Bold ideas and strong teams are more important than financing, venture capitalist says.
To venture capitalist Chip Adams, the recipe for a successful Silicon Valley startup company has just three ingredients.
Funding isn't one of the ingredients. Funding will follow if your startup has a bold idea, a solid economic model, and passionate people in key positions, says Adams, founding principal of Rosewood Capital in San Francisco.
If your company doesn't have those three ingredients, Adams isn't betting on your future. Although he's in the business of financing startups, Adams sees a shakeout coming down the pike. He predicts that in the long term, each market niche of the Internet will be similar to the auto industry, with the DeLoreans of the Internet either selling out or shutting down.
"Companies will continue to be bought out," he predicts. "Three to four major competitors in each market will survive."
In the meantime, there will be scores of new startups jockeying for the top positions or merging with other technology companies, he says, and developments such as broadband access will change the landscape several times. "I really do think we're still in the first or second inning," Adams says of the Internet business.
Finding success
So you want to make sure you're working at a startup that will succeed, not crash and burn? "What makes a great company hasn't changed in the last 30 years," says Adams, who's funded Xpede, UltimateBid.com, BuyMedia, and Hooked on Phonics, among others. "A lot of these things are common sense, but that's been in short supply lately."
A bold idea that's worth pursuing is perhaps the most important ingredient, he says. You can build a business plan and hire passionate people, but if you aren't offering an exciting product, you're just another face in a crowd.
"If you look at eBay at the time it was started, that was a bold idea," he says. "But buying lipstick online isn't a bold idea, and buying a computer at 30 percent off is not a bold idea."
After your startup has a bold idea, it needs a real economic model, not a "pipe dream," Adams says. While stock prices are currently going wild for companies losing bucket loads of cash, Adams predicts that trend will change.
"Ultimately, everything comes down to making money," he says. "You've got to have a business that has a way to make money."
Finally, your company needs people passionate about their product, especially the people running the show. "Professional managers are a big question for me right now," Adams says. "The entrepreneurs who are fanatic about the idea might have a leg up on the professional manager."
Adams acknowledges that solid business plans and passionate staffs can be built, and venture capital firms can help. "If you start with the bold idea, you have some flexibility to put a management team in place and build a business plan," he says.
Money and niche
Adams, being in the finance business, doesn't discount the importance of money, but he does believe financing will follow if the other ingredients are in place.
"There's no question having a huge pile of low-cost capital helps," he says. "It prolongs your ability to hang on longer, but it doesn't guarantee success. Lots of mediocre ideas are supported by venture capital. That's where our industry is today."
It also helps a fledgling startup if it's carved out a unique market niche, Adams says. Sometimes, however, it's difficult convincing venture capitalists to buy in if they don't see your niche as the Next Big Thing.
Adams points out that fast-food giant McDonald's started in the hamburger-selling niche, when all other restaurants were offering full menus.
"A good niche business many not bring a US$1 billion market cap that the venture capitalists are looking for," he says. "As an entrepreneur, what's the matter with building a niche business with a US$100 million market cap?"
Adams predicts a ton of money will become less important for startups in at least one respect – national advertising campaigns. Many Internet startups will move away from big television campaigns, he says, because the short spike they get in traffic doesn't justify the cost.
"Startups need to understand you'd rather have creativity than dollars," he says. "People are moving back to a model of building great customer service targeted to the customers they want.
"I don't care how much you spend on the Superbowl," he adds. "If you don't have a good idea, it doesn't matter."
