Is the cost of starting a business less than zero?

featurepics-Chart With Downward Trend-102143-1635446There has been a well documented and discussed deep decline in the cost to start a technology business over the past ~ 15 years. From the days where every website was custom and each site element was a de novo build to today where virtual servers are easily and cheaply spun up and down and where frameworks exist for just about every feature and functionality that you could imagine building, the cost of starting a tech business has gone from $5-$10M to maybe $50k or less. It’s a remarkable trend and one of several key factors driving the Democratization of Entrepreneurship.

But is it possible that the cost of starting a tech business has fallen to less than zero? In some cases I think this is now the case. It’s now possible for entrepreneurs to seed ideas into the market and get people to put their money where their mouths are before even laying down a line of code. And this trend is true perhaps even more powerfully on a product level from existing companies.

We recently announced our investment in LeadPages – a platform that allows publishers to quickly create and host lead and conversion pages. The company actually started by selling the product that it was thinking of building, rather than building it first. Co-founder Clay Collins put out the idea for the LeadPages product on his marketing blog and before they had even scoped the project had $40k of pre-orders (paid pre-orders). With that money he built the beginnings of what became LeadPages.

Also in the Foundry portfolio BetaBrand is doing the same thing on a product level through its ThinkTank initiative. The idea is pretty simple – customers “vote” on new product ideas by agreeing to buy them. The ideas that get enough support get made.

Browse Dragon, KickStarter or Indigogo and you’ll see lots of examples of this (not every crowdfunded project fits this but many do) – show your support for something and if we reach a certain threshold, we’ll create it for you.

Another great example of a company taking advantage of this trend is Filament. It’s ThinkTank for web apps. As they describe it: “We show you a vision of a Web app. Your votes determine whether we build it, and its features.”  Exactly what I’m talking about.

I think this trend is incredibly powerful. And we’re just at the start of it. Just as we’ve seen the control of IT systems become decentralized across organizations of all sizes, I think we’ll also see a similar decentralization of the product ideation and development process. And while not every product and innovation can be developed in this way, many many can, should and will.

I’d love your thoughts on this as well as other examples of companies getting creative about pre-sales.

  • Interesting way to think about it Seth.
    When we started Happy Inspector, I designed some screen mockups for the iPad and when door to door selling vaporware. When I demoed the screenshots, I would tap and do a quick swipe almost to make it look like it was a functional app!

    I knew we had something going when all of the meetings ended up with, “how much is this product and when can we use it?”.

    After 20 random visits and 20 paying customers, I ran back to the office and got my co-founder to work on it.

    There is no excuse for not starting something or “building it and they will come”.

    However, you do need to factor in the cost of time. 🙂

    • Cost of time – absolutely. And that it’s helpful if you have an audience of some kind already built up (which is why this trend may be more powerful for product innovation than company innovation).

  • Nice article. And I love what BetaBrand and Dragon are doing.

    BTW, I’ve thought a lot about what it takes to pre-sell something before you’ve made it, and I’ve arrived at this formula that’s seemed to work pretty well for us in the past.

    The formula is: CC + EIN + S + SP + SI = lots of presells

    CC = co-creation. Folks want to be part of the narrative about how the product came to be. If the audience feels like the protagonists in the story about how the product came to be, they they’re much more likely to buy it. If they feel like the product idea was their idea in the first place (because it partially was), then they’ll be much more likely to purchase. So co-create the product with your audience.

    EIN = early investor narrative. Western civilization has created the myth of the early investor. The person who got stock options in google before they had their IPO, or even the single mom who was in on the ground level of Amway, etc. If folks who purchase during the presell feel like their participating in a narrative where they reap huge benefits because they buy in early, then they’re much more likely to buy in early. So incentivize early adopters (maybe they’re locked in at a very low monthly rate for a SAAS app for example).

    S = scarcity. It helps if there’s some scarcity either in number of units available during the presell, or time-based scarcity (there’s only a few weeks to purchase, etc.)

    SP = social proof. If you can create a movement that organically births a product, then a lot of members of the movement will be inclined to buy the product. This is standard social psychology.

    SI = status indicators. Folks who purchase during the presell should be specially highlighted in the members area of a directory, for example. Or have a slightly different version of the product that elevates their status by virtue of buying early.

    There’s probably something else that I’m forgetting 🙂

    –Clay