October 6, 2004

Big Deal

Interesting story in Business 2.0 by Om Malik that asserts that the new road to riches in high tech is to "build a company cheap, flip it fast, repeat."

an emerging breed of here-today, bought-tomorrow startups that are sprouting with minimal funding, flowering briefly, and being gobbled up by far bigger companies. In many instances, these built-to-flip outfits forgo - or sometimes can't get - money from venture capitalists. They instead create shoestring operations focused on the rapid development of narrow technologies to plug gaps in existing product lines or add useful features to existing products. Then they look to a deep-pocketed patron to scoop them up.

has made the cost of many basic technology components, from superfast chips to heavy-duty storage systems, so cheap that it's easier than ever for a bare-bones operation to build new products. The emergence of Linux and standard programming languages like Java also has made it easier to write software that can be easily woven into existing applications.

More important, however, are the evolving positions of larger companies. In many cases they have emerged from the tech collapse more dominant than ever. The firestorm of the bust cleared out weaker competitors and underscored to technology buyers the virtue of teaming up with established players that can take the heat of tough times. Today it's harder than ever for upstart companies to crack some of the most lucrative tech markets. Equally important, large companies increasingly recognize that, with stock options no longer the lure they once were, the most cost-effective way to bring in new talent and to fund R&D is simply to buy up innovators and their ideas. "Big companies stink at innovation, and they know it," says Vivek Mehra, general partner at venture fund August Capital in Menlo Park, Calif. "There are a lot of chances for startups to fill the niches and holes in big companies' product lines."

The big-buying-small movement is in some ways a return to the tech industry's traditional patterns. For most of its history, tech has been dominated by a handful of giants - from HP and IBM to Intel and Microsoft - that have constantly bought up talent and technologies. New members of the elite, such as Yahoo and eBay, emerged during the boom. That all these power players are feverishly acquiring now presents massive new opportunities for entrepreneurs who can spot things the heavyweights need, develop them rapidly, and be willing to sell out quickly. "'The art of the deal,'" says Silicon Valley venture capitalist Bill Burnham, "has become 'the art of the flip.'"

UPDATE: Wonder no more: Dr. Cornwall has weighed in on the Business 2.0 article and what it says about the state of entrepreneurship in the tech sector:

Om Malik, who has had his work in a variety of business publications including Forbes, writes a piece in Business 2.0 titled "The New Road to Riches: How to get ahead in the postbubble world: Build a company cheap. Flip It fast. Repeat."

When I first read this title, the words of Pres. Reagan came to mind, "Here we go again!" But read on. The techies finally are beginning to understand true entrepreneurship in Version 2.0 of information technology start-ups.

"(It) is part of an emerging breed of here-today, bought-tomorrow startups that are sprouting with minimal funding, flowering briefly, and being gobbled up by far bigger companies. In many instances, these built-to-flip outfits forgo - or sometimes can't get - money from venture capitalists. They instead create shoestring operations focused on the rapid development of narrow technologies to plug gaps in existing product lines or add useful features to existing products. Then they look to a deep-pocketed patron to scoop them up."

Instead of raising money just because they can, these folks are now looking for real opportunities, bootstrapping them, and finding a way to help them grow. While I am a little concerned about the "flipping" part, at least they are getting the first steps right this time.