September 17, 2018
I was going to start this article talking about how the cost of building technology businesses (or software drive businesses) has collapsed. And I was going to talk about how there has never been a more affordable time to start a new business. And I was going to talk about a new reality. And then I read this quote from the very readable REWORK by Jason Fried and David Hansson (of 37Signals fame) :
There’s a new reality. Today anyone can be in business. Tools that used to be out of reach are now easily accessible. Technology that cost thousands is now just a few bucks or even free. One person can do the job of two or three or, in some cases, en entire department. Stuff that was impossible just a few years ago is simple today.
Only they weren’t writing today. Their book was published in 2010 (and probably written in 2009).
So if it was true in 2010, and if it’s true today, then it will be even more true in 2019 and beyond!
When I was a kid the sort of businesses people I heard about starting were a BBQ chicken shop, a video store, a law firm, or a hairdresser (ok I wasn’t spending time with the 80s entrepreneurs doing more interesting things). But even with the boring businesses it was costly - perhaps $250k just to start a BBQ chicken shop. Even then your net profit margin might be relatively low, giving say a 20% return on your investment (without including your time). The main upside was to get the business up and going and then on-sell it to someone else before the signage started looking tired. The downsides were also real - riding the highs and lows of the local economy (less chickens sold than forecast) or perhaps rent increases erode your margin. Material risks with modest rewards was a risk-return equation some people were willing to take. But a risk they normally took alone.
Fast forward to today and the scene could not be more different. What would $250k get you today? 12-18 months runway with a few very smart engineers building products that can be distributed and sold to a global market and with very high margins. The downside risks today relate to product-market fit (is this a product that people actually want to pay for?), but the upside is enormous relative to invested capital.
But where does this $250k come from today? While its certainly the case that a smart and hard working coder/engineer can live off noodles and free showers at the beach for 18 months, not everyone can bootstrap themselves (like if you have any commitments at all in your life). And whereas a local bank might have lent money for the purchase of the rotisserie oven for the BBQ chicken shop 30 years ago, no sane bank manager today is going to lend any money to a startup (the number of risks would overwhelm their forms and systems). Similarly, equity houses aren’t going to back a company that is unproven (even when investors are there to take more risks than the bank manager, they aren’t stupid and don’t like losing their money).
So we come back to angel investors as the people who are willing to invest in such an early stage venture. These angel investors are willing to take risks for potential upside that is asymmetrical to the risk. Sure it’s not any easy investment for anyone to get right. But the combination of modest outlay of funds with material upside will continue to be attractive to risk taking angel investors. And this kind of opportunity isn’t going away: the costs of the startup keep collapsing so if anything the odds are tipping in favour of the investors. So the opportunity and need for angel investing is here to stay. It’s the new normal.
Hi. I'm Nigel Gordon and here are my musings on business, investing, startups and growth. Follow me on Twitter