There’s a debate brewing on the state of startup funding in Canada.
This got me wondering how many startup entrepreneurs think their bottleneck is a lack of financing when in actuality it’s not (or doesn’t have to be). I was reminded of this Business 2.0 article from 2005 in which entrepreneur Joe Kraus compared the costs involved in launching Excite in 1995 with what it cost to launch Jotspot exactly a decade later.
It took $3 million to take Excite from concept to launch, versus $100k for Jotspot exactly one decade later. I thought it would be interesting to extract some of his comments and see what has changed just three years later:
1. Hardware has become insanely cheap. As Kraus recalls, Excite ran on Sun servers that cost as much as $60,000 a pop. “Today JotSpot runs on commodity hardware–Intel chips inside boxes with no corporate logo, made by companies no one’s heard of.” And instead of $60,000, those anonymous boxes cost $1,000 each.
2008 Update: Even cheaper today with Amazon S3.
2. Infrastructure software is even cheaper. Excite paid a vast amount of money to companies such as Oracle just to license the software needed to build its service. “We must have spent $250,000 before we’d written a line of code,” Kraus says. But now open-source–Apache, Linux, MySQL, Tomcat, and so on–has reduced that cost to zero.
2008 Update: Zero is still zero, although the tools you can get for that price have improved.
3. The labor market has gone global. In the 1990s, only monster companies like IBM had tapped into offshoring. Today JotSpot, using Elance and RentACoder, has programmers on the payroll in Germany, India, Romania, and Russia–at a fraction of what they’d cost in the Valley.
2008 Update: Still holds true as ever. If you’re still at the stage where your concept is not yet proven in the marketplace and you’re raising money to hire a bunch of local developers, you probably don’t get it.
4. Search has rewritten the rules of marketing. Before Google, advertising on the Web was all about big marketers paying big bucks to reach as many eyeballs as possible. “But now,” Kraus says, “pay-per-click advertising, placed in an automated fashion, with no money spent on creative, lets me reach small or medium-size markets incredibly efficiently.”
2008 Update: Search Engine Marketing is no longer the panacea. In fact, in can be downright dangerous to rely on it exclusively as competition for your keywords and even Adwords’ algorithm itself are out of your control and can have a significant effect on your campaigns. Today’s successful startups are ones that harness communities, and hence thrive on the fact that their very own customers refer others to the site.
$100k is still a chunk of money, but it’s arguably within the reach of entrepreneurs with a bit of creativity.
Venture Capital still does and always will have a role to play. But I’ve seen entrepreneurs spend a year trying unsuccessfully to raise capital for a new concept, time they may have been able to better spend getting much further along their product roadmap before seeking out external funding. (OK, I’ve been that entrepreneur.)
What do you think? Post your feedback in the comments below.
Pipes, on the other hand, is a Yahoo! baby from the start. It was incubated within Yahoo!’s new Brickhouse division, physically located away from the Yahoo! campus, where teams are given more freedom to think outside the box and experiment.