visit Apple — either in person or online — they’re confronted with tons of choices, without much information about the differences that separate one product from the other.

As Mike Murphy from Quartz notes, “Apple now sells 55 different Apple Watch bands and watches made out of five different materials, in two sizes. (That’s not to mention the myriad Hermès and Edition versions it also sells.) Apple sells iPads in five sizes and three colors, and has five iPhones in three sizes and four colors. It has laptops with 11, 12, 13 and 15-inch screens, some of which are available in multiple colors.”

Apple fans used (righteously) mock the Samsung crowd for having smartphones and tablets with names like the “Samsung Galaxy Tab 2 10.1” and “Samsung Galaxy S II Epic 4G Touch”. He who fights monsters should see to it…

One of Apple’s core values has always been delighting customers.

Delighting customers starts at the top: understanding the kind of experience customers are supposed to get when the shop at Apple, not overwhelming them with mundane choices, and understanding that sometimes, making the decision for the customers about what they can have is better than leaving the decision up to them.

Delighting customers should also show care: the care that customers should see the products in the best light possible, and caring that the products will get the customers excited.

Apple could have done better.

The Financial Times’ article on Bitcoin is disgracefully misleading

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The Financial Times is usually a terrific source for financial news. It’s straightforward, unbiased and most of the time, accurate. Unfortunately, the paper fails to live up to that standard on occasions, such as when it published an article  by Dan McCrum yesterday titled “Bitcoin’s place in the long history of pyramid schemes“.

Being an alarmist would be okay, if the facts in the story were straight. But they weren’t.

McCrum started the story off by introducing readers to a social financial network, MMM, run by a convicted fraudster and former Russian parliamentarian.

In order to join MMM, new members must purchase bitcoins, and then write online testimonials describing their improbable profits. Other users will then join, thus pumping the new users’ bitcoins back to the service and those who had praised the service. In other words, a classic Ponzi scheme. While such a scheme is indeed happening, there’s no evidence out there with regards to how MMM and the scheme at large is affecting the bitcoin market. It may be to a minimal, or moderate extent.

No one knows.

In 2013, when the Mt. Gox scandal tanked the bitcoin from its rally-high to just 10% of its former value, it recovered somewhat, after a correction, because people realized that the bitcoins affected in the Mt. Gox scandal were not a huge amount at all. The scandal did not jeopardize the currency. It is, after all, always important to remember that a drop involving rumors or scandalous incidents will always have an outsized influence on the market (more on this below).

When McCrum states conclusively that it is this “fad [that] helped to power an explosion in the bitcoin exchange rate, from less than $200 in September to more than $500 per bitcoin last week,” he is deliberately misleading his readers. The rally could’ve been caused by any number of reasons, including the massive number of trades in China by those wishing to get around capital controls, the increased interest in the underlying blockchain technology by big banks and mainstream investors, the recent positive press surrounding the technology.

The fact is, I don’t know and odds are, neither does McCrum.

Satisfied with crediting the recent bitcoin rally to a single, isolated scandal, McCrum focuses next on the history of the Silk Road — a crowd favorite to invoke whenever someone doesn’t understand the technology behind bitcoins. The Silk Road, in many ways, is perfect for the narrative McCrum wants to focus on: it involves crime, and it involves the downfall of bitcoins. “… the seizure of the Silk Road, a popular website for trading bitcoins for drugs and other frowned on goods and services, prompted a crash in the price to almost $100,” McCrum wrote.

True!

But as Coinbase co-founder Fred Ehrsam pointed out, the cryptocurrency doubled within a month.

bitcoin recovery post silk road

There’s a simple reason for this: people realized that the bitcoins involved in the Silk Road only represented around 5% of the nascent network volume and that the scandal would not hurt any potential long-term usability. As I said before, scandalous incidents will always have an outsized influence on the market.

As those who lived through the 2013 bitcoin bull run remember, one of the unique characteristics about bitcoin is its extreme volatility. Here, McCrum invokes a Nobel Prize winning economist to back him up: “It’s value is so volatile it’s not likely to serve as a medium of exchange,” says Eugene Fama. The reality McCrum turns a blind eye to, however, is the fact that bitcoin’s value has stabilized considerably in recent times. Proof: in the last 30 days, bitcoin’s value has shifted by only 3.53%, with an even lower 2.68% fluctuation rate in the last 60 days (source: Bitcoin Volatility Index).

