The Gist: Tech startups' life cycles get even shorter. As the pace of innovation increases, the useful life span of a given new product or service often decreases - and so does that of the company that makes it. Startups are still good business, but fewer will be built to last.
False Alarm: The return to value investing. True, the dotcom bubble produced hundreds of startups whose precipitous flameouts came sooner than planned. But as Moore's and Metcalfe's laws compound the pace of change, companies will have to keep up: launching, growing, and cashing out their investors at an ever faster clip. The corporate life cycle that accelerates of its own volition, in relation to market forces, will capitalize on its speed at every step.
Exhibit A: Data collected by the research firm Venture Economics shows that, in 1991, the average time to IPO or acquisition for venture-backed startups was nearly six years; last year, the average was down to 3.6 years. Meanwhile, Cisco et al. are, in effect, outsourcing R&D spending by selectively gobbling up infant firms. Of the 23 companies Cisco bought in 2000, for example, 15 were less than 3 years old upon acquisition. "In the technology business, development cycles have shortened. Overall, we invest earlier and we acquire earlier," says Ammar Hanafi, Cisco's VP of business development, who oversees acquisition strategy. Harvard Business School professor Josh Lerner points out that venture investors, perhaps aware of the accelerated life cycle, are dramatically increasing the percentage of money they're pouring into early-stage investments, which has doubled to become a full one-third of all venture fund money raised. "Companies are getting a lot more resources earlier on," he says.
Words to Live By: "The life cycles of technologies and the life cycles of companies are shortening all the time, and in order to stay competitive you need to develop faster."
On the Rise: Remember Netscape? You know, the company that went from idea to IPO to acquisition target in less than four years? In the future, it will be the anomalous tech startup that lives (independently) even that long. We will also see some "progeria" startups - companies afflicted with the equivalent of the rare children's disorder that causes premature aging and death. A prime candidate for that syndrome is Napster, founded with lightning speed to exploit a technological disruption even while its window of opportunity was closing.
Future Reference: Venture Economics (www.ventureeconomics.com); Cisco Acquisition Summary (www.cisco.com/warp/public/750/acquisition/summarylist.html); The Venture Capital Cycle, by Paul A. Gompers and Josh Lerner; Competing on Internet Time: Lessons From Netscape and Its Battle With Microsoft, by Michael A. Cusumano and David B. Yoffie
