Entrepreneurs, angels, and the cost of launch David 30 Jun 2005

61 comments Latest by Flights

Joe Kraus from JotSpot has a great piece on how the last ten years has reduced the price of doing a startup from three million to a hundred thousand dollars for him. That’s definitely an interesting development and Joe is highlighting the right trends. But since Joe is coming from a company launched on angels and running on VC ($5,2 million, no less), his side is only one side of the story.

As part of a debt-free company that didn’t need angels to launch and is operating on revenues instead of VC, I naturally have a somewhat different perspective. I think the most interesting change in this economy is what can be done with little or no explicit investment at all. The products that emerge from the constraints of prior commitments. Like being a student, working for clients, or being just a regular old employee.

Now that all the fixed costs are gone, you’re left with the requirements of time and passion. While those resources (or at least one of them) can be bought by setting up shop and saying “we’re doing it”, they can certainly also be had outside the typical startup atmosphere. And I think that story is actually a lot more interesting since its not just lowering the costs of an existing model, it’s throwing it out and opting for a new one entirely.

As mini-investments from VCs and angels become the next big thing, I hope more crews will think hard and consider whether they could do without. Look at the project that costs $100,000 and figure out how to make it cost $20,000 over the shoulders of three guys. Do it out of your own pocket and you’ll be forced to reckon with constraints earlier and more intensely.

Constraints drive innovation and getting your idea out in the wild in two months instead of six will likely do you a world of good. A month or two out the gates, you’ll have a pretty good idea of whether you “got something” or not.

If you do, you’ll be self-sustainable shortly, and won’t need the external cash (neither the $100K to launch nor the $5.2 million to run). If you don’t, you better turn down the life support cash and come up with another idea that’ll put you in the first game.

Taking cash shouldn’t be a necessity, a goal, or a celebration. Once we change the social aspirations around the last two, our culture will have caught up with the economics.

61 comments so far (Jump to latest)

~bc 30 Jun 05

As much as I agree with all of the ‘launching from your own pocket’ ethos, there are certainly some companies who cannot launch from scratch. Assuming all of the above is targeted at the web/software industry. But, for example, I don’t think you could start a company like Akamai without a big investment in infrastructure, servers, etc… So, it’s not like there’s no place for VCs, etc. Of course, many of the places starting up are more interested in big bucks than the product their selling… so naturally those people will turn to free cash to start their business they’ll abandon in 5 years…

If you have the passion you can start from scratch, and you’d likely be better for it.

I think the web/software industry is very unique in the history of capitalism in having the ability to start with very little. Can anyone else think of an industry like it (excluding, say, service industries… of course you can start a home cleaning service for next to nothing…)

Art Wells 30 Jun 05

This is an excellent description of something I’ve admired about many started-small businesses. I think the “constraints” you are talking about are imposed not just by the reality of unfunded startups, but a fortunate definition some have of “success”.

If “money now” is the goal of the company, then acquiring VC is a success to be celebrated (and should be a warning sign to investors). If however long term prosperity is the goal, and one subservient to higher goals (like “beauty”, “quality”, “fun”, and/or other hard-to-define-but-common ideal)s, the constraint of non-indebted startups comes as second nature, and, as you say, part of the drive. But this is rare and I think getting rarer.

Steve James 30 Jun 05

What the low cost of launch is allowing me to do is to field multiple projects or concepts at one time, and seeing what sticks. If one project fails, so what, I’ve spent very little. Must be the serial entrepreneur in me…

Jeni 30 Jun 05

Taking cash shouldn’t be a necessity, a goal, or a celebration.

I once worked with a client whose entire business plan was based around “when I get VC.” He’d been in business for three years and consistently lost money - yet he held on to the belief that one day he’d get VC and his business would suddenly be profitable. As best I could tell, he was kin to the underpants gnomes.

It was a sad expression of the worst of the dot.com mentality - if I have a business plan and a sub-standard product, then I’ll get rich. Which is not to say that JotSpot is sub-standard, just that it, too, subscribes to the dot.com startup mentality. The really great web apps, the ones that change everything, don’t start with angels. They start with somebody poking at a keyboard in a back room, trying to solve a problem, have some fun, or do something a little better than everyone else. Look at sites like Craigslist and del.icio.us, or companies like Flickr’s Ludicorp. It isn’t about VC and making sure everyone on the top has an important title. It’s about a labor of love - and that’s what truly seperates them from the VC seeking startups.

Ross Mayfield 30 Jun 05

As someone who has done both models, I can say they are both good options. At Socialtext we spent two years bootstrapping and getting the benefits of constraint-based innovation and constant customer-driven iteration. Funny thing is, when you raise capital, the scope of your opportunity increases and the constraints are still there.

Not sure if you have raised capital before, but I can tell you that it is hard work (not in the George Bush sense of the word). Raising a round is not the end goal, but it is a milestone and milestones should be celebrated.

