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Web Startups and Cash

Roulette graph

I have no idea what this image is either

I think it’s fair to say that most web startups have a tenuous relationship with cash. And by tenuous I mean they don’t have any. What’s incredibly interesting though is the perception between any new business, particularly Internet related ones, and money. It’s often one that’s born out of a misconceived notion that a billion dollar web company can rise out of nothing more than a few hundred bucks and, whilst this does occasionally happen, the harsh reality is that most successful online ventures require a lot of work, time… and buckets of cold, hard cash.

Now, you’re probably thinking I’m a bit of an idiot making this assertion when the very own business I run is completely self-funded and is developing its own bootstrap web software. And you’d be right, I am a complete idiot. But that’s never stopped me before and neither should it you if that’s honestly the way you’re so inclined. Hell, 37 Signals, GitHub and Slicehosts all did it this way and I’m sure there must be at least a handful of others, none of which I can find any reference to on the Internet but let’s just pretend for the sake of my morale and self-esteem anyway.

Of course, as idiotic (passionate, we say) as we are, we’re also under no illusion that we’re going to challenge the Technical Gods and build the next Twitter all by ourselves on a shoe-string budget. Oddly enough however, it does seem to be the common perception that this is a completely plausible approach. Many people imagine a web startup as being run from the bedroom of a few geeks, desperately coding away in the vain attempt to become the next Yammer and be bought out by Microsoft for $1.2 billion just four years after starting up.

“The lack of money is the root of all evil.”

Mark Twain

Perhaps it’s a throwback to the dot-com boom of the mid-to-late nineties and all of the ‘fabled’ stories of folk starting up multi-billion dollar online businesses in their garage like, y’know, Amazon. This notion couldn’t be further from the truth, however, and a simple Google search reveals the real seed funding of a few of the most well-known web ventures.

  • Before Facebook was even available to the general public as a social network, it received an initial investment of $500k from Peter Thiel, co-founder of PayPal, and then hundreds of millions of dollars thereafter from companies such as Microsoft and Goldman Sachs. This all, of course, isn’t even including the original cash that Eduardo Saverin put up to get it going in the first place.
  • Twitter picked up a not-too-shabby $5 million in secretive funding way back in 2007 before anyone had even heard a tweet out of it.
  • Eric Lefkofsky gave Groupon a cool $100 million in 2007 just to ‘develop the idea’. Eric, if you’re reading, I’ve got plenty of ideas I’d like to try and develop.
  • Quroa received $11 million in its first round of funding. And then another $50 million this year from Peter Thiel again. I really need this guy’s phone number.
  • Zynga waggled a nice $10 million in it’s first round of investment in 2008, just 10 months after starting up.
  • Little ol’ cutsie Instagram wasn’t built in a bedroom and, in fact, had a modest $500k to kick it off.
  • Yammer obtained $5 million seed funding back in 2009 to get it started.
  • Even Kiltr, the hugely underused Scottish social network (yes, we have our very own), secured £80k seed funding in 2009.

LinkedInStorifyWonga… the list is endless.

Oh, and if you’re wondering about Amazon, Jeff Bezos borrowed his parents life savings to get it up and running, received its first investment of $8 million in 1995 and then didn’t even turn a profit until six years later in 2001.

The simple truth is that most web startups require a huge amount of investment just to put them on the map… and then years of operation and more investment before they ever sell and manage to fuflfil that glorious Exit Strategy clause in their now completely defunct business plan. Fortunately, unlike in the UK, I imagine that in America all you need to do is turn up at an investors meeting wearing a Ruby on Rails t-shirt, thick rimmed glasses, carrying a MacbookPro, and they will playful throw bundles of $100 bills at you in some kind of expensive version of a dorm room pillow fight.

Anyway, the moral of this blog post is that you should never underestimate the money involved in realising an ambitious startup. Although some people manage to pull it off (and fuel my hideous jealous in the process), usually it requires a pragmatic and realistic approach to financing. Yes, you need the idea, yes, you need the bootstrapped prototypes, yes, you need the hard work… but you also you need serious money.

So get out there and start meeting some really, really rich people.

Image credit: tableatny

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Author: Gordon McLachlan

Gordon is uncomfortably good looking.

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