Why do tech firms only last a generation?

It was with some degree of sadness that I saw 3Com sold to Bain Capital and Huawei. But it got me wondering why we see so many one-generation companies.

Think of it: Network Equipment Technologies, 3Com, Novell, Palm, Ciena, Cascade, Ascend, Newbridge and the list goes on. Yes, I know that some were merged and some still exist in diminished state, but for all of them, their moment in the sun is over.

The same pretty much holds on the computer side of the house: Burroughs, Univac, NCR, Control Data, Amdahl, Honeywell.

My friend Clay Christensen from the Harvard Business School was a guest lecturer at my class at MIT last week and the subject came up. (“What’s the difference between Harvard and MIT students? MIT students have better brains; Harvard students have better haircuts.”) I mentioned that every CEO at 3Com was a friend of mine and all were seemingly competent managers — so was it just bad luck, bad karma or bad management that kills once successful network technology companies?

Was it the fact that they had turned from a company run by technologists to one where the guiding force was the ongoing demands of financial results?

Clay’s answer: It was precisely because they were well run that they failed. At best, only one company in 10 sustains profitable growth by internal means, but capital markets demand growth and profitable growth — and punish those that do not execute.

Because they are well run, they religiously abort the disruptive potential of new ideas before they see the light of day.

So what is the answer? Manage less well? Set up stand-alone subsidiaries to compete with the mother ship? Most companies find their internal growth slowing and then start to do financial engineering, buying firms with a rapid trajectory, hoping these companies will turbocharge the entire organization.

This usually works for a while, and then the whole thing blows up when the upstarts begin to crater. Evidence: Look at all the acquisitions that Lucent and Nortel made. 3Com tried. It bought Tipping Point, which is a young powerhouse in secure converged networks; it bought out Huawei’s 2 per cent minority share in its joint venture. But in the end, the company threw in the towel, selling out to Bain and Huawei.

Turning a company on a downward spiral is the single hardest job in American industry, and 3Com has been on a downward spiral seemingly forever. It remains to be seen what the Boys From Bain can do.

Yes, 3Com will have the luxury of private ownership for a while and, yes, it can cut costs, rationalize organizational charts and try to keep its customers from going from sullen to mutinous.

Most of the buyout and private equity firms stumble mightily when they try their magic on technology firms whose customers are more likely to turn fickle when waiting for the product improvements that they thought were coming.

In some cases, the demise of stalwarts like 3Com should make it easier for younger venture capital companies to succeed — except it doesn’t. If you put on your Darwinian hat, you might argue that these one-generation companies survive because their experienced managers live to fight another day — in a new company, where they bring the same high quality of management that will assure their new employers will also be one-generation wonders.

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Jim Love, Chief Content Officer, IT World Canada

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