“Could VC be a Casualty of the Recession?” asks Paul Graham. His new article is about Venture Capitalists losing out when technology startups decide they don’t need investment.
The reason startups no longer depend so much on VCs is one that everyone in the startup business knows by now: it has gotten much cheaper to start a startup. There are four main reasons: Moore’s law has made hardware cheap; open source has made software free; the web has made marketing and distribution free; and more powerful programming languages mean development teams can be smaller. These changes have pushed the cost of starting a startup down into the noise. In a lot of startups—probaby most startups funded by Y Combinator—the biggest expense is simply the founders’ living expenses. . .
And because Internet startups have become so cheap to run, the threshold of profitability can be trivially low. Which means many Internet startups don’t need VC-scale investments anymore. For many startups, VC funding has, in the language of VCs, gone from a must-have to a nice-to-have.
Full article “Could VC be a Casualty of the Recession?”
Obviously this applies very much to technology startups, and less so to traditional SMEs who have different costs structures, but even in the traditional SME it’s becoming easier to cut startup costs. What do you think?
RSS Feed
By Email
Twitter
{ 1 trackback }
{ 3 comments… read them below or add one }
Hi Alastair, I think it is definitely true that many hard costs are next to zero — certainly very low.
The one area I would push back against Paul Graham on is marketing. It’s not entirely true that marketing costs are zero. In fact, it costs something to market online, what with SEO and Google ads and content creation and other techniques.
It may be setting up entrepreneurs for unrealistic expectations for Graham to say that “the Web has made marketing … free.”
Most startups either have to spend a lot of time or a lot of money — or both — to build a presence online. One way or another, it costs something. It certainly did for me.
Best,
Anita
Hi Anita, thanks for your comment!
I agree with you in arguing that marketing costs are not zero, despite the channel being next to zero cost (though don’t forget connectivity and technology are not completely free).
In general I see that a lot of small business owners tend to devalue their own time completely.
I know that sometimes it’s expedient for an SME owner to do marketing, operations and other work themselves, but there are plenty of times when it’s so much better to delegate or outsource.
One obvious example is accounting – most small business owners I know have an external accountant and don’t do their own end of year books in house. However, when it comes to other business components they dive in head first.
By the way, I’m arguing that businesses should outsource, delegate and hire in external specialists rather than trying to do everything themselves, but I do this myself all the time! Sometimes there are situations it’s necessary. The obvious reason, with the current credit crunch, is that cash flow might necessitate going DIY (Do It Yourself).
I think we just have to figure out the balance and focus on the core parts of our businesses, and delegate as much of the rest of the pie that we can afford.
Thanks again.
Alastair.
Do business owners who outsource their labor force believe that foreign workers are as good as US ones?
Quite honestly they don’t care. And I know this to be a fact from a recent meeting.
The reasoning? Even if the skill level is low (which was admitted to) and the output level not quite as high (also admitted to) the results in cost savings would boost the profits high enough that the real productivity and quality assurance standards don’t come into play.