The Software Revolution led to the rise of startups and created the Startup Economy. Their impact is BIGGER than ever before. BUT how BIG? Find out now …
The digitalization of human life is unstoppable because we are in the midst of a major societal and economical shift — the Software Revolution. Sam Altman, president at YC, describes how the great technological revolutions have affected what most people do every day, and how society is structured.
In human history, there have been three great technological revolutions and many smaller ones. The three great ones are the agricultural revolution, the industrial revolution, and the one we are now in the middle of — the software revolution.
Marc Andreessen — a founding partner at VC firm A16Z — made a now wide-spread prediction in 2011 – ‘Software is eating the world‘. It underlines the fact that startups and their soft- and hardware are influencing all areas of our life.
This is a follow up post of ‘Startup Mystery: What is a startup‘ summarizing startup experts on:
- What macro trend and innovations led to the rapid rise of startups.
- How many jobs do startups create?
- What impact all this has on your life and career.
- How you can benefit from the emerging startup economy.
What major trend led to the rise of startups?
Technological revolutions lead to dramatic social and economic changes in a very short time. They also accelerate technological progress in other areas.
The only constant is change — it has become such a cliché, but it’s true. Nothing is ever stable. Everything is dynamic.
David Carr, the author of ‘Big Switch’ (2013), historically outlines strong parallels of the current epochal, technological transformation with the democratization of electricity a century ago that lead to the Industrial Revolution.
“What happened to the generation of power a century ago is now happening to the processing of information. Technology shapes economics and economics shapes society“.
In his TED talk ‘Accelerating Power of Technology‘ Ray Kurzweil — American author, computer scientist, inventor, futurist — talks about the exponential growth of evolution and technology.
Most people associate this with Moore’s Law that explains the doubling of computer processing power every 18 months. But Moore’s law will end when we hit natural limits of designing computer chips — confirms Gordan Moore himself:
“We have another 10 to 20 years before we reach a fundamental limit.”
So, when Moore’s law is just one phase of a greater trend that all technological change occurs at an exponential rate, what happens next?
For the vast majority of human existence, it was safe to assume that the world in which you were going to die would look pretty much the same as the one in which you were born. But that is no longer the case.
Just think about how much things have changed over the last ten years — wireless internet, smart phones, Facebook and Uber — and then try to imagine how things will be different in 2020, or even 2100.
This rapid technological change demands a lot from us. More and more people feel overwhelmed. Can’t and don’t want to keep up anymore. Personally speaking, my GenY often seems paralyzed by the immense pool of opportunities available.
Barry Schwartz calls this ‘the paradox of choice’. I call this the ‘miserable and great truth of IN-ACTION’.
In his TED talk ‘What does technology want?’, Kevin Kelly provides three practical lessons:
- How to better prepare for the technologies to appear.
- How to steer them into the best roles for humanity.
- How to leverage technological advancements.
You might be asking yourself: How weakly or strongly should we embrace technology?
There are surely other people who are better able to answer this question than I am. One thing, however, is sure: the Internet will not disappear like a fashion trend and be replaced by another trend. Google Documents, Dropbox, Wunderlist, Evernote are prime examples of a lasting, ever accelerating change.
What particular innovations foster startups?
The Information Revolution drives several innovations that have been changing our lives.
Firstly, the Internet has been continuously connecting computers to one information network (the Internet 1.0) and humans (the Internet 2.0), but now also increasingly connecting all devices to everything (the internet 3.0 – ‘Internet of Things’ ).
Secondly, by improving broadband technology more people connect to the Internet faster and cheaper.
Thirdly, new product categories — smartphones & tablets — allow people to access the Internet at home or in their office in novel ways (touch screen, voice commands).
Fourthly, the number of people who are ‘online’ increases every hour. A comparison of several media helps us to understand better, the massive changes created by the Internet. Telephone technology needed 75 years to reach 50 million people, the radio 38 years, television 13 years, the Internet 4 years, and the most popular ‘apps’, such as Whatsapp, nowadays need several months to do so. I even assume in 10 years from now; it will take apps weeks rather than months to reach 50 million people.
The following infographic nicely shows 15 important differences between 2000 & 2015.
