Great time to be a tech startup

The Facebook acquisition of WhatsApp last week for $19bn shows just what a disruptive world we are in. 4 and a bit years, just over $8m of capital, a handful of people and business of truly global reach is the result. WhatsApp had 450m users on the announcement date, and has added 15m more in the week since - they are on target for 1bn users by early 2016. 

Exponential is a hard concept for the brain to grasp…the stadium analogy builds the picture. Imagine you are in the Nou Camp in Barcelona sitting up "in the gods". Lionel Messi on his day off is standing in the center spot and has a pipette of water…he puts one drop of water on the grass and walks off. Being Messi, this drop of water is magic, and it's going to grow exponentially - doubling every minute. How long do you have before the stadium is completely full and even you up in row Z are engulfed? Human thinking tends to be linear and wildly over-estimate the time…days, weeks or months. 

The answer is 49 minutes. 

What's really surprising and hardest to fathom is that at 45 minutes the stadium is 93% empty. That's 4 minutes from an apparently safe situation to a flooded stadium.

Exponential is WhatsApp - from a standing start a few years ago to carrying more SMS messages than the entire SMS of the telecoms world combined. The network connected world is exponential. Moores law is exponential. Exponential is why leaders in industries such as music, publishing, retail, travel and advertising constantly get it wrong - they're aware of the danger to their businesses, but aren't aware that they are in the last 4 minutes.

If you are an investor in global multibillion dollar businesses like the telecoms companies that WhatsApp disrupts, then risks are higher than ever, and in many cases underestimated. The McKinsey topple rate - the % probability that any industry leader will lose their market leadership position in any year - is at its highest ever, and is 40% higher since the 1980s. Even for Facebook, who have a market cap of $180bn - how can a P/E ratio of more than 100x be justified if its business is already so at risk that it is obliged to pay $19bn for a scrappy start-up that has beaten them in the mobile messaging race.

It’s a great time to be a tech start up and a scary time to be big business with hardwired processes.