> We can outline a simple recipe in just three steps for success as an IT startup:
You might as well put a sticker on your forehead that says, "SUCKER."
Four of my investments (including a startup of my own) were absolute slam-dunks according to your process: large, well-established markets, orders of magnitude price-performance improvement over the competition, good IP protection. They all failed.
Like I said: unless you are very, very lucky, you will be absolutely be shocked by the creative ways the universe will come up with to screw you.
I've seen a lot in business, and I never saw anything as challenging and perverse as your "creative ways the universe will come up with to screw you".
The worst I heard of was law suits by patent trolls.
For "secret sauce" in IT, that's in software locked up in the internals in a secure server farm. Tough to know just what is in that. Tough to get a judge to force you to present all your software to some troll without a lot of good reason.
There can be collusion in restraint of trade, but that's much harder to do now than 100 years ago.
There can be nuisance law suits, but the usual response is that those are too much work and trouble if the defendant is small and too little chance of winning if the defendant is big enough to defend themselves.
I saw a lot of how FedEx grew; some Teamsters were angry, but all they wanted was the usual, just money. Your statement of the perverse universe was not the case at FedEx.
I've seen some families do well with life style businesses. They commonly had problems, e.g., union problems, but they didn't have anything line your perverse universe claims.
Somehow I doubt that IT startups will have union problems anything like what was common in some old US businesses and industries some decades ago.
1) key employee has an old discounted investment make them independent and they take flight (didn't see that coming.. they seemed all in)
2) dot-com bubble and crash. Simultaneously freezes investment and convinces everyone that internet related startups are hokum. We survived and exited at less than a quarter what we would have had. It didn't matter that we had positive cash flow and gazillions of thrilled customers.
3) major media company quietly puts copyrighted material onto your system, sues you for copyright infringement based on that same material and spends years in discovery. You win, but lose.
4) the very clever marketing guy your investees just hired turns out to be a plant by the giant competitor who leaks your marketing plans like a sieve back to self-same giant competitor.
There are gazillions of other things the universe can do to you.
1) Yup, employees can leave. We know that. If have a "key" employee, then need some strong reasons they will stay, and even with those reasons they may leave because of something about their marriage, children, health, etc. If you promised them stock and are 18 months late, then they may get pissed, not trust you, and leave. They may get run over by a truck, etc.
We know that.
That's why the founder should be the main key employee. Or, if have a key employee, then maybe they should have a deputy that can fill in in case of an emergency. That's why there are carefully thought out compensation plans for key employees, e.g., unvested stock options.
Once I was in a little company. Since there was some question about my status, I circulated some resume copies. In that little company, some instances of good work I'd recently done made me essential to our business with one potentially good customer and with our main customer. One of the resume copies got me a better job offer, and I took it. As I submitted my resignation letter, soon late at night I got a phone call from the CEO of the little company: He told me that he would accept my resignation "with prejudice" which didn't really mean anything. He was also drunk at the time.
Part of the job of a CEO is to keep key employees happy. That CEO had been treating me as excess baggage, with the mushroom treatment (keep the employee in the dark and feed them BS) until I became important. Then at one point, in the hall, as apparently an off hand comment, with some resentment and no details, elaboration, or discussion, he said "You are becoming an important person around here". Actually I'd just done some work for a week I'd never told the CEO about, work that thrilled our main customer and in effect got us sole source on a competitive software contract. I didn't yet know how important my work was, and I didn't know that my CEO knew anything about it. But apparently some high up guy at our main customer (the US Navy) called my CEO and had a chat about my work. So, as of the mushroom treatment, not letting an employee know they were doing well, etc., my CEO didn't discuss my exceptional work with me. So, all he did was just make the resentful remark in the hall. He was happy as a clam until he got my resignation letter which suddenly put his future with the two customers at risk. He was CEO of the little company, but that little company was just a subsidiary of a much bigger company; so, no doubt, from losing two big chunks of business, the CEO's job was also at risk. He was a dumb CEO.
