The speed of technology's 'creative destruction'

The Internet, built on open source, may well hasten the creation and demise of tech start-ups, but companies focused on long-term customer value will thrive.

Activists worry about the environmental cost of discarded mobile phones, personal computers, and other technology. Perhaps they should also worry about the swelling graveyard of start-ups and tech titans gone bad.

As Le Monde points out (in French), though businesses fail in all areas of the economy, technology ventures, and especially Web start-ups, prove particularly short-lived.

Joseph Schumpeter Wikipedia

It's Joseph Schumpeter's creative destruction...in overdrive.

Le Monde suggests three reasons: the speed of innovation/evolution (AOL's walled-garden approach meets Yahoo's open-portal approach), the ability of incumbents to crush nascent competitors (Netscape meets Internet Explorer), and the shortcomings of business models (Skype: only $500 million out of more than 520 million subscribers).

These are good points, but perhaps there's another: technology companies are increasingly disposable because they're so darn cheap to create.

This affects start-ups and incumbents alike. For the latter, perhaps the negligible cost of starting a new company fosters the comparative disposability of such start-ups. As Bernard Dalle, a general partner with Index Ventures in London, notes , start-ups need only rent essential infrastructure like hardware and software, and that rent is dirt cheap.

Ideas that couldn't survive a $5 million to $10 million capital-raising process might well weather a friends-and-family round of $50,000...and expire shortly thereafter when the idea proves barren.

But it's also true of the incumbents: Gulliver-esque Microsofts can fight off most of the Lilliputians, but an increasing array of the pesky imps sprout into adulthood (e.g., Google, Salesforce, Facebook).

Unfortunately (or fortunately, depending on your market position), this process of creative destruction may well be accelerating, and open source is one of the primary fuels.

The Linux Foundation's Jim Zemlin insists that the pace and price of innovation today requires open source, a communal effort that isn't bogged down by the bureaucracy or cash constraints of any one company. He may be right.

That certainly seems to be one lesson to take from the success of Linux, Firefox, and other open-source projects, particularly those that are community-led, as opposed to company-led. It's hard to compete with a group of self-selected, highly focused developers who can focus on good code, not good financial quarters.

Now that virtually every technology company depends upon and contributes to open-source software, we may well be laying the foundation for even more industry innovation...and corporate bankruptcies.

Guess what? There's nothing we can do about it. Nor is there anything we should do about it, except focus on building long-term customer value rather than short-term start-up goofiness. That's the way to thrive in the fast-evolving world of technology, because it's the one thing that never changes:

Customers pay for value, and companies that consistently deliver real value acquire the most customers.

Tim O'Reilly points toward this in his call for developers to "work on stuff that matters." It's a reminder but also a warning.

Microsoft is still with us because it has delivered an amazing amount of customer value in its 30-plus years. The same is true of IBM, Oracle, SAP, and other industry incumbents.

But it's equally true of relatively new companies like Salesforce, Red Hat, and Google, which have eschewed gimmicky software and flimsy business strategies to give customers tangible, ongoing value. None of these companies sought an early exit through acquisition. None of them were content to build for the quick flip.

So, yes, technology may be a veritable boneyard of failed companies, and essential ingredients like open source may accelerate the demise of start-ups and incumbents alike. But those companies that use such ingredients to deliver above-average customer value are going to endure...and thrive.

Follow me on Twitter @mjasay.

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Tech Culture
About the author

    Matt Asay is chief operating officer at Canonical, the company behind the Ubuntu Linux operating system. Prior to Canonical, Matt was general manager of the Americas division and vice president of business development at Alfresco, an open-source applications company. Matt brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. He is a member of the CNET Blog Network and is not an employee of CNET. You can follow Matt on Twitter @mjasay.

     

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