Experimentation takes place in laboratories, under lab conditions, and the quality of results is influenced by their environment. Early-stage ventures are R&D projects, and the laboratory in which these are conducted are the economy and its capital markets. This analogy is broad, and for that reason not wholly adequate. There are subsections of the economy and of capital markets that more directly than others correspond to the particular R&D that are Internet and technology startups. Manufacturing, for example, or the high yield market, don’t have much impact on Foursquare, whereas consumer spending probably does… at least indirectly. (This is complex territory, and consumer behavior in the current economy is not always straight-forward.) But the extent to which components of an economy impact the overall state of affairs, and the extent to which all components are part of the same general mass that floats up or down in greater or lesser turbulence, to this extent startups are influenced by macro-economics just as a chemical reaction may be influenced by the temperature or lighting in a lab, or other variables that extend beyond the narrow enclosure of the beaker.
Whether the Internet exploded in the mid-90s because lab conditions were ideal – which is to say, because the economy and capital markets were thriving – or whether the Internet caused parts of the economy and capital markets to thrive – which is to say, took over and became the lab – is even with hindsight a difficult question. Maybe if we currently experienced a technological revolution as profound as the Internet, this would provide a sufficient boost to the economy to shake it out of its stagnation. But the reality is that (with the possible exception of clean tech or alternative energy), there aren’t many technical explosions on the horizon, at least not of sufficient importance to carry the day. And so, technology and its myriad startups, rather than taking over the lab and defining its conditions, is now rather a component part of the whole. As such, and because this whole is not at the present time thriving, the success or failure of startups, the results of iterations and experimenting, are occurring under lab conditions that are less than ideal. On one hand, this context calls for more focused concentration – and much luck – and on the other hand its results are less conducive to scientific repeatability.
In such an environment, formulas and recipes for success become a matter of greater nuance. It is no longer sufficient and is an oversimplification, possibly a flaw, to follow “established” precepts – say, for example, a finance approach based on seed funding augmented by multiple VC rounds, or, in building a business, pursuing a bowling pin strategy that was successful years ago elsewhere – because of a different context now in relation to the time when such formulas were invented. Strategies and precepts, however, are also challenging to invent anew, because the testing and the iteration of these will take place under suboptimal conditions for experimentation. From the perspective of founding entrepreneurs, a volatile laboratory environment indicates that simple products, simple business models, addressing simple market needs with simple solutions, are (within reason) superior to the more complex or convoluted. This was no doubt always indicated, but especially so in the present economic climate in which external volatility is already of inordinate proportion. From the perspective of investors, two themes would become more pronounced and advisable than in the past: diversification, and visibility to cash flows. Ideally, visibility should be good enough to discern the shapes of objects without prescription-lens support.
