2013 will be “The Year of the Startup”
A revitalized interest in tech and Internet startups will make 2013 the “Year of the Startup”. In addition to equity-based crowdfunding made possible by the JOBS Act, faster development tools made possible by platform-as-a-service offerings, and lower entry costs made possible by the cloud, the rapidly growing base of business incubators and accelerators is already giving savvy startup entrepreneurs the boost they need to hit the ground running.
Startups will always face a tough upward battle, but today they have several unique advantages compared to times past. Look for example, at the 1990s, a time we recognize as a dynamic period during which Internet startups appeared daily, received unbelievable amounts of venture capital, and were the darlings of Silicon Valley. But was it really that easy to launch an Internet startup during the boom? Outwardly it did seem so, but it wasn’t really the case. The millions in venture capital that were being thrown around with such apparent carelessness were really directed towards a small group of well-connected individuals in a handful of geographic areas. Competition was fierce, and startup costs were high.
Costs then and now
Did it really take millions of dollars to start a web site that sold pet food online and advertised on network television with a sock puppet? Well, the short answer is, yes.
First of all, because those early dotcoms were all operating in Silicon Valley, they faced high-priced real estate and expensive labor costs, both of which got higher as the boom progressed. Ultimately these spiraling costs priced those entrepreneurs that weren’t connected to a venture capitalist with a fat checkbook out of the market.
Second, the boom of the nineties was pre-cloud. Infrastructure costs were high, and Internet startups had to build and operate their own data centers. Third, marketing costs were higher then, again because this was in the early days of social media marketing. Internet startups were still stuck in the traditional marketing and advertising mode, focusing on outsized ad budgets, glitzy Super Bowl ads and television commercials. It was a wonderful time for ad agencies.
Today, two major factors contribute to the compressed costs involved in launching a startup: Silicon Valley is obsolete, and infrastructure has moved to the cloud. A strong startup culture still exists in central California, but it has since moved to all points east. The high cost of living has driven countless creatives and tech professionals to places as unlikely as South Bend, Indiana, where the decaying hulk of the old Studebaker factory is rapidly being replaced with an exciting, high-tech hub of activity and innovation. Part of the reason startups are sprouting throughout the industrial Midwest is simply because they can. The cloud has made it possible to operate from anywhere, allowing virtual groups in multiple cities to get business done transparently, and to gain access to inexpensive and reliable infrastructure without having to deploy and operate it on-site.
Hey buddy, can you spare a hundred bucks?
After 2007, the recession began and money tightened up. Yes, interest rates were low, but banks weren’t lending, and they still aren’t. Venture capital became a lot harder to come by as VCs wised up to the fact that the startups they were funding really did need business models and revenue plans. Entrepreneurs wanted to launch tech startups more than ever, but were faced with a financial dilemma. Even relying on equity in their homes became problematic, as the housing crisis caused property values to plummet. Crowdfunding came to the rescue.
Early crowdfunding sites like Kickstarter and IndieGoGo gave startup entrepreneurs a venue for raising money in small increments, and the JOBS Act brought into play a platform that will allow small businesses to raise up to a million dollars in equity funding without having to launch a full-scale IPO. Donation-based sites like Kickstarter set the tone, but the equity-based sites that will come after the SEC puts the final rules in place early in 2013 will bring crowdfunding to a new level and spur on a wave of entrepreneurial startup activity very quickly.
Ten bucks for the domain and a dollar for a pair of socks
Startup costs have been dramatically compressed since those days, and the well-known Internet pet food failure with the sock puppet could be launched today for pocket change compared to the millions it took back then. The lower cost of entry we see today is due primarily to tremendous advancements in development tools, which allow entrepreneurs to create web sites quickly using WYSIWYG tools, and to create useful and functional apps without having to re-invent the wheel every time. Cloud computing has three parts: software, infrastructure, and platforms.
The platform-as-a-service (PaaS) component, sometimes called the “third leg of the cloud”, is the least known but most important part of the cloud, because this is the piece upon which true cloud apps are built. There was a time when applications were coded from scratch, and shops no doubt still have all-night, caffeine-infused sessions—but the process is faster today. A good PaaS tool will provide ready-made, cloud-ready components, allowing for a proof-of-concept design to be up and running within days; and a beta version of a product in weeks as opposed to months. Security, e-commerce functionality, and catalog interfaces are pre-built and ready to drop in. Load the whole thing up into a virtual server in the cloud, and you’re ready to go.
A startup still needs some seed capital and a budget for staff, development, and marketing. After all, even if you can build it yourself, you still have to tell people it exists. The point is, you will spend a lot less today than you would have thirty years ago—and that has already encouraged a lot more people to jump on the bandwagon.
A new dotcom boom, with more common sense
If you missed out on the last one, don’t worry, there’s another one that has already begun. The new wave of Internet companies, driven by low barrier to entry, easy development tools, access to capital via crowdfunding and the diasporization of Silicon Valley, will reach a tipping point in 2013. Instead of relying on VCs, the new wave will rely on self-funding, bootstrapping, business incubators and accelerators, and crowdfunding to pay the bills, and we will be seeing an incredible wave of innovation the likes of which we haven’t seen in decades.