Tuesday, September 18, 2012

The Myth of Start Up Costs

Conventional wisdom in the start-up community these days is that it has never been cheaper to start and build a company. It's been written and re-written about, but I'll summarize the logic as:

You used to have to build your product, then write enormous checks to Oracle, Microsoft, IBM, Sun, etc to buy the hardware/software that you needed to run your business. Then, if you got big enough, you had to build a datacenter. Contrast that with today, where you simply need to sign up on AWS, get a subscription to Workday/SFDC, etc...and the costs of starting up have plummeted.

Makes sense. Seems logical. But, it seems to me to be only part of the story.

If now is the cheapest time ever to start a company, how do you explain this:




Certainly, I could quickly speculate that companies are staying private longer than before and hence, need more capital. However, if you look at the data below, I'm not sure that argument holds up:




My belief is that the cost of starting a company is essentially unchanged from 10-20 years ago. If anything, its a bit higher. (Note: obviously this depends on whether you look at year 1 costs or costs until liquidity or somewhere in-between year 1 and liquidity. I'm focusing on the latter two cases).

So, why have the costs of starting a company and running it through the mid-years not changed, given that the costs of year 1 are substantially cheaper?

I think there has been one substantial change to start-up economics, that very few are acknowledging or writing about: early stage companies have started paying salaries/benefits, etc that are on-par with what Fortune 500 companies pay. I see this over and over again...and its in all parts of the country. This is partially driven by a war on talent, but I don't think its that simple. I believe the culture and expectations have changed and salaries/benefits are becoming table stakes, as opposed to a nice-to-have. There was a time when you joined a start-up for equity and/or stock options. While there is still some of that, most are joining for salaries/benefits, along with their interest in the mission of the company. This is a fundamental shift in start-up economics and I think it offsets 'The Myth of Start Up Costs'.

I'll acknowledge that some of my data in this post in anecdotal and I certainly do not have extensive data on private companies. However, I am writing this based on what I've seen with my own eyes. Criticism and disagreement is welcome.


4 comments:

  1. Hi Rob,

    Great blog! Is there an email address I could contact you in privtae?

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  2. Somehow starting a software/web company certainly feels cheaper, but I can only offer anecdotes here. If one's sample consists of startups that stayed private longer and raised much more capital investment, then those are precisely the companies that I'd expect to pay market salaries and benefits. Which is cause and which is effect? Not sure.

    Among the things that make starting up cheaper today:
    - form an LLC at your state's website, without a lawyer, and pass through expenses as income deductions
    - use Amazon web services
    - use open source software pieces and dev environment
    - deliver a service or prototype over the web
    - create awareness over the web & social media
    - cheap computers & telecommunications
    - crowdsourcing of service providers, e.g., design
    - etc.

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    Replies
    1. Raul- I think you are right, if you look at the first 1-2 years of a company. Beyond that very early stage, it seems like costs are high...but my views may be too anecdotal.

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