At a web services conference a few weeks back, I remarked that the story behind the show was really that fixed costs will become variable / “flexible” costs costs. This is better than capital efficiency, this is capital alchemy. Only allocate capital the instant it can marry customer demand. In the start-up world the trend is hard to ignore.
It used to be that start-up needed $5 million just to build the infrastructure that was needed to launch a website. That’s $5 million just to test whether or not an idea had any legs. That’s $5 million whether just one person who visited your website or millions did. But today, Amazon Web Services has turned this “fixed” infrastructure costs into variable expense. Get your credit card, sign up for an AWS account, and pay as you go. Tough to imagine companies were once launched any other way.
Another example is CPC advertising. It’s only been in the past decade that we’ve seen widespread adoption of pay-for-performance advertising. Instead of doing a fixed $X0,000 media buy, businesses can bid on keywords knowing that they will only pay if someone clicks their ad. A fixed marketing expense is now variable.
Capital alchemy is a trend that has already revolutionized both the advertising worlds and the web infrastructure worlds. Undoubtedly, it will impact many more sectors of the economy. I’d love to meet with entrepreneurs who have some ideas on where the magic of capital alchemy might strike next.
Filed under: start-ups, venture capital | 5 Comments
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One we’re looking at is the notion of software licensing by the minute. Amazon is enabling it, and the large enterprise software vendors are dabbling in it. I’m surprised that more startups (particularly open-source startups) aren’t participating in it more enthusiastically.
Actually that is exactly what we are doing. Using data exhaust and revenue sharing empowered by Amazon and others. We utilize what is out there to minimize startup costs. To date we have kept our costs as low as possible with the focus on marketing the product. We’ve had a great conversation with First Round and look forward to a follow up hopefully.
As a serial, sometimes parallel, entrepreneur I love capital alchemy. My favorite feature is on-demand dilution on a sliding scale. The old $5M model calls for a big hit followed by the opportunity for a disastrous hit when you need more capital.
You can reduce your financial risk even further these days. Why pay for clicks that may not convert when affiliates will accept payment per lead or even deal?