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 In Articles, Startups

We keep reading about how the pace of startup activity and innovation in the USA is slowing down. There are definitely not as many innovative startups breaking onto the scene lately. There have been stories about this in the New York Times, Forbes, and the Wall Street Journal.

Basically, it looks like entrepreneurs are becoming more risk averse and investors are seeing deals with business models that just aren’t compelling. Projected startup expenses are high and any sign of profits are off in the distant future.

Are all the great innovative money-making ideas gone for now?

I don’t think the lack of business ideas is the real problem. If you look a deeper things get clearer on why the pace of startup creation and innovation has slowed.

Starting, building, and scaling great businesses takes people. And in this day and age those people are mostly technical people who can create and maintain the technology needed to deliver products and services on digital platforms.

So where is the problem?

I heard this story about a programmer who was two and a half years out of college and received a $200,000 pay package (salary, bonus, retirement, etc…) from a west coast company. And this was not this programmer’s only offer in that pay range.

This compensation number surprised me so I checked with a friend in a senior technology management position on the east coast. He verified that this is the pay range even on the east coast.

Wow… What does this mean?

It means that this programmer and a few hundred thousand of his peers will probably have little or no appetite for the startup world.

Think about it… In five years, this programmer will earn over a cool million dollars without risk. There may be an occasional 60+ hour week but less than 50-hour weeks will be the norm in this no-risk world and there will never be that nagging fear that the company may run out of money or a competitor will take you out of the game. Or any of the five thousand risk factors that keep startup founders and employees awake at night.

If you work out the simple startup success probability numbers this guaranteed million-dollar opportunity is pretty much something that can not be passed up. No matter how boring the job would be.

Too many people are taking the boring million-dollar pay package path instead of the exciting startup maybe nothing pay package path.
That’s one reason the best and the brightest are turning their backs on the startup life.

But the other side of the dilemma is even worse…

Let’s say you are some swashbuckling startup founder with the next great innovative idea, a clear distribution plan (the way you will bring you product/service to market and make a profit), and investors lined up and ready to write checks…

The only problem is that you need to fill ten or twenty desks with technical talent so you can develop and deliver your great idea. At $200,000+/Year to fill each of those seats your business model is all out of whack.
So why now?

These technical pay packages are high because the current guys in Washington have virtually stopped the flow of foreign technical talent into the USA on special work visas. This lack of supply has pushed technical salary packages up into the sky.

What can this do to the launch cost and risk for a new product?

Let’s say the start to finish timeline for your MVP (minimum Viable Product) is nine months and you need five people to do the job. Even if you could attract the right talent for say $150,000 (annualized) plus some stock by the time you load in reasonable benefits and taxes you will be back at the $200k number so that MVP launch will cost you $750,000. That’s a lot to just get to the starting line. Plus, you can be sure you will be rolling right in to upgrades and bug fixes the day after your MVP launches. Your monthly technical team carrying cost will be around $90,000. How many orders, sales, users will you have to get just to cover that? And this does not even account for your marketing costs.

The best potential solution is for startups is to do more technical outsourcing. And I don’t mean just customer support people to answer the phones…

Typical Eastern European Co-Working Space

With better low-cost communications systems along with more sophisticated and easier to use programming languages/tools someone with perfect English language skills in Eastern Europe at 20% of US salary just might be able to get your startup MVP done faster, with less risk, and at a lot lower launch cost. Then you just might want to do the upgrades and maintenance with your new “reasonably priced” team in Eastern Europe. That same team of five will coats you less than $15,000 a month.

The difference between $15,000 and $90,000 a month can give a startup enough time to better figure out their exact market and pivot as needed to improve profitability.

You might be thinking, “what about the costs to set up an office in one of these low cost countries?” Well you don’t really need to set up an office. Coworking spaces in the European Balkan region go for around $125/Month per desk. Compare that to $750 a desk in New York City.

And what if you just want to outsource your technology work to one of these lower cost European countries? Then the fully loaded hourly rate is around 30 Euros/Hour ($35). That’s around $6,000/Month or $73,000/Year. For everything… And when the job is done you have no overhead or expenses. Outsourcing may be a good way to start before you decide to just set up an office.

More on the ins and outs of outsourcing in my next article…

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