Posted: 5:15 p.m. Friday, July 19, 2013
By Neal Cabage
Innovation and access to seed capital is making it easier than ever to start a technology company. Here's a look at how the tech industry is changing and how businesses can cope.
A decade ago, building a website was difficult and expensive. WordPress didn’t exist, nor did the tens of thousands of free plugins and low-cost design themes that can be installed at the click of a button. Today, when someone creates a "brochureware" website or blog, there’s a good chance they’re starting with all of these resources already assembled. The job that remains is to simply integrate and customize.
The same is true of just about any Web application you may be looking to build. There is a plethora of open-source and hosted platforms that make it possible to setup well-designed, and even enterprise-grade, solutions for e-commerce, customer relationship management, and just about any software model you can describe, for a fraction of the time and cost of what was needed before. Cloud-based data and service APIs, meanwhile, are available for just about everything you can think of, often for a low monthly fee. Or in the case of Google Maps, free in many cases.
The net result of all of this inherited innovation is a better quality product for considerably less time and cost, as much as 5 to 10 percent less, in fact. A typical e-commerce platform would have cost $100,000 to build in 2003, but it is now possible to build something comparable for $10,000 or less. And for the smaller online retailers who don’t require deep customization and don’t want the hassles of running their own technology stack, it's possible to set up a hosted online store through Shopify, Volusion, or Magento Go for as little as $15 per month and a couple of hours of setup.
How did we get here so quickly? In one word, commoditization. In a 2003 Harvard Business Review article, Nicholas Carr boldly asserted that, “It is difficult to imagine a more perfect commodity than a byte of data. As information technology’s power and ubiquity have grown, its strategic importance has diminished.” To the ire of the IT leaders of the time, Carr argued that information technology is no different than technologies that had come before it, and it would see the same fate. Consider the jet engine, which was the “high tech” of its day and very expensive to build, employing many of the world’s best engineers at high salaries to develop. Today, that problem is solved at a commercial level, and it is just one of the many parts assembled by airline manufacturers who inherit the technology and build products around it. That is where the market is in the aerospace industry today.
As we witness the solving and inevitable commoditzation of an increasing number of software challenges, we are seeing an explosion of new Web and mobile applications in its wake. Start-ups and hobbyists alike are taking advantage of the increasingly powerful inherited technology stack in large numbers. NetCraft estimates there are approximately 15 times more active Internet host names today than a decade ago and there are now 900,000 apps in Apple's app marketplace, a feat accomplished in the last 5 years alone.
In the midst of this explosion, we are also seeing capital reach more early-stage ventures than ever before, having a further amplifying effect. Accelerator programs like Silicon Valley-based YCombinator are providing mentorship and seed funds to scores of new start-ups every quarter in exchange for a small equity stake. They also prepare these early stage start-ups raise additional funding at the end of the program.
This approach has allowed accelerators to play the odds across a spread of big idea start-ups, without having to shoulder the risk of investing too heavily in a failed business. Because this approach has proven out so well, there has been an explosion in start-up accelerator programs across the United States since 2005, with an estimated 200 to 300 programs now operating across the country.
The implication of all of this activity for technology start-ups should give prospective founders pause. The fundamental challenge a decade ago was technical in nature. The technological and financial barriers to entry limited competition and required engineering wizardry both for the development of the platform and even to master the available online marketing channels available at the time: SEO and paid search.
Now, with many of the technical challenges behind us, the prevailing problem is competition. No matter what your idea for a website or an app, there’s a good chance you’ll find 10 other start-ups who are already in the market, and a couple of those are likely even funded and already on the ground running. Simply building another great product in this climate is not enough. It is time for technology entrepreneurs to begin developing a deeper appreciation for the art of marketing and the nuance of strategy, if they hope to compete in this maturing marketplace. The objective in this new world is to connect with customers and solve their problems through the use of technology, not innovating the technology itself.