2) Yup, the year 2000 bubble and crash hurt a lot of startups. But for a startup, the flow of more equity capital is always a really bad crap shoot that can be affected by anything including the hemlines of skirts of teen girls, sun spots, and a war in central Africa, or a drought in the Amazon valley. A startup just CANNOT depend or count on (count chickens before they hatch) on future equity capital. Similarly for future M&A deals.
Instead, if the customers are still happy and the revenue is still there, then that's about the best can hope for; in bad times, commonly anything more than that can be just a red cherry on top of whipped cream on top of ice cream on top of a waffle. Until the bad times pass, what's real is just the waffle. For the going business, just keep that going, be glad there's no second Great Depression, be glad some one customer, the source of 75% of the revenue, doesn't go bust, etc., keep the revenue going, please the existing customers, try to improve the business in promising, incremental ways, accumulate the after tax earnings, keep watching for better times, and be thankful for what do have.
3) Sure, there are lots of ways some lawyers can look for billings. One way is nuisance law suits. So, sure, maybe start your business as a sole proprietorship. As soon as have any decent revenue look into business insurance to protect you from nuisance law suits and pay a lawyer to set you up as an LLC. Then get to relax for a while. If are small, then filing a nuisance law suit against you is not worth the time, expense, and effort. But if are small and some lawyers do file, then -- IANAL but just thinking out loud about what I'd consider doing -- let them sue the LLC. Shutdown the LLC and restart the business under another name; contact the old customers, etc. and keep going under the new name. Also patch the legal hole the lawyers used to attack you. Also, as soon as have any decent revenue, talk to some lawyers and get some protection against nuisance law suits. E.g., I just saw a disclaimer by a major company saying that they don't accept, look at, or use unsolicited ideas from outside -- right away I kept and indexed a copy of that disclaimer and will be sure to use it when and if appropriate. Generally, need some protection against law suits from unsolicited outside contributions -- IANAL, but likely YouTube has some legal walls against such attacks.
Once are a significant company, do check with more than one high end business law firm and business insurance firm on being protected.
4) Sure, can have spies, worms, saboteurs, agents of competitors or unions, thieves, etc. So, use some standard precautions, e.g., the standard rule in security, "need to know". Maybe have some bonded employees. Look into some security firm checking the security of your organization, say, something like a white hat hacker would check the security of your server farm or other computers. Keep the intellectual property crown jewels nicely locked up. When still small, for the daily incremental backup data, maybe have the CEO take those home and store them in a box in his den; have multiple copies of full backups stored with great safety, off site, etc. Make good use of encryption. Etc. Nothing here is new; we're not the first to consider such things; so, there should be some good advice readily available.
If there could be a book, then there's enough for a blog post for the four cases you mentioned.
As it is, you are telling me that during the night aliens will attack my business, leave without a trace, but have my business in ruins by 8 AM in the morning. Your claim is the first I ever heard of such a thing.
Having orders of magnitude better price/performance is amazing. An "order of magnitude" is usually a factor of 10; those are not easy to come by. Leading examples include Moore's law, hard disk drive capacities, solid state disk drive capacities, optical fiber data rates, wireless data rates, and floating point operation rates in GPUs. In any market of any major size, typically customers just LOVE some factors of 10 better price/performance, and any company that is the sole source of such an advantage should have nearly a license to print money. What went wrong? Anxious readers are eager to know! You have an attentive audience waiting!
The Flownet article was nice. I got reminded of lots of old networking stuff, e.g., ATM.
From about 1980 to about 2000, LAN technology was a chaotic war. The war part was from all the competitive battles. The chaos was from all the different technologies, often to address some of the issues in the link you gave. There was no cheap, easy, perfect solution.
So, there were the various versions of Ethernet. Also there was token ring. And of course ATM, really intended for voice and video streams. And I forget some of the clever addressing ideas.
