Bootstrapping Entrepreneurship: How Technology is Revolutionizing the StartUp

Category: Business & Economics
Published on Mar 10, 2012

Anyone paying attention to the economic impact of the Internet cannot have missed its manifold contributions to prosperity and growth: the rise of new growth industries; more potent models of innovation and marketing; staggering new efficiencies in retailing and other sectors; and the plethora of free Internet services like email, search and social networking, to name just a few. In these economically challenging times, however, the Internet’s most significant economic gift to the world is arguably its potential to make the small-and-medium-size business sector a more powerful contributor to innovation, growth and job creation.

Whether searching for financing or sourcing low-cost manufacturing options, virtually every aspect of starting and running a company has changed beyond recognition in recent years. From globally accessible cloud computing services to mobile-to-mobile international phone connections and online sales and advertising platforms, technology-enabled possibilities to connect, outsource and streamline are endless. In addition to improving company performance, these platforms are also increasingly important in finding new clients, accessing international markets, expanding manufacturing capabilities and matching talent pools with job opportunities.

Exactly what kind of capabilities can today’s entrepreneurs take advantage of? Consider the following:

By expanding access to capital, crowd financing creates a more dynamic and liquid funding ecosystem for start-ups. Start-ups can’t breathe without a steady supply of oxygen in the form of investment capital. In the past, entrepreneurs could turn to their friends and family, their bankers, and/or seek a venture capitalist. Venture capitalists, in particular, constitute a critical link in a long chain of innovation where nascent ideas and technologies morph into market-ready products and services. For starry-eyed entrepreneurs, attracting venture capital is often seen as both a rite of passage and badge of honor validating their work and their viability. But even venture capitalists admit that the current mechanisms are pretty poor at getting money to where it will create the greatest value.[1] “The problem,” according to a 2009 report by North Venture Partners, “isn’t the number of opportunities investors are presented with, but it is rather the lack of an efficient means of filtering the options.” Throughput, not supply, argues the report, is placing unnecessary constraints on today’s innovation system. “How do investors find, filter and fund the most promising new opportunities in a deep ocean of possibilities? The truth is they can’t,” the report concludes.[2]

Now with the rise of collaborative venture funding platforms such as Kickstarter, IndieGoGo, Y Combinator, TechStars and Vencorps, entrepreneurs can not only seek out short-term funding from a broader and more international community online; they can find like-minded collaborators, get access to resources, seek out mentoring and connections, and even win new customers. In other words, community-powered venture capital models can both filter the global wealth of opportunities and channel more intellectual horsepower into making each investment successful. In a typical crowdfunding example, a company looking to raise $100,000 uses an Internet site to invite investors to buy as much as $100 of shares each.[3] This way, the company can raise funds inexpensively, while early investors can buy a stake in an innovative business with limited downside risk. While crowd financing has the potential to run amok of securities laws, federal securities regulators in the U.S. are currently weighing demands to make it easier for fast-growing companies to use social networks such as Kickstarter to raise money by relaxing or even waiving the need to undergo the full panoply of disclosure and other legal requirements required by the securities laws for share issues. The promise is that these more open financing structures will deploy capital more widely and effectively to the swelling universe of start-ups looking for funding. With appropriate regulatory adjustments, crowdfinancing could augment traditional investment capital to provide an enormously powerful engine for job creation, innovation and growth.

Digital utilities and cloud computing make incredibly powerful IT and communications capabilities—the kind only big companies could once afford—accessible to just about everyone. Unlike the previous generations, today’s entrepreneurs can buy, off the shelf, practically any computing and communication function they need to run a company, from storage to word processing to free video chat services. Users of Amazon’s cloud computing services, for example, pay 10 cents an hour to harness its nearly unlimited computing capacity, allowing anyone to leverage the size and reach of the world’s greatest e-commerce engine—from the computer geek testing a new algorithm from her dorm room to a Mumbai-based start-up that wants to roll-out a new call center service without spending all its capital on computers. With each passing day, the list of productivity-enhancing tools gets longer and longer, with apps for everything from file sharing and bookkeeping to salesforce management and customer support. “You can bootstrap a company much more easily,” says Kim Polese, CEO of SpikeSource, an open-source software services start-up that has flourished in this new environment and was recently acquired by Black Duck Software. Polese estimates that her company’s expenses for hardware, software, and network bandwidth are as little as one-tenth of what they would have cost five years ago. And it’s not just Internet companies that are benefitting from the declining costs of computing and communications. In fact, an estimated 75 percent of the economic value created by the Internet arises from traditional companies that are using Web-based technologies to lower the costs of running their businesses.[4]

