The returns to entrepreneurship

I was at dinner the other night with a group of entrepreneurs. One told the story of a 27-year-old whiz kid whose company will likely exit for $500M –$1B – the business now being less than two years old. You can imagine the effect that this had on the brilliant, hardworking 35+ entrepreneurs in the group, who have had their share of hits, but not at that magnitude and not that quickly.

These stories are getting more commonplace. It seems that the entrepreneurs who “hit” these days are doing it more quickly, making more money, and doing it at a younger age. Back in the 70s, it took a decade plus to build a company and $10M, even in today’s dollars, was a big victory for an individual. Up until the late 90s dot-com boom, even though these stories existed, they were less common and took longer.

The storyteller explained that this 27-year-old is more brilliant and more hard-working than the previous entrepreneurs he’s seen.

That can’t be it. There are only so many hours in the day, and the entrepreneurs of yesteryear worked just as hard as the entrepreneurs of today. And the ones who came before were just as brilliant. Human intelligence has not evolved that dramatically in 10-20 years.

Rather, I posit that the amount of leverage available to a modern Internet entrepreneur is far, far greater than was available to entrepreneurs of previous generations. The number of entrants has dramatically increased as well. The overall hit rate might be lower, but the ones who win, win bigger and faster thanks to the leverage.

Gone are server farms, telesales and support, marcom material, tradeshow booths, direct sales forces, licensed software, mountains of code, reseller agreements, plane tickets, hotel rooms, printing CDs, voicemail systems, and so on and so forth.

Modern Internet entrepreneurship starts with a few engineers working for nothing and carrying latops and cellphones. They coordinate with Skype and GTalk and wikis and bug tracking sytems. The company itself is snapped together with outsourced HR, cookie-cutter incorporation, and outsourced finance / payroll. Marketing is done virally, or through SEO, or SEM. Customer service is handled via the community and forums. PR and outreach through tweets and blogging. Payments come via Paypal. Ads are served up by third-party ad networks. Storage goes on Amazon. Computation scales via Amazon, Softlayer or Rackspace. Code is built upon stacks of open source, SaaS, and $10/month services.

What used to cost $1M-$2M to set up, now costs $10K. What used to cost$5M to build, now costs $250K. What used to cost$20M to go to market now costs $1M.

But the upside hasn’t gone down. It has gone up. The 3 billionth person will be online shortly. They can all use the product. Network effects are stronger than ever, and some businesses become natural monopolies very quickly. Most web products have no marginal cost of replication, so adding a new customer is pure profit.

Less labor required. Less capital required. Less cost to scale. Larger markets. Cheaper marketing. No cost to ship more product.

No, people aren’t getting any smarter or harder-working. But the amount of leverage is obscene. The hits – Yahoo!, EBay, Google, Skype, MySpace, YouTube, Facebook, Twitter, Zynga, are each arriving faster than the previous one did. And the leverage is increasing, not decreasing.

The returns to scale for being smart, young, skilled, and high-energy have gone up tremendously, and that has profound implications for society. The smart are getting richer.

Update

An insightful comment on Hacker News: Basically, the Internet is a wide and deep place. The depth creates a few huge winners and the breadth creates a large number of small winners (who would have been losers in the old system, but due to the above-mentioned low costs, can still win). What’s missing is the traditionally fat middle. We’ve gone from a normally distributed set of outcomes, to a power-law distribution. The median is a small fraction of the mean. This is bad news for anyone who has built their business predicated on their achieving mean outcomes. That includes mid-stage VC funds, moderately-capitalized companies (traditionally speaking), and societies that care about “equal” outcomes.