Following Your Startup Dreams
What does it take to succeed in this economy?
By Peggy Albright
Entrepreneurs in today’s economic environment are faced with a particularly frustrating set of circumstances: infrastructure, device and software technologies are now available to inspire a world of new products and services, yet funding for startups wanting to exploit these capabilities is tighter than ever. What does it take to get a new business off the ground in this downturn? What does it take to make a dream come true?
Certainly most entrepreneurs have never seen it as bad as it is today. The IPO market that traditionally helps motivate investment in new companies is dormant and the mergers and acquisitions market has slowed down considerably. Forced to hold on to companies longer to achieve liquidity, a typical venture firm’s pool of capital today simply can’t support as many businesses as it might have a couple years ago.
“What it means for entrepreneurs is that it’s a very difficult time to raise capital,” said David Lane, general partner at Onset Ventures.
Software sector is strong
Fortunately, there is some silver lining behind the clouds. While all sectors have been seriously hit by the investment downturn, the software sector is receiving the highest level of funding compared to others, based on first quarter 2009 data published by PricewaterhouseCoopers and the National Venture Capital Association.
The software sector is considered a safer bet than others because it is the glue that pieces products and services together in an increasingly connected world and also because software-based businesses are much more cost-efficient to build and operate than facilities-based enterprises like manufacturing. The IT services sector is also doing better than most (though not as well as the biotech and medical devices and equipment sectors, which followed software in funding, and media and entertainment, which came in just ahead of IT).
Potential business developers will also likely welcome indicators from PWC and the NVCA that the investment climate may be improving. While cautious, the firms projected a mild but steady increase in investments throughout the rest of the year.
Starting a new business
VC firms generally do not get involved with startups until the company has produced a well-crafted business plan or even introduced a product. Ajay Chopra, a general partner at Trinity Ventures, which specializes in funding early-stage companies, suggested that before approaching formal funding organizations, startups should look for support from friends and family while assembling their teams and conducting market research.
Smart entrepreneurs, he emphasized, will take advantage of every available means to advance their business in the most frugal and cost-efficient way. He suggested using online outsourcing marketplaces such as oDesk and Amazon’s Mechanical Turk to find skilled talent at reasonable cost. He recommended controlling facilities costs as much as possible. In the Silicon Valley, for example, the Plug & Play Tech Center provides furnished office space under flexible leasing arrangements and a full suite of corporate services, including introductions to funding resources, for startup firms.
“We love capital-efficient companies,” he said, adding that this business principle must extend not just when seeking funding but throughout a startup’s growth, including product launch and customer acquisition phases.
Is this idea worth funding?
It is often hard to predict if a bright idea is a lucrative one and worth pursuing. Fundamentally, it should solve a real pain point in the market and it should be possible to build a business around it.
Onset’s David Lane said the very best ideas tend to be revolutionary, not evolutionary, and they promise a substantial market opportunity: $10 million in revenue is not good enough, hundreds of millions is desired.
Beyond offering a revolutionary idea and substantial market opportunity, a startup must have a first class team with expertise in its field. It must prove it can launch a product and get customers, demonstrate measurable goals and the ability to meet those goals. It must convince firms that it will be able to produce profits quarter after quarter and advance to a succession of business milestones, including raising increasingly higher levels of funding in future funding rounds. It’s a lot to pull off and not everyone can do it.
“The fundamentals haven’t changed,” observed Liz Kerton, a board member of the Telecom Council of Silicon Valley who also chairs its investors’ forum. “The funnel [of available funding] is a lot smaller but companies are still meeting the criteria and getting through.”
Startups must also understand that technology for the sake of technology is not enough.
Don't forget the revenue
A successful business is one that “provides optimal value to the shareholder,” and generates revenues “sooner than later,” advised Azita Arvani, principal of Arvani Group, a business consulting organization for high-tech companies. She observed that a Web 2.0 or social networking service, for example, might find a substantial market but it might lack a real means of producing revenues. And even though a company might introduce a breakthrough technology that creates a new and lucrative market, it can still fall prey to established competitors and not reach its expected value.
If it is an enterprise product, the cost of the product must be justifiable and it must provide value to the customer. Ed Esber, a PC industry pioneer and founder of The Angels’ Forum, cautioned that a performance improvement “has to be an order of magnitude” better than what an enterprise has today; a 10% performance improvement won’t cut it, he said.
“Enterprise IT managers and CTOs are very cautious these days about the expense of adding something to their IT infrastructure,” he said. The enterprise needs assurance that the startup is a lasting one that will be able to support the product in coming years.
Obviously, having a track record as an entrepreneur is an advantage and most funding firms look for this experience. “At the end of the day you’re betting on a team,” Chopra advised.
But first-time entrepreneurs can find backing too if they have the right idea and the passion to go with it.
“These are individuals who fundamentally believe they will not fail. That’s how they help convince others to go along with them,” Lane said. CW (14 May, 2009)