From U.S. Steel (NYSE:X) to Hewlett-Packard (NYSE:HPQ) to Google (NASDAQ:GOOG), America has long enjoyed a thriving start-up culture. Despite these businesses' economic importance, the precise process of building a successful business remains a mystery. That's the tough challenge Jessica Livingston tackles in her book Founders at Work.
With a background in marketing, Livingston's currently a founding partner at Y Combinator, helping early-stage companies raise money and grow. Her book includes 32 interviews with founders and key employees of tech companies, focusing on the first few years of a company's existence. The book becomes a study of psychology, as founders deal with abundant rejection, setbacks, and customer resistance.
Witness Apple's (NASDAQ:AAPL) co-founder Steve Wozniak. One of history's brightest engineers, he loved working at Hewlett-Packard. Yet he got bored designing calculators, instead longing to spend all his time building personal computers. In his spare time, he created the Apple I, and even fruitlessly tried to convince HP to pursue the PC.
Rejection didn't stop Wozniak. Building the Apple II was an obsession on which he spent many long hours. According to him: "This computer was me. And everything had to be as perfect as could be made." It certainly was. Simple, friendly, and relatively inexpensive, the Apple II was a tremendous technological innovation for its era. Just a few years later, Apple went public, sparking the PC revolution.
Keep in mind that many successful startups lack Wozniak's innate sense for a new market. Craig Newmark's Craigslist was originally an email alert for local events, Flickr started as a gaming site, and PalPal was once an encryption service.
Start-ups do have one critical advantage: With no legacy business to shackle them to the past, they're free to innovate in ways their larger rivals sometimes can't. In the 1970s, Microsoft (NASDAQ:MSFT) was trailblazing new territory by selling software that could be installed on a computer. It was a disruptive idea, derided as a niche market by companies like IBM (NYSE:IBM) and DEC. Wasn't software supposed to be strictly for big businesses, deployed through massive mainframes or minicomputers?
Today, Microsoft looks like the dinosaur. As it churns out box after box of the various flavors of Vista and Office, companies like Google and Salesforce.com (NYSE:CRM) deliver their software via the Internet, making money through subscriptions or advertising.
That's not to say that startups are perfect. Many fail, and even those who succeed must endure turbulent challenges. PayPal, for example, didn't anticipate widespread fraud in online transactions; at one point, it was losing about $10 million per month. Serious engineering helped to solve the problem, and PayPal's greater security became a major competitive advantage. In 2002, eBay (NASDAQ:EBAY) bought the company for about $1.5 billion.
Strangely enough, even before the buyout, eBay helped propel the PayPal user base. eBay users wanted an efficient way to handle payments, and started to link to PayPal on their own. This is not unusual. According to Excite co-founder Joe Kraus: "Microsoft built itself off IBM (NYSE:IBM), unwittingly. Excite built itself unwittingly off Netscape. Google built itself unwittingly off Yahoo! (NASDAQ:YHOO)."
Despite its 446-page length, I finished Livingston's book in about three days. The stories are fascinating, filled with many valuable lessons. While the author is prone to repetition and provides no conclusions of her own, I think this book is still a must-have for anyone who wants to understand the unique phenomenon of great start-ups. Livingston is also writing a "version 2.0," and I'll certainly grab a copy when it hits the market.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,611 out of 29,456 rated players in CAPS.
