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Thursday, January 18, 2007

Learning From the Crash

It looks like the Darwinian winnowing of 2000 has caused the survivors to learn a thing or two about fiscal discipline. Now the watchword is survival not fame. Being the last one standing is the goal.

Today's tech start-up can last almost indefinitely even without revenues because it only takes one or two engineers to build a fully functional Web 2.0 site, and hosting costs are minimal. Exit strategies have also changed from IPO to acquisition. A WSJ article nicely highlights the differences between startups of 2000 and 2007.

What's changed?

  • Pets.com Inc. burned through $110 million in 1999 and 2000 -- including spending an estimated $25 million on advertising in venues like the Super Bowl
  • PayPal burned through about $10 million a month in mid-2000 to maintain a staff of 200. In total, PayPal spent $150 million before it finally broke even
  • Spending an average of $35 on advertising, sales and other promotions to get just one user
  • Using inexpensive server systems, open-source programs or Web-based services to build and launch their products, and offshoring to places like India
  • Tech start-ups raising less funding these days -- an average of $8 million each time, down from $11 million in 2000
  • Making the money last longer: Tech start-ups in Silicon Valley now survive an average of 17 months on a single round of funding before needing to raise more money, up from just 10 months in 2000
The key to survival that all smart start-ups know is to keep money in the bank for the inevitable shakeout, which the online video sharing sites are feeling right now.

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