The State of Tech Startups

The State of Startups by Jerome Gentolia:Venturestsb

Tech Startups Photos by Clayton Hauck for Tech Cocktail via Flickr

There has never been a better time in history to start a tech business. This is primarily due to the fact that you can start a tech business for a relatively low cost; making this business model more accessible to the modern entrepreneur. Below I will look at the main reasons why the tech landscape is undergoing permanent change.

The speed of technological advancement today is astounding. Not only have there been very significant advances in programming language that is used to design and control computer programs, but product development cycles have also become much shorter. Concepts, designs, prototypes, tests and all other aspects of product development can all be carried out much faster than ever before. Faster technological advancement is making tech startups more accessible to people with smaller budgets that can’t wait for years before their product is released to the public.

Another thing that has changed drastically is the economics of a tech startup; the costs of starting this type of business have decreased significantly. This is an opinion shared by many Investors and Entrepreneurs alike:

“Only a few years ago, it would cost at least a million dollars ($1M) for a team of professionals to produce any commercial software product. Now, with open source software components, and low-cost development tools, the same job can be done by one good hacker for a few thousand dollars”. Martin Zwilling on You Don’t Need To Be Rich To Be An Entrepreneur

It is amazing how open-source development programs (being able to alter an original piece of software to better suit the needs of your business) and “cloud infrastructure” are revolutionizing the tech landscape. Chris DeVore on Carlson’s Law, Software Innovation Venture Capital states:

“Between powerful, open-source development frameworks like Ruby and PHP and cheap, pay-as-you-go cloud infrastructure services like Amazon Web Services, Urban Airship and Twilio, world-changing software innovations can now be created and brought to market by small teams of two or three developers. Ideas that once required millions of dollars of venture capital to build now require hundreds of thousands – or for the right team of motivated entrepreneurs, none at all.”

Low cost open source software, cloud servers and hosting have become much cheaper in recent years. This has led to lower production costs for prototypes and products. Relatively low amounts of data can even be stored for free on some of the popular cloud servers. In addition, open source software can be free if you don’t need to modify the source code or you can modify it yourself.

Many of the major applications and social platforms online are free; this has drastically reduced marketing costs for the new tech business wanting to release their first product. Web 2.0, social and new media platforms and viral campaigns are mostly free or low-cost, and the results can be phenomenal. Effective marketing is no longer limited to the marketing ‘experts’.

“Marketing now typically means using a variety of online distribution channels via paid & organic search (SEM/SEO) on Google, viral/social amplification on new media platforms & social networks like Facebook, Twitter, & YouTube, and the quickly-growing mobile platforms of Apple iPhone & Google Android. With the exception of search, most of these distribution channels didn’t exist 5 years ago, yet they now easily reach over 100M-500M+ users, with very low cost and measurable marketing campaigns such that even a small team can reach billions of people globally.” by Dave McClure, Money Ball For Startups

A massive ‘tech talent war’ seems to have broken out across the western world, particularly in places such as Silicon Valley. Tech companies are doing whatever it takes to recruit the best staff, whether that is providing them with top-spec iMacs or offering other incentives such as yoga lessons or free lunches. Even the largest and most renowned tech companies such as Google are struggling to retain all of their staff. Google has recently given all of their 23,000 staff a 10% pay rise in an attempt to increase staff retention rates. Although Chief Executive Eric Schmidt acknowledges this problem, he also says that it may be exaggerated by the media: See: CEO Eric Schmidt: There is a Talent War, but Google isn’t Losing. However, companies are competing on far more than just money. As aforementioned, many other incentives such as new computers and free lunches are being used as ways to attract and keep high-quality tech workers at a company.

There has also been a prolific influx of a new breed of investors such as Micro-VC’s and Super Angels. An increased number of internet-based software, tools and resources have also encouraged investment in tech startups. This has led to more startups becoming ‘capital-efficient’ and requiring less initial investment, although returns for investors can still be very large. The idea of Micro-VCs and Super Angels is that they invest in businesses that are relatively high-risk but do not require enough capital investment for the traditional VCs to get involved. This is leading to higher levels of investment in new and growing businesses as well as increased valuations for companies.

