As someone that has been working hard in this domain, there is one major problem to this in software.
Initial funding. There is a lot of growth non dilutive capital available but the first 500k are near impossible to get without a network in old money.
You used to raise that money through other local mittrlelstands. At the Masons lodge. At the local kiwanis or Rotary. But these have closed to young member decades ago when said younguns moved to uni degrees as a path in.
There is a lot of money idling out there to do that, but as Indie.vc showed, the usual LP are super frigid to it.
I do not have a good answer to this. The current young people simply are too unstable and too close to poverty to take the risks. And there is noone taking a risk on them either.
There is a looooot of value to make though. These markets are ripe for productivity enhancement through good software by small teams.
But the people that have the domain knowledge and the tech skills do not have the risk taking capability to execute.
Whoever find out how to provide them this will unleash massive growth on the world.
> The current young people simply are too unstable and too close to poverty to take the risks.
One piece of the solution that is very clear to me and contains many other upsides is better access to healthcare. The fact that Americans mostly get healthcare through large corporate jobs significantly ratchets up the risk of entrepreneurialism. A better healthcare safety net would make it safer to leave the safe confines of a corporate job that provides health insurance.
If you are an entrepreneur under say 40, can’t you just roll a D10 and hope you don’t get a 1? Surely most people before middle-age won’t need expensive healthcare?
A 10% chance of a million-dollar healthcare bill you can't pay and will spend the rest of your life dealing with is still shitty odds on top of all of the other risks involved in starting a business.
Also: parents. Childbirth is expensive and most parents want some reasonable level of certainty that they can afford good healthcare for their kids. Or, to put a finer point on it, when forced to choose between health stability for their children and starting a business, most will sacrifice the latter to get the former.
There is a simple solution. It also give middle class an actual shot at an exit even without hitting a unicorn. This is for the groups that went to state schools not the Ivys.
Take a group of 4-6 CS grads and maybe a business major. The parents of these kids form a company and bootstrap the kids by having them work from home and just covering legal costs and cloud costs with a focus on keeping costs low. They go find a problem and start finding customers. No salaries are needed as each parent takes care of their own kids. This gets rid of the problem of just giving 22 year olds $10M and hoping they figure it out. The middle class doesn't have that kind of money, they have to be smarter but it is possible. Someone who has the knowledge could make a template that others could just use even without the know how. I wish my parents would have done something like this. I didn't have the chance to mess with a start-up after graduation. I worked 40 hours/week while in college. Graduation was about getting money asap to start digging out. This is the thing that the 1% have over others, a huge backstop and support self in case they fail.
If they can't do that, then it's not an initial funding problem (which the parent post tries to solve) but that their business just should not get started.
> but the first 500k are near impossible to get without a network in old money
Four hundred* golden tickets per year winning $500k available here for the low price of $0, although an application is required, and some light strings are attached: https://www.ycombinator.com/deal
You sound like you are making a lot of excuses, but I actually deeply agree with every negative point that you make.
As you are pointing out, the risk of being a founder is just not worth it for you or most people, financially or socially or personally. It rarely makes sense even if you are already wealthy or privileged: even given the advantages you have correctly identified, the expected outcome is failure. Without those advantages the rewards for the risks are even worse. Calculate the median return[1][2][3] implied for the majority of ycombinator founders and it is approximately zero.
I dunno. I feel like the first 500K aren’t really the big problem, since growing to, say, a 500M valuation as an upper limit is still quite the upside. Also, non traditional funding options are on the table at that level (some cash from you and family, some equity in your home, perhaps some state funding or loans).
I feel like the next rounds may become much more difficult. How can I raise the next 10M, …, 200M if the company is unlikely to grow beyond 500M?
This resonates with me. I have close friends who would be great co-founders, 3 out of 4 have moved in to camper trucks or vans. They work easy remote jobs and just enjoy life. We are mostly in our early 30s, worked in startups together over the years as engineers, sometimes as first or second hire. It's going to be quite hard to talk one of them in to being a principal co-founder at this point.
This is an English-speaking board where people have individualistic preferences so it isn't surprising that people default to an answer from private capital, but in Europe the government does this, and it works. Starting a company in the Netherlands was a breeze, and the tax breaks are very generous in the first few years.
I am in France, and i can tell you, the government only really support "want to be a unicorn" or companies that are already established or company that generate a ton of local jobs.
I went to talk to our local chamber of commerce and industry, which handle navigating the subsidies, and their answer was "how many local jobs are you creating ? Just you for now ? Then we cannot help you, come back when you create a dozen in the region"
Disagree. This is like complaining rent in the big city is $4k/mo and impossible. No, spend a week on craigslist and get a great place with a roommate for $1.8k/mo.
The same is true for a medium sized business. Nothing is stopping you from doing it, its just stopping you from doing it from a hammock in the Caribbean.
I have a total free time to do non essential things per week of 3h. And i already have insomnia which is the only reason this time is not in the negative.
