David O. Sacks, the chief executive of Yammer, who recently sold his business to Microsoft for $1.2 billion, is suddenly bearish on start-ups.
On Saturday, Mr. Sacks lobbed a controversial letter on Facebook:
I think silicon valley as we know it may be coming to an end. In order to create a successful new company, you have to find an idea that (1) has escaped the attention of the major Internet companies, which are better run than ever before; (2) is capable of being launched and proven out for ~$5M, the typical seed plus series A investment; and (3) is protectable from the onslaught of those big companies once they figure out what you're onto. How many ideas like that are left?
The statement, soon picked up by Techcrunch, set off an avalanche of responses on and off Facebook, from the likes of Marc Andreessen, the co-founder of Netscape and co-founder of Andreessen Horowitz; George Zachary, a partner at Charles River Ventures; an d Shervin Pishevar, a partner at Menlo Ventures. Â
Mr. Sacks, who has investments in start-ups like Uber and Cherry, later clarified his statement, explaining that Silicon Valley could still produce innovative software start-ups, but that these would be exceptions to the rule because there were too many big incumbents.
He argues that the incumbents, rich with resources, will increasingly account for a larger percentage of technology innovation. Moreover, only start-ups with defensible businesses that exist in areas without incumbents will have the opportunity to become big companies, according to Mr. Sacks.
Mr. Sacks's argument did not sit well with many of his venture capital friends, especially Mr. Andreessen, who chimed in with more than 20 comments. Mr. Andreessen, who recently raised (and will soon have to put to work) $1.5 billion for a third fund, fiercely defended the potential of innovation among small start-ups, calling their opportunity “unen ding.â€
Mr. Andreessen, who sits on the boards of Hewlett-Packard and eBay, also had plenty of criticism for Mr. Sacks's big incumbents, pointing out that first, there are only a “few competent incumbents.†Many, he argued, are prone to the pitfalls of incumbency, including placing a higher priority on “stability over change†and losing talent to nimble young start-ups.
Mr. Sacks, who encouraged the lively debate, said his forecast was not tied to his deal with Microsoft, despite the auspicious timing.
This is a great, lively discussion, and TechCrunch has picked up on it, wanting to know what the connection is to Yammer. In short, the answer is not much. My argument explicitly applies to software categories where there's an incumbent. Yammer created a category that didn't exist (Enterprise Social Networking). Creating new categories, rather than iterating at the margins of existing categories, is what I'm arguing entrepreneurs need to do. The question is whether that's getting harder or easier as the Internet matures. Personally, I think it's getting harder, but VCs like Marc, George, Shervin, and others may have a better vantage point to make that assessment.
