Why Scarcity is Good for Entrepreneurs
This is the Chapter 19 of my e-book Silicon Valley for Foreigners, that can be downloaded for free on www.siliconvalleybook.com or purchased for $2.99 on the iBookStore and Kindle. A new chapter will be posted on this blog every week.
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Contrary to the popular imagination, Silicon Valley investors do not like nor give much money to starting entrepreneurs. This is not the mythical place portrayed by the media where any startup can raise millions of dollars by just breathing the air of California.
Actually, it is pretty hard to raise money in Silicon Valley due to the enormous competition from the best entrepreneurs in the world. Most investors appreciate founders that are nimble, bootstrap their companies and can execute with few resources.
Founders like Brian Chesky, Joe Gebbia, and Nathan Blecharczyk from Airbnb. As they were starting out in the summer of 2008, the founders needed a way to raise money and sustain their business as no investors were interested in their crazy home sharing idea.
During the 2008 presidential election, the three founders bought a ton of cereal and designed special edition election-themed boxes, released that fall — Obama O’s and Cap’n McCain’s, which they sold at convention parties for 40 dollars a box. They sold 500 boxes of each cereal, helping them to raise around $30 thousand for the startup.
Skeptical about the product and business model, but impressed with the founders’ hustle, Paul Graham, the CEO of the accelerator Y Combinator, decided to accept Airbnb in the 2009 batch, putting another $20 thousand dollars in their coffers.
Airbnb founders, pressured by the lack of resources, were successful in solving their lack of cash and went on to build the first prototype. The startup was only able to raise institutional money from investors after demonstrating their product got real traction from users. Nine years later, Airbnb ended up becoming one of the most valuable and successful startups of the last generation. The company raised more than $4 billion and is now the largest hospitality chain in the world.
Stories like Airbnb’s are not the exception to the rule. The smartest founders are always capable of solving big problems with little or no resources. Silicon Valley investors know that well and are careful, most of the time, not to throw a lot of money on entrepreneurs that have not proven themselves before.
Bad investments, of course, do happen from time to time but this is due to the portfolio approach taken by venture capitalists. The media usually amplifies the bad stuff and does a really poor job of explaining what really happens inside the ecosystem. The impression you may have by reading tech blogs or newspapers is that Silicon Valley is a bubble where money is thrown at stupid ideas from dropout kids. This is far from the truth and is one of those fallacies that is repeated over and over again with no evidence.
I vividly remember when, in 2009, most analysts were decreeing that Facebook would never become a real business or make a profit. Journalists accused Mark Zuckerberg of being a toddler CEO and reprehended investors for throwing money at a dropout kid running a “vaporware” business. In 2016, Facebook made $10 billion in profit and, as of May 2017, is the fifth most valuable company in the world.
The same has been said about other industry disruptors such as Uber, WhatsApp, Instagram, Tesla, and SpaceX. These startups were considered by many as crazy ideas or were deemed to be unviable economically before success. They either had problems raising money at the beginning or were funded by the own founders. It was only after they got traction and proved their business model, money ceased to be a problem.
Scarcity is crucial to building a lean and successful startup culture. If too much money is available to entrepreneurs, they will focus on the wrong priorities and will never learn how to overcome near death moments (that will be many). Abundance of resources damages entrepreneurship.
