Entrepreneurs are the heroes of the tech business — they take the big risks and push for the big disruptions that move the entire industry forward. They create a hot job market for engineers, huge returns for investors, and concrete real-life improvements for the rest of us.But that doesn’t mean that big old companies like Google and Microsoft are losing their relevance, as Sarah Lacy at TechCrunch argued last week.
Some big companies have big problems, Microsoft and Cisco being two obvious examples. But the tech industry isn’t a binary Cold War universe with old defensive companies looking over their Berlin Wall to a host of innovative startups on the other side.
It’s an ecosystem. Everything is connected. Without the big old tech companies, the startups wouldn’t and couldn’t exist.
Here are some of the functions served by the lumbering giants like Google and Microsoft:
- Training ground. There’s a reason Facebook is filled with former Googlers. What happens when a startup expands beyond its two graduate-student founders and needs to hire engineers who understand how to solve hard problems like scaling an Internet business to tens of millions of users? They’re not going to find those engineers in grad school — they’re going to find them in the ranks of ex-Googlers (and Yahoos, and Microsofties, and Ebayites or whatever they call themselves). Not to mention executives, marketers, HR staff, and all the other functionaries that a big tech company needs.
- Money. Where do entrepreneurs get the money to start all these great new companies? Sure, some of them are young kids who live on ramen for a year while they beg their friends and families for the first $50,000. But a lot of them worked at big rich companies and saved their money — or cashed out some stock — so they could fund their new dreams. Same with investors — just look at all the angels and VCs that came out of Google, PayPal, and startups that cashed out at the last of the top bubble. Oh yeah, and Google, IBM, Intel, Comcast, and other huge old boring tech companies have their own venture funds as well.
- Inspiration. There’s personal inspiration, like Bill Gates inspiring Mark Zuckerberg, or Steve Jobs inspiring Sergey Brin and Larry Page. But more than that — big old companies have massive reach. Every time a new version of Windows ships, it reaches hundreds of millions of people in a year. Every time Google adds a new feature to its search engine, it reaches hundreds of millions of people in months. Massive reach generates ideas — even if it’s a young kid saying “I could do that so much better” or “what if I took that great idea and tweaked it so.”
- Safety in a down cycle. Remember 1991? Or 2002? Or 2008? The economy moves in cycles. When the tech startup spigot turns off, a lot of failed entrepreneurs will probably be thankful that Google and Microsoft and HP still need talented people.
- Innovation. Sure, the big companies play defence. But they also have big R&D budgets and the staff to solve hard problems. The biggest innovations in user interface in the last five years have come from Apple (touch), Microsoft (voice, gesture), and Google (voice). Smartphones are being driven by Apple and Google. Cloud computing is being led by Salesforce (not big, but public and not a startup either), Amazon, and Google.
- Platforms and infrastructure. Half the consumer-facing Internet startups in Silicon Valley use Amazon Web Services as their back-end. Without Apple and Google creating the smartphone market, there’s no $100 million exit for mobile gaming companies like OpenFeint. Startups that get big enough to need their own data centres are probably going to be calling on HP and Cisco.
- Exits. Right now, big late-stage valuations and a suddenly hot IPO market may be crowding out a lot of M&A — a lot of big tech companies won’t pay the high prices a startup can get elsewhere — but that’s a historical oddity. For most of the last decade, the most likely way for a startup to make its investors rich was by selling out to a larger company like Google, Cisco, or Microsoft. Imagine how many VCs would have taken a risk on a startup in 2009 if there WEREN’T a bunch of big, cash-rich companies in the same sector who could buy them out at 10 times the value of their initial investment. Very few.
It’s true that big tech companies are trading at historically low multiples while the valuations of younger startups are booming. So what? All that means is retail investors still don’t trust the tech market after the last bust. Most of today’s hot startups are still private.
Entrepreneurs and startups keep the tech industry interesting and occasionally force disruptions.
But the big companies make it an industry worth paying attention to in the first place.
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