The challenge for start-ups

The world has certainly changed since the days when Web browsers vied for market dominance. Software powerhouses now have more might, reach and money relative to upstart operations than ever before.

Even so, savvy start-ups still have huge opportunities, but, competing in a market where elephants dance, they must figure out how to avoid getting trampled. With competition as fierce as it is, the ability to reach the $1 billion revenue mark is much harder than it was 15 years ago when few large software vendors existed.

So in planning for the future, small companies must consider what to do if their success attracts the attention of the elephants. At that point, a start-up has three real strategic options:

Execute better and faster.
The classic strategy of being more nimble than the competition works well when a company is small. It also requires a vision of what customers will want next--something beyond what the bigger competitors will soon turn into a commodity.

Look to be acquired.
This option is the favorite pitch for every start-up looking for funding. It's effective, but also very risky as a sole strategy. Many start-ups fail to understand that in the absence of a compelling reason to buy a smaller firm, the big companies will just as soon invest in building their own implementations.

Move on to a different, but related, market.
Often correlated with executing faster, this strategy takes the company to related markets that leverage past experience and technology, but with a value-add component that the elephant can't match.

Let's examine a few examples--one is a huge, untapped market that can never be satisfied by a start-up, while the other is an area where start-ups can grow quite nicely.

Instant messaging has become very popular with people working for large companies. Some 15 million people access IM from work, though the vast majority taps their personal accounts. Customers like IM as a communication medium, but without directory access they still can't find everyone in their company they need to contact. What's more, IM represents a huge possible security hole for the enterprise--a concern that has been elevated in the aftermath of repeated hacking incidents.

So IT has two choices: Shut down access, which is unpopular and unproductive, or embrace IM with a package that offers policy and security management. Smart IT folk will choose the latter option. Unfortunately, no products yet exist that would support their demand for control and also interoperate with the free services to allow employees to communicate with the outside world.

On the surface, this would appear to be a big enough market where start-ups could flourish. But there are those elephants again, and they pose a significant barrier. The fact is that start-ups will always be at the mercy of the big services, which might block access. Once Microsoft, AOL and Yahoo determine that a market is ripe for plucking, the cost and time they would need to invest to duplicate the start-up's effort would be miniscule.

On the other hand, start-ups still have advantages in areas that bridge important gaps. For example, tools that aid interoperability across different platforms and devices, or special-purpose applications, such as collaborative applications for product lifecycle management or managing drug pipelines for pharmaceuticals, could become big markets. Success requires either special-purpose knowledge or the kind of focus the big platform companies cannot afford to invest across multiple vertical markets.

Taking a drug to market, for example, can cost $1 billion and require a decade of testing. Tools that streamline the process and reduce time and cost by 10 percent would represent huge value to a pharmaceutical company, not to mention the automation vendor.

Despite the power of the software giants, smaller software companies can still thrive if they know how to solve customer problems. There will be plenty of venture capital money around for providers that demonstrate an understanding of how to provide returns on customer investment.

It also helps if they know how to navigate in an increasingly treacherous market where the industry elephants are always lurking.