Entrepreneur

Welcome to the new startup order

(Editor’s note: Brant Cooper is an independent startup consultant specializing in customer development and marketing. He submitted this story to VentureBeat.)

The difficulty of assessing change is knowing where you are on the curve.  At any moment in time, there’s a tendency to believe you have witnessed change, rather than are currently experiencing it.

It is, of course, impossible to predict what long-term changes the explosion of entrepreneurship will bring to the startup ecosystem. One thing is clear, though: The large number of students graduating from college with plans to start new businesses is a global phenomenon that’s here to stay.

How founders and early investors will benefit from this emerging new startup order is is proving to be a source consternation, though.  Startups are fighting in increasingly crowded spaces and traditional investors bemoan the dwindling “big wins” – companies achieving revenues of greater than $100 million.

Today’s high tech startups are, for the most part, incredibly inexpensive to get off the ground. They’re also able to move quicker than ever.  As embodied by the “Lean Startup” philosophy, agile, new businesses excel at quickly “learning” their way toward achieving Product-Market fit before they worry about raising significant capital to finance scaling.

These lean startups means are predicated on generating more output on less input; i.e., more power from a less expensive box. It is, essentially, miniturization – the Moore’s Law of startups.

Say the image to the right represents a Lean Startup.  The spiral represents a vague idea of a new startup on the outside, iterating its way toward honing in on a product that successfully solves a problem for an identifiable group of users who are willing to pay.

Along the way, the startup may find it necessary to change its business in one or more ways – product functionality, market segment, business model – until it has found a profitable market “signal.”

Even with Product-Market fit, however, a Lean Startup may not have found a scalable startup. In other words, it may not have found a market that represents the “big win” to investors.

Some of these companies will make it.  Most will not.  But even those that don’t have still found something of value  - and in an era where we may now find thousands of these companies, what becomes of that value?

If it’s true that Lean Startups product more output with less input and that the definition for the “big win” hasn’t changed, then there’s only a couple of ways to get big: 1) hope you fund the right startups, or 2) smartly combine startups.

If each spiraling clock represents a lean startup, the bottom base of the Sean Ellis-inspired pyramid to the right is made of companies that have complementary technology, but have not found a market in which to scale by themselves. By combining at that point, they’re able to grow and ultimately scale.

The key, though, is founders must learn to anticipate that combination pre-funding. If they don’t, the financing must be structured in such a way that an early merger rewards founders and investors sufficiently.  (Perhaps a secondary equity market will emerge, designed explicitly for such a scenario.)

Leaving aside the messy realities of merging companies, the efficiencies gained through parallel learning processes may be worth the effort, especially if this new reality were to create a viable “exit strategy.”

A pool of these combined smaller companies would make for attractive acquisitions for larger firms, especially older ones that are faced with The Innovator’s Dilemma.

Large, market-leading tech companies tend to move “up market” over time, maintaining competitive advantage through “continuous innovation”  - which leaves the company vulnerable to disruptive innovation.  Acquiring startups is one way for established businesses to stay competitive along both continuous and disruption innovation curves.

Perhaps this sort of ecosystem will enable the vertical integration necessary to “retool stale businesses,” or, in other words, move late majority companies into the technology revolution.  Ultimately, more companies solving problems for more market segments – regardless of size – will move the entire technology industry further along its lifecycle adoption curve.


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