Bitcoin's volatility compared to the volatility of gold, the Brazilian Real, and Chinese Yuan.
Bitcoin’s volatility compared to the volatility of gold, the Brazilian Real, and Chinese Yuan.

Next, McCrum moves away from the scandals and focuses on the underlying technology of bitcoin: the ledger, more commonly referred to as the blockchain. He describes the blockchain as “just a glorified list of liabilities, keeping track of where the bitcoins are located.” Incredibly myopic does not even begin to describe the statement. Without any network value, of course the blockchain is useless. But it is because of the network value that investors are clamoring to get into the technology, pumping billions in total investment into it.

Why BTC is rallying in one chart
These investment firms aren’t dummies… they’re throwing money that has potential in the future!

To complete an article filled with misleading information and cherry picked facts, McCrum compared bitcoins — a technology so complex most can’t even fully comprehend it yet — to… tulips.

tulips wtf btc

The question is, how did this article get published on the Financial Times?

Be honest with yourself: is your startup actually legit?

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Is Silicon Valley currently in a bubble? Is the party over?

Some very smart people are arguing yes.

Others are saying no.

But what’s clear is this: we’re at the peak of this ~10 year cycle, and every boom comes with a bust. The players in the game (mainly, VCs and startups) have already began bracing for this cycle’s bust by raising as much money as possible and storing it away, drastically reducing funding for risky investments, and negotiating punitive term sheets that would save the VCs in case the startup vaporizes, among other protective measures. Investors like Bill Gurley think we’ll see a couple dead unicorns this year. And he’ll be right.

Once a few of those unicorns implode, panic will set in. Investors will pressure startups to start generating revenue instead of focusing on customer acquisition, and will completely cut funding for businesses that don’t have the potential to bring in high profit margins. As First Round Capital’s Rob Hayes pointed out, a game of musical chairs will begin around this time: employees, suddenly unsure of the prospects of the startup they’re working for, scramble to get their old jobs back at Google or Facebook. Except there won’t be a lot of chairs left.

BUT… if you have a legitimately disruptive startup (one that isn’t a service based simply off the idea “what can’t I get my mom to do for me?”), you shouldn’t worry. Here’s why.

Startups that are disruptive tend to upend the existing model not because they’re necessarily better (although they do get better with more time and cash infusion), but because most of the time, they’re more convenient and less expensive.

Think about Starbucks: the coffees/lattes/mochas served at Starbucks are definitely not better than the ones served by, say, a high quality boutique café somewhere in the city. But what Starbucks brings to the table is convenience (it’s everywhere), affordability (compared to the prices that could vary between individual boutique shops) and consistency (yeah, the drinks they serve may not be as great, but at least you know what you’ll be getting, every single time). Because of that, Starbucks has more or less dominated the coffeehouse industry.

Now, during a downturn, people are looking to save money. They want the cheapest product or service that they know will serve them reliably. Does your startup do that?

Uber does that: Uber X is cheaper than most cab rides. Uber X cars are not only nicer and cleaner than most cabs, but its drivers tend to be more polite too (kudos to the rating system; think about how important this can be during a frustrating time like an economic downturn!), which makes Uber’s value proposition all the more advantageous.

Jet.com does that: the same product offered on Amazon is cheaper on Jet.com, and by extension, much cheaper than in retail stores.

Airbnb does that: hotels are expensive, and its prices fluctuate wildly during peak seasons. A traveller can potentially save hundreds, if not more, by renting an apartment on Airbnb (also, as an added bonus, most Airbnbs are much bigger than hotel rooms — for the same price, or even less).

Xiaomi does that: people want the best phone, without the price tag. Xiaomi offers just that: the Mi Note, for example, has build quality and specs that rival Samsung’s Galaxy Note at roughy half the price.