Paul Bellows 30 Jun 05

Starting a business and managing a music career aren’t all that far off. I do both. I just spent a week in Seattle with a small label that’s been picked up by Sony. They were talking about all their great artists that get college radio play. And the dismal reality that to get onto commercial radio, you need to pony up about $200K just to get in the game. That’s what you pay the people that pay the people that decide what goes onto radio.

It’s not that different with business. I see a lot of web businesses in my market that arrive with a whiz and a bang and a flurry of expensive promises. They talk people into big budget projects. 2 years later they’re gone. 10 years later I’m doing exactly what I’ve always done, but better than ever. Happy clients, good ideas, real work. I drive a 1972 Ranchero and I sleep at night.

Jake Walker 30 Jun 05

I can’t tell you how true this rings for me.

Having seen the “raise money” route go wrong with the first company I ever started, DiscLive (which I am no longer involved with), and now seeing the success we’ve had with The Show which started with no money at all.

It’s not that our hearts weren’t in the right place with the first launch — we had a concept that required a lot of equipment to purchase (burning thousands of CDs on site at a concert in a few minutes), but once the money is there, and there are lots of people involved, it becomes easy to start hiring lawyers, justify expenses, etc. It didn’t mean we worked less — we put everything we had into that company — but the decisions that are made are much different.

Also, raising money meant for a lot of reasons that the original founders of the company (myself and a few others) were less and less influential in the operations. For us, that was because of our age (we needed to bring in experience in order to raise money), but also because by nature, raising money means bringing more people in. When the money ran out, a sale was forced which was the downfall of my (and all the other original members) involvement with the company.

The root of all the problems wasn’t raising money itself, but everything that came along with it. The expectations are simply higher. People start taking salary, and the motivation is to build it up and sell it, or find some other way for the initial investors to make their money back. In the case of the first company, we simply started acting much bigger than we were — out of necessity.

With The Show, we started the company as an accident, and with no real formal arrangements at all. Almost on a whim. When you strip down what we were doing, we realized that we could deliver a much better product with less costs, only with more time. And we gambled with a bit of our own money that people would be willing to wait for quality over speed. But the company has stayed (and will likely continue to be) a small operation. And ever since that first project, we’ve been fully self funded. With just a bit of creative terms from our vendors, we’ve never really need to put much of our own money into the operation at all. And the expectation isn’t to grow and sell, but to grow for the sake of growth and to continue to benefit from it financially. And if it ended tomorrow, everyone would go home happy and compensated.

You will act much different when you’re directly motivated by expenditure and effort. It’s clear to see for me that every penny I save when our company is out on the road is a fraction of a penny that pays my rent. For lots of reasons, raising money disconnects you from that instinct. And even if you can keep that instinct, not everyone around you will.

There will be businesses in my future, I’m sure, that may require money and investment to start. But the lesson of starting my first company is very much about making sure that you create incentives for everyone involved to treat each decision like it’s one they are making with their own wallet.

Pelle Braendgaard 30 Jun 05

I agree wholeheartedly David. We have learnt from the dot com boom, that VC’s are not necessary for most internet startups. Absolutely true, they are for some.

But for the types of companies that were receiving funding 6 years ago, the vast majority would if they had been real business ideas not have needed funding.

I bootstrapped my first site a travel discussion board 10 years ago. I wrote it in my final year of University in Perl on a Linux machine. This was before the Netscape IPO. I ended up selling it although for way to little, but there were those of us who did this stuff back then as well.

Now having done the evil chase investor rewrite businessplan rat race for some years, I’ve decided enough is enough and gone back to my bootstrapping roots. There’s been hard experiences but with the help of Rails, blogs, google, backpack et. al we can do stuff much better and quicker and cheaper than before.

Don Wilson 30 Jun 05

The only expense that I will be over coming for my new product will be the purchasing of a rental server over at ev1. Some still like to stick to the “purchase everything that we want and deem it a business expense” route.

Alex Payne 30 Jun 05

This post expresses a wonderful sentiment, one I wish carried over from IT entrepreneurship to other industries. Coming from the tech world it’s been a real shock when planning a business that produces honest-to-goodness things you can hold in your hand. Thanks to technologies like Rails our IT costs are all but negligible and can be accomplished in-house, but there’s no escaping needing capital to jump-start a physical supply chain.

pb 30 Jun 05

Thanks, Ross, from bring some rationality to the discussion.

ed fladung 30 Jun 05

I like David’s response much more then Joe’s piece. Joe seems pragmatic, but he’s still driving around in a Mercedes. David is probably driving a VW, but the 37 sig. plan is self-sustainable. you go guys.

not pb 30 Jun 05

I think Ross is talking more nonsense. If he can’t make SocialText go on his first multi-million dollar round, and thinks Round B is going to bring him the answer, he’s just wasting other people’s money.

He’s trying to sell an open source wiki. That’s the problem. It’s not a lack of money, it’s the lack of a business.

