Startup Shelf Life – Doug Green

February 12, 2002

3 Min Read
Startup Shelf Life

Consider this: A two-year-old optical startup company lays off employees, hoping to conserve cash until the industry turns around. Perhaps it still has money from a monster financing round back in the good old days. Perhaps is has obtained a modest third or fourth round from its previous investors. Press releases are issued. The company assures us that with money in the bank and a reduced burn rate, it now has enough cash to weather the storm.

It’s a scenario now repeated so often that one must ask: How long can these companies retain their original competitive advantages while in survival mode? In other words, what is the “shelf life” of a startup?

To understand why this is an issue, consider how a startup competes. Incumbent equipment providers always have the advantage. Their products are proven, more stable, and feature rich. A startup must leverage newer technology to provide a value so great that it overcomes these advantages – something marketing gurus call the “10X factor”: 10 times smaller, 10 times cheaper, 10 times faster, etc.

If a startup is successful, over time it becomes an incumbent. It cannot continue to incorporate new technology every few months, as this would be too expensive and disruptive to the installed base of customers. So, it must begin to compete based on other factors, like having products that are proven, more stable, and feature rich. If the startup fails, a newer startup comes along leveraging later and greater technology to start the process again.

Now, what happens if a new company has what appears to be a killer value proposition, but nobody is buying anything from anybody? Does this sound familiar? The current wisdom seems to be to put such a company on life support until the buying starts again. If the customers were interested last year, certainly they’ll be interested next year, right?

Preserving promising technology seems on the surface to be a good investment strategy. However, while the company is fighting to stay afloat, a new generation of startups might well be leveraging newer technology to leapfrog its products. Larger incumbent vendors with deep pockets are also given a chance to catch up (yes, it does happen once in a while). Meanwhile, the aging startup fails to gain the advantages of incumbency that would normally become a barrier to these up-and-comers with newer and shinier gadgets.

(Note that attempts at preserving a once viable company are not to be confused with the embalming process. That’s where investors try to keep a dead company from decomposing before they can sell it to someone else. But that’s a another article…)

So, just how long can a once-fresh product sit in the customer’s trial lab before it starts to smell? Shelf life will vary, based on the extent to which there is true innovation in architecture – as opposed to a simple cut-and-paste of the latest chipsets and operating systems. With enough money to keep it going, a completed product with substantial architectural innovation may survive six months to a year of market stagnation, perhaps more with a bit of luck. In my experience, however, both innovation and luck are rare commodities. Most “once promising” startups have a shelf life measured in months.

So what does this mean to the current crop of companies undergoing the freezing process? Only in rare cases will their technology still be fresh when thawed. When spring and summer come around and products from the newer startups start to sprout, look for the customers to start cleaning out their labs to make room.

Doug Green is an independent consultant providing expertise in telecommunications product marketing, communications, and investment due diligence. He was formerly vice president of marketing at Ocular Networks (acquired by Tellabs Inc.), and prior to that held marketing positions at Chromatis Networks (acquired by Lucent Technologies Inc.) and Ciena Corp..

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