The underground entrepreneur

What happens when scores of young, intelligent people, many now empowered with real business battle scars, are thrust onto the street? The answer is proof that entrepreneurial passion is still very much alive in technology; you just have to know where to look for it.

Gallons of ink have been spilled announcing the end of innovation. From a strictly public point of view, I can see the point: Venture capital is at historic lows; IPOs are nonexistent; and the Silicon Valley PR machine, so adept at trumpeting the arrival of "the next big thing," has effectively been powered down.

But my report from the start-up trenches is that entrepreneurial passion is very much alive. I'm talking about an underground of entrepreneurs and skunk-works projects so stealthy they haven't hit the radar of the traditional press. The oft-heard phrase down here is, "I'm working on my next project," which is code for, "I'm going to start something, but I'm going to do a ton of homework before I do."

Here's the scoop: five years of dot-com and technology mania. Thousands of highly motivated entrepreneurs and MBAs from all over the world join the "revolution" and sign up for stints at highly innovative, immensely risky companies. Some early efforts produce groundbreaking products and spectacular wealth. This leads to an exodus to tech start-ups from every corner--large corporations, non-tech businesses, even early exoduses from universities. Soon, everyone is at a start-up. Next: The finite number of true business leaders gets diluted by the sheer number of companies, leading to the funding of highly questionable teams and concepts. By 2001, the jig is up, and the exit door starts to get the majority of the traffic, both voluntarily and involuntarily.

If you watch this body flow carefully, like seed-stage VCs do, you see two types of "entrepreneurs." The first are what are affectionately known as "the tourists," those newly minted MBAs who got in over their heads, had some fun, and were forced back home--"home" being a brand management position at Procter & Gamble, a job in management consulting, or the dorm room.

But the second type are the executives who possess real technology management experience and an entrepreneurial track record. These second- or third-time entrepreneurs are still brimming with passion but are exceedingly aware of the current challenges in building technology companies, including reduced corporate spending on technology as well as the incredibly high bar set by venture capital funds. So, what happens when the feet of smart entrepreneurs meet an uninviting street? You get a "new project" phenomenon with bands of supersmart entrepreneurs quietly working on "what's next."

The other day, I spoke with Joseph Ansanelli, who was most recently vice president of marketing for Kana after the acquisition of Connectify (funded by Crosspoint and NEA) where he was co-founder and CEO. Joseph told me he knows of an abundance of people with solid experience working hard to find that next big market. He says that, while many people in the late 1990s raised money on an interesting idea and a few slides, today these same people are being asked by top-tier venture capitalists to solidly prove market demand.

What makes this current "next phase" exploration so striking is the sheer amount of work currently being done in the pre-VC trenches. Never before have so many smart people been expending so much energy and brain power in such a nonpublic fashion.

Of course, one answer to the stealth aspect is somewhat clear, and it mirrors the reason that most VCs are on the sidelines: In this difficult environment, it is simply not clear what the next technology breakthroughs will be, beyond the obvious list of high-level observations that could be made in any down market. Core technology is in. "Comfort" technologies like storage are a good bet. Anything consumer is out.

But given that we have just emerged from a period of unprecedented entrepreneurship, the current start-up tenacity is incredibly impressive. Entrepreneurs I am working with are headed down many paths, including security, collaboration, and even music and media. Oftentimes, their exploratory ride hits a dead end, but most times they back the car up and steer down another path. Resiliency is the rule of the day.

In a familiar pattern, what these pre-VC entrepreneurs are searching for is "the idea." But the search for the killer concept is much different than it was a few years ago, when companies were started on ideas so lacking in substance that so-called "idea factories" emerged to create and incubate them. Today's stealth entrepreneur is working on multiple ideas and is road testing each one thoroughly.

Taking a page from VCs, I am seeing entrepreneurs do extensive customer research before writing one line of a business plan and even more groundwork before starting any product development. Evidence of this is suggested by the growing popularity of the Morgan Stanley Quarterly CIO survey. This report on the tech spending habits of corporations has replaced many analyst reports as the required reading for pre-company entrepreneurs.

Of course, this next-project syndrome has its problems as well, not the least of which is the fact that it is downsize driven. For many weak entrepreneurs, "working on the next project" is also code for, "I can't find a job so I'm going to try to start a company." And then we have the competing CEO issue, where smart entrepreneurs feel it is their birthright to be CEO of any new company they are involved in. Unfortunately, we're going to see some nascent teams break up in Buffalo Springfield-style, where an abundance of strong individuals causes talented teams to splinter before reaching their potential.

But in the end, the report from the trenches is that there is a lot of exciting work being done on new companies. And the good news is that entrepreneurs--and investors--are using their heads this time around. I for one, am encouraged by the fact that, unlike the "instant" companies of the late '90s, entrepreneurs today are doing a tremendous amount of work before a single line of code--or share of stock--is created.