The problem was, year by year, all the ideas that looked good one year were swamped just by much faster data rates the next year. Finally, TCP/IP let the lower levels be sloppy, e.g., have dropped packets, out of order packets, goofy packet timing, etc. For streaming (not conversational) video over TCP/IP, just have a lot of data rate (that is, a network with much more data rate than might think would be needed) and buffer at the receiving end.
Flownet looks like a nice solution for a problem that, however, was well on the way to going away due mostly just to much faster data rates.
It's nice that Flownet was developed so nicely on Linux, so quickly, and for so little cash.
But for making a business out of Flownet, I wouldn't have tried: Basically would have to go to some big office buildings with some big LANs running Linux (so that your device driver development would work) and have them convert over to Flownet. But mostly those offices would have been running Windows for which there were no Flownet device drivers. And mostly those offices were busy, at each computer upgrade, riding the Windows, Ethernet, Cisco LAN switch and/or TCP/IP router horses. Flownet would have been a tough sale.
I know; that's easy to see with 20/20 hindsight. But those years, I was using first 4 Mpbs token ring and then 16 Mbps token ring and watching 10/100/1000 Ethernet rise. I could see that token ring was dying. Also dying was IBM Systems Network Architecture (SNA). In IBM Research, I went to lots of research presentations where the speakers were hinting how dumb it was for reliability not to go just end to end as in TCP/IP.
Flownet was a long way from "orders of magnitude" (factors of 10) better. Flownet was aimed at a market with a lot of big, powerful players -- IBM, Cisco, Juniper, and more -- and where the market was in chaos due to the rapid speed increases of Ethernet, the death of dial-up, AOL, Prodigy, and Compuserve, the use of the coaxial cable of cable TV to carry telephone and Internet traffic to SMBs and living rooms, all the legal stuff about sharing the last mile, ADSL, etc.
When the giants are in a chaotic war, looking for critical mass, setting de facto standards, and pushing data rates by 1-3 factors of 10, little guys stay out.
In broad terms, right now is a great opportunity: Get to use HTML as a great user interface well understood by 3+ billion people. Get to develop Web pages that will look good on anything from a smartphone to a work station with a Web browser up to date as of about 10 years ago. Get to exploit the Internet which for the more developed countries can easily supply 10+ Mbps data rates to everyone, fixed or mobile. Get to use Windows or Linux for Web servers, and using commodity motherboards and processors can build one heck of a Web server for $1500. Can put that Web server in nearly any room in the industrialized world that has a cable TV connection. Are just awash in powerful, often quite cheap or free infrastructure software from operating systems, data base managers, Web server and page tools, language processors, communications, etc. E.g., now the Ethernet, cable TV, ISP, Internet backbone connections and TCP/IP stack software are nearly universal and rock solid.
Now get just to build on these resources and get to avoid developing them.
Now, just think of something good to do with these resources, along the lines I outlined.
In particular, now get to stay the heck away from developing hardware, fighting industry standards, writing device drivers, hanging on by fingernails as processor clocks and data rates are increasing by more than an order of magnitude, developing your own user interface (as AOL tried/had to do), etc.
> Flownet was a long way from "orders of magnitude" (factors of 10) better.
That article was written towards the end of FlowNet, when we were already winding it down. The work started in 1990. We built our first (and only) prototypes in 1992 (self-funded). Fast Ethernet was not introduced until 1995, and at that point our BOM cost was 20 times lower because our NICs used 100% off-the-shelf commodity hardware, and we didn't need hubs or switches. So for about a year we were 5x faster and 20x cheaper. It took five years for Fast Ethernet to completely catch up with us.
And remind me to tell you the story of Tokutek some time.
You illustrated an old, back of the envelope standard for investing in new hardware: The new stuff has to be at least 10 times better than the old stuff.
You might as well put a sticker on your forehead that says, "SUCKER."
Four of my investments (including a startup of my own) were absolute slam-dunks according to your process: large, well-established markets, orders of magnitude price-performance improvement over the competition, good IP protection. They all failed.
Like I said: unless you are very, very lucky, you will be absolutely be shocked by the creative ways the universe will come up with to screw you.