“We start to see more exits however small, we should see a steady increase in angel investing activity, resulting in even more capital in the market. More capital means higher valuations, bigger seed rounds that close faster, and less reliance on VCs to get companies to exit. In addition, many VCs already invest at this stage and more will do so over the coming years, further increasing supply.” JS Cournoyer: Implications of Excess Capital and Excess Demand for Talent.

Higher levels of investment mean that the value of tech companies can increase very shortly after their creation.

“A market is willing to pay greater than intrinsic value for an asset class”, Mark Suster, On Bubbles …And Why We’ll Be Just Fine.

Additionally, we are seeing very tight competition between Micro VC’s and Super Angels. They don’t want to miss out on the next best thing; the next Facebook, LinkedIN, Zynga, etc so they are investing early.

The internet has been around for a number of years, and the online market has matured and still growing at an astonishing rate. The number of people using the internet is permanently increasing, and broadband technology is making the internet more accessible and user-friendly. Rapid technological change has also spread to other areas such as smart phones and tablets. The internet has been integrated into other areas such as video gaming and television. We are also becoming increasingly reliant on the many different types of software available, with many new programs being released every day. Social distribution means that information can be shared and distributed very quickly.

Due to the high levels of competition between investors, some of them are making less informed decisions when deciding to invest in a company. They are investing without sufficient analysis. This may be good for some tech companies but may not end favourably for the investors.

“However, there are a few storm clouds out there that we need to watch out for. In particular, I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.” Fred Wilson, Storm Clouds.

In conclusion, much of the evidence points to the fact that this is a great time for a tech startup; the barriers to entry are much lower than ever before. You can ignore the bubble; concentrate on creating value for your company to increase its long term financial value. This is what Google and Salesforce did in the last bubble, and it’s clearly paid off for them.

 

  • Nathan

    Hi Jerome, very interesting post. With all the open source solutions, the barriers of entry are clearly getting lower. I was wondering if you knew of any low cost “one stop shop” to turn a simple idea to a concept online. I have researched development sites in India, however it’s quite a jungle out there, and hard to find the diamond in the rough. I see so many people that state they have an idea, but then are stuck when it comes to converting it. Ideally, you would start small, get it up and running at a limited cost, and see if you get some kind of traction, if people respond. Would love to hear your feedback. Nathan

    • http://www.venturestab.com/ Jerome Gentolia

      Nathan,

      Send me an invite via LinkedIn and send me your information and I’ll point you out to good IT development teams that caters to start-ups.

  • http://nanodome.wordpress.com/ Nick Pelling

    Errrm: I love software too, but isn’t this a pretty narrow window on what constitutes “tech”?

  • Hal Spice

    Jerome – Excellent analysis of current state of startups. You might want to take a look at the intellectual capital equivalent of open source – programmers in low wage countries. I have found exceptional talent in Israel, China, and the Philippines for complex and creative programming projects. In Manila for example, you can get a web developer with 10 years experience in web technologies, including the latest technologies, who was employed by a multi-national corporation, for $10 per hour, which is double the prevailing wage.

  • http://twitter.com/DomCrincoli Dom Crincoli

    Yes, Jerome, the open-source movement and other factors have lowered the
    bar on tech start ups, and you would be right man to get someone
    started. Good post. Dom

    • http://www.venturestab.com/ Jerome Gentolia

      Dom,

      Thanks for the kind words and your optimism. I have a great team and everyone is very well motivated. Thank you for visiting my blog!

  • http://twitter.com/DomCrincoli Dom Crincoli

    Yes, Jerome, the open-source movement and other factors have lowered the bar on tech start ups, and you would be right man to get someone started. Good post.

%d bloggers like this: