Why it costs a lot less to build a startup these days

The WSJ has a good article on the “ new VC” model. In a nutshell, since it takes a lot less to get a startup to traction now versus late 90’s it has spawned a new age of VC’. Since I started and sold 2 companies during the “bubble of 90’s era” I can give you some perspective as to what’s cheaper and why is it a lot less expensive. The number 1 cost in any software / Internet startup is people (initially until you get traction). Another big area of cost is infrastructure and G&A etc.

1. Lower technology operations costs: This is by far the biggest cost that’s been removed. At Interfinity, (which built order management systems for large companies), we had to hire 5 people to do system administration, database administration, monitoring and SLA management. Today with Amazon web services most companies have 1 (if at all). Besides you dont need to spend a few hundred thousand on hardware (Sun, Cisco, DELL, Compaq) any more. The cloud makes it a lot less expensive and since its not an upfront investment (pay-as-you-go) you can try stuff out cheaply.

2. Lower G&A costs: Today’s business has the same number of people but 80% less costs of telecom (all employees at my previous startup had Skype), free email (Google Applications) and an extremely cheap laptop ($1099) minus Windows Office (saving $700 almost per employee). Overhead costs the way I calculated it were close to $2100 LESS per employee per year.

3. Lower Marketing & business development costs: I had 2 people doing marketing and building relationships (yes I admit my company had a few Barney relationships myself). If I were doing it again I would rather be a consumer startup and have a facebook application to get the word out virally. The marketing costs for an enterprise startup (those that build software and solutions for large companies) have not significantly reduced but consumer startups costs have dramatically gone down.

4. Lower development costs*: I have heard of several of my peers outsourcing development to Romania, Prague, India and other places. In the valley its still very difficult to hire good, talented engineers and they still cost a lot. I am not sure I would do the outsourcing for version 1 or 2, but to scale the company beyond the initial few developers the costs of adding developers has reduced on average by 2/3rds.

On average if you add all these up, you are looking at building a startup to momentum costs lower by 60-80%

No wonder there are so many startups being started daily.

Advertisements