Start-ups: The bad and the truly ugly

Last time, we started looking at the good, the bad, and the ugly of working with start-ups. And, by the way, our definition of a start-up could include companies that have been in business in some cases up to at least five years. In the prior newsletter, we mentioned that these companies often provide excellent opportunities to sample innovative technologies well ahead of the normal curve. But this time we’re going to look at the other side of the picture.

A phenomenon that we often see is that in an emerging technology, such as Wi-Fi a few years ago or network and application optimization today, there typically are more companies than can survive. One of two things typically happens to these start-ups. They either grow into a substantial company on their own, or they get acquired. The latter is much more common, since the entrepreneurial spirit and typically engineering-based management teams often lack the skill and/or the desire to grow to being a long-term entity. However, the risk comes when neither of the above happens.

In fact, at one time (many years ago), the State of North Carolina required that all high-tech vendors at least put schematics of the equipment into escrow in case the company failed. This is clearly not a reasonable request in most cases today, but the purchaser of leading-edge equipment from a small start-up does present a question: What happens if the company fails? The buyer is left without support or product updates, and the money could be essentially wasted. This gets back to our point in the last newsletter: If you decide to buy the product, make sure the company has enough funding for 2 or 3 years, so you are not hurt as badly when/if they go belly up.

That’s the bad, but then there’s also the ugly – and the ugly sometimes affects the overall telecommunications economy and, unfortunately, the overall reputation of smaller companies in general. For instance, one of the “restructuring” techniques used when corporate resources are depleted is to sell the assets of the company to a major creditor or another entity that then reinvents the company as a new entity. Secured creditors, if they are lucky, get pennies on the dollar, and unsecured creditors (like analysts) get nothing.