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Tech Startup 2.0

By Robert D. Hof Everywhere you look, signs of life are emerging in startup land. Entrepreneurs are huddling in their garages and dens, tapping out software code. Venture capitalists prowl Stanford and Massachusetts Institute of Technology, checkbooks in hand. Then there's the fairy-tale rise of Google (GOOG) from obscurity in 1998 to a recently public, $50 billion colossus that stands tall among tech's titans.

It may not be the halcyon days of 1999, but it's a long way from the dog days of 2002. "The valley and the tech community are ready for the next wave of companies and opportunities," says Yahoo! (YHOO) co-founder Jerry Yang.

"NEW KIND OF COMPANY". Yet choppy economic waters could just as easily sink many startups -- and that could ripple through the rest of the economy, which depends on them for much of its growth. For one thing, burned tech buyers remain especially wary of such outfits. Moreover, Sarbanes-Oxley regulations and pending stock-option expensing threaten to make startups more costly to run and less profitable.

At the same time, huge software-industry mergers, such as Oracle's (ORCL) hostile takeover of PeopleSoft (PSFT) and Symantec's (SYMC) pending purchase of Veritas (VRTS), point to traditional tech sectors consolidating into a few giants. And the consumer-electronics products and services that may well define the next tech wave require strong distribution channels and brand marketing that favor big, established concerns.

The upshot is that startups today must forge a path that's starkly different from not just the boom times, but from before the bubble as well. The good news is they're stepping up to the challenge. From Silicon Valley to Boston, entrepreneurs and venture capitalists are rethinking everything they do. This generation of startups is more organized and aggressive than ever. "It's a new kind of company being built," says Netscape Communications co-founder Marc L. Andreessen, now chairman of Opsware (OPSW). "It's back to the culture of how to do it right."

OFFSHORE EDGE. Indeed, this new crop eschews the anything-goes culture of previous generations. And that's almost certainly a good thing. Says High-Tech Startup author John Nesheim: "Startup management is looking more like American football than the free-for-all soccer of old."

For one, startup teams don't just consist of two kids in a dorm room anymore. Many of today's entrepreneurs are battle-tested veterans of several ventures. And they're quickly joined by executives who have also done it before. Friendster, for instance, was founded by a seasoned entrepreneur, Jonathan Abrams. Last year, he ceded the top job of taking the Web social-networking phenom to the next stage to former NBC (GE) network whiz Scott Sassa.

New outfits are also getting to market with real products much more frugally -- and amazingly, even faster -- than bubble-era "fast companies" did. By offshoring some research and development and marketing on the cheap at trade shows, Voltage Security launched its Internet security software less than four months after getting initial funding, using only half the $4 million first-round money.

MORE TRANSFORMATIVE. Others are plugging into the boom-built grid of Web-based technology and services that has only now matured to mission-critical standards. What's more, open-source software costs almost nothing, and it can run on dirt-cheap PCs and servers. "You can bootstrap a company much more easily," for as little as one-tenth of what hardware, software, and network bandwidth cost five years ago, says Kim Polese, CEO of open-source software services startup SpikeSource.

Not the least, startups are now going global from day one -- something that used to take many years. And it's not just offshoring a piece of their R&D -- which can cut the cost of getting to market from $50 million to $20 million or less -- that makes it possible. Thanks to the opening of a full-fledged operation in China almost immediately after its founding in 2002, Valley-based Analogix Semiconductor has already won a blue-chip global customer, Chinese giant Huawei. "Asian companies are becoming global players, so we need to grow with them," explains Kewei Yang, Analogix's chairman and CEO.

The 21st century blueprint for high-tech company-building reflects the new realities of information technology. Tech's rise from the slump that began in 2001 looks remarkably similar to the transitions of other great technological waves, from the railroad to the automobile. After the period of frenzy ends in an economic downturn, the real, decades-long buildout begins. If it's just a tad less exciting, it's also a lot more productive -- and transformative.

DRIVING JOB GROWTH. If you listen to Oracle CEO Larry Ellison, you get a different take: The tech industry just needs to get used to a long, slow decline. Don't believe it, because today's startups don't. Their attitude is promising for both the industry and the economy at large, since smaller enterprises traditionally have accounted for virtually all net job growth.

That's because startups have been responsible for bringing to market new technological and managerial innovations -- and the seeds of new corporate powerhouses -- that are key to keeping the U.S. economy strong. And plenty of new opportunities exist -- from Web services to nanotechnology to genetic medicine. Says Reed Hastings, founder and CEO of online DVD rental upstart Netflix (NFLX): "It's out of this stage of the venture cycle that you get the next Ciscos (CSCO) and Microsofts (MSFT)." If you want to know what's next, keep your eye on the little guys. Hof is manager of BusinessWeek's Silicon Valley bureau

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