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Thursday, Jun 8, 2023

Lower Overhead Helps VCs Fund More Firms

Advances in cloud storage and other technological necessities in recent years mean that more startups are able to finance their first few years on much less than even 10 years ago. As a result, area firms are receiving more funding, and that’s helping fledgling companies to have a better a shot at growing their business. According to Ryan Born, CEO of Sherman Oaks-based digital licensing company AudioMicro Inc., the changes in recent years have been drastic, and he’s seen the overhead costs drop. “I used to be the VP of a $208 million company and we would spend $15,000 a month on servers,” he said, referring to his time with WireImage, which sold to Getty Images in 2007. He recalled that they paid for hosting, server fees, physical storage in air-controlled environments, and remembers there were ever-growing costs as the company grew. Ten years ago, the average tech startup needed $5 million to $10 million to get through their first three years, according to Steven Hughes, senior relationship manager at Silicon Valley Bank’s Sherman Oaks location, which focuses on finding funding for young tech companies. Now that number is down to between $2 million and $5 million. “People are able to do good work because of capital efficiency,” said Hughes. “It’s enabling investment groups to try to find game changers.” Dana Settle, a partner in Greycroft Ventures, a venture capital firm that has remained intentionally small because of the ability to fund more companies with less money, says that these changes are benefitting startups. “Companies are able to iterate into the market more quickly and ask, in a more realistic fashion, what their chances of being successful are and then determine if they’re going to achieve outside growth,” she said. “Then they can see if they want to go get outside funding.” Others in the area agree. Without having to buy or rent massive physical storage space, and with easier-to-create Internet purchasing systems, getting a product out onto the market has become easier and more cost-efficient. “Cloud computing and offsite storage… they’ve really helped,” said Matthew Smith, president of Calabasas-based startup Nevolution. “For less than $1,500 it’s all you can drink access.” Smith recalled that just a decade ago, finding the money for a startup was daunting because of the initial needs of a tech company. Now, using products such as Amazon S3, companies can select their level of storage needs, and change their levels as the company grows. They can also prepay, allowing them to leverage what they think they’ll need against the long-term savings. All of these add up to lower overhead, but may not necessarily add up to success. For firms and banks looking to invest in startups, the decrease in overhead is making it easier to get behind them, Settle said. “By funding companies that are very capital efficient, it has enabled us to have a bigger portfolio,” she said. Born, who is an angel investor in two startups, said this is increasingly the case. “Everyone is moving down,” he said. “Everyone needs less money.” He noted that the capital changes made starting an Internet-based business that nearly anyone could do it, even a high school kid still living at home. He doesn’t see much downside to the increase in opportunity for new businesses to emerge, though. “It’s great for everyone,” he said. “There’s no downside. There’s just zero.” But the basics of startups still apply, he said. “If you build without a revenue model, you still have to find some way to pay that Amazon bill at the end of the month,” he noted. Settle said that the overall shift has helped not only in terms of capital costs, but has also changed how a VC is able to help startups it has invested in beyond just funding. “It’s really about having a portfolio that has a cross-spectrum of companies,” she said. “Having that breadth of companies increases the network that each are able to reach out to.” In the technology industry, that may mean sharing resources, as some have done in physical spaces in growing numbers. “There are incubators and accelerators on every corner — at least eight in the area alone,” said Born. Sometimes co-op spaces work for tech companies and sometimes they don’t. But it still takes hard work, he cautioned. “There’s always competition, but good execution always rises to the top.”

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