October 3, 2000

October 3, 2000 | Commentary on Internet And Technology

Keys To Surviving The High-Tech Startup Jungle

WASHINGTON-Small business startups-new companies short of cash but rich in ideas-have for years propelled America's economic growth. They remain the source of nearly all new jobs in an era when Fortune 500 companies continue to downsize.

These fledgling companies often emerge as household words (Microsoft) and are at the vanguard of today's profound technology shifts. Yet small business failure rates hover at the 70 percent range.

How do successful startups survive? According to Columbia University professor Amar Bhide, the very precariousness of their situation forces them to adapt quickly to changing circumstances in order to survive.

If you're thinking this sounds like an update of Charles Darwin's theory of "natural selection," you're right. But can this theory be applied to economics? Bhide says yes.

In his book, "The Origin And Evolution of New Business," from Oxford University Press, he examines the stages of small business evolution.

They parallel the adapt-and-survive notions advanced by Darwin. New companies mature, shifting gears and product lines to survive. They must respond to a natural environment of intense competition and ever- changing demands.

In researching some 200 companies, Bhide found that today's high-tech companies require adapt-and-survive skills that often differ from those successfully employed by the first generation (early 1980s) of technology- based companies, such as Wang Computers.

To successfully maneuver through the harsh terrain and uncertain climate, startups must do several things.

Endure far greater risk than conventional businesses: The daring entrepreneurs behind Cisco Systems, believing that the idea of linking disparate computers would yield a customer base, worked without pay to keep the fledgling company afloat. Today, Cisco holds more than three- quarters of the global market for routers and switches that link computer networks.

Moving ahead without internal recriminations: They rely on instinct, not endless boardroom meetings, as they overcome potential adversity.

Chemdex managers' company prospectus intrepidly proclaimed mounting losses-while touting faith in inevitable success for its e-commerce system. Today Chemdex has a client base of 2,300 and is considered the chemical industry's leading business-to-business supplier.

These traits are far more important, Bhide says, than market research, extensive business plans and top-rated managerial talent.

Avoid venture capital support until security is achieved: In the 1980s, relatively little capital was raised from the personal savings of company founders. Intel, Lotus, Genentech, Staples and Compaq were early recipients of venture capital.

This is no longer true. For instance, Richard Cheng used a few thousand dollars to develop an English-to-Chinese computer translation device, and a $20 million business was born.

Adapt quickly to changing opportunities: By the late 1990s, this became an essential ingredient for many companies. The founders of spreadsheet-maker Excel began as sellers of Xerox machines to wholesalers, but quickly shifted gears to capitalize on a "moving target" niche market-computerized spreadsheets.

"Their owners are achievement-oriented," Bhide notes. "They manage internal conflicts well." He adds they "have tolerance for ambiguity," unlike micro-managing bureaucrats at entrenched multinational corporations.

Perhaps the most important of these characteristics is tolerance for risk. According to the new paradigm, laid-back Silicon Valley companies talk the talk on that issue, but relatively few take the walk.

Risk-taking provides ample opportunity for just-created high-tech high-flyers and dot.com startups. Their founders have mastered one survival skill-fearlessness.

Even lacking the capacity to undertake major research and development programs and large-scale overseas marketing, adaptation enables them to evolve.

In time, according to Bhide's data, they will increase earnings and expand, at which point they must again alter fundamental business strategies.

Today's startup companies customize niche products and concentrate on small markets at first. Profits are long-term goals for them because they don't have outsiders such as fickle shareholders to keep happy. They are content to remain within a core business, concentrating on gradual product improvements.

With startups, decision-making and managerial systems accommodate the product, not the other way around. Even the product schedules of startups reflect their footloose style.

Two-thirds of the companies Bhide surveyed brought out their product within a few months after conceiving the idea. Bhide shows that the talent, audacity and drive of a committed few at a garage-based startup

can rival and even beat well-heeled corporate hierarchies. It's as if Darwin went digital.

Although evolution is not a standard discussion in economic development and business management courses, in the 21st century it might be as common as supply and demand.

Julian Weiss is a former nternational communications fellow at The Heritage Foundation (www.heritage.org).

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