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Have Lean Startups Helped Us Scale Larger Technology Companies?

by Randall on August 4, 2012 · 3 comments

Posted in: Business Strategy,Economics,Entrepreneurism,Investing,Randall Howard,Society,Software,Startups,Web

Credit: NewBlood.com

Building larger technology companies is critical for our future economic well being, yet somehow we seem to pay more attention to the seed and startup phase. This post and a subsequent missive, Wisdom from Recent Waterloo Technology Acquisitions, aim to analyze some recipes for building technology businesses to scale first from the perspective of recent companies and then specifically through the lens of local acquisitions. This pair of posts will be based on extensive data, but the findings are intended to start discussion rather than be the last word.

The importance of building new, innovative, and large, companies can’t be underestimated regionally, provincially and nationally. Here in Waterloo, with perhaps 10 000 jobs at a single behemoth, Research in Motion, the notion of job creation is particularly topical simply to lessen our dependency on such a large company.

My sense is that, of late, most of the focus centres around making startups: small, energetic and entrepreneurial software, web and mobile companies, some simply building a mobile application. And, even with the current notion of Lean Startups or our Venture 2.0 approach, there is no question that building such early stage companies is probably an order of magnitude cheaper than it was back in the 1990’s While undoubtedly a good thing for all concerned – founders, investors and consumers all have so much more choice – has this led to a corresponding increase in new major businesses in the technology sector?

I see this as more of a discussion than a simple answer, and thus to start, I include the following table of my sense of how the numbers have changed over time. The following table provides some idea of how company formation has trended over the last 25 years, through the lens of scale rather than acquisitions:

DECADETOTAL STARTUPS# TO GET "BIG"% "BIG"
1990's40 - 501224% - 30%
2000's200 - 25062% - 3%
2010's800+??

NOTES ON DATA:

  1. Sources: public records, internet, personal recollections and interviews with 20 key ecosystem participants.
  2. The definition of “big” is purposely somewhat arbitrary (and perhaps vague). I am using a threshold of 50 employees or $10 million in revenues, which is probably more indicative of these startups becoming mid-sized businesses.

INITIAL INSIGHTS:

This data, while helpful, can never provide a complete answer. However, it can guide the conversation around what I see to be an important economic mission for our region and country – that is, building more significant technology businesses. I’m sure there are no easy answers, but in shaping policy, it is important to base decisions on informed debate and research.

To that end, I would offer the following thoughts:

  1. The current plethora of “lean startups” does not (necessarily) represent a clear path to growing those startups into larger businesses.
  2. I suspect that, in some ways, multiplying small startups can retard the growth of larger companies. That said, the data are insufficient to prove cause and effect.
  3. At the ecosystem level, we need to focus resource allocation beyond simple startup creation to include building more long term, and larger, technology businesses. Instead of spreading talent and other resources thinly, key gaps in senior management talent (especially marketing) and access to capital (B rounds and beyond) need to be resolved.
  4. Even in day to day discussion, the narrative must shift so that entrepreneurism isn’t just about startups, to make company building cool again.

Canada holds many smart, creative and hardworking entrepreneurs who will undoubtedly rise to the challenge of building our next generation economy. Meanwhile, I’d welcome comments, suggestions and feedback on how we can build dozens or more, instead of a handful, of larger technology companies in our region.

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About Randall

Randall Howard is a serial entrepreneur and long term technologist with a passion for social innovation.

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  • Hi Randall

    I have been working on my startup since the last bubble. That was before the idea of a “lean” startup. Today, I see many startups that are repeating the pre-bubble habits. 

    I too have to wonder if the “lean” startup movement is helping build our tech community. A large percentage of companies have pivoted after getting financing. And while I applaud the efforts to find a profitable market, I still wonder why the original idea got funding and why after months of prep work to get in front of angels or VC’s, the idea was so quickly tossed aside. 

    I also agree with you about the available resources for management is being spread too thin. It’s not only management personal but the One Network and it’s partners who are now catering to so many new ideas. 

    If this trend continues, many solid business ideas are going to get lost in the noise. I have lots of ideas that could be $1 million – 10 million companies if done correctly. This size of company is great but will not generate the boat loads of cash and jobs needed to employ those who have mortgages and kids to send to university. 

    I feel that the ecosystem must root out those companies with the shot of “making it big” and ensure the resources are available to grow it. I understand that picking “winners” is extremely difficult and most time ineffective. But leaving these big opportunities to fight through the mire of low cap startups burns cash, time and energy. Resources better spent to gain traction in the marketplace.

    So from here, to build out those dozens of large firms, a concentrated effort province or country wide needs to happen. An effort that zero’s in the biggest opportunities we currently have in the ecosystem. Then using the resources we already have in place, kick the tires and try and poke holes in the business model. Those startups that make it through are the ones were the bulk of resources and attention need to be focused. 

    Startups are a gamble and we need to start doubling down on the ones with the best shot of success. 

    • Thanks for your further perspective on building more startups to scale

  • Ernie Chang

    Ernie Chang

    I think that Randall can provide some real insights into the question of second and third round funding and growth or failure – are successes due to financing, the right manpower and relevant experience, expanding the marketing, reluctance to diluting on the part of the founders?

    Are failures due to some or all of the above, and which are the most important (and lacking in Canada, and need stressing)? You point to senior management talent, especially in marketing…

    ….myself, Axia Multimedia went to $540M market-cap on the TSE, but it was due to some other investors taking over the startup, finding a new CEO and in fact a new strategic direction – ie transforming the company – but with the downturn in the 90s, it still is now rather small

    The process of coming to agreement between investor and seeker is pretty complex, and especially in later rounds, based not just on the soundness of the idea and the best-outcome market plans, but on the management team and the initial success of proof of concept market tests – so investors could make demands for changes in direction and team make-up, suggest new talent etc which don’t sit well with the founders, propose dilution factors that are “unacceptable” etc..

    Do you believe that the investment community does enough to prepare the angel-funded first round companies for the demands of the next round? Often I see that the investment side places a person on the Board, who acts as an Executive member, and helps direct strategy and progress, but the management team and the founder’s sense of direction is not in sync with the success criteria needed for the next round.

    This question could be asked at every level…..

    Do you really think that a government agency or provincial strategy could provide helpers to companies to get them to the next level, and would the investors allow these advisors to effectively direct the company (because if you have $2M or $50M invested in it, you have to believe that you know best, not some bureaucrat from NRC??) In fact, perhaps the NRC Technology Advisor IRAP program has contributed to Randall’s problem of too many small startups….they coach at the angel level, and not much beyond

    Ernie Chang

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