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Democratization of the Startup Process

October 27th, 2009 2 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.