The Myth of the Costless Startup

Early capital matters to student startups as much as any other

Why are students looking for money? They have free housing, free food, and no job. So maybe they run an ad or two. How could they possibly need money?

I hear similar refrains all too often from young graduates frustrated at how “easy” it is for current students to raise seed money. The emergence of student-run venture funds has certainly made the process more accessible and in turn ignited debate over which resources (namely mentoring, network, talent, and capital) are most valuable to a student-founded company. I’ll readily admit that most student-founders overemphasize capital needs. After all, as the Social Network reminds us, a million dollars is barely even cool anymore. In the absence of customer validation, stringing together a little VC validation seems a lot easier (it’s not). But dismissing the value of early stage capital for these companies is equally naive. Student companies’ funding needs may be modest, but even a small amount of cash helps student founders do what matters most: move fast.

With next to no living or opportunity costs, we should see plenty of students starting companies. And we do. But that’s about as far as most get. A domain name, a generic “coming soon” page, and perhaps a LinkedIn profile update are all that become of most students’ big ideas. Campuses are a breeding ground for zombie startups—companies that hover in limbo between life and death out of either neglect or unwillingness to admit defeat. I’ve been guilty of letting projects zombify at least a handful of times. It gives you enough busy work to justify calling yourself a startup founder, but you have no startup to show for your efforts.

Students never experience the relentless pressure to succeed or survive that shaped so many successful companies in their early days. Ideas are cheap, but execution is hard. Anyone who can build a company out of pure passion and sweat has proven himself as a founder and can go out and raise a true seed round. But what about earlier in the company’s lifecycle? Can five, ten, or twenty thousand dollars make a difference in the six month sprint to discover customers for a product?

I say it can. And more importantly some of the top venture capital firms do too. Where does the money go? To eliminating distractions. At, our bills for non-mission-critical web services (i.e. everything but AWS and Heroku) totals nearly $200 a month. These services help us manage and track everything from accounting to projects to emails. If we can reroute just a few hours a month from anything that’s not building the product or working with customers, that’s worth paying for. And Rough Draft Ventures, one of our investors, helps us do that.

A small amount of seed money, for a software startup, lets you move fast. It lets you spend more time experimenting and building, which in turn helps you discover your business model sooner. Tales of caffeine-fueled coding marathons stretching late into the night are exciting, but in reality people only have a finite amount of mental and physical energy. Putting a little bit of cash in the hands of someone passionate enough to build until their eyes can barely stay open is an incredibly powerful investment. Even if their current company fails, they’ll have learned more and pivoted faster, just because they had a few thousand dollars on hand.

One of the benefits of providing such a small amount of money is that the fundraising process can be drastically shortened. Rough Draft makes most of its investment decisions within 24 hours—contrast that with six weeks for traditional rounds of venture financing. Investments can be made in the form of a convertible note, with no discount or cap, and a one page term sheet.

Finding the type of founder who just needs that little bit of help to relentlessly push for validation is the biggest challenge that student venture funds like Rough Draft and Dorm Room Fund face. The type of students they desperately want to fund are the same ones who will likely not seek them out—they’re too busy building. My hope is that this kind of person will take note of what’s happening around college campuses. Side projects are great, but considering making a run at your big idea that might seem out of reach. Your first angel investor might just be sitting across the classroom.