Cheaper…but still expensive

By: Paul A. Jones

Conventional wisdom has it that it takes a lot less capital to build a startup tech company these days – or at least a web-based startup tech company – than it did say 10 years ago. Many folks think that this should make it easier for flyover country entrepreneurs to compete with their counterparts in the major venture capital centers: that having big VC funds close at hand is no longer a pre-requisite for entrepreneurs in places like Wisconsin to compete with entrepreneurs in places like San Francisco. Well – I am not so sure.

As with much that passes for conventional wisdom, there’s an element of truth in the notion that it takes less capital to build a web-based startup today than it did in the past. The cost of building the tech in these startups is indeed a small fraction of what the cost was a decade back. But there is also an element of naiveté in the conventional wisdom, because while building out the tech may be cheaper, building out the company still takes, in most cases, the kind of capital that is still scarce here in Wisconsin.

These thoughts occurred to me a couple of days back when I saw that San Francisco-based Limos.com recently raised $10 million, courtesy of Austin Ventures, to become the Travelocity (or whatever) of the private limo business. That’s ten million dollars to … build a web site to book limos? Not really. The site was already built (presumably with some of the $5 million previously invested by Canal Partners). The new money will be mostly invested, presumably, in building the brand. Because the idea that “if you build it, they will come” only works, with any regularity, in Hollywood. In most other places, having built it you then have to tell people about it. A lot of people. A lot of times. You have to build a brand, and that still takes real money. It might even take more money today than a decade ago, when the noise level on the web was a small fraction of what it is today. And that’s sobering for entrepreneurs (and angel investors) in places like Wisconsin, where the number of firms that can invest $10 million in a “we have the technology, now let’s build the brand” play like Limos.com can be counted on the fingers of one hand, with digits to spare.

I guess my point here is not that it’s impossible for entrepreneurs in places like Wisconsin to compete, in terms of building meaningful web-based businesses, with places like Silicon Valley, or Boston, or even Austin. We have the technology, so to speak, and we have sufficient (there’s never enough) seed risk capital to make it work.  But we still don’t have regular access to the high seven and eight figure capital rounds that it usually takes to build a world beating brand. Until we do, don’t look for the next Limos.com here in the Badger state.

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One thought on “Cheaper…but still expensive

  1. Paul,

    I like your article but there is a silver lining to doing things the Wisconsin way. By deploying smaller amounts of startup capital and moving a little slower, but steadier – you are forced to validate key business assumptions and build viable plans at an earlier stage. Sometimes a limos.com might raise $10M, only to spend it in 6-12 months and then figure out their business model is not quite right.

    One of my favorite examples of Wisconsin midwestern work ethic and logic beating the Silicon Valley ‘build it and they will come’ mentality is the story of the pet industry from the dot-com era.

    VCs invested hundreds of millions in Pets.com, Petopia (remember the sock puppet Super Bowl ad?), only to be beaten by the slow and steady Wisconsin based Drs. Foster and Smith company of Rhinelander, Wisconsin. They stayed away from shipping pet food for free and big ad spending, and focused on the niche driven from their expertise as veterinarians to provide vet-approved medical supplies and pet products.

    Drs. Foster and Smith has 600 employees and $300M in revenue in Rhinelander, WI and validate that the Wisconsin way of building a business can succeed in a dog-eat-dog venture capital world.

    Todd Asmuth
    CEO, AquaMost, Inc

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