Start-Ups: Round 2

The bell has rung, and the competitors are moving to their appropriate corners. Winners in the black trunks go to one corner of the ring, and failures in the red trunks congregate in another corner. The only problem with this match is that we are seeing a lot more failures and very few winners.

Round 1: Start-up versus market is over. Round 2 begins with a new breed of start-up companies. We are seeing three major changes: the successful companies are being helmed by seasoned leaders, start-ups no longer have to rely solely on VC funds, and products are actually available and functioning when the marketing starts.

Gone are the days of meeting with a 25-year-old who has a multimillion-dollar idea (just thought of last week, of course) that he or she wants to take public in three months.

Maybe it is the fact that VCs are now starting to demand profitability or at least steady growth beyond the first year. Maybe it is the result of the bloodletting that has resulted from the IPO craze of the last 18 months. Whatever the cause, the effect these factors have had on start-up companies recently is profound and is being embraced by investors and agencies like us, who work with many start-ups.

The best change that has come out of the shake-up is that we are seeing more seasoned leaders and/or founders starting their second, third, and fourth companies. The greatest insight a founder can have is knowing when to get out of the business. More and more founders have gone through the process of starting a company, making it a success, and getting out when the time was right.

And I don’t mean that they have done this in the last 18 months. We are now starting to see founders who have gone through this process and cultivated successful companies 5, 10, or even 20 years ago. We are no longer meeting with the 22-year-old and his or her buddy; we are now meeting with management teams led by a founder and a cofounder with successful start-up experience. And, more than likely, he or she has staffed the management team with people he or she is comfortable with and has worked with at another successful company.

The partnerships upper management or founders have cultivated in the past are an extremely important resource. It is actually changing the way companies are being funded. More and more start-ups are getting smarter about where they look for their funding.

They are tapping angel investors, and they are looking for larger companies within their industry that may benefit from their technology or service. They no longer have to rely on VC funding alone.

Marketing wars still exist between companies that may or may not have the product or the service to back up their value propositions, but this is becoming a thing of the past. Customers no longer tolerate the company that markets a product knowing that the current product is nonexistent or vaporware. Frankly, I never knew why customers were tolerant of this practice to begin with, but the companies that will survive out of the gate are companies that actually have a functional product at the time the marketing of that product begins.

It will be interesting to see how long this round will last and how it will finish. I like what I see already. It is more fun to work with the new breed of management that knows the ropes already. These managers typically know their own expert limitations as entrepreneurs. They know when and which areas of the business need their involvement. They have the resources both human and monetary to be successful.

We now have to do less educating about the basics of how to run a company with our clients. We are more confident that these start-ups will be around for longer than just six months, and it is much more fun to be in the ring with them in this round than it was in the last.

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Overhead view of a row of four business people interviewing a young male applicant.