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The Sucess of Start-ups: An Unexpected Consequence of the Recession

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"When it's darkest men see the stars" -- Ralph Waldo Emerson

This Thanksgiving season, it might seem there's less to be thankful for. One out of 11 of Americans is out of work. The common wisdom says that the chickens have all come home to roost from a disastrous series of economic decisions including outsourcing the manufacturing of America's physical goods. The United States is now a debtor nation to China and the bill is about to come due. The pundits say the American dream is dead and this next decade will see the further decline and fall of the West and in particular of the United States.

It may be that all the doomsayers are right. But I don't think so.

Let me offer my prediction: the second decade of the 21st century may well turn out to be the West's, and in particular the United States', finest hour.

I believe we will look back at this decade as the beginning of an economic revolution as important as the scientific revolution in the 16th century and the industrial revolution in the 18th. We're standing at the beginning of the entrepreneurial revolution that will permanently reshape business as we know it and more importantly, change the quality of life across the entire planet for all who come after us.

The Barriers to Entrepreneurship

While start-ups continued to innovate in each new wave of technology, the rate of innovation was constrained by limitations we only now can understand. Start-ups were once constrained by:
  • long technology development cycles (how long it takes from idea to product);
  • the high cost of getting to first customers (dollars to build the product);
  • the structure of the venture capital industry (a limited number of VC firms);
  • the expertise about how to build start-ups (clustered in specific regions like Silicon Valley);
  • the failure rate of new ventures (start-ups were a hit-or-miss proposition);
  • the slow adoption rate of new technologies by the government and large companies.

The Democratization of Entrepreneurship

What's happening is something more profound than a change in technology. What's happening is that all the things that have been limits to start-ups and innovation are being removed. At once. Starting now.

Compressing the Product Development Cycle

In the past, the time to build a first product release was measured in months or even years as start-ups executed the founder's vision of what customers wanted. Today start-ups have begun to build products differently. Instead of building the maximum number of features, they look to deliver a minimum feature set in the shortest period of time.

For products that are simply "bits" delivered over the Web, a first product can be shipped in weeks rather than years.

Start-ups Built for Thousands Rather Than Millions of Dollars

Start-ups traditionally required millions of dollars of funding just to get their first product to customers. Today open source software has slashed the cost of software development from millions of dollars to thousands. The cost of getting the first product out the door for an Internet commerce start-up has dropped by a factor of a ten or more in the last decade.

The New Structure of the Venture Capital industry

The plummeting cost of getting a first product to market (particularly for Internet start-ups) has shaken up the venture capital industry. New groups of VC's, super angels, smaller than the traditional large VC fund, can make small investments necessary to get a consumer Internet start-up launched. They make lots of early bets and double-down when early results appear. (And the results do appear years earlier.)

In addition to super angels, incubators like Y Combinator, TechStars and 200-plus others like them worldwide have begun to formalize seed-investing. They pay expenses in a formal three-month program while a start-up builds something impressive enough to raise money on a larger scale.

Finally, venture capital and angel investing is no longer a U.S. or Euro-centric phenomenon. Risk capital has emerged in China, India, and other countries where risk taking, innovation and liquidity is encouraged, on a scale previously only seen in the U.S. In sum, the worldwide pool of potential start-ups has increased at least 10-fold since the turn of this century.

Entrepreneurship as Its Own Management Science

Over the last 10 years, entrepreneurs began to understand that start-ups were not simply smaller versions of large companies. While companies execute business models, start-ups search for a business model. Instead of adopting the management techniques of large companies, which too often stifle innovation in a young start up, entrepreneurs began to develop their own management tools. Using the business model/customer development/agile development solution stack, entrepreneurs first map their assumptions (their business model) and then test these hypotheses with customers outside in the field (customer development) and use an iterative and incremental development methodology (agile development) to build the product. When founders discover their assumptions are wrong, as they inevitably will, the result isn't a crisis, it's a learning event called a pivot -- and an opportunity to change the business model. The result: start-ups now have tools that speed up the search for customers, reduce time to market and slash the cost of development.

When It's Darkest Men See the Stars

The economic downturn in the United States has had an unexpected consequence for start-ups -- it has created more of them. Young and old, innovators who are unemployed or underemployed now face less risk in starting a company.

It's possible that we'll look back to this decade as the beginning of our own revolution. It may even be the dawn of a new era for a new American economy built on entrepreneurship and innovation. One our children will look back on and marvel that when it was the darkest, we saw the stars.

Excerpted from a Thanksgiving 2010 message on Steve Blank's Website and Blog.