Barriers to market entry tumble down

As a key figure in the development of the Air Miles loyalty card system, Nick Hynes understands very well how cheap travel has made the world a smaller place. As a serial entrepreneur of digital businesses, he has also seen how the cost of launching an ambitious business venture has shrunk.

In 1998, he launched Goto.com, an online advertising business that soon changed its name to Overture Services and listed on the stock exchange before being snapped up by Yahoo in 2001 for $1.6bn.

When he started, Mr Hynes had to pay cash for his employees’ PCs as well as finding the money for racks of computer servers. Among other office overheads, he had to source the phones to handle sales calls. The total bill ran into hundreds of thousands of pounds.

“A lot of it came second-hand from eBay, but we still burnt through 50 per cent of our available cash paying for it all,” Mr Hynes recalls.

In 2009, he co-founded Somo, a digital agency that helps brands such as Audi and Interflora make sense of the emerging opportunities in mobile marketing and technology.

The business now has offices in London, San Francisco, Los Angeles, New York, Singapore and Berlin, but Mr Hynes was able to set it up at a fraction of the cost of Overture because of innovations such as cloud computing that greatly reduce the need for expensive kit. If anything, the pace of change is accelerating, Mr Hynes notes. He points out, for example, that when he set the business up, Nokia and BlackBerry led the market for mobile phones.

What has not changed, Mr Hynes says, is the way he addresses growing his businesses to a global scale. “The fundamentals remain the same,” he says. “We have to ask what we are trying to achieve: does the market want that, are they prepared to pay for it and who is prepared to pay for it? That sort of stuff is basic management.”

Another way that change is shrinking the cost of business while increasing the opportunity to grow is in capital fundraising.

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The use of the internet to reach an audience of thousands of investors, who together can generate far larger rounds of funding than even multinational venture capital firms, has transformed the ability of founding teams to grow an operation.

The crowdfunding platforms that provide these services enable even the most inexperienced founder to get backing, as well as an army of enthusiastic potential customers willing to support the fledgling business.

Crowdfunding, however, is also being adopted by those who have already proved to be capable of raising equity finance through traditional routes.

Brett Akker was part of the team behind Streetcar, the UK-based city centre vehicle rental service that was bought by rival Zipcar for $50m.

He raised seed capital from some of the angel investors and venture capital firms that backed him and his co-founders at Streetcar when setting up his second venture Lovespace. This is another “sharing economy” business that allows people to rent storage space by the box-load.

For his first significant funding round, however, Mr Akker turned to the crowdfunding platform Crowdcube – to great success. He hit his target of raising £600,000 24 hours after bidding went live, but then continued the process, more than doubling his total to £1.25m over the next 10 days.

“Things have changed pretty dramatically since Streetcar launched, not just with crowdfunding but in the way angel investors and venture capital firms operate,” Mr Akker says.

“I am seeing venture capital firms looking at an earlier stage – the £500,000 mark. In the past it was £2m-£2.5m as an absolute minimum. They are also looking to come in much closer to launch.”

Christian Lanng has launched three businesses, starting his first when he was 19. He co-founded his current venture Tradeshift, an online network for businesses to manage issues such as invoicing and payments, with less than $1,000 drawn down on his personal credit card.

“All we needed were a few desks to put our laptops on,” he says from the company’s San Francisco headquarters. “It took us less than a day to register the company.”

Mr Lanng, who like his co-founders was born and educated in Denmark, tested their ideas for Tradeshift while still working in salaried posts. In the three and a half years since they quit these jobs to focus on Tradeshift full time, the business has grown to 160 people, with offices in London, Tokyo, Copenhagen and Suzhou, China, as well as in the US.

Half a million companies now use the platform, which manages $250bn of spending.

Although the business was cheap to launch, it has raised $120m to help build operations to their current scale. Mr Lanng defines Tradeshift as a “fat start-up”, mimicking the “lean start-up” method of company building developed by San Francisco-based entrepreneur Eric Ries.

“It is true that the barriers to entry are low, but I am a big believer that you need to take cash early,” Mr Lanng says, adding that many of his fellow European entrepreneurs are afraid of raising large amounts of cash and spending it fast.

“Americans are more aware that it is about raising money and scaling,” he says.