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Democratization of the Startup Process

October 27th, 2009 Leave a comment Go to comments
Capital Efficiency Sea Change Drives Democratization of Startup Process

Capital Efficiency Sea Change Drives Democratization of Startup Process

Much has been written about the dramatically reducing costs associated with getting a new company off the ground in many technology sectors.  There are many ways this new Capital Efficiency impacts the startup world.  It seems to me that there is a huge Democratization of the startup process, which should empower many entrepreneurs who would never have even gotten off the ground even a few years ago.

In the old standard company formation/maturation process for a technology startup, there were five sequential stages (simplifying tremendously):

(1)  Have Idea

(2)  Raise Capital

(3)  Build Product

(4)  Sell Product

(5)  Scale Up

Almost always, the most fundamental risk facing a startup is the Market Adoption Risk at the Sell Product stage.  The question of “will the dogs eat the dog food?” is generally where most startups fail.  But, before an Entrepreneur could even ask the question, they needed to undertake the herculean (and humbling, and long, and distracting) process of Raise Capital.  There are lots of Need/Nice-to-Have attributes required to be able to do this process:

(1)  Ability to go without salary for the many months the process takes

(2)  Introductions into Venture Firms, since they generally don’t like cold calls

(3)  Located in Silicon Valley

(4)  Ability to “Present Well”

(5)  Willingness to undertake this herculean task

Without these attributes, many potentially great ideas stayed at the idea stage, because the entrepreneur didn’t happen to have the attributes required to even undertake the Raise Capital stage.  But, the changes that enable Capital Efficiency in sectors like Mobile, Gaming, and Consumer Internet, have made it so cheap to put product into the market that entrepreneurs can go straight from Have Idea to Sell Product without any outside funding.  Of course, that first version will lack some bells and whistles, and the “Selling” part may be a bit hypothetical in that first version, but it is often possible to get customer adoption metrics with only tiny amounts of out-of-pocket expense for a team of one or two entrepreneurs.

This eliminates the need to Raise Capital right at the outset, and levels the playing field for entrepreneurs who don’t happen to have the full set of Nice/Need-to-Have attributes.  This democratization of the startup process has a huge positive impact on the ability for entrepreneurs to get businesses going, and the ramifications of this change are only just beginning to be to be felt and understood in the startup and venture ecosystem.

Some significant possible Democratizing results of Capital Efficiency:

  • Entrepreneurs outside of Silicon Valley are just as able to put product into the market.  All they need is a decent Internet connection. I believe this is the biggest potential impact of Capital Efficiency, and should be a huge benefit to places with highly skilled technical and creative talent.
  • Entrepreneurs without the ability to go with salary needn’t quit their day jobs (but watch out for the terms of any IP rights documents you signed).
  • Entrepreneurs without introductions to venture firms, or presentation polish, can skip straight to wowing the market with real users. When you get a kabillion users, it will be easier (but still a significant effort) to raise the money you need to scale your business.
  • G Adams

    I enjoyed your blog on start-ups and the democratisation of capital, but felt that while I agree that it is more democratic it is limited democracy. Consider we live in an information age, where ideas abound, but only a select few know how to implement them thus by definition we limit our access to the true power of human capital. The reason this rather long sentence struck me was I was considering a particularly simple app which requires a bit of smarts to do, but I have no idea who I could ask to help, as anyone I would ask would probably steal it and do it themselves. Thereby robbing me and future generations of the modest outcome I would expect from such an adventure. The full democratization occurs when I can have an idea and go to someone who can build it and then we together go off with modest investment to gain the modest outcome I would expect for my app. Here in lies the opportunity, but here is the catch: few people who can’t go and write an app think to find someone who can and those who can write an app don’t think about the poor forgotten masses. By extension think how little access to human capital we truly have when you combine the need to implement an idea with the creation of the idea. Anyway just a thought.

  • admin

    @G Adams
    Great point!

    I agree that the democratization is neither absolute nor perfect. In a perfect world, the tools would be so easy to use that anyone could develop a mobile app. Maybe we’ll get there in the coming years, and it will be as easy to develop a mobile app as it is to have a Facebook profile today.

    But, on a relative basis, the hurdle is more than 100X lower than it was just a couple of years ago. From the venture investor perspective, this is a phenomenal improvement. Two+ years ago, you had to deal with a mobile operator to get distribution, which entailed at least millions of dollars of up-front technical and business development expense before you could ever test end market demand. Today, popular iPhone and Android apps are being released with only thousands of dollars of expense, AND with bigger market opportunities (see iPhone App ROI 2600X of Mobile Operator App post).

    I’d love to have the world benefit from whatever your mobile app idea is, and have you be able to capture the economic value created, so below are three suggestions for how to get your idea turned into reality. Frankly, I wouldn’t worry about your development partner “stealing” your intellectual property. Those folks are in the professional services business, and think about things in terms of profitability per hour. The far bigger concern is someone seeing your app after it’s been released, and copying that. The downside of Capital Efficiency is that access to capital is no longer a barrier, and your app had better Build Real Barriers to Entry.

    (1) Google search “iphone app development” and pick the professional services outfit that fits your needs best. A typical app can be developed for less than $10K this way.

    (2) Go to Elance and search for “iphone app development”. There are some incredibly good and inexpensive folks that can be found here. Unfortunately, there are also some very shoddy folks that can be found here, and it is hard to tell the difference up-front. I suggest scrubbing the reviews carefully up-front and giving your favorite candidate a small initial job. If they do well with that then give them a bigger job. A typical app can be developed for less than $2K this way, but you may have a few false starts with the shoddy type of Elancer folks.

    (3) If you are of a technical bent, be one of the million+ people to download the free Stanford University course on iPhone App development. This costs nothing but your time!