The 2011 startup pattern is set: Rising, gathering momentum.
You can see it more clearly daily. I and others have been blogging about it week after week in January.
One of the signs of the rising wave is mergers of startups. Each signals a change in the plans of the companies as they compete in the race to the top of a new category.
As I explained last Tuesday, January 25, your prime directive is to strive to emerge from the war as Number 1, The Gorilla of the new space. If that turns out to not be realistic, you must figure out how to be a successful Number 2 or 3 (a thriving chimpanzee). The rest of the startups will be sold to other startups or established public corporations at very low values.
Those animal terms are not trite, they are used by the venture community to signal the status and power of startups competing in each new market category. During each startup race, observations will be made on who is likely to become Numbers 1, 2 and 3. Eventually it will become clear who The Gorilla is going to be. Then it's time for the other startups to jockey (alter business plans) to become Numbers 2 or 3.
Knowing what to do to become a successful Number 2 increases your chances of final success. Investors are very interested in what you plan on doing if Number 1 rank eludes you. So let's take a look at a real example and look at lessons from it that you can apply to your startup idea.
Today I have spotted a startup merger that is an excellent example of two new enterprises combining. The two are established startups, each with successful, branded products and good managements. Take a quick read of the TechCrunch blog and you'll see what the managements say is the hope and future for the combined startups. Then go through the tips below and see what you'd do to alter your plan for your startup if yours is going to have to scramble to be Number 2 or 3. Exclusive: Lockerz Acquires Social Photo Sharing App Plixi (Formerly TweetPhoto.
- Is The Gorilla established and is there a chance to be Number 2 or 3? The TechCruch blogger does a neat writing job of succinctly commenting on what is going on: "For Plixi, being acquired by a growing social network makes sense. It has been difficult to compete with Facebook, Foursquare and Twitter, which all offer photo sharing within their networks."
- What is the new focus? ."Lockerz eventually wants to be the go-to commerce homepage for teens and young adults". That is a crisp focus, the narrowing of firepower that experienced venture investors are looking for. Less can be more in such situations.
- Is the change confusing the brand? In this case the photo sharing service name will again be changed. It was first known as "Tweetphoto" and blossomed with the boom of Tweet. Then it was named "Plixi" as it moved to also work on other platforms: "Plixi is an enormously popular social photo sharing application that serves more than 1 billion photos monthly. The startup rebranded from “Tweetphoto” last year, as the photo sharing network expanded beyond Twitter to other platforms like Facebook and MySpace and added location-based check-in features." Renaming a product/service is dangerous -- it is essentially a re-start. One such change is hard to do successfully. Two is rarely a success. The fundamental question for a brand is "What does the brand (name) stand for?" Each new name has to attain its own meaning. It takes time and a ton of clever marketing communications skill. This is tricky to do. Think it through carefully before making name changes to an established brand.
- Does the management have the skills and emotional commitment required to execute the altered plan? Note carefully the blogger's word obout management: Only the founder of the acquiring startup is mentioned. " Founded by Kathy Savitt, a former Amazon and American Eagle Outfitters exec;" So who are the CEO, the VPs and key employees? Do they have the psychological desire and drive needed to make this altered plan succeed? What skills and experience are missing? In this merger the teams may be superb. Great, I wish them much success. My point is this: What are there alternative strategic moves that your startup is able to take (if the path to Number 1 is blocked), and are those moves that your existing management team is capable of executing?
- Is there enough cash to execute an altered strategic plan? Typically the purchasing company is expected to have a hoard of cash and the selling company struggling to raise fresh capital at reasonable rates. In this case we don't know the facts. For your thinking, you will be wise to think about mergers well before you run short of cash. That way the seller gets more value and avoids exploitation by the company with the cash. The buyer will acquire a healthier startup.
BOTTOM LINE: Think now about what you might do if you have to try for the silver or bronze medal. Do not give up too early in the race to become The Gorilla. But serial entrepreneurs sense early when that throne is going to be occupied by someone else. The wise quickly work out the alternative path to become Number 2 or 3. And there is no shame in selling your startup to another startup. Often the best executed business simply gets leapfrogged by another startup. And bad things happen to even the best people leading new enterprises. The wise look for a way to make great value out of what has been created, sell to a quality startup and contribute to the merged success. When you can think like that, you'll be using your brain like a serial entrepreneur. It is all part of learning to build an unfair advantage.
I wish you The Best on your Adventure!