Big data mining, online advertising and social networking are creating interactive and highly targeted marketing opportunities for companies, while rendering traditional advertising obsolete. In the offline world of advertising, a publisher or broadcaster gathered particular types of people into something called an audience, and then advertisers purchased ads to reach that audience. Ads in highly coveted publications or broadcasts were very expensive, but the ROI on ad buys was famously illusive. Today, a standard ad targeting company that uses real-time bidding can offer targeted ads based on how users act (behavioral), who they are (demographic), where they live (geographic), and who they seem like online (lookalike), as well as something they call “social proximity.” They give advertisers the ability to choose the types of sites on which their ads will run based on parameters like publisher brand equity, contextual relevance to the advertiser and content quality. And though the boundaries of online privacy are routinely being stretched to uncomfortable limits, online marketers can increasingly fuse disparate databases together to build fully fleshed out digital portraits of their existing and potential customers. These highly-targeted, data-driven methods of marketing not only work better than traditional media advertising, they are far more cost effective. A start-up can not only buy an online audience for one-fifth the price of traditional media buys, they can bid on “eyeballs” in real-time across millions of sites without ever having to talk to ad salesman. Expanding product reach into overseas markets has never been easier. With a few clicks, a start-up in Uppsala, Sweden can be marketing solar-powered tablets 10,000 kilometers away in Rio de Janeiro, Brazil. Savvy marketers can also use the power of social media to engage with customers directly, co-creating their next marketing campaign or getting input on product innovation.

Professional services marketplaces are expanding access to the global talent pool and bringing unprecedented flexibility to today’s labour markets. Business process outsourcing is no longer just for big multinationals looking to shed costs. For entrepreneurs, marketplaces like Elance, oDesk, PeoplePerHour and provide flexible, on-demand access to talented people and business capabilities for much less than it would cost hire or build internally. The “talent as a service” model is both attractive to employers who can get access to valuable skills on-demand, and to freelancers, who can build reputations as reliable service providers and earn money from the comforts of their homes. Xenios Thrasyvoulou, the founder and CEO of PeoplePerHour, points out that the vast majority of his 70,000 clients are small companies that do not want to hire a full-time accountant or human resources professional but need occasionally to dip into these services.[5] Business owners can browse detailed work samples and customer ratings for thousands of vendors in service categories ranging from accounting to web design. Elance provides built-in software to track works in progress and handle billing, payment, and tax records, while allows buyers to put funds in escrow until work is received. ODesk has even negotiated benefits packages for contractors using its site.[6]

Micro-manufacturing and 3D printing bring the power of the global plant floor to start-ups. Until recently, only large companies had the manufacturing muscle to bring physical goods to the mass market. But as the machinery of factory production become available to individuals, anyone with a good idea and some ingenuity can design and sell goods globally without a physical plant or even inventory.  Thanks to contract manufacturing in China and affordable 3D printing, virtual micro-factories now make everything from bike components to bespoke furniture in any design you can imagine. A search on Alibaba .com, the largest aggregator of the China’s manufacturers, pulls up a long list of suppliers that will manufacture product designs in batches as small as a single unit. Alibaba’s IM even translates between Chinese and English in real time, so customers can communicate with suppliers using their native language. With a few key strokes, a clever product designer can set assembly lines in China into motion, and after a few weeks of prototyping they can be in full production, making hundreds, thousands, or more.

As much as contracting manufacturing has changed the game for start-ups, the most revolutionary developments in manufacturing will manifest when 3D printers reach price points attractive to ordinary households—a reality that could see consumers swapping product designs over the Internet and printing out physical copies in the convenience of their living rooms. MakerBot’s Thing-o-Matic (the company’s most affordable 3D printer) comes close already. Literally a factory for your desktop, this laser printer-sized appliance retails for $1299 and can print just about any 3D shape into plastic (five years ago, you couldn’t get anything like this for less than $125,000). From custom chess sets to decorative lampshades, MakerBot enthusiasts seem to have endless imaginations when it comes to dreaming up new uses. Users who like to tinker can share their custom modifications with like-minded “makers” who congregate on, a collaboration and discussion platform where users swap product designs by the thousands. True, these makers may be in the vanguard, for now. But momentum is building quickly.  Terry Wohlers, who produces an annual in-depth study of the advances in additive manufacturing technologies, estimates 3D printing will grow to become a $5.2 billion industry by 2020, up from $1.3 billion in 2010.[7] Meanwhile the most recent Maker Faire in San Francisco—an event that cater to a growing population of makers and their fans—attracted more than 100,000 engineers, tinkerers, programmers, hackers and general-interest do-it-yourselfers. With local “hackerspaces” and Maker Faires now booming in urban centers around the world, it’s only a matter of time before the technology matures to a point where the mainstream market follows.

