Tech stars of tomorrow have to overcome the giants of today

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Breaking into the high-tech market can be challenging for startups. Photo: iStock

It’s one of the big mysteries about startups. The number of new jobs created by companies less than a year old has declined from 4.1 million in 1994 to 3 million in 2015, according to the US Bureau of Labor Statistics.

With so much new technology coming on line, why is it then that entrepreneurs and investors believe the chances of success for new businesses are shrinking?

I recently visited a building housing a startup incubator, where dozens of young people rented small offices, or even work space tables, as they tried to build their fledgling enterprises.

Naturally, many of them were software based, looking for the next big breakthrough. Most of the floors were quiet with people working on computers.

Many of these budding entrepreneurs were looking at programs  targeting smartphone applications or specialty online offerings of products or services.

Others were developing business software, which would reduce the cost of providing services and maintaining records.

As I walked through that building filled with industrious and ambitious young people, I realized they shared a common problem – access to customers.

It also struck me that their fates would likely be controlled by a small number of giant corporations.

For example, products dealing with advertising would probably be filtered by Google and Facebook or perhaps a few cable companies. Online products would likely require a relationship with Amazon.

Anything dealing with smartphone or tablet apps would have to go through Apple or Google.

Communications hardware, or software, would also require access to public US carriers, such as Verizon, and the marketing channels of companies like Nokia and Ericson or Huawei in other parts of the world.

Of course, this is the problem as very few entrepreneurs have the experience of managing “monopoly” channels to market. So, the failure rate is high.

I have had experience in such matters when one of my portfolio investment companies tried to sell enterprise software through IBM.

The net revenue result after two years was minimal, while the cost of educating the IBM sales team was high. They were simply not paid enough to sell the products of a startup, despite management promises.

When I started to think about the situation, it occurred to me this might be one explanation for the reduction in technology startups – industry consolidation which blocks new entrants very selectively.

Some will benefit from successful channel access through the big players and tap into revenue. Many others will struggle, and their ventures and dreams will be crushed.

Between 1994 and 2015 enormous industrial shifts occurred which affected the ability of new companies to gain a market foothold.

In addition to dealing with dominant industrial companies, entrepreneurs increasingly have to cope with the impact of globalization, which has seen the US electronic manufacturing sector, such as displays and consumer products, move to Asia.

Developing channel partners with foreign companies for industries that were formerly in the US can be very challenging.

Industrial consolidation is not new, but the rate it is occurring today in technology markets is remarkable. For example, major parts of the commercial software industry are in the hands of just a few companies such as Oracle and Microsoft.

In the hardware sector, the dominant supplier of communications equipment is a relatively newcomer, Huawei, the Chinese multinational group.

There is no evidence that the consolidation trend is being reversed. Reaching scale and the resultant benefits in cost structure, product development and global marketing are the powerful drivers of consolidation.

But there is one consoling thought when you look at history – many of the high-tech giants of today did not exist before the 1990s.

They displaced older incumbents and they are vulnerable to new entrants with a completely different and compelling value proposition. Nothing, as they say, is forever.

And perhaps one of the teams I saw working so industriously in that incubator might just be that catalyst for dramatic change. In the end, that is the value of capitalism and free enterprise.

Dr Henry Kressel directed electronics research at RCA Labs and subsequently was the senior partner for tech investing at Warburg Pincus, a leading venture capital firm.

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