Warning for Silicon Valley startups in the era of "Hyperscale" tech companies

We are in an era of “Hyperscale companies” such as Amazon, Facebook, Google, Microsoft and Apple with limited opportunities for startups warns Sam Altman, head of Y Combinator, Silicon Valley’s influential investment group and educator.

In his 2017 YC Annual Letter Altman wrote: “We’re now in the era of hyperscale technology companies…Companies like Amazon, Facebook, Google, Apple, and Microsoft have powerful advantages “

“I expect that they will continue to do a lot of things well, have significant data and computation advantages, be able to attract a large percentage of the most talented engineers, and aggressively buy companies that get off to promising starts.”

This situation “is unlikely to reverse without antitrust action.”

His warning was carefully worded because Altman knows that advocating for government intervention is unpopular in Silicon Valley. He adds some balance and points to opportunities for startups where these hyperscale companies “are naturally weaker.”

He says that most startup founders and investors do not fully understand hyperscale’s “powerful advantage.”

Foremski’s Take: [I’m a big fan of Sam Altman, the 31-year old head of Y Combinator group after moderating his presentation at the excellent Startup Voodoo in St Louis.]

It’s good to see someone as influential as Sam Altman raising this issue because it is a topic I’ve been writing about for nearly three years: Scale versus innovation: The peril to Silicon Valley’s future | ZDNet.

We continue to see massive late stage VC deals where the race to scale fastest and become the largest is the primary goal over any consideration of other values.

It’s because in digital economies the first company to scale has the potential to push nearly everyone else into the margins very quickly.

In traditional markets a company would expand by establishing offices or stores in new regions and countries – a multi-year process that gives competitors time to respond. But in digital markets a well-funded competitor can quickly scale to a dominant global position in weeks.

Scaling is not very interesting but it’s how you win in digital markets.

However, scaling even at hyperscale levels is not illegal. Anti-trust punishes illegal business practices.

Silicon Valley used to celebrate great ideas and extraordinary achievements rather than scale. Fortunately, Sam Altman is still motivated by great ideas and the potential benefits to humanity of “the most significant technology revolution in human history.”

“It’s an exciting time to do what we do.”