Netflix does that too. I recently watched Hitman in theaters; the ticket cost me $12.15. Netflix, in contrast, offers a ton more movie options and unlimited viewing for less than $8 a month.

In all of the examples above, each company focused on driving down one thing — the one critical thing that everyone thinks about during an economic downturn: the price. Most of them did so without reducing the quality of services/products offered. Now that is real disruption.

On the other hand, if your startup does neither of those things, but instead provides a service that’s “nice to have” when money is flush, get ready for winter. Already, we’re starting to see some of these “nice to have” services go under: Homejoy is the one that immediately comes to mind. It’s the quintessential “what can’t I get my mom to do for me?” service. After raising close to $40 million in financing, it imploded because users did not want to pay $85 for the service after its first-time promotional price of $19. The service made cleaning the house more convenient, for sure, but not at a price where users were able to justify the costs. Homejoy targeted the masses, when really, only the ~5% of elites could justify the cost.

There are, of course, still many startups like Homejoy out there. One of them, Instacart, has raised more than $270 million at a $2 billion (!) valuation from several respectable VC firms. That’s great for Instacart… but when crunch time comes, will its current users still want to pay someone to buy their groceries for them when they could do it themselves? What about when Amazon inevitably pours more money into its Fresh project, which offers same-day and early morning deliveries? Will Instacart still be able to retain its users? Now, take this with a few grains of salt, but some investors in Silicon Valley have already begun worrying about Instacart’s finances out loud.

And it’s not just Instacart that may be in deep trouble: GrubHub, Postmates and Seamless’ livelihoods could be threatened after Amazon announced its Flex service just a few days ago. Traditionally, companies either focused on wide-breath but shallow offerings (i.e. Walmart), or short-breath but deep offerings (i.e. Apple). Amazon is the very first company of its kind: it offers a wide-breath of product, but still manages to go deep on every vertical. If Amazon could pull off the development of Fresh and Flex like it did with all of its other projects (and there’s no reason to doubt it), GrubHub, Postmates, Seamless and its ilk of services may, in the best case scenario, be acquired, in the worst case, vaporize. History may not repeat itself, but it sure does rhyme!

(See also: BuzzFeed News’ investigation into WeWork’s shaky finances, where phrases like “profits look less certain when you read the fine print” and “WeLive is expected to supply 21% of the company’s overall revenue by 2018 — even though it has yet to launch” appear way more often than any investor should be comfortable with. The published forecasted revenue and earnings growth is also something to marvel at.)

Of course, there’s still room for optimism: some of the best services which we use today came out of the economic downturn. Facebook, Google (sending Yahoo! into a tailspin), Salesforce (to compete with Oracle), eBay and Netflix (effectively shutting down Blockbuster) all emerged as victors after brutal economic downturns, killing the previously dominant businesses in their industries.

This time around, there will be victors too: products built today that our grandkids may continue to use. But don’t forget how many startups had to die before the smoke cleared, showing a clear picture of the true victors.

To the VCs who are asking for data instead of “anecdotal evidence”:

  1. What’s the point of comparing the data to previous bubbles when pattern matching is almost completely useless and misleading? (More people are online now than before, global economy has changed drastically, etc.) 
  2. Just because it’s not as bad now as it was in 1999/2000 doesn’t mean that it’s not going to be ugly when the bubble bursts. 
  3. There is, however, one pretty big difference between this bubble and the 1999/2000 bubble: the number of investors proportionate to the number of companies. Back in the 1999/2000, the general public who usually doesn’t care about technology are investing because it made sense to. This time around, however, VCs and investors stand to lose the most since the inflation of the bubble is largely contained within those two sectors.
  4. How can one be sure that there’s a bubble? It’s quite easy: when products and services — some without even a path to profitability — are valued astronomically almost on a daily basis (the rate at which startups are inflating and deflating to become unicorns — or not — is almost equal). Or when VCs/investors prop up startups with massive amounts of cash because they fit some sort of profile of companies that previously got acquired. 
  5. Data usually makes a lot more sense… in hindsight. 

An interesting tangent: Valent’s crash shows that companies with no real economic purpose will fail in the long run. Startups that don’t provide real value can only hide under the covers provided by VCs for so long.