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The Startup Cycle

I agree with John that corporate attitudes about startups have shifted somewhat. But at least to the same degree, the venture community has hit on a formula for success. Here's my take on that formula.

These days, even more than in the past, VCs specialize. The ones who back infrastructure startups steer clear of those who back software-as-a-service startups and so on. There are a couple of good reasons for that. First, as you can imagine, the successful VCs develop a nose for what will work within their area of expertise. But even more important, the VCs bring with them a Rolodex of past ventures that owe the VC a favor or two, like perhaps trying out a new product from an unproven company. Collecting favors isn't hard when you sit the board of directors of the company you want a favor from. This part of the startup process is so important that you'll almost never find a successful startup that doesn't have venture backing or that isn't started by someone with extensive hooks in the venture community.

Once these proof-of-concept opportunities are landed, the next step is finding real enterprises with a significant pain point. I remember my first meetings with NetScaler and Redline, two vendors that pioneered the application front end (AFE) space. The obvious value proposition for these products was providing relief for server farms at Internet-centric businesses. Sure enough, when you talked to NetScaler about who was using its products, names like eBay and Yahoo came up (I say "like" because I don't recall if those were actual customers).

Finding these opportunities is perhaps the toughest thing a startup faces, particularly in an unproven market, like AFEs were at the time. But once these customers are found, the wheels turn quickly. In the case of the AFE market once a few big names bought in, F5 enhanced its global load balancers to offer a similar feature set to the AFEs. That single event validated the market and opened the door for Cisco, Juniper, and Citrix to go on an AFE startup buying spree.

This cycle has become so common that it's pretty hard to find a category that didn't play out this way. Some CIOs are even joining in the game. Large companies interested in a particular startup's technology may broker a deal with a larger incumbent player, essentially saying, "You buy these guys, and I'll buy their product from you." When someone with a checkbook the size of GM's or Boeing's or Bank of America's makes such a statement, the Oracles and IBMs of the world take notice.

As we start our startup watch in this blog, it'll be interesting to see who, as the Motley Fool guys like to say, are rule makers and who are rule breakers. As you watch your favorite startup mature, let us know what you think of its business model.

Perhaps if we all develop a keen enough eye, you, I and anyone else who follows this blog might discover an interesting career 2.0. Post your thoughts here, or send them directly to me at awittmann@nwc.com.

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