Maybe we’re in a bubble but it doesn’t matter

What should you do?

Lots of people are saying we are in a bubble. The IPO market caps for Groupon and Zynga are too high. The purchase price for Instagram is too high. Early stage valuations are too high, no thanks to that darn Y Combinator.

We are definitely in the growth phase of a cycle. I personally believe that we still have a ways to go before a retraction, but that is not the point of this post. I am writing this post for all the aspiring tech entrepreneurs and programmers out there who hear bubble and wonder whether jumping off is the right decision, and all the college kids wondering if a CS or engineering degree will pay off. To those readers: we might be in a bubble, but for you it doesn’t matter.

The reality of the world is that software, specifically Internet enabled software, is becoming a part of every business. Marc Andreessen said “software is eating the world,” and by that he meant that as time goes on, every industry is becoming a software industry. Old incumbents in retail, service industries, medicine and every other industry are being or will be disrupted by software companies created by younger (at least in mindset) entrepreneurs that have a better grasp of the implications of a world where every human being has an Internet-connected computer in their pocket. Here are some examples:

  • Retail: Amazon posts 35% year on year growth in net sales last quarter. Best Buy posts a $1.7 billion loss and is shuttering 50 stores. Traditional retailers complain about Amazon’s seemingly predatory practice of asking customers to scan stuff in local stores to price match, but are powerless to fight back.
  • News / Publishing: The news industry is being fucked, and everyone knows it. The advertising dollars that supported the news industry is moving online, replaced by Craigslist and others on the classifieds side and blog networks on the display side. News sites with a better grasp of how the Internet works, like HuffPo or Mashable, are worth hundreds of millions.
  • Transportation: Uber takes advantage of city-enforced monopolies in the taxi industry and a simple product that uses the tech in your mobile phone to improve and automate dispatch to grow extremely rapidly. Taxi companies are unable to respond with technology, and instead try to fight with regulation. You might think since black cars are too expensive for normal people that this doesn’t disrupt all transportation, but Uber has been experimenting with lower cost rides, and if they don’t do it there are plenty of people who want to apply the same model.

The truth is that the technology sector as a whole over any length of time is a positive-sum game even if the economy doesn’t grow at all, because it is taking business away from other industries (i.e. those other industries will experience negative gains adjusted for population growth; that is, they are shrinking in relation to everything else). A retraction of investment interest in this will slow but not stop the disruption.

As a programmer or technologist, this is good for you. The world is being bifurcated into two classes: high skill knowledge workers and creators (programmers, designers or those who otherwise contribute to a technology organization, finance, a few lucky enough to work in the creative class) and everyone else. The good news for programmers is that while CS enrollment has increased, it hasn’t increased nearly enough to support the demand for engineers and software product people.

For everyone else, this is bad for you. Most people aren’t self aware enough to realize what is happening that is making their jobs disappear: a strong trend in software automation to make business processes more efficient. Instead of stocking DVDs at a bunch of retail outlets, why not just store them in central locations and ship them on demand? Costs go down; head count goes down. Better still, forget the DVDs and just stream the movies over the Internet.

Where once you would have an army of data-gatherers map every street to make a city map, instead now we just have a few people drive around a car that gets even more data than the data-gatherers could, and we have the software to turn this into beautiful and usable maps. Pretty soon, the cars will drive themselves.

These low and middle skill jobs are going away and aren’t coming back. I have no comment on the morality of this trend. As a society, because of the trend towards winner take-all economics, we will see a continually increasing disparity of wealth. We will have to decide if that is a society we want to live in or whether we figure out new ways of redistributing that wealth.

Anyone who tells you that you shouldn’t be in tech, or that the current market situation will create an oversupply of people in tech, is doing you a massive disservice. You should be in tech if you can stomach it at all. Furthermore, “technology” has tentacles that are beginning to reach into every industry (fashion, journalism, medicine, manufacturing, etc), and thus there is almost certainly something for you to be interested in regardless of what you do. Yes, in the event of an investment down cycle it will be harder to find a job (or get funding for your company), but it is just as likely that you won’t even have a job in another industry, because that job will be being done or made irrelevant by someone else’s software.

People will draw parallels to the finance industry bubble and burst and what happened to all the finance jobs in 2008. Tech in 2012 is not the same as finance in 2008, and here’s why:

Finance firms in theory create market liquidity for assets (making things more efficient) and provide financing for businesses (allowing new businesses to get started). By the mid-2000’s, we had an oversupply of talented people in finance, and the marginal gain from adding more talented people to the industry wasn’t growing the total value created by the finance industry. This is not the case in technology today: we are nowhere near that saturation point yet.

In the past couple decades we’ve had the phenomenon of the big box retailer that comes to a town and can use its’ massive economies of scale, distribution and brand to offer an irresistible combination of prices and service to drive all the other stores out of business. The technology industry is like that, but for all business in all vertical industries – companies with traditional distribution and marketing can’t compete. Internet software benefits from massive economies of scale and network effects previously unknown to the world. Games with virality built in can touch significant percentages of the world’s population in a matter of weeks. 20 years ago, if you wanted to distribute a game to millions of people, you’d have to package and ship the boxed software to thousands of outlets. Today, you just push a binary build to the Apple or Google website.

You want to be in the tech game, because in time it will be the only game in town.

If you’ve read to the end, then you might want to check out my new startup, Exec. At Exec, we are redefining and disrupting the traditional concept of a job through technology. I think the most interested and unsaturated vertical in tech is online-to-offline technologies that affect the real world, and we are right in the heart of it.