Creative Destruction at its best
Schumpeter’s act of ‘creative destruction‘ is in full swing by replacing old structures with new ones. Startup founders leverage these opportunities to market products and services via the Internet. The Economist (2014) describes this trend as a result of Cambrian explosion of digital startups. It results in an incredible variety of services and products.
Most important are “platforms”—services that can host startups offerings (Amazon’s cloud computing), distribute them (Apple’s App Store) and market them (Facebook, Twitter). Then there is the internet, the mother of all platforms, which is now fast, universal and wireless.
You have two choices
Software is changing our economies and so our societies. Let’s face it. You have two options.
Firstly, you can become part of the shift and pro-actively influence your future.
Or secondly, you can be quietly influenced by other people’s purposes and intentions and complain about the fact that they don’t care about you.
@Students: Nobody truly ever cares about you. That’s the truth of human compassion and empathy. The only one who cares about you is YOU. ‘Choose yourself’ as James Altucher would phrase it.
@First-time startup founder: If you have started to follow your passion, purpose or whatever you want to call it, please remember to embrace what it means to change other people’s lives.
Let’s explore why startups do matter — socially and economically — to help you better decide whether to join or start a startup.
Why the economic future lies with startups — not large corporations
In short, startups market disruptive technologies or/and find scalable business models much better than big companies because they are better able to cope with the ‘Innovator’s Dilemma’ and ‘the Chasm’. More about these concepts in a second.
Our whole society, education, mindset and in fact everything is based on Industrial Age thoughts and systems. Have you ever wondered why schools teach us in classes or batches?
Are pupils like cars?
In fact, our education system is based on the same processes that Ford, Volkswagen, and Toyota are using to produce their cars. Sir Ken Robinson, a British educationalist, makes strong points on what is broken in our education system and how to fix it.
Our education system limits you in everything
His message: Start breaking out of your self-limiting beliefs about education, creativity, and ideas. Your education is responsible for your inability to come up with ideas and be creative. Every child is creative. We learn to unlearn this. Stop this now! You can change this.
As change is rapid and progresses quickly, larger (older) corporations can’t keep up. They are stuck in the Industrial-Age mindset. Their management practices and organizational structures are based on Taylorism (some also call it ‘Scientific Management’). It focuses on administration and execution of a proven and repeatable business model in saturated or even shrinking markets.
Have you ever wondered why Universities call their business degree “Business Administration”? Because it is the science of doing something proven — like Accounting, Financing, or Marketing.
Every large corporation vanishes within 40 years
The average life expectancy of corporations is between 40 and 50 years. More than one-third of the corporations listed in the Fortune 1000 in 1970 had vanished, acquired, merged, or broken into pieces by 1983.
But wait! It becomes even worse.
The mortality rate of corporations doubled in the last century, and will continue to grow.
“From 1973 to 1983, 350 corporations fell out of the Fortune 1000.
From 2003 to 2013, 712 corporations fell out of the Fortune 1000.”
This means very few companies will be around in 30 or 40 years from now on. There are two major reasons for this: the ‘Innovator’s Dilemma’ and ‘the Chasm’.
#1: Innovator’s Dilemma
The first reason is what Clayton Christensen, a well-known Harvard professor, and businessman, calls the Innovator’s Dilemma. Large corporations reject potential opportunities to innovate. They think that the base of customers is too small, and the vast majority cannot currently use these ‘opportunities’.
Everett M. Rogers, a professor of communication studies, describes five distinct groups of consumers that exhibit different patterns when it comes to adopting new technologies:
- early adopters
- early majority
- late majority
Innovators, also called tech(nology) enthusiasts, and the group of early adopters stand for 16% of a potential market for any given technology. This share is too small for large corporations to have a notable impact on their profits (compared to their ‘cash cows’). As a result, ideas with great potential go into the trash bin. What a shame!
On the flip side, as it turns out, the innovator’s dilemma leads to great opportunities for startup founders to innovate under the radar of large corporations.
#2: The Chasm
The second reason is what Geoffrey A. Moore, an American organizational theorist, management consultant, and author, calls “Crossing the Chasm”. He argues that there is a chasm between the early adopters of a product and the early majority. Moore argues that both expect very clear things from technology.
