May 25, 2009

We've known for some time now that the costs of starting a business can be at this point so low that pretty much anyone can do it. We frequently use developing an iPhone application as a typical example, but really, it's anything Web-based that can be pursued at roughly the same intensity and same cost as you would a hobby. This week, Time magazine runs a nice article highlighting this new situation.

"At no other time in recent history has it been easier or cheaper to start a new kind of company," the magazine declares. "Possibly a very profitable company. Let's call these start-ups LILOs, for 'a little in, a lot out.' These are Web-based businesses that cost almost nothing to get off the ground yet can turn into great moneymakers." Actually, we almost prefer the term they use later in the article: "ramen profitable". "It means that your start-up is self-sustaining and can eke out enough profit to keep you alive on instant noodles while your business gains traction."

So what's new bout this "time in recent history"?

The main structural change from the past, even the recent past, that Time traces is that tech companies had to secure significant funding at the outset because the costs of software, broadband, and the rest--things that are now either free or totally taken for granted (you can use free cloud computing; your broadband bill is like your electric bill)--required lots of cash on hand. Hence the need for financing, which invariably diluted the owner's stake (creating less incentive for massive success) and frequently bound entrepreneurs to business models that quickly turned obsolete. Now, if you have an idea, you can sit in your home for several hours over several weekends and give it a go: it's as simple as that.

The other characteristic of the current situation that Time points to as something likely to cultivate many more new start-ups is, of course, the recession. It's not just that many talented people suddenly find themselves jobless, having more time on their hands and more need for extra cash. The recession also lowers the opportunity cost of failure, encouraging risk-taking. And it is liable to force a certain discipline upon the entrepreneur, who lacks the normal accoutrements of good times to fall back upon.