US opportunities for Kiwi startups

The stateside culture nurtures startups.

Friday, September 09 2011 || Start Me Up || BY Ken Erskine

On a recent business trip to Boston and California I was fascinated by a number of insights. As you’d expect, there was a sense of optimism there about the future and excitement about the prospect of global success.

But I didn’t expect to observe the importance placed on the development of smaller startup organisations and new, leading edge businesses, products and services for larger corporations. In the current market it seems many large organisations have significantly cut back on corporate R&D. Many leading IT organisations have adopted a strategy of buying new products from agile startups. This activity has seemingly replaced IPOs as the most likely exit for an entrepreneur looking to realise a return on their venture before moving to the next.

I like this as an approach as it essentially means development is done and valued in relation to markets and customers’ actual needs. However, this approach is less practical for the development of significant, new intellectual property. At FXPAL (Fuji Xerox Palo Alto) labs — a research facility employing around 50 staff, half of whom have doctorates, the focus is on ensuring that developments are tested and validated by the market at an early stage. The key goal is ‘spinning’ new ventures in to the corporation. If this is impractical, new technologies can be spun off as new businesses to marry the technology with an appropriate entrepreneur who will use it to form a new company or license the technology.

On my visit to the US there seemed to be a very realistic approach to the risks involved in setting up a new venture. Many investors said they really wanted to work with entrepreneurs who had experienced at least one business failure.

While failure is undesirable for most of us, it results in a refreshing perspective — both culturally and practically. It allows us to understand the value of learning tough lessons.
There seemed to be a majority view that the team involved in development was more important than the initial idea. As one US investor said, “A great team can turn crap into gold and a bad team will turn a golden idea into crap.”

What is clear is that you need a mix of a good idea and a good team.

Amazingly, some 90% of net new jobs in the US are created by new firms, and these jobs are created by a small proportion of startups (between 4% and 5% of new firms is the quoted proportion). I found it fascinating that the US government now supports an increased focus on exports and attracting new entrepreneur immigrants. Today, it seems less than 1% of all US companies export and over 90% of companies there are small — some 80% of all companies employ fewer than five employees.

At many meetings with US venture capitalists and angel investors, they were keen to see startups ‘bootstrapping’ without the need for external investment before securing initial customers. Many Kiwis think it’s harder to raise funds locally, but it’s just as hard in the US. Statistics shared with me show only around 1% of companies that seek to raise external funding in the US are successful.

I was surprised to hear the theory being debated in California that the entrepreneurial success of Silicon Valley is due to the large immigrant population there. The thought was that fresh thinking mixed with local markets results in a dynamic that supports the creation of new and innovative companies.

I was also impressed by the humility of a couple of very successful people I met. One investor told the tale of a software developer he had worked with in a very successful startup business. The business sold within a year of being formed and the investor made a 99% internal rate of return.

About five years later the software developer approached the investor with the opportunity to make a new investment in an online retail company called Amazon. He declined to invest the $100,000 sought. A year after Amazon’s IPO that investment would have been worth about US$33 million and at Amazon’s height would have been worth US$66 million. Oops.

There is a lot of opportunity for Kiwi companies in the US. We have a great reputation and it’s up to us all to make sure we make the most of it.

Ken Erskine leads the startup team at the Icehouse and is also responsible for the Ice Angels