By Andrew Gordon

November 22, 2004

If you're supposed to learn from your mistakes, then the dot-com bust should have been one hell of an education for start-ups.

"Despite the bust, there are just as many stupid start-ups today as there were then," says Melody Haller, president of the Antenna Group. "And there are just as many smart ones."

"I would say it's 50/50," adds Richard Cline, president of Voce Communications.

But the start-up market still holds potential. Analyst firms are predicting modest growth in IT spending, while venture capital firms have reported increases in fundraising. And after a few years of tight-fisted VCs, start-up funding is starting to flow again.

According to a recent study by VentureOne and Ernst & Young, investors pumped $59 billion in funding into 3,619 companies in 2000 at the height of the bubble. That number plummeted to $10.3 billion for 1,216 companies last year. But there appears to be light at the end of the tunnel. Since the second quarter of 2000, funding had dropped each quarter until the fourth quarter of last year, when the slide stopped and funding started to increase again, albeit slightly. Funding also increased in Q1 and Q2 this year, only to drop again in Q3.

And while it might be too early to say whether the start-up market will be thriving again soon, the future still holds major challenges. The software industry grew just 3% last year, says Albert Pang, IDC's director of enterprise applications research. But during the first six months of this year, the top 50 software brands grew 10.4%, indicating that any recovery is probably benefiting market leaders with strong brands.

Which means start-up companies with little to no name recognition have their work cut out for them.

"What start-ups are realizing is that you have to talk about your valid business model," says Wiebke Liu, a marketing consultant working with start-up Jigsaw. "Everybody got hurt by cool concepts with no business model. Unless you have a solid business model, the press won't feel comfortable talking to you, no matter how intriguing your story is."

Hope on the horizon

But even with skeptical VCs, media, and analysts, there is still hope. Even during the downturn, companies were still being funded, points out Matt Wolfrom, an SVP with Euro RSCG Magnet. "There is always room for companies that will solve problems and benefit their customers, no matter how bleak the market," he says.

But the customer is king in the tech-start-up world, now more than ever. VCs want to hear about customers just as much as media outlets do. And a great concept might get a start-up's foot in the door, but it's positive customer references that seal the deal.

Also, solid business plans and innovation should not be mutually exclusive, adds Wolfrom. The best start-ups offer both. Wolfrom points out that one reporter at USA Today seeks out fresh voices in the tech market because she wants new perspectives, albeit perspectives based in reality.

"VCs have set the bar pretty high," adds Haller. "Some companies are starting to meet that bar. But VCs are being extremely cautious and are playing hardball. But can you blame them? Five years ago, the whole climate was of everyone competing to get their blankets on the beach. And there are still companies today that are just as stupid as ever, who have PR people who haven't spent time to learn the technology or think they can just pick up the phone and think BusinessWeek will cover them because they are so fabulous."

But she also has seen an increase in companies that come in with long-term plans and marketing goals that look out over several months, not just weeks.

"We're actually being given things for PR to amplify," says Haller. "They aren't relying on PR to create excitement out of nothing."

Most PR firms are setting expectations in the right place by letting start-up clients know they will face skepticism, says Mike Armistead, VP of marketing at Fortify Software. His company took such a long-view approach to PR that it spent considerable time educating reporters and analysts about application security problems before discussing how Fortify's software could offer solutions. And by focusing on building the company's credibility, Fortify generated more press coverage than it had ever anticipated, says Armistead.

If a start-up's product looks like just one aspect of a Cisco product, no one is going to care, says Armistead. But if the company looks as if it's taking on Cisco, the story suddenly gets much more interesting. Start-ups barely have money for PR, much less anything else. So they better come to the table with something that is new and interesting, backed with leadership and customers that bestow a sense of credibility.

But many start-up firms right out of the gate still suffer from the "let's get out there and get some press" mentality, explains Cline. Too many start-ups still think that all they need is a publicist. And while the media is important, so are honing customer messages, focusing on specific markets, and developing collateral, all of which PR agencies can do, says Cline.

"Vision and technology help a lot," says Cline. "You can't take all the credit as a PR person for generating interest. There has to be something there to begin with. You have to offer something different, something that will affect lives and business to some degree."

Picking the right agency can make a big difference in developing that communications strategy, adds Aaron Burcell, director of marketing at Contactual. Burcell says he prefers working with smaller firms because of their deep experiences with smaller clients.

"The big firms try, and they are terrific when you can get one mind focused on you," says Burcell. "But they give most of their senior talent to the Fortune 500 clients. It just takes a whole different skill set to work with start-ups, and that just isn't where [the large firms'] bread is buttered."

A shift in strategies

Despite the skepticism from VCs and the media - and the propensity of some start-ups to still not see the big picture - Access Communications president Susan Butenhoff believes that the start-up environment is in much better shape than it was just a few years ago.

Everyone was to blame then, as companies went from engagement to visibility in a nanosecond, she says. Start-ups had unrealistic expectations, PR agencies did nothing to change that, and the media was all too willing to anoint the latest tech darling. There was no sense of competitive analysis, no time spent on developing messaging or proof points. The flood of enthusiasm to get to IPO status washed away common sense.

But Butenhoff says that she senses a shift, marked most prominently by start-ups engaging PR much earlier in the process and using it to develop sound strategies.

"Budgets are tighter, and there's a schizophrenic quality to the market," says Butenhoff. "But there are people out there who are brighter now. They came out battered and bruised but brighter. And if you didn't come out brighter, it's probably because you didn't survive."