Every time I go to a networking event with social media types I hear the hopeful phrase, “The World is Flat.“ The premise with the world is flat is that in the internet age the start-up entrepreneur has an equal shot at making it against the powerhouse media conglomerates or the big company on top of any given industry. The phrase the world is flat is like fly paper drawing the bugs to the trap. Anyone who wants to get-rich-quick loves that phrase.
While it is true that start-ups can take on and defeat the big dogs today, (this has always been true) it isn’t because the world is flat.
Start-ups take out big dogs because of these two factors:
1. The winner in a space is always smarter. I’ve met up with loads of developers, entrepreneurs, and wide-eyed bloggers hoping to make a million on their idea. I OFTEN am left with the impression that they are investing in a dumb idea or have ruined their ability to take out their competitor because of a horrible business plan or having sold out their long-term hopes for short-term VC dollars. Recently, I’ve met start-up owners who are extraordinarily smart but lack the funding to make their idea happen. And I’ve met start-up owners who are dumb, but have well-funded projects. Bing.com thinks they can beat Google if they outspend them. It’s a stupid strategy and will be a billion dollar failure. Mint.com has a great business model and took out Microsoft Money by making money on the back-end (advertising) and giving the product away for free to customers. (Last week Intuit bought Mint.com. A 28-year old entrepreneur who started the thing in his apartment just sold his baby for $170 million to the company he was about to take out. Delicious irony.)
2. The winner always contains costs. I am continually shocked when I hear the type of money people invest in developing technology. Half a million on development, 10 million on marketing. Eighty thousand to add this piece. On and on. These ideas are destined for failure before they have a single customer. Stupid. Stupid. Stupid. Very few companies can invest a million and make a billion. But loads can invest a million and lose it all with only the manager getting fired.
All of the internet is boiled down to a single formula and yet even the smartest companies manage to screw it up. Every single internet entrepreneur talks about ROI, but only a couple seem to truly be driven by minimizing the I. Each space has a finite amount of return. The false assumption is that everything on the internet can be a gold mine of infinite return– it’s a stupid assumption. Each niche only has a certain amount of customers/revenue. Therefore, the only way to maximize return is to minimize the I. Investing $500,000 in a technology that may return $2,000,000 in revenue over 4 years is almost a 0% return after expenses. At best it’s a 2:1 ratio. (You could do better at the horse track.) But a start-up investing $5,000 in that same $2m space has a ROI ratio potential of 400:1. I’ll take that guy!
The internet world is not flat. The world is flat for smart people and people who are willing to work for free to make their dreams happen. The world is as dangerous as ever for everyone else.
The internet world is full of fast talkers. That’s another thing I’ve learned at networking events. The same adage from the high school locker room is true among internet types, “He who talks the biggest game probably scores the least.” As with any new gold rush industry, for every good business person out there there are 10 shysters.