Saturday, May 29, 2010

Startups: Tentpoles and pollination

One of the most effective mechanisms for creating startups is a successful startup that turns into a big business. eBay is an excellent example of s startup that became successful and made a lot of people rich. Those people turned around and invested their money in their own startups and those of other entrepreneurs, which created a new generation of startups. I call these big, successful startups "tentpoles", the same term used in the movie business for a motion picture that's expected to be wildly successful and to spin off a series of sequels. In Silicon Valley, Hewlett-Packard and Fairchild Semiconductor were two of the earliest tentpoles; Apple and Intel sprung from them, and the current generation of tentpoles includes Google and eBay.

Tentpoles go through their own lifecycles, however. Early in their lives, they tend to attract engineers who are likely to go off and do their own startups. As they get bigger and more bureaucratic, however, they attract employees. Employees don't want to be entrepreneurs. They want a steady paycheck and good benefits with no risk. Employees crush the startup spirit of the tentpole with bureaucracy and hierarchy. Potential entrepreneurs who do join tentpoles by the time they reach this stage either leave quickly or get trampled down in the organization. As the Japanese say, "The nail that sticks up gets hammered down."

There's another model for startup creation, and perhaps its best exponent is Jason Fried, the co-founder of 37signals, the Chicago-based company that offers Basecamp, Backpack, Campfire, Highrise and other web applications, and that developed Ruby on Rails. Fried and Ruby on Rails developer David Heinemeier Hansson recently wrote Rework, a book about creating and growing small, sustainable businesses. Rework has gotten a lot of attention, and Fried often speaks about his concepts to groups of business founders and potential founders.

Companies that apply the concepts in Rework are unlikely to ever become tentpoles, and that's just fine with Fried. He believes that companies should grow organically from their own cash flow, and shouldn't depend on venture capital. Companies following the Rework model are likely to look a lot like 37signals itself--small (almost always under 100 employees), virtually organized (utilizing team members wherever they're located), very efficient, extremely flexible and a little bit opportunistic.

I call this model "pollination", where a set of concepts, or even a single idea or meme, can pollinate startups around the world. It doesn't depend on a tentpole, local universities or an active venture capital community; all it needs are motivated people who want to start their own businesses. The companies that develop out of this pollination are unlikely to ever get big enough to go public and score huge paydays for pre-IPO founders and employees, so they're probably not going to spin off lots of startups themselves. But, if they're successful, they encourage others to follow in their footsteps.

The tentpole model is the way the startup environment has grown for the past 50 years, but when it costs less to start a new technology business today than ever before, and when more resources are available in more places around the world than ever before, pollination makes more sense. It doesn't depend on the existence of a local tentpole to spin off more startups, and it doesn't rely on a local concentration of resources. People have been trying to build Silicon Valleys in their regions for decades, largely without success. Perhaps the Internet and its related technologies have made it unnecessary to replicate Silicon Valley, but it also means that there's not likely to be another concentration of tentpoles in one area like Silicon Valley in the future.
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