The Truth About Start-ups

Inc. revisits 27 companies profiled in Anatomy of a Start-up to find common pitfalls and experiences.

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The Truth About Start-upsWhy does one new business succeed while another quickly perishes -- and what can be learned from each? We revisited the 27 companies profiled in Anatomy of a Start-up over the past three years and came up with some surprising answers

Five bucks says we know your first question about the start-up companies we've profiled: How many are still around?

The answer, surprising to some, is a good two-thirds (although all but a handful missed their growth projections). Of the companies that aren't in business, some have failed in standard fashion, formally dissolving and closing their doors. And others have retreated in that more time-honored entrepreneurial way, collapsing back almost to square one, with a lone founder, encamped at a dining room table, continuing to pursue the long-held dream.

Other questions we hear: How are the companies that have made it really doing? What happened with the test site we read about, the expansion plan, the joint-venture idea? Did they end up raising that money? Who skipped town?

And what about those so-called experts who comment at the end -- who dissect a company's strengths and weaknesses? How often were those folks right, anyway? Are founders commonly blind to flaws that are obvious to informed and disinterested outsiders?

Finally, considering all the lost sleep, unfathomable debt, and enormous risk that come with starting a company, would any of those founders do it again? And if they would, then what -- given the benefit of hindsight and the experience of surviving the occasional disaster -- would they do differently?

But first, a bit of history. The Anatomy of a Start-up series made its debut in February 1988 with a profile of Video's 1st, a franchised chain of drive-through video stores founded by two former stockbrokers. Video's 1st is now out of business, but the series continues to thrive; it has, in fact, become Inc.'s most popular. By the end of 1990, we had profiled 27 companies, doing our best to get into the minds of founders. How did they plan to compete? How did they calculate sales projections and profitability forecasts? How did they think they'd raise money, find staff, persuade customers to buy?

Now we'll see what happened to them. We've tracked them down, updated their stories (see "Where Are They Now?" page 5) and reassessed all that expert advice (see "Truth and Consequences: What the Experts Knew," page 7). We've spoken to many of the founders -- some bankrupt, some rich, most something in between -- and examined their various tales in a search for patterns. Did the start-ups beat have lessons to teach?

Plenty. Here we give you six.

If Cash Is King, Flexibility Is God
Many of the challenges in the start-up process are utterly predictable. You need a good idea, and you need a market that has at least marginal interest in that idea -- even if that market doesn't know it yet. You need good partners, unimaginable amounts of money, and the ability to charm in the morning and play hardball in the afternoon. Each challenge has its own pressures, but it's clear from the outset that you'll have to meet those challenges. Not only can founders foresee which challenges will come up, most can practically pinpoint when.

What has made or broken many of the companies we've watched, though, is this: the ability (or inability) to recognize and react to the completely unpredictable. To use enough managerial sense to plan and anticipate, yet have enough street savvy to know when things are going quite wrong. To be flexible, and not just in response to small surprises but to really big ones -- like discovering you're selling to the wrong customers or selling through entirely wrong channels.

Some companies even find they have to revamp from top to bottom in order to survive. They discover they're in the wrong business.

No Anatomy subject illustrates that kind of discovery better than Buddy Systems Inc. When we wrote about it back in 1989, Buddy Systems was a manufacturer of medical computer systems, providing machines for cardiac patients to monitor vital signs at home. The company intended to sell to hospitals and home-care nursing companies. Last year, when we checked in for an update, sales were slower than molasses, but Buddy Systems was still making machines.

Today? Buddy Systems has metamorphosed into a service business -- a provider of those very clinical services offered by the companies it used to pitch to. Why did founder Thomas Manning make that kind of fundamental change five years into development? Lack of success, partly, and inadequate financing. Target customers turned out to be "so caught up with other growth situations that the cardiac application was not the highest priority," he says. "It just didn't get the attention." That miscalculation led to a cash crunch, and when a new investor group offered $3 million if Buddy Systems would use its technology to become a clinical-services provider, Manning took the plunge.

He argues, though, that Buddy Systems hasn't switched businesses. "The original conviction, that there is a need for telecommunication between home and nurse and doctor, continues to be our guiding vision," he says. He had always imagined going into the service business, but he originally abandoned the idea because of scarce resources. The company now has contracts with clinics in Chicago and Cleveland.

Like Buddy Systems, Wall Street Games Inc. (WSG) went through a major metamorphosis. Timothy A. DeMello started the company as a toy business. Target customers for his securities game were general consumers and students; they purchased a box with instructions and an 800 number for buying and selling stocks in their mock portfolios. Because WSG was a standard retail product, DeMello had to confront the ensuing challenges of getting it onto store shelves and into college curricula.

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