Joe Kraus has a thoughtful post: It’s a great time to be an entrepreneur, in which he rightly points out that the startup costs of a software startup have dramatically dropped. He cites the example of JotSpot vs. Excite in terms of investment required to move from the idea to the initial product: $100K vs. $3M, a 30X difference.
Why ?
- Hardware is 100X cheaper: Cheap Intel boxes vs. Sun gear
- Infrastructure software is free: LAMP vs. Solaris and super expensive development tools (was that $5,000 or $14,000 a pop for the Sun compiler ? can’t remember)
- Access to Global Labor markets: elance.com rules
- SEM changes everything: you can economically launch multiple campaigns and adapt them almost in real-time – and engage with your audience through blogs and forums.
My own, focusing more on consumer Internet startups (eh, that’s what I do after all):
- Advertising dollars are shifting online: search is booming (check out the coverage of Vertical Leap).
- Eyeball/usage monetization works: create a valuable service for a niche community that is of value to advertisers/sponsors, and get them to use it – a lot – and dollars will follow.
- Bandwidth is cheap: unless you are dealing with hypersized multimedia downloads (like Doug’s 380 GB last Tuesday – the iTunes 4.9 effect).
- Web services integration: lots of web services out there that can be integrated very quickly (Maps, Payment, Printing, E-Commerce Carts,…).
We had the same discussion on the Investing panel at VL (which I have yet to blog about) and I actually quoted $50K as the initial cost to bootstrap a service (and no, people don’t get paid US salaries in that model – they work for equity) to a point of being able to launch, or lure angel investors – or even VCs – to invest a few hundreds of $K in their venture. Think how much del.icio.us must have cost to bootstrap (and yes it might be an extreme – one server with a database and a bit of code – and the tagging meme got started), or the award-winning Dogster.
So is it the era of the "disposable startup" ? A company that develops niche functionality of value to a community that will monetize through advertising, and will ramp quickly to being cash-flow positive and recoup the modest investment it took to start ? And then run for a while, and either grow enough to be acquired by one of the "big boys" or actually create a real opportunity that VCs will fund and help grow to $50M to $100M in revenues ? And if it does not work, well it was "just" $50 to $100K – trash and move to the next ?
Hmmm, don’t think so. First, it is not because it is cheap that it is easy. Second, not everyone will be bought be Yahoo or Google for top dollars (some might get a few million dollar acquisitions, and have an interesting job building their product with the means of a larger company – nothing wrong with that – but noone makes money on these). Third, you still need to build some level of defensibility and differentiation – and not shoot for the path of least resistance (distribution was cited often as a key factor for search engines). Fourth (anyone) ?
We had between 15 and 20 vertical search startups at VL, stealth or having just launched a beta site, and they were busy pitching – and being pitched to. This is both encouraging, and concerning.
Amusing anecdotes ? One startup founder asked a question during the VC panel starting by "Hi, we’re a couple of Stanford students and we are just launching a (vertical) search engine" – yes, they were duly noticed. Also, I was shown a one- from an angel investor who was seeking investment opportunities, and who left his coordinates for startups to get in touch on tables and chairs in the break area. Clever (?).
What do you think ?