E-commerce platforms have opened up the world of retail to a global network of smaller producers and a long tail of niche products and services. In the past, large vendors, distributors and product manufacturers dominated retail outlets to consumers. Opportunities to sell products to the masses were limited by the product placement fees demanded by powerful retailers.  Today, e-commerce platforms such as eBay, Amazon, etsy and Apple’s AppStore enable nearly unlimited opportunities to sell an infinite variety of products to niche audience–from the craftsperson who sells one-of-kind-furnishings from his workshop in depths of the Amazon to the dorm room developer creating location-based photo sharing apps for the iPhone.[8] Take the Apple App Store, for instance. In a few weeks, developers can easily build an application, submit it to the store and immediately find out whether it has any traction. In other words, they can vet the idea in the marketplace, thereby radically reducing their time-to-market. Moreover, they can do so with only a few thousand dollars and, in some cases, they can end up quitting their day jobs.

For the entrepreneur, a breadbasket of Web-enabled capabilities as rich as the one described above is wonderfully empowering. Suddenly the small can become very large, very quickly with superefficient business models that allow entrepreneurs to design, develop and deliver their products around the world with a fraction of the resources that would have been required just a decade ago. A study by Dr. Robert Hendershott, a professor at the Leavey School of Business at Santa Clara University, found that the availability of open source tools, cloud computing, and the rise of virtual office infrastructure has driven the cost of launching an Internet venture down from $5,000,000 in 1997, to $500,000 in 2002, to $50,000 in 2008.[9] Another recent study by McKinsey corroborates the work of Professor Hendershott, finding that at least one-third of SMEs make extensive use of web technologies, and those that do have benefited tremendously, using new Internet-based services to perform the functions that entire departments once performed for large corporations.[10]

And yet, too much of the analysis of technology’s impact on entrepreneurship focuses on a simplistic analysis of the declining costs of starting and growing an enterprise. True, the huge decline in computing and telecommunications costs—perhaps best symbolized by the rise of “cloud computing” —has clearly reduced many firms’ need for capital and thereby made it easier to start and grow them. But the innovative use technology yields several other advantages as well, including facilitating experimentation, increasing flexibility in the face of changing economic circumstances, enabling internationalization, and, perhaps most important, boosting productivity and competitiveness. Moreover, all of these benefits accrue to traditional companies and not just those that define themselves as Internet pure-plays. The implication is that a successful, modern firm today is technology-intensive by definition, regardless of the sector they operate in.

[1] Paul Kedrosky, “Right-sizing the U.S. Venture Capital Industry”, Ewing Marion Kauffman Foundation (June 10, 2009).

[2] North Venture Partners, “Breaking Through The Broken: The Transparent Guide to Overcoming Inefficiencies in Early Stage Venture Capital,” (Oakland: North Venture Partners, January, 2009).

[3] In this sense, the model is often likened to Barack Obama’s now infamous political fundraising campaign in 2008, where hundreds of thousands of small donations contributed online outweighed the traditional reliance of campaigners on receiving big money donations from wealthy donors.

[4] James Manyika, Charles Roxburgh, “The great transformer: The impact of the Internet on economic growth and prosperity.”(McKinsey Global Institute, October 2011).

[5] Initially founded in London, the PeoplePerHour network now has about 250,000 active users, of whom 180,000 are freelancers and 70,000 are clients.

[6] In July 2011, some 250,000 companies paid 1.3 million registered freelancers on oDesk for over 1.8 million hours of work, up from half that amount a year earlier.

[7] Terry Wohlers, Wohlers Report 2011: Annual Worldwide Progress Report, Wohlers Associates, 2011.

[8] See, for example: Arte com Ciencia, a project to stimulate the creative economy in Brazil

[9] Claire Cain Miller, “Do Web Entrepreneurs Still Need Venture Capitalists?” New York Times (May 14, 2009).

[10] Matthieu Pélissié du Rausas et al. Internet Matters: The Net’s Sweeping Impact on Growth, Jobs, and Prosperity (McKinsey Global Institute, 2011).

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[…] the current mechanisms are pretty poor at getting money to where it will create the greatest value.[1] “The problem,” according to a 2009 report by North Venture Partners, “isn’t the number of […]

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