Abu Dhabi, UAEThursday 19 July 2018

Speciality to be name of the game

Two decades ago, a US start-up was the first to set the benchmark for a rash of new ventures that went on to become household names and business behemoths. But experts say the model Starbucks reflects is changing.
Yahoo has succeeded at shifting its image to some degree with improved earnings and its acquisition of Tumblr. Above, Yahoo chief executive Marissa Mayer announces the acquisition of the blogging service. Adrees Latif / Reuters
Yahoo has succeeded at shifting its image to some degree with improved earnings and its acquisition of Tumblr. Above, Yahoo chief executive Marissa Mayer announces the acquisition of the blogging service. Adrees Latif / Reuters

It was more than 20 years ago when Dan Levitan first got involved with a start-up that would eventually shake up the coffee industry like none before it.

Back then there were still only about 100 shops under the venture -mostly located in the north-western corner of the United States and cities such as Vancouver and Chicago. But this particular brand was looking to expand, aggressively, across North America and go global.

Mr Levitan, then an investment banker, had been hired by Howard Schultz, the chief executive of none other than Starbucks, to handle the company's initial public offering in the early 1990s. During that time Mr Levitan saw why the coffee chain seemed set for success regardless of which city - or country - it opened in.

"You go to the store and track the core customer and there weren't a huge amount of them but they were going to Starbucks 18 times a month," says Mr Levitan.

"They had their relationship with the barista and it was just part of their life.

"What makes a great consumer business is cracking the code early on and getting the business and service pitched to your target group," adds Mr Levitan.

"Then, over time, what great businesses do is they test two things: ancillary products; and services."

The landscape for businesses around the world has changed markedly since Starbucks went public. Mr Levitan and other veterans within entrepreneurial circles in the US predict in the future the kinds of start-ups that will try to reach consumers will become much more segmented and specialised. Already, they say, the world has been heading in that direction and they expect fewer blockbuster businesses to crop up in forthcoming years based on familiar models from the past.

"I do think that the days of finding the next Google and Facebook, in reference to social consumers on the internet, are over," says Bill Lee, a prominent angel investor who has backed companies such as Tesla Motors, Yammer and HootSuite.

So where, then, is the start-up world headed in entrepreneurial hotbeds such as Silicon Valley and elsewhere?

Some say the industry is moving toward fostering a more sustainable environment for niche ventures. Selfpubd, for one, is a publishing platform geared specifically at independent videogame developers. It launched last year and was accepted into a speciality accelerator programme, YetiZen, which is based in San Francisco and focuses entirely on growing game studio and platform start-ups.

"They have over 150 mentors come through - it's a very intensive accelerator," says Andy Rosic, 41, the founder of Selfpubd who is based in Portland, Oregon.

"I have a really wide, deep [contacts book] but it wasn't nearly as strong in gaming. [YetiZen] really expanded that network and gave me tonnes of unofficial advisers, mentors and some official ones."

Initially, Selfpubd sought to raise about US$500,000 dollars to help grow and become a sustainable venture.

By the end of its sessions at YetiZen last year the start-up increased its goal to $1 million. Now, Mr Rosic says, Selfpubd is on track to raising even more than that amount.

"These sort of 'silo-ised' incubators and accelerators really help because not only does the focus and mentorship get more pointed and industry-specific but the investors you talk to are also better," says Mr Rosic.

"If I were to pitch my game platform to an investor who understands whatever - a big green eco world, or medicine - they're just going to glaze over and say, 'Never mind' because it's not into their attention span."

More start-ups in the future will also be concentrated on improving existing companies with smaller features - rather than whole systems - that make it cheaper or somehow more efficient to deliver a product or service, experts say. The industry is becoming "more featureised", says Mr Lee.

Some of Mr Lee's peers agree, noting bigger businesses sometimes swallow smaller, feature-focused firms for a hefty payoff. Yahoo, for one, recently announced that it agreed to spend $1.1bn to acquire Tumblr, which lets people share photos, text, music and other digital data online.

"Features can surprise us and be businesses," says Scott Kurnit, an investor and tech entrepreneur who founded About.com, which The New York Times acquired in 2005 before selling it last year.

"I think we're going to see this model happen for the foreseeable future - more companies done more cheaply with more failures but better, or more interesting, ideas."

Not everyone sees the feature-led transition as a positive trend, though.

Back in the 1980s, a group of budding entrepreneurs worked on transistors and disc drives while trying to create full operating systems and technological infrastructure through Sun Microsystems, which specialised in selling computers and related components, software and services.

"Really brilliant people were working on really hard things," says Scott McNealy, one of the co-founders at Sun Microsystems, which was acquired by Oracle a few years ago.

"Now you have a couple of kids with a new idea and you hope to become the new taxi-hailing service. Everyone's looking for something to tip and they're all trying to create brands because you can come up with a taxi service in a couple of afternoons - but do you become the go-to brand?" says Mr McNealy.

The number of new businesses in the US has certainly grown in recent years compared with a decade ago, especially in sectors such as technology and fashion. Overall, there were between 514,000 and 565,000 new business owners created each month over the past three years, up from 395,000 to 470,000 between 2000 and 2002, according to the Ewing Marion Kauffman Foundation, which studies trends in entrepreneurship.

But while the surge of start-ups has inspired entrepreneurs to follow suit in other parts of the world, including the UAE and the broader Middle East and North Africa region, this has also led to increased competition.

"Silicon Valley is so competitive and Darwinian right now," says Mr Lee, who in addition to being an investor has also created Twist, a mobile app start-up.

It is easier to get started, in part because technology costs have come down.

Entrepreneurs no longer need to begin with the same kind of stellar track record they did during the dot-com boom of the late 1990s, although there is more pressure to stand out from the crowd with a finished product.

"It is much, much easier to get into the game than before," says Kevin Davis, the co-founder of Geekatoo.com, a crowdsourced marketplace that is part of the 500 Start-ups accelerator programme and provides in-person tech support.

"Before, you'd have to come from an amazing background but there are so many people who can readily build products that look really cool - and they have to up the bar to make sure they're the cream of the crop," adds Mr Davis.

Even as technology costs have fallen, for some ventures revenues have risen on the back of increased use of gadgets, especially mobile phones and tablets. This is a trend that is only expected to continue, experts say.

Zulily, a private-sale online shopping site that launched for busy mothers a few years ago, started out selling items just for children. It then expanded its line to include items for a woman's wardrobe and other rooms of the home.

The company is backed by Maveron, a venture capital firm Mr Levitan and Mr Schultz founded together in 1998, following the success of their Starbucks IPO.

"Most of our businesses are [seeing] 30 to 40 per cent of their traffic and sales coming from mobile devices," says Mr Levitan.

"I don't think there's been a more exciting time for technology businesses to reach customers."