The Crazy Upside-Down Economics of the Seed-Stage Ecosystem

Brad Feld was in Seattle yesterday and stopped by the Founders Co-op offices to talk about his excellent new book, Startup Communities.

About 100 people showed up for the discussion: a great cross-section of founders, UW MBA students, venture and angel investors, deal lawyers, journalists and other entrepreneurial free radicals (thanks again to Ignition PartnersMichelle Goldberg for sponsoring lunch).

Among the many points Brad hit in his remarks was a strong message to anyone who wants to play a positive role in their local startup ecosystem: “be a mentor, not an advisor”.

“Mentors” offer advice and support with no strings attached, while “advisors” approach the same conversations with a goal — implicit or explicit — of putting money in their own pockets.

I strongly agree with Brad’s characterization of the mentor / advisor distinction — last year I wrote a similarly themed post about “angels with sticky fingers” — but I also understand how confusing this can be to well-meaning folks who are new to the early-stage community.

To a newcomer, the economic flows — or lack thereof — in early-stage startups can seem completely upside-down. Founders barely get paid, mentors pitch in for free, everyone works like a dog and they all act delighted to be there. 

What’s going on here? There are good reasons for things being the way they are today, but they require a little explaining…

Over the past 10 years — thanks to cloud infrastructure and open-source software — the cost of technology innovation has collapsed. This, in turn, has radically recast the economics of early-stage innovation.

Skilled teams of maker-founders can now build and distribute world-class software with no outside financing required (at least until the business starts to scale). The financing event that used to mark the beginning of a startup’s life — raising a few million dollars in Series A venture — is now a growth financing event that comes 12-18 months later (if at all).

Because there’s so little financial capital at work in the system, early-stage innovation tends to attract people who don’t rate money very highly on their hierarchy of needs. From my own experience, early-stage community members:

  • are fascinated by the power of technology to create positive change;
  • love to be in the flow of new ideas;
  • seek to advance their own thinking by spending time with thoughtful and intellectually curious peers;
  • self-identify as entrepreneurs and enjoy the company of others on a similar life journey; and/or
  • have accumulated business and life experience relevant to tech startups and enjoy sharing their lessons learned with a new generation of founders.

It’s not that these people don’t need money (although many don’t) or are precluded from having some economic interest in the startup ecosystem. It’s just that money isn’t the “why” behind their involvement.

This can be confusing as hell to “normals” who are used to a world where people do good work and command premium rates for it — and especially to the vast ecosystem of vendors and consultants who came up in the ’90s, when venture-backed companies were a rich vein of opportunity for well-paid work.

I know because I get referrals to these kinds of people all the time: freelance strategy consultants; 20-year bigco veterans fed up with the grind; corporate lawyers with time on their hands; investment bankers who want to become VCs, etcetera. They’ve all read the articles about the booming early-stage startup scene and figure there must be money flowing in here somewhere, if they can just figure out how to divert a little of it their way.

When I tell these people that early-stage founders hardly pay themselves, they nod appreciatively at the sacrifices that young entrepreneurs are willing to make.

But when I tell them that everyone else in the early-stage ecosystem is either an unpaid mentor, or an angel investor who puts money *in* rather than taking it out, they look at me like I have two heads.

The strange truth is that the tech startup community — that hotbed of capitalist innovation, job creation and individual enterprise that politicians love to talk about — is absolutely stuffed with people who view money as little more than the exhaust of their system, the grease on its wheels, not its reason for being.

It’s not that entrepreneurs don’t care about money — Gates and Jobs and Bezos are heroes to the early-stage crowd because they changed the world *and* reaped the rewards that came with it.

But there’s a deep, almost countercultural, conviction in the maker community that the gains from their efforts — if there are any — should flow to the pirates who helped to build the ship or signed up to go to sea, not the tradesmen who gouged them for supplies when money was short and the adventure had barely begun.

Please don’t misinterpret my remarks — the world is full of amazing professional service providers who make major contributions to the growth and success of entrepreneurial companies. It’s just that anyone who wants to get paid “market rates” for their work should target companies that have raised at least their Series A, or better yet their B. Almost by definition, these companies are in hypergrowth and can easily rationalize “renting” elite professional capacity that they can’t yet afford to own. Early-stage companies can’t, and shouldn’t.

For me, the early-stage innovation community is the most beautiful, inspiring, intellectually stimulating, emotionally rich and welcoming pocket of modern culture I’ve ever found. But if Willie Sutton were still around he wouldn’t be caught dead working at — or selling to — an early-stage startup.