Tech Entrepeneur Martin Varsavsky: You Can Build Your Start-up Without Venture Capital.

Guest columnist Martin Varsavsky is a well-known tech entrepreneur and angel investor.  Born in Argentina and now based in Madrid, he is the founder of a number of tech companies in the U.S. and Europe, includig Viatel, Jazztel and FON.

Ok, this is it guys. No more VC money.  Or at least not as much as there was. So can you still build your company?  I think so.  There are plenty of businesses that have been jump-started without venture capital or with minimal investment and only raised venture capital once they achieved a certain level of success.

In Spain,  examples of these kind of businesses include  Meneame and Panoramio, now part of Google Earth.  In the U.S., recent examples are Digg, Friendfeed and Techmeme. Actually some of the world’s most successful technology companies were started without any early stage venture funding, including the likes of Microsoft, Dell, Cisco, Oracle and eBay.

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In this difficult economic climate doing without VCs  may be a forced decision but that could be a good thing for software and Internet start-ups in general. First of all, if you are starting a company and raise VC money too early you’ll probably have to sell anywhere from a third to more then half of your company. And, the more you raise, the higher your exit will need to be in order to give you a great return. Most consumer Web startups, at least those that don’t need to manufacture anything, could actually find it beneficial to minimize costs, capital and number of employees.

Bootstrapping, the practice of funding a company’s operations and growth with internal cash flow coming from customers, is not only feasible but also a good way to start a business. Bootstrapping your company will force you to focus on your business model and customers, building revenue streams right from the start. With little money to run on you’ll need to solve problems and inefficiencies as they appear and this will build a valuable frugality and efficiency culture into your company.

Companies that bootstrap are those that will most likely get through difficult times.  I bootstrapped Viatel (www.viatel.com), my first telecom start up, with a $200,000 loan from my father- in- law and I turned that $200,000 into $145,000,000 10 years later when I sold my shares.

Many factors are helping today’s start-ups build and grow a business with limited capital. For starters, young companies  are being created open source style: everyone puts in a little bit of their time. Capital efficient start-ups will be able to attract talented and passionate people who will work for them in their free time or as a part-time job. This could actually give companies an edge over their funded competitors. Open source technology itself is a boon: programming requires fewer resources than before and hosting and hardware are cheaper. Open Source applications lowered the barriers to putting products on the Internet and so do a wide range of services that lets start-ups avoid investing in costly infrastructure. With tools like Amazon Web Services, start-ups can access computing, database and storage facilities and pay as- they- go  for their actual usage. This represents  a dramatic reduction in capital expenditure and gives companies the ability to easily scale their businesses as they grow.

A thriving ecosystem of open APIs (Application Programming Interfaces) means today’s startups can avoid wasting their time and development resources on replicating software and web components that already exist. An API is a software interface that enables  developers to access features and functions of an existing software or web application. Today if your website needs a map component, you can use the Google Maps API and get one with very little effort; if you need user identification and community features you can use the Facebook Connect API or Google’s Friend Connect API; if you need access and storage for videos or pictures you can use Flickr’s or Youtube’s APIs, and so on.  The list includes APIs for the most popular web services and applications on the Internet.

Start-ups can now alo outsource development or graphic design, thanks to websites like rentacoder.com or elance.com that offer easy access to a remote workforce of talented freelancers. A start-up in the U.S. or Europe can have developers in India or Eastern Europe and manage their work with cheap or free tools like 37signal’s Basecamp (another very successful bootstrapped start-up) or Skype. Cheaper, yet skilled, talent will help these companies keep their burn rate minimal or self-fund their growth.

Another plus: today’s Internet startups can grow their business exponentially without spending a dime on marketing. Think Skype, Youtube or Facebook. These companies have marketing built into their product. Users try your product, love it and share it with their friends. These are the dynamics of the most successful Internet start-ups today. Forget about PR, forget about advertising. You can do your marketing by keeping a blog, talking to other bloggers and having a fan page on Facebook.

Compared to a few years ago, Internet start-ups today can also tap into much larger markets. With broadband becoming pervasive, increased computer literacy and the proliferation of smart mobile devices, the Internet is now ten times bigger than it was at the time of the last crash. Indeed, here is a little tidbit of information for you: in 2007, YouTube alone consumed as much bandwidth as the entire Internet in 2000.

All these trends push towards a world in which VCs could lose much of their relevance, at least for what concerns early stage financing of Internet and software start-ups. These startups will require little or no money to start, capital that can be provided by “friends and family”.  Angel investors can get in later to help grow the business, and funding from VCs, if ever needed, will help scaling the operation at a later stage. Venture capital remains a great tool for business when it makes sense, like for capital intensive technology companies, but with the crisis hitting VCs, having to raise money from cash-crunched Limited Partners, it’s good to know many Internet and software start-ups can now count on a favorable technologic environment to operate on a low budget and keep innovating, building the Skypes and YouTubes of tomorrow.

 Guest columnist Martin Varsavsky is a well-known tech entrepreneur and angel investor.  Born in Argentina and now based in Madrid, he is the founder of a number of tech companies in the U.S. and Europe, includig Viatel, Jazztel and FON.

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