Start-ups and the race against insolvency

Structurally in Australia there has never been a more fertile environment for new companies. Venture capital investments have grown steadily and stand at record highs. The support services that aid in creating a new company -- lawyers, bankers accountants, PR firms -- all have programs for startups. Some even offer to work pro bono until venture capital is raised. In addition, some hardware manufacturers, software vendors and telcos are offering free products to start-ups that design and build systems using their platforms.

And in spite of the stockmarket correction, interest in Australian IT entrepreneurs is at an all time high.

But while building a company of any kind today is a Herculean task, starting a technology company is even worse.

I recently asked several venture capital firms to list the main factors they look for in a high-tech investment, and not one mentioned technology first. Instead, they stressed studying the company's management team and its market potential when evaluating possible investments.

Market potential for many was extremely hard to pin down. "It's a bit like surfing", one commented. "Companies get up too late and the wave is over the top. Or they get up too early and they are waiting for the next wave that doesn't come."

Another important factor mentioned consistently was the quality of the company's top managers and the need to evaluate not only what they've accomplished in their careers, but also what they've accomplished in their lives.

Taking a company public today is a massive drain on management's attention and time, which means that companies must staff for it. Long-term consequences aside, meeting the challenges takes more than one person at the top with all the answers.

The CEO is generally charged with setting the company's tone, pace and agenda, but she/he also has to lead the efforts to raise funds, strike alliances and win customers. And unless, the company intends to grow and flourish as a privately held entity -- somewhat of a rarity in the stockmarket-crazed IT industry -- the CEO is expected to lead the troops to the promised land of IPO riches, or at least into the arms of a fiscally generous suitor.

Responsibilities

Australian venture capital industry raised a record $A845 million in funds in the past year of which Internet-related vendors accounted for less than 25 per cent. By comparison, of the $US9 billion in US technology investments made in the third quarter of 1999 alone, 50 to 60 per cent went to Internet companies.

Today's IS leaders bear a heady responsibility. They are riding herd over an industry that is growing two or three times as fast as the economy and in a sector that is rapidly gaining in importance as a slice of Australia's gross domestic product. What is needed most of all is dependable information on the local industry and its players both old and new and, importantly, on the macro trends that -- properly interpreted -- can help shape business strategy.

"Many of the dot-com CEOs lack depth of experience and common business sense," noted George Colony, chairman and founder of Forrester Research. "Their commitment has been short-term -- three years on average.

"Several factors are creating hollow companies, which have limited experience, wisdom, commitment, long-term view, allegiance to the customer, or a sense of construction. These companies are not built to withstand competition, they're not built to deliver sustained value and they're not built to last" Colony added.

Prerequisites for growth

The inaugural Deloitte Touche Tohmatsu dot.com survey of the leading CEOs of dot-coms in Australia, which was released during the recent volatile period, highlighted many key factors required to achieve growth. They included:

A total of 90 percent of respondents saw having skilled staff as very important to reach business growth targets.

Understanding target markets (80 per cent) Having innovative ideas (84 per cent) and Working collaboratively with partners and alliances (79 per cent).

Interestingly, having a strong stockmarket was seen as the least important growth factor (19 per cent) of the 12 key growth factors listed in the survey.

In this lopsided landscape where ideas are more plentiful than talent, company founders are willing -- with astounding regularity -- to hand over professional management, recognising that they do not posses the business and financial savvy to help the company mature.

The acute need for seasoned executives has also given rise to a cottage industry of "rent-a-manager", consisting usually of a group of "grey hairs". Their respective skills usually cover assisting in the creation of business plans, development of marketing plans, building teams, hiring required executives, forming a suitable board of directors, introducing the team to marketplace leaders and then firing themselves and moving on.

Get up and go

What makes a technology company dynamic? It is not merely a question of projected earnings or revenue gains, which can also underestimate potential. Internet companies, after all, may not be profitable but can be tremendously dynamic.

A venture capitalist I know describes a start-up venture as a "race against insolvency". He also states "choices for investment are shaped by gut feelings, fine-tuned by years of studying markets, technologies and human nature".

Many founders put a lot of time and research into starting companies, but also risk blowing it all by not knowing their investors. Look for value-added contributions. Discover their contacts. Uncover their power base. Ask what they bring to the table beside money?

If you can find an investor who shares your vision, you've done your homework. And if both parties agree it's a mutually beneficial fit, the remaining steps should be a lot easier.

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