Joe Kraus 30 Jun 05

Great post David and I think you guys make amazing products. I commend you on all your success.

For the record Ed Fladung, I don’t drive a Mercedes (Honda Civic Hybrid). But, I have been very fortunate in my career.

I am constantly impressed with the way you have built your company and I think it’s definitely a different and inspiring model.

Ross Mayfield 30 Jun 05

not pb, well, we were the first people to make a business out of our space and were running the company on revenue before the round, so either I don’t know what you are talking about or you don’t.

What Joe and 37 are doing are fine, different paths, and quite frankly different goals. Should be said that all of us are doing a very good thing.

Oh, and what Joe did for $100k, we did for $5k and a lot of sweat.

kwikifan 01 Jul 05

“Oh, and what Joe did for $100k, we did for $5k and a lot of sweat.”

‘a lot’ is right, if you include the collective sweat of the kwiki community. but that’s what you meant, right?

Josh 01 Jul 05

I agree with part of what Ross said… You can do it for cheaper than $5k if you are willing to pour your sweat, time, and elbow grease into it. I posted the rest of my thoughts on my blog.

ed fladung 01 Jul 05

Hey Joe - my apologies, i didn’t mean anything negative by my comment. It was meant to be a metaphor. I love Jot Spot. you guys are doing great work.

Ross Mayfield 02 Jul 05

Nice try, Kwikifan. But I am glad you are a fan.

Socialtext was originally based on Nice Little Wiki, by our CTO and co-founder Pete Kaminski. Within two months we had customers running on it.

The four co-founders, of of whom have to work for a living, were able to develop a product, market it by blog (SEO is slimy to me, guides people towards buying keywords on competitor brands, etc.), iterate with customers and generate revenue. Keep in mind this was the first time anyone took the risk to develop a commercial wiki company and when the economy stunk.

Then we did an angel round of $150k. This let us pay ourselves a little and hire Brian Ingerson, creator of Kwiki and more. We had intended on releasing NLW as open source, but we were such fans of Kwiki that we rearchitected our product on top of a Kwiki core. Today contribute to the majority of Kwiki development, a great community that is growing slowly but surely.

Now that we’ve cleared that up, maybe you’ll join us?

Clarence Wooten 04 Jul 05

A lot has been said about Joe’s post during the past few days. Which made me think — is it also a great time to be an investor?

I think so and provide reasons why in my post, Web 2.0: It’s a great time to be an investor. It would be great to get feedback to see if others feel the same. It’s clear that Web 2.0 is not only changing the rules for entrepreneurship… it is also changing the rules for angel and venture investing.

Mike Sanders 05 Jul 05

Ross - When you take investor money, do you feel that you have an obligation to give those investors a good/great return for their investment? If so, how does that change the equation of delivering the best product for the lowest possible cost to your customers - assuming of course that great products at low costs are a good thing for customers.

Peter Ireland 11 Aug 05

Back in the late 1980s I noticed that there were basically two types of startup entrepreneurs. The vast majority fell into the “Let’s Write a Business Plan and Look for Money” camp. The minority fell into the “Let’s See How We Can Create Some Cashflow Immediately. Investors Will Follow” camp.

The latter group understood that investment dollars come to entrepreneurs who have found a means to generating some cashflow. Meanwhile, the former group would, in most cases, simply waste 6 to 18 months of their precious time waiting for someone to gamble $500K, or whatever, on their plan.

Realists understand that they need to provide tangible proof to investors that they are more than just a business plan writer. That proof is cashflow.

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I totally agree that many of the “new breed” businesses can be launched on a very sparse budget.

Many entrepreneurs are still in the frame of mind that in order to launch a successful online venture they require million of dollars. Well, that’s not true. Some capital is required in order to successfully development, launch and market an online service, but with a lot of cheap resources available in the arena right now, it is possible to succeed with little capital.

Right now is the time to think up ideas and getting those ideas developed on only fumes from the bank account. Outsourcing development is certainly an option to having ideas put into action. I have years of experience in IT outsourcing, so if anyone need any information please feel free to contact me. It could be the way that your project could come to life at a fraction of the cost of having it done in house.

Well, I am also the running goalserve.com and goalservebetting.com. Both sites launched on virtually no budget. Having said that money in today’s economy in of lesser importance than today, I also understand the need to move to the next level and that is where investors coming in at $50,000 - $100,000 can accelerate an almost developed business. I am in the place with my sports venture where I am looking for strategic partners who can inject some capital into the further development.

It is VERY important to find the right investors who understands your business and who have contacts within the industry of your business. Someone who can come in and add 20 new clients to your business could prove much more valuable than $100k in the bank account.

Listen to advice. There are people out there who’s seen it and done it. LISTEN. We are all eager to progress quickly, but listen to people’s advice and evaluate it.

If anyone would be interested in talking business and internet ventures with me please fee free to email me. I would love to hear from both entrepreneurs as well as investors. I have a lot of technical experience as well as business and investment experience.

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