Built to Flip - Where Do You Come Down?

Second, today's startups have only a short time in which to reach "escape velocity" -- to conquer a chunk of market territory. Achieving critical mass early is essential because, in many new-economy businesses, the barriers to entry are low. Companies that are serious about carving out a permanent leadership position need to move much more quickly than they might have moved in the past. And to do so, they need capital. VCs provide the initial funding, but later-stage capital must come from an IPO or, if the right partner comes along, from an acquisition.

And that's healthy. In today's economy, no one can predict what will come next, so every organization must be quick and nimble. Some large companies acquire their nimbleness -- by buying small, innovative companies with big, breakthrough ideas. And many of the best-performing companies of the future will be amorphous organizations that spring up suddenly, create value, and then disappear -- before the trappings of an organization come to mean more than the people who work there.

Contact Christina L. Darwall by email (cdarwall@hbs.edu).

Gary Sutton

Gary Sutton, 57, is chief executive officer of @Backup, a 3-year-old company in San Diego that provides Web-based backup, storage, and remote-access services. Over a 20-year career, he has run nine companies -- six of which have been sold off. The first was Montron Corp., a toy maker that was acquired by Fisher-Price. Then came USPress Inc., Checks-to-Go Inc., Smiley Industries Inc., and Knight Protective Industries Inc. Sold. Sold. Sold. Sold. Next, in 1990, Sutton founded Teledesic LLC, a satellite-telecommunications provider. It too was sold: In 1996, AT&T, Boeing, Craig McCaw, Bill Gates, and Saudi Arabian prince Alwaleed Bin Talal together acquired a controlling interest in the company, and last year Motorola became an investor as well.

I am a serial flipper. I admit it. I've run and sold six companies in a relatively short time, and I am embarrassed by that. In each case, selling out was a function of what the owners wanted. I wish I could go back and run any one of those companies.

But I don't believe that flipping, per se, is a bad thing. The principle of corporate sustainability flies in the face of everything that's happening in the economy today. Even the word "sustainability" is boring and depressing. It suggests a static condition. So-called sustainable companies are the ones that lose a lot of money and then fizzle into mediocrity. They don't innovate, and they don't yield real productivity gains.

Here's an example: 3M is a sustainable company. It invented Post-it Notes, and that was a wonderful innovation. But 20 years later, 3M is still trumpeting its giant leap from Scotch tape to Post-it Notes. What has 3M done for us lately?

The problem with Built to Last is that it's a romantic notion. Large companies are incapable of ongoing innovation, of ongoing flexibility. And that's dangerous: Every idea that we have today will be obsolete five years from now. The only certainty about a five-year plan is that it will be dramatically wrong within five years. Companies that are built to last forever usually find out too late that the world has changed right under their noses.

Silicon Valley, meanwhile, is innovating at a level that no one could have imagined 20 years ago. Its impact on the economy recalls the California gold rush of the early 1850s, which accelerated westward expansion and promoted the creation of the railroads. Today, there's a new gold rush, and it's happening because single-product startups are proving to be a very efficient source of R&D for larger companies that can't innovate on their own.

This practice isn't all that new. During World War II, the War Department discovered that "skunk works" projects (as they came to be known) could develop new products in a hurry. That was a far more rational model than what followed in the 1950s and 1960s, when corporations built inbred R&D departments with no connection to their companies' customer base. Outsourcing R&D to startups helps ensure market accountability: A startup receives a finite amount of money, and it has to produce something that customers will buy -- or die.

The way you create a great business is by doing something that others can't easily replicate. Do that, and you're going to be wooed by a lot of potential acquirers. Sure, it's naive -- and, in my view, vulgar -- to start a company with a schedule for selling out already in place. But remember: The best antitakeover strategy of all is to be mediocre. Acquiring companies target innovative, growing businesses, not businesses that have reached their peak.

@Backup is one of those innovative, growing companies. And because we occupy a unique spot in the marketplace, we are going to be barraged by people who want to invest in us or acquire us. I hope that we can keep going for a long time without that sort of help. My partners and I are having fun, and we believe in what we're doing.