Fundality

Posted on January 18, 2008
Filed Under Getting Started | | Written by Gary Reid

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Is there a new funding reality for start-ups today? A fundality?

The vast majority of start-ups will bootstrap, because equity funding is thin on the ground. The credit crunch may take away a lot of the sources of debt funding as personal loans become harder to get and as the economy becomes weaker, with pressure on house prices and jobs it means friends and family will become less likely to help out.

This isn’t new and in fact recessions tend to kick start entrepreneurial activity as many seek to secure their own future by doing it themselves or spend their redundancy cash.

The new reality is more related to what I was blogging yesterday - business models.

So many rely on critical mass to achieve a profit, they don’t scale in reverse. Bootstrapping your way to critical mass, takes time and money.

When I started Blue Box back in 2000 the sums were easy, a dedicated box cost me $200 per month, I reckoned I could get 100 customers on it at $78 per year - gross margin from each box =  $5400. In reality we got around 160 people on each box, the price of servers went down as they became more powerful and by 2003 you could get 500 on each box. The economics were simple.

But, if the new crop of entrepreneurs enter the Web 2.0 scene then the economics are not so easy. Critical mass is paramount. You can’t follow most of the current business models unless you have critical mass and even then you could be operating in a market with a VC funded player who doesn’t have any business model.

I don’t know what will happen, but we could see a whole new funding reality this year - a fundality

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Comments

One Response to “Fundality”

  1. Garrison on February 3rd, 2008 8:39 am

    It seems the trend in equity funding seems to be private equity firms buying out established brands such as EMI, Boots etc etc…

    And on the other hand you have people pouring stupid amounts into start ups such as Facebook, like the dot com crash never happened.

    That leaves a whole strata of interesting start up devoid of funding which is why bootstrapping is becoming, not so much popular, but vital.

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