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Brains Trump Money For Startups

The balance of power is shifting from investors to hackers when it comes to starting a software company.

The balance of power is shifting from investors to hackers when it comes to starting a software company.Why? "Because you don't need as much money, but you still need as much brains," says Paul Graham. He's a co-founder of Y Combinator, which provides micro-funding (along with reams of good advice and great contacts) to entrepreneurs.

Graham gives four reasons why it's cheaper to start a software company today than it was in the past.

  • First is open source software, which is widely available and free for the offering.
  • Second is Moore's Law -- computers are more powerful and less expensive than ever, and bandwidth is cheaper.

  • Third is the Web itself. In the 1990s, startups had to rely on old-school methods to generate buzz and attract interest: hire publicists and marketers to court the media and attract users. But today, the Web's social networks spread the word faster than a press release or a goofy guerilla marketing campaign ever could.

  • Fourth is the change in programming languages. "Ten years ago, the most common development team was eight guys writing in C++ or Java," says Graham. "Now it's two guys writing in Ruby or Python. And those two guys are probably the founders, so you don't have to pay them anything.""
  • Graham is putting his theory to the test with Y Combinator, which rarely gives startups more than $20,000. It's a pittance compared with the millions handed out by traditional VCs, but just enough for the founders to assemble a working prototype in three or four months. The prototype then opens doors to additional VC funding or, in a couple of cases for start-ups backed by Y Combinator, outright acquisition.

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