With the financial meltdown yet to be resolved, a slowing economy and VCs backing away from Web 2.0 start-ups, many people assume that now is the worst time to launch a start-up. Yet, now is precisely the best time to launch a tech start-up. Historically some of the most successful companies have started during times of financial uncertainty. Given that IBM, Microsoft, Oracle, and Google were all started during economic downturn, we may see the next big thing emerge.
To begin a start-up the right way in today’s environment, one should go by the following three principles which have become standard issue in Silicon Valley:
1.Focus on Your Business Model and Technology – Investors and entrepreneurs are realizing that a big user base start-up such as a social network or a community powered media site is not necessarily the path to success. Social sites can be hard to monetize, and most social sites do not require the creation of any defensible IP. With no defensible IP or sustainable business model, many recent social and media start-ups are finding it harder to stay afloat.
If you were to begin a start-up today, make sure to start with a strong business model and comprehensive technology. Google is a great example of this. Early on in their development, they made focusing on their technology and business model a priority. With the tech boom busting in 2000, Sergey Brin and Larry Page knew it would be hard to survive without being self-sufficient. In the past, other search engines had made their business model secondary. Having deep pocketed VC’s backing them; it was assumed they’d have ample funding forever.
At Spock.com, we’ve focused on our technology since day one, and have emphasized our business model even more so over the past several months. I cannot tell you how much we have learned about our business and market potential after we focused equally on our technology and business model. I would recommend to every aspiring high-tech entrepreneur to make it a priority to concentrate on building companies with a strong business model and technology. Not only will you be able to survive the lean times, but you will also create something of value that other companies will pay serious money for when it comes time to think about an exit strategy.
Many newly formed start-ups in the Valley are beginning to see the value in this principle. Billshrink.com, a cell phone and credit card comparison site, is an example of a start-up that emphasizes their business model and has a strong focus on building a unique technology to solve a common problem.
2.Hire Great People – There are a lot of great engineers and business types in the marketplace today. During lean times, it is easier to hire great talent because there are not as many start-ups to compete with. If you have a compelling start-up during a downturn, you’ll be able to attract the cream of the crop. This was one of the primary reasons that Google was able to hire a great set of engineers in 2000 after the bubble burst. Since many saw it as one of the few start-ups left that had a chance to succeed, its openings were highly pursued. With such a deep and talented pool to pick from, Google ensured that its new hires met their criteria of engineering horsepower and team culture. In 2006, with Silicon Valley full of new start-ups, it was difficult for Spock to easily hire the top talent. Yet, we made sure to only hire the people who met our unique needs, from experienced engineers to young and motivated talent. To run our search, we picked up Hongche Liu, a seasoned expert in information mining from Yahoo. Our next great hire was Wayne Kao, a young and talented engineer from Microsoft, to run our front end. Both Hongche and Wayne are responsible for the development of Spock and its progress to date. If we had hired the wrong people in the beginning, we may have never gotten off the ground. I cannot stress enough how important hiring the right people is to any start-up. Spend the time necessary to find the right people for your business and never compromise.
3.Create a Prototype First – The days of taking a PowerPoint to a VC and getting a term sheet are extinct. Investors want to see that you can actually build a product and have market feedback. It’s in your best interest to get as far as you can without investors. You’ll be forced to focus on building a quality product and being scrappy. Startups such as GoPlanit.com are examples of companies bypassing initial VC funding while they prove their model works. Ultimately, if your product receives a positive response from the market, you’ll be in a much stronger negotiating position for more favorable term sheets with VCs. From a financial and sustainability perspective I think this is the best approach.
While doing any start-up or business is a daunting task, the better job you do in fine tuning your business model, hiring the right people, and creating the right product upfront, the greater your chances of outlasting the competition and achieving success.