We are always keen to champion startup companies within these pages. The innovation and technology they produce is helping to shape tomorrow’s world while they also drive job creation and the economy. However, they could be facing an uncertain future, as Joe Bush reports.
To coin a phrase, startups are a small fish in a big pond in many cases, and the big fish are circling. Leviathan organisations like the ‘The Four Horsemen’ - Facebook, Amazon, Google and Apple - and the growth that they’ve experienced in recent years, combined with their diversification into different markets, has made it increasingly difficult for startups to compete or attract investment.
Big tech impact
To put things in perspective, it is estimated that Apple is on track to become the world’s first trillion dollar company, and last year, Facebook and Google accounted for 99% of revenue growth from US-based digital advertising.
This has led to a drop in the number of new business launches and many experts claim that these big players are to blame. Figures show that in 2015 some 414,000 startups were established. This was nearly 100,000 less than the number formed in 2006.
Twenty years ago startups were on a slightly more level footing and were sought after cradles of innovation. Today that advantage has shifted somewhat as the big boys have got even bigger.
There have been several examples of innovation developed by startups being either swallowed up or cloned by the big tech companies (such as Instagram and WhatsApp which are now owned by Facebook) and, although breakthroughs are still occurring, research suggests that less than one percent of startups in the US become $1bn companies.
Companies like WhatsApp and YouTube (now owned by Google), could have emerged as a serious competitor to the Four Horsemen – instead they just became another piece of a big tech empire, adding to their market share.
The competition squeeze
And, of the startups that do breakthrough, most encounter merciless competition. The tech giants swallow up innovations and have measures in place that ensure they still get a good deal, such as server clouds and app stores, to which the smaller startups must pay. Some experts have also claimed that the bigger firms have become more astute at locking down and closing off paths to market for the startups.
There was an example of a US-based nappy retailer initially rebuffing advances from Amazon regarding a buyout. The result was a dramatic slashing of prices from the latter. Selling their products at a loss for a sustained period was something the startup clearly couldn’t compete with so eventually ended up selling to Amazon in 2010.
This is also creating a stumbling block to investment. If a startup is ultimately going to go head-to-head with Amazon, for example, it’s hardly surprising if potential investors start to shrink back into the shadows. These tech giants are getting larger and larger so, as their staff salaries increase accordingly, the option of leaving to become a startup entrepreneur becomes less appealing – particularly given the possibility that you may ultimately be acquired your old employer.
Times have changed
While opportunities still exist for startups, the general feeling is that regardless of their level of success, they will eventually be killed off by the tech Goliaths. Looking back in time, nearly every recent decade saw a startup launched that went on to change the world. That seemed to stop around seven years ago as the big companies became more aware of potential threats to their dominance.
In addition, launching a startup simply isn’t as cheap as it used to be and it takes longer to reach profitability. When Mark Zuckerberg launched Facebook in 2004, there were few competitors and it was relatively cheap to run a website, meaning the site became profitable quite quickly.
However, as investors have realised how profitable dominant technology companies can become, they’ve been willing to pour more and more resources into ensuring that their startups are the ones that dominate their market. And that, ironically, has made it more difficult for anyone to reach profitability.
So the theory is that any new startup will feel the boot heel of the big boys as soon as they start making too much noise. However, all is not lost and there are some things that startups can do to fight back.
Know your strengths: Competing against the resources, spending power, brand recognition and economies of scale of the bigger names is clearly a non-starter for a startup. It is therefore vital for them to identify what their unique strengths are and what they can bring to the table that is different from the norm.
The size of startups obviously means that they can manoeuvre and adapt much more quickly than the big organisations, meaning that the disruptive technology which leads to a far more rapid increase in product performance, can be taken on board much faster.
Startups also offer that personal touch to create real one-to-one relationships with their clients, which can be lacking from a faceless multi-million dollar corporation. In addition they tend to be free of red tape which can all help to enhance the customer service experience.
Be agile: If a lightweight boxer jumps into the ring and goes toe-to-toe with a heavyweight then there will only be one winner. The best chance the lightweight has of avoiding that knockout punch is to not be there when it arrives.
The same rule of thumb applies to startups. If a tech giant moves into their sphere then they will almost definitely lose if they try to compete directly. Rather than facing them head-on, startups should look to side-step the big fish by looking for other opportunities, gaps or sub-niches in the market that are free from the influence of the big companies – which of course is easier for smaller companies to adapt quickly to in order to take advantage.
The customer comes first: Although we touched upon it earlier, the role of customer service should not be underestimated and is one area where startups can really out-perform the monster companies. We’ve all had that frustrating experience of trying to phone a large multi-national corporation (mentioning no names) and being bamboozled by a labyrinth of automated dialling options and listening to Greensleeves while being on hold for what seems like forever.
Smaller companies can avoid this and are able to provide that extra level of customer support – commonly referred to as the ‘shopkeeper’s advantage’ – which builds brand loyalty and customer trust and will ultimately retain them in the long term.
If you can’t beat em’ join em’: It will depend on each individual case, but in some instances it will help startups to partner with larger companies that are entering their market. It can open up new revenues of business for the smaller company and they can also avoid being swallowed up.
So while startups are certainly facing an uphill battle, there are measures that can be employed that will lighten the load. Startups are key to job creation, economic growth and a driver for disruptive technology. So even though the big tech companies dominate the industry, the role of the startup should not be underestimated.