"Medium scale/growth/etc startups should be feasible.
And
"Middle class startups should be feasible for people of all time/energy/financial constraints"
---
My point is that medium sized businesses (including startups) have always been feasible. Yeah it takes more effort then coasting on huge financing but thats the price you pay.
>> Initial funding. There is a lot of growth non dilutive capital available but the first 500k are near impossible to get without a network in old money.
For two tech founders, the first 500k is literally a year of salary for the two founders. One option here is to bootstrap without outside capital, de-risk, and raise a better round once you've de-risked. For tech founders, the best form of capital can be their own minds and time. (Doesnt work as well if you have a family and if you're a single earner with dependents of course!)
Totally considered. I did my bootstrapped startup while working a day job for the first year. The point is the value of your free time is 250k/yr. If you are smart and motivated, your time is incredibly valuable regardless of what your employer is paying you -- because you cannot easily hire that skillset with VC money.
In my case, when I was raising in 2012, the typical VC line was "go move to SF/SV and work for ramen-pay", which is ridiculous and only something rich people can do (things have changed now.) So I bootstrapped and built it myself on my spare hours (note, of course the start up should not be competing in the same market with your dayjob which would be a conflict of interest.)
Once you have a prototype and de-risking, the tables turn and VCs chase you
I mean, what is the alternative? See the GP comment I was replying to:
>> There is a lot of growth non dilutive capital available but the first 500k are near impossible to get without a network in old money.
If you're not in the circle where VCs are throwing money at you for some juice squeezing appliance, then you just have the option i've presented...or the option of not playing at all. But i'm very interested in the topic, i'd love to hear what your proposal is...because I think "poor people cant found tech startups" is not the world I would want to live in.
I mean the problem is not only poor people. It is that access start at 250k a year which is really hard to get even in tech.
The reason it is harder in tech to get funding for these good ideas that could be profitable has multiple factors
1. As pointed, decoupling of relationship between entrepreneurs and "old money". This could be rebuilt even a the local government level with reach out actions
2. The untangibility of tech assets make banks loans near impossible to get
3. People cannot afford the risk. Better safety net would help. Obamacare was a good first step. Far more are needed.
4. The winner take all model has failed to generate profit. It generated capital returns but as pointed out by OP, pretty bad one. But it needed a lot of capital and LPs had a lot of money to throw around. The current inflation and folding back to Value investment will help. But we need to make the point.
5. The rise of passive investing has reduced the amount of money available to these kind of "semi anateur small rounds". The return to a less bullish market may help.
6. Housing. A lot of money and security rn for young people is sinked in rent
7. O'Reilly had amazing result with Indie.vc. The LPs refused to invest. There is a story that need to be told more. We need dozens of people banging the drum on this.
In the end... i don't have a solution sadly. We need a return to fundamentals to make the story of these models work. Focus on real possible profit and not some "we will control the world". FAANG are the exception. Not the rule. LP need to realise that.
>> 2. The untangibility of tech assets make banks loans near impossible to get
Avoid bankloans and explore PIPE financing or similar non-dilutive financing
>> It is that access start at 250k a year which is really hard to get even in tech.
Not really. If you aren't VC funded, you can hire anywhere and anyone. You make the rules. At that point, you can hire in India, Indiana, Ukraine, Pakistan, or Pennsylvania. You get a lot for your money. We hired entirely outside major markets and saved a lot. Unfortunately once you go the VC route you get forced into hiring expensive talent and end up burning money.
No founders are paying themselves $250k/each/yr until MANY rounds of funding in. If you get seed/angel funding, you'd be paying yourself like $40k in the U.S. if at all. Founders take a lot of risk too, not just "play with funding money earning a job salary"
I like your concept - few come to the realization that you do. I come to a different conclusion. I believe founders can make good progress using their income to replace themselves the first months (eg: outsource as much as they can) rather than to initially work full time..
Sounds to me like those founders don't really have the work ethic required to start a company if they immediately set out a red line that they won't work for less than $250k/yr. Who the hell makes that kind of money anyway? Only a very very few do.
Initial funding. There is a lot of growth non dilutive capital available but the first 500k are near impossible to get without a network in old money.
You used to raise that money through other local mittrlelstands. At the Masons lodge. At the local kiwanis or Rotary. But these have closed to young member decades ago when said younguns moved to uni degrees as a path in.
There is a lot of money idling out there to do that, but as Indie.vc showed, the usual LP are super frigid to it.
I do not have a good answer to this. The current young people simply are too unstable and too close to poverty to take the risks. And there is noone taking a risk on them either.
There is a looooot of value to make though. These markets are ripe for productivity enhancement through good software by small teams.
But the people that have the domain knowledge and the tech skills do not have the risk taking capability to execute.
Whoever find out how to provide them this will unleash massive growth on the world.
I advice to look at what calm fund is doing. https://calmfund.com/
The solution may end up being some kind of crowdfunding from other tech specialists with high income. Like FAANG devs.