The Only Time You Should Start a New Company

Earlier this week, Caterina Fake posted 6 reasons it’s a bad time to start a company. I didn’t see that post until I saw Fred Wilson‘s follow-up today.

There are three of Caterina’s reasons that I find particularly compelling, because they remind me of the build up to Bubble 1.0.

1. Everybody else is starting a company.

I remember during Bubble 1.0 there were so many tech-related companies being formed that you couldn’t keep up with them. There were companies formed just to hold stakes in some of these startups. Some of these holding companies actually went public. Of course the insiders got silly rich and the retail buyers lost everything, but that was part of the game that lead to Bubble 1.0 and the pop heard round the world.

In the sports area alone, there were a ton of companies battling for reader eyeballs. I had 5 companies fly to Houston to try to convince me to either merge with them and become an insider (which I wasn’t interested in because some part of me knew the whole game was a house of cards) or to sell one or more of my sports-related sites to them (I’ve told that story before).

Everybody was racing to get their product, network, etc. put together so they could go public and make some greater-fool money. As a backup, they could sell to Fox or Yahoo or someone with more cash who dreamed of becoming Fox or Yahoo.

4. You can’t operate in obscurity anymore

This is a very good point that may actually save us from some of the greater-fool puffery that happened last time around. Even back in the mid to late nineties, the web was not the transparent, all-inclusive place it seems to be now. When some company wanted to buy one of my websites, I could get some information off their web page, but I still had to rely substantially on information I received from the company. Now there are thousands of mini-Naders blogging away about these companies.

Granted, there are some promoter-types out there writing about how wonderful most of this new Web 2.0 stuff is, and I’m sure some of them are making money in one way or another by doing it. But if you do your homework, you can get a lot more scoop about companies and the people behind them than you could back then.

Here’s a good way to carve the promoters from the tech-enthusiasts: if someone is telling you that some new application is cool and useful, think tech-enthusiast; if someone is telling you that some Web 2.0, high school science project turned business is going to be the next IBM, the look for the money trail.

As a whole, the new internet is a check and balance against monkey business. But there will always be people who, intentionally or not, use their platform to promote as opposed to inform.

The check and balance, of course, are the posts and stories people write by the hundreds or thousands. Any of these tech-related startups who get into the IPO pipeline will be plastered all over Memeorandum and a ton of other pages (including this one) with people like me asking what about this company makes it a viable public offering?

And finally, I think a lot of people learned some hard lessons back in Bubble 1.0, which will put IPO’s under greater scrutiny now. Back then, any tech-related IPO would make you money. I’m not sure that’s the case now. I have bought exactly one IPO in the past 5 years- and I have passed on opportunities for quite a few.

5. Web 2.0 isn’t all that.

Amen, sister. Caterina’s company, Flickr, is the king of the new companies, so she knows what she’s talking about.

Just look through some of my Web 2.0 Wars series posts and try to find businesses with enough legs to warrant even dreaming of big money. They’re hard to find.

IPO’s are still largely off the table (thankfully), so the exit strategy is to get bought by some bigger company who is desperate to get into the internet race.

The odds are long and the door is closing.

When is the Only Time You Should Start a New Company?

Here it is, in one, easy to remember sentence.

When you have a product or service to sell that enough people will buy to create a reasonable profit without relying on advertising revenue.

That’s it. Plain and simple and old-fashioned. And smart.