Halfway into 2012, we’ve seen quite a few milestones in the universe of technology startups. The JOBS Act was signed into law, allowing startups to crowdfund from non-traditional investors, while discussion of the Stop Online Piracy Act was postponed. Facebook acquired Instagram for $1 billion, then went on to a lukewarm (or, at least, lukewarm-ly received) IPO. And the Pebble smartwatch set a Kickstarter record by raising over $10 million.
Behind these big hits, the startup landscape is gradually evolving. Paul Singh, a partner at the 500 Startups accelerator, has been traveling around the country giving talks on angel investing, in which he identifies some of the latest trends affecting startups and their fundraising efforts. Here are some of the most notable:
Lower Costs…Sort Of
It isn’t news that startup costs are falling: you can power your technology with cloud servers, take advantage of open source software, and distribute your product online. But according to Singh, growing and scaling is still expensive.
“Yes, it’s getting easier to start a startup, but it’s also getting harder to actually, really build them, to really grow them,” he says. Employees will always cost money – over $120,000/year for some non-founders in Silicon Valley – and the abundance of startups means you have to constantly compete for talent.
Traction Rules, Not Technology
Because costs are lower, Singh says, building reliable technology isn’t what makes you stand out; it’s getting people to use it. Angel investors aren’t just looking for a genius prototype.
It’s “no longer ‘good enough’ to depend on tech differentiation,” Singh tells startups. “I personally don’t ask about patents.” In fact, he thinks trying to patent your technology early on is a bad use of capital.
For example, Instagram wasn’t the only photo sharing app out there with sleek, funky filters, but it was the one with 30 million users. To investors (or acquirers like Facebook), this shows that the team can execute and continue bringing in users, which ultimately leads to revenue. Another example: the reason that competing with Facebook sounds ludicrous is not because of its technology, but its overwhelming traction.
Two-Way Competition for Investment
We’ve already written about the higher bar for startups seeking angel funding (which might change due to the JOBS Act). Because costs are lower and startups can bootstrap further (or use Kickstarter), angels expect more sophisticated ideas when entrepreneurs come in to pitch. And while angels may prefer to invest locally, they can still get pitches from around the country, or even around the world – so yours needs to stand out.
On the flipside, there is a higher bar for angels. As Singh explains, angels have to reach startups before they get lots of media attention; otherwise, angels are competing with other angels and VCs to make an investment. That’s why he and Dave McClure fly around the world looking for startups to invest in. (Singh jokes that, to make money, you have to be the first investor in a deal or the smartest one, and he isn’t smartest.)
To deal with competition from other investors, angels have to offer better terms, or additional assets. For example, 500 Startups has a Q&A platform for its network that lets startups ask questions and schedule office hours with over 150 mentors.
“Raising the bar all around is a good thing,” Singh says.
Looking toward the rest of 2012, Yahoo and its new CEO, Marissa Mayer, could be acquiring startups to kickstart the company. Mobile will continue to rise. JOBS Act crowdfunding could be delayed until the end of 2013 (if the SEC doesn’t move faster). And competition for talent, customers, and investment will only go up, at least for the time being.