Start-ups that don't cost much under the radar

It costs a lot less to start an Internet company than it used to.

This is venture capitalist Marc Andreessen, speaking last year: "If you wanted to start a new Internet company 10 years ago, you probably needed to raise

US$20 million, just to get started. You would spend US$5 million on Cisco routers and US$5 million on Sun servers, and US$5 million on Oracle software, and then you'd write Yahoo a US$5 million cheque to get distribution. And then you could try all your new ideas.

Today it's advanced to the point where entire companies can get up and running - to provide global services, in some cases to millions or tens of millions of people - for less than a million dollars."

It costs a lot less to start certain kinds of manufacturing companies, too. Here's Mark Hatch, chief executive officer of the do-it-yourself workshop chain TechShop, whom I talked to recently: "Pre-TechShop it was a million to a million-and-a-half dollars to start a hardware company. Now you can start a hardware company for US$5,000.

It's literally their laptops and their ramen noodles, and that's it. And they walk in the door, and sometimes they have five million users in 170 countries. That's just a phenomenon that's never existed before.

"You get your tools - and often the skills to use them - at TechShop," Mr Hatch went on, "raise whatever capital you need on Kickstarter or Indiegogo, and reach customers via Etsy."

There are lots of exceptions to this "cheap start-up" rule. I spoke with Mr Hatch during a break at O'Reilly Media's Next: Economy conference. A few minutes later, Otherlab chief executive Saul Griffith was on stage describing a company he co-founded: wind turbine maker Makani, now owned by Google. "In 2006, we said it will take 10 years and US$100 million," he said, and that's about what it will work out to be when the company goes into production next year.

There are also Internet companies - if that's what you can call Uber or Airbnb - that have felt the need to raise billions of dollars to bankroll their efforts to conquer the world. Our economy isn't being entirely taken over by bootstrapped virtual start-ups or Kickstarter-backed "makers".


Start-up enterprises with low overheads exist and there are probably getting to be enough of them to have an economic impact, despite what the investment figures say. - PHOTO: BLOOMBERG

Such low-overhead enterprises do exist, though, and there are probably getting to be enough of them to have an economic impact.

So when somebody points out that alarmingly little money seems to be going into investment in general, and tech investment in particular, in the US in recent years, as economist J.W. Mason did in a Roosevelt Institute report, it's worth pondering whether this is a question of demand as well as supply. That is, there may be less demand for capital because many once-capital-intensive aspects of starting and growing a business are now cheap or free.

Back to Mr Andreessen: "A lot of the Internet start-ups that we see coming through here raising money are start-ups that raised a half-million dollars, that still have most of it in the bank.

"It's four kids and their laptops, and the entire company is run on the cloud, on Amazon Web Services, on Salesforce.com, NetSuite and Gmail. These companies have effectively no capex (capital expenditure). It's literally their laptops and their ramen (noodles), and that's it.

"And they walk in the door, and sometimes they have five million users in 170 countries. That's just a phenomenon that's never existed before."

Look at the economy-wide numbers and we appear to be in an era of low investment, low productivity growth and declining entrepreneurial activity.

Hang out in or near Silicon Valley (I'm in San Francisco right now), and we appear to be living in a time of epic excitement and upheaval and ferment. Part of the disconnect may have to do with the fact that we measure economic activity mainly by money spent and people employed. Technology-enabled start-ups that spend very little money and hire few people may go under the economic radar, at least for a while.

BLOOMBERG VIEW

A version of this article appeared in the print edition of The Straits Times on November 21, 2015, with the headline 'Start-ups that don't cost much under the radar'. Print Edition | Subscribe