A recent Kauffman foundation study showed that the average cost of starting a start-up was $30,000, noting that this money usually comes from a combination of personal savings, friends and family – also known in Silicon Valley as “friends, family, and fools.” The takeaway is clearly intended to be that the idea of anyone with a good idea can start a start-up is something of a myth.
But this number is in fact deceiving and misses the point.
Back in 1992 when John Nesheim first wrote the book “High Tech Startup” the original how-to book for starting a startup, he clearly noted that one shouldn’t think about starting a startup until one had achieved a real VP-level position in a real company with everything that that entails – significant management and business experience, a high degree of domain knowledge in a given market, an excellent reputation in that market, and a certain amount of just overall life experience.
Obviously things are much different now – as the latest versions of the same book reflect. Most start-up founders these days are in their early to mid 20’s and so have none of the above attributes. Which may not matter so much: few truly have the expectation of building a sustainable business that could someday perhaps go public. Rather the goal is to sell quickly to a company like Google, Yahoo, or Facebook for a grossly inflated price; such companies will often pay an irresponsible premium simply to acquire promising young engineers with the right pedigrees. By “quickly” I mean before the start-ups actually have to earn revenue – much less become profitable – which would be an impossibility for the overwhelming majority.
This shift in age tremendously alters the context of this $30,000 number. A “real” VP at a company like Cisco or IBM back in the day could easily invest that $30K – no problem. But the moment we’re talking about a 20-something being able to do so, we are indeed for the most part restricting ourselves to the population of those from upper middle class backgrounds or better.
Furthermore, that $30K won’t actually get you very far. A large law firm will take easily a third of that amount just to do the incorporation. By the time the few founders have each bought nice new laptops, printed business cards, and taken care of little else, that $30K will be gone. Poof.
But even that $30K is far less of a problem than having to pay for one’s basic living expenses, especially in high cost areas like the SF Bay Area in which rents are easily $2k – $3K a month. If the founder’s family and friends can invest in the start-up and/or can financially support him – or her – should the need arise, everything is peachy. But if not, it becomes far more daunting than the one-time $30K because it is essentially an open-ended commitment.
So it is no surprise that Stanford produces a great many entrepreneurs, or that 2/3 of Harvard MBA students intern at startups. It’s a matter of access to capital, in both large and small amounts. Nor is it a surprise that the overwhelming number of startups these days are focused directly or indirectly on ad revenue generation, and on apps that will mostly be used by those under the age of 30. These combined filters of youth and wealth restrict broader and deeper technology innovation significantly. They thus ultimately create an opportunity for pockets of more varied innovation to flourish outside of Silicon Valley. It will be interesting to see in the coming years who, if anyone, manages to seize that opportunity. These are the bigger questions that the Kauffman guys would do well to ponder.