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Is it really cheaper to build a startup now? The data shows it’s actually more expensive than ever before

Sunday, October 30, 2016 20:01
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(Before It's News)

I’m sure you’ve all heard the same mantra over the last few years – “it’s far cheaper to build a startup now than it was ten years ago.” Usually when someone says this they’re referring to the massive decrease in hosting and development costs which without a doubt are a lot cheaper than they were even five years ago.

The problem I have with this statement is that building a business is a whole different can of worms than just getting a good deal on servers and development horsepower. No founder will tell you that building a business is easy, and in fact, many will tell you that there is more competition than ever before. More competition, more investors, more money flowing into startups and the ante has just been upped when it comes to growth.

I remember what a friend of mine in the consumer app space said years ago. He said that when he started building apps getting 1 million users was a huge sign of traction, now he said if you’re not getting more than 10 million active users you’re not going to impress people like you used to. Bigger growth numbers, more competition, larger Seed and Series A rounds, if you look at it this way it might actually be more expensive to build a startup now than ever before.

Mattermark did a deeper dive into the data, here’s their approach (which I think is spot on):

Sure, building the underlying technology behind a startup may be cheaper and easier today. But what about building the business as a whole? There are likely many ways to answer this question, but we’ll focus on the rate at which startups that received Seed or Angel funding are able to raise a Series A round.

Why this approach? For the past dozen or so years, startups have used Seed and Angel investment to build the first iterations of their technology, hire the first key members of the technical and business teams, run some marketing experiments, and, ultimately, gain sufficient traction to justify raising a Series A round to fuel continued growth.

If it is cheaper to start a startup now than ever before, we’d expect to find that startups that have raised smaller seed rounds in the past few years are more likely to raise a Series A, when compared to startups that raised similar amounts of money in the past. (Source – Mattermark Blog)

So, given how much data Mattermark has access to they were able to make a nifty graph showing the % of companies that raise a Series A round:

angel-and-seed-financing

Okay, so you might not be able to look at this chart and make a lot of sense of it, but you don’t have to since the analysis has already been done. Here’s what they were able to deduce from the data:

It’s more expensive to start a startup today than it was in the past. Note the steadily increasing rate at which startups successfully raise Series A rounds as they raise more from Seed and Angel investors. There is no appreciable decline in rates of future fundraising success. In other words, each dollar these relatively new companies raise prior to Series A is positively correlated with future fundraising success, at least up until the $4 million mark. After that point, the data are thin, so it’s hard to say whether the positive trend continues beyond that point.

And there you have it. While there are some parts of running a startup that are now a lot less expensive but the reality is that it’s more expensive to start a startup today than it was in the past.

What do you think, do you agree with Mattermark’s analysis? Comment and let your voice be heard!

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