It has significant implications for corporations and startups alike when it comes to choosing a target market, positioning the product, building a marketing strategy and selecting the most appropriate distribution channel and pricing the product accordingly.
To be clear, most startups also fail because they are not able to cross ‘the chasm’ – like larger corporations.
It’s a challenge corporations, and startups face alike.
The chasm is simply part of the innovation game, and every startup founder should understand what the chasm means and how to overcome it.
The startup economy: What IMPACT startups create
The role of technology entrepreneurship in our global economy has never been more important. Startups make great use of the Software Revolution to take over and replace major parts of our global economy.
It is nearly impossible to underestimate the impact of startups. Regarding wealth creation, the entire U.S. GDP is $15 trillion. Collectively, only nine companies that barely existed 20 years are responsible for one trillion of that figure. They are Amazon, Google, Salesforce, VMware, Facebook, Twitter, Groupon, Zynga, and Apple.
Beyond wealth, startups also bring jobs. Lots of jobs. In fact, they’re the only ones that bring jobs. The highly influential Kauffman Foundation study demonstrated that high-growth startups were responsible for all net new job creation in the United States between 2000 and 2010.
Industrial Era companies dismiss more jobs than they create — while startups add to the total (between 2000 and 2009 roughly two to three million).
That’s even more impressive considering that 75% of startups fail. It is a tiny percentage of startups that create net new growth in income, jobs, and standard of living for everyone. Research shows that eight startup unicorns are created every decade that truly make it into the ranks of the big boys.
Moreover, high-growth startups also create new ecosystems (e.g. Facebook, Zynga, Google, Salesforce) on which smaller startups build on to spring up. Facebook, for instance, created 4.5 Million jobs as Deloitte reports.
Remember: The main difference of a startup versus an ordinary business is growth. If successful — startups grow rapidly, and their economic impact is tremendous. Hence, the impact of startups can’t be overstated.
Let’s look at a few consumer-facing examples — Industrial Age vs. Software Age
Note: there are many software startups disrupting business to business applications as well:
- Contact book > Salesforce
- Offline ads > Google (online ads)
- Marketing agencies > Hubspot.
Destruction or creation of jobs
Sam Altman, president of Y Combinator, sees two major challenges that humanity faces:
- Creating more wealth but destroying middle-income jobs.
- Concentrating power in smaller groups.
Moreover, he points out that:
we need to work very hard to make sure the edge we get from technology on the good side is stronger than the edge that bad actors get.
Information technology has been accumulating momentum exponentially for the last few decades. Now the infrastructure is in place for the global economy to be completely reorganized in Information Technologies.
Every job where a human performs some repeatable process will be taken over by software. It is expected that as many as 50% of today’s jobs may be replaced by software.
If you spend time on my about site, you know that I love technology and startups — especially the lever that they create to improve people’s life.
Not trying to compare myself with his tremendous achievements, I am also worried about how technology influences societies — as Sam Altman is.
That’s why startup founders have to keep a bigger picture in mind when bringing ideas to market.
We have a greater responsibility for our societies and humanity than just worrying about product/market fit and growth.
- Marc Andreessen: Why Software is eating the world
- Sam Altman: The Software Revolution
- Kauffman Foundation Study: The Importance of Startups in Job Creation and Job Destruction
- The Economist: The Startup Explosion (Digital Cambrian explosion)
- Josef Schumpeter: Act of ‘creative destruction’
- The Economist: The Startup Explosion
- Peter Thiel: Free summaries of a student from Thiel’s Stanford lectures on which his book ‘Zero to One’ is based.
- Max Marmer: The Great Transition: Industrial to Information Revolution
- Max Marmer: The Rise of the Startup
- Venture Capital Database: The Multi-Front Innovation War that Large Corporations are Fighting
- The Economist, Dan Breznitz: Startups are a great start, but not the goal
- How to Think Exponentially and Better Predict the Future
- Technology Feels Like It’s Accelerating — Because It Actually Is
Next on StartupGeist
- What Is Entrepreneurship? Or why Inventing is NOT Innovating?
- The Startup Path: Measurable & Repeatable
- Startup Fundraising: The Crazy Startup Madness.
- On Technology
- On Society & Economy