It seems hardly a day goes by without some new technology start-up being lauded as ‘the next Facebook’. But is that just perception, or is the world of tech start-ups really changing? The Economist magazine has published a focus report on the issue, which provides plenty of food for thought.

It has noticed an astonishingly proliferation of digital start-ups, which it attributes, at least in part, to the economic conditions. With so few traditional jobs available, many young people have turned to entrepreneurship instead. Although not dissimilar to the first dot-com bubble in the 1990s, this time, growth may rest on stronger foundations, because it is now much cheaper and easier to form a company. You can build an app or a website quickly and easily using free tools available online. Although the failure rate may be similar to the 1990s, it’s not going to bring down markets. Will these start-ups change the world? Not individually, but, the Economist suggests, they show us how the world might be in future: lots of small, innovative firms operating on large platforms owned by a few providers.

The process of start-up

Start-ups used to begin with a product. Now, they often begin with a few people who want to work together. And what they’re developing is not so much a product, but something that customers want. These start-ups are highly responsive to customer needs. They need to develop something, user-test it, and then redevelop until it is what customers want, achieving ‘product-market fit’.

Alongside start-ups, companies offering ‘start-up support’ have developed, providing apps that can test minor changes in electronic offerings, such as different coloured ‘Buy Now’ buttons, to see which improves sales, and user-testing services. Another crucial development is ‘leanness’. A bit like Lean in manufacturing, this movement aims to keep things simple. There is always a tendency to embellish, to make something a little bit better. The drive to leanness means that everything is tested against consumer needs, to see if the market really wants those ‘bells and whistles’.

‘Accelerators’ act as business schools for start-ups, bringing them up to speed on what they need to do, providing a network of contacts, and helping to identify which start-ups are most likely to succeed. Accelerators tend to take an equity stake in the companies they nurture, and pay them to attend, and places on accelerator intakes are highly sought-after. ‘Classes’ may be minimal, but the close working, time pressure, and mentoring approach is very productive. At the end of the process is demo day, when the start-ups pitch their ideas to potential investors. The success of the model is still largely untested, since most of the start-ups that have gone through accelerators are still in their infancy, and only time will tell.

It’s clear, however, that start-ups need more than a ‘school’ for success. The ‘community’ or ‘ecosystem’ is also important, which is a way of saying that entrepreneurs tend to cluster together geographically, with accelerators and venture capitalists close by. There’s nothing new about that—think Silicon Valley—but there are now many more places where ecosystems have become established, some government-supported.

The dark side

The report also considers what it calls ‘the dark side’ of entrepreneurship: the price of the constant struggle to establish a start-up, and the pressure to succeed. Many start-up founders are short of money, work long hours, and find that life is not as good as they thought it would be. One commentator has suggested that founders of tech start-ups are not the elite, but simply the new ‘working class’. Starting up a business is easy: anyone can do it. It has become a commodity, and no longer requires elite knowledge and skills. Investors are effectively employers, and many start-ups will eventually be bought out by a company who wants the founders, not their fledgling company. This means that the start-up ecosystem is not a way of nurturing new businesses, but more a training programme for knowledge workers.

Other development

The final part of the jigsaw is platforms. These provide a stable base on which the detail can be changed quickly and easily. The most powerful platform providers are probably Amazon, Google, and Microsoft. The more open the platform, the more widespread. The more widespread, the more customers want it, and the more developers will build. It’s a positive feedback loop. It’s a world of a few large providers, supporting thousands if not millions of small start-ups. Quite how this will develop, and what governments will want or need to do to control it, remains to be seen.

Image credit: Staircase illusion by Cuba Gallery

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