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Optical/IP

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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elvislives 12/4/2012 | 10:57:16 PM
re: Startup Shelf Life You are saying that while startups are hibernating, new startups are developing better products ?

And where do these new startups get their money ? I had the impression that it was almost impossible to get funding.. unless you're willing to sell your soul to the VCs.
redbull 12/4/2012 | 10:57:14 PM
re: Startup Shelf Life King?
dietaryfiber 12/4/2012 | 10:57:12 PM
re: Startup Shelf Life
elvislives,

I think you are missing the point of the whole startup debacle, thus leading you this incorrect conclusion. In 1999 and 2000, many startups were created that ramped headcount rapidly to try to push large new platforms out to the market. These generally were aimed at the "new carriers", the CLECs and the new IXCs that came about. This has created two problems. First, the products have to be retargeted at the more traditional carriers. These carriers have legacy needs and tend to move slower due to technology introduction issues. Second, the amount of revenue needed to make a 250 person company breakeven is quite challenging...on the order of $100M per year. This is a 3 - 4 year ramp from product availability. These companies were built to be a quick bolt on division for Cisco/Nortel/Lucent and this is not realistic anymore. So, these companies are left in a quandry about how to make their business plans effective for their shareholders. This makes it challenging to raise money at previous valuations and often dilutes out employees and earlier investors. At the same time, if the product is reasonable these companies are still getting money, in massively down rounds. Some are unwilling to bite at the terms and exit stage left.

Ok, so NewCo comes along. It can't get the wild valuation that the current round of startups did, but it can get money. So, things have returned to the 1980s and early-1990s in terms of how companies are valued. They will be built with significantly smaller teams and operate on much less cash. Life will go on and some of them will succeed.

dietary fiber
inlight 12/4/2012 | 10:57:11 PM
re: Startup Shelf Life I think this article is also relevant to some of the startups, which could get very less amount in their 3rd or 4th round and laid off more than 50% of their employees, thinking that they can just survive till a year or so for market upturn and then they can some how sell their current product. This will not happen as they do not have enough people to keep up with the changing market requirements.

IL
Confucius 12/4/2012 | 10:57:11 PM
re: Startup Shelf Life Yes, dietaryfiber. The rest of the story is that while the existing startups are treading water, the incumbent vendors have time to get their act together and put together a blade or two that plugs into their existing platforms that makes the startup's existing offering somewhat less compelling. Even if the new blade offers 1/10th the functionality, if it allows a management type at the carrier to check off a box on the features list it is dangerous to the startup because the incumbent vendor is a known quantity that has already made it through qual. The shortsighted management type may find it less risky to go with the incumbent solution, even if it may be inferior. Carriers are extremely conservative by nature, and risk reduction is the name of the game. To be successful, an existing startup had better keep moving forward and adding value to its solution set, otherwise the unfortunate circumstance of poor market timing may well get the better of it.
elvislives 12/4/2012 | 10:57:10 PM
re: Startup Shelf Life By north bay, I meant north of San Francisco a.k.a telecom valley.
elvislives 12/4/2012 | 10:57:10 PM
re: Startup Shelf Life Fiber,

I agree with your point.
But, it is one thing to say, "yeah, some new startups can get funded..." but does anybody know of any ? I have still to find any decent new startup.

I have a bunch of friends who are on "vacation" and would really like to find those new startups.. not to make a fortune but to have a paycheck.

If anybody knows about some new startups, that got funding, located in the north bay, please post it here..

Thanks
rjmcmahon 12/4/2012 | 10:57:10 PM
re: Startup Shelf Life If anybody knows about some new startups, that got funding, located in the north bay, please post it here.
______________

LR makes some revenue from companies posting jobs on its site. Anybody hiring and wanting to post their job listings should pay LR for their services, not post on these messsage boards.
realdeal 12/4/2012 | 10:57:08 PM
re: Startup Shelf Life Startups are being funded from coast to coast, just not at the alarming rate seen in 1998-2000.

I see 2 camps of VC's:

1. Those who over-funded companies and are now trying to pick up the pieces of the train wreck. We will not see many new companies funded by this group.

2. Those who are sitting on hundred million dollar funds just waiting for the right investment opportunity.

We'll see a "changing of the guard" in the next 2-4 years in the VC community. As with all service related companies, those who work hard and provide the best service will be riding high.
dietaryfiber 12/4/2012 | 10:57:04 PM
re: Startup Shelf Life elvislives,

I am aware as I sit here in Petaluma of 3 startups in the North Bay that are in the funding process.

dietary fiber
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