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Saturday, July 19, 2008

Not Getting the $50,000 Startup Thing

If you're like me, you've worked with or in a startup or two. My consulting company was a startup, I'm a co-founder of HomeStars, the home improvement startup, and quite a number of our consulting clients have been startups. "Startups" as I define them are either bootstrapped on a shoestring (the little consulting shingle), or funded by angels, family and friends, or VC's.

When it comes to the latter - funded startups - most raise anywhere between half a million to $10 million from all sources.

So what is with these Cambrian House, Y Combinator, et al. bootstrapping support concepts that seed promising young ventures with $50,000?

My gut tells me that if you have no money and you don't have the ingenuity enough to sell your car, beggar thy neighbor, go nuts on your credit cards, or just moonlight and grind, maybe $50,000 isn't going to help you launch a successful business. Stories abound of entrepreneurs who have scraped and fibbed their way into the needed bootstrap capital.

Hiring a single person other than yourself: $50,000. Have any other expenses at all? Now what?

I can see how $50,000 could help
  • Fund an already successful employee's 20% time to work on an idea;
  • Me start a cool blog or two and compensate one other person but me to spend their 20% time on it
  • Any number of other growth initiatives, such as funding the hire of one new person, or giving someone leave to work on a book, that might boost the long term growth prospects of an existing, successful business.
  • Buy some bandwidth, or something
My point isn't that it's a bad idea to fund promising ideas, and to come up with innovative ways of sparking growth. My point is pretty simple, though. First, for a true startup, $50,000 either isn't enough or is so close to zero that the failure of the entrepreneur themselves to go out and raise it doesn't bode well for their use of funds later, when they have access to more capital. Second, while they're less sexy and don't get as much ink, those little $50,000 decisions in small to mid-sized growth companies are probably where the money really gets applied (with a high percentage of success) to scaling growth hurdles in an operating business. Maybe there's a lesson in there - those of us who run existing companies should assign interns to go after $50k micro-funds.

I recognize that in the flip-it-fast world of technology venture capital, anything goes, including micro-funding phantom startups with partially completed features that you can put a $200k valuation on and flip for 10X that. These are definitions of a "company" that no one taught us in school.

Posted by Andrew Goodman




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