Low Startup Capital Requirements: Blessing or a Curse?
However, one of the fundamental laws of economics is: there ain't no such thing as a free lunch. In a competitive market, any advantage which is freely available to all of the participants doesn't benefit any of them, because it will simply cause new people to enter the market and make things more difficult for everyone. Suppose there are two cities, A and B, and people in both have a taste for ice cream. People in A are willing to pay $1 per scoop, but people in B are willing to pay $3 per scoop. This might seem to benefit ice cream sellers in city B. However, what will happen is that ice cream sellers will move from A to B until there is no more reason to move (ie, expected profits in both cities are equal). In other words, even though prices are higher in B, so many people are selling ice cream in B that any one ice cream store will have relatively few customers, canceling out the benefits.
The same goes for the world of entrepreneurship. There are lots and lots of people who have, or can get access to, $5,000. There are many fewer people who have, or can get access to, $500,000. Hence, many more people will try to start companies in fields where the capital requirements are only $5,000, and so the market in these fields will be flooded with new entrants. The flood will continue until the difficulty of competing with all the other entrants equals the difficulty of getting $500,000 (assuming the expected reward and risk are equal).
If we look at the Internet, this is, in fact, exactly what we see. The capital requirements for starting a website (whether for profit, for fame, for the heck of it, or whatever) are so low that millions of people have done it. Someone once quipped, "Type in, ‘Find people that have sex with goats that are on fire,’ and the computer will say, ‘Specify type of goat.’" This is great for Internet users, because they can find information on practically anything, and a huge variety of applications, at no cost to them.
However, the flip side of this is that there are so many people competing for Internet traffic that you either have to be really skilled, or really lucky, or spend a ton of money on advertising, or do deals with a bigger partner, or something else extraordinary to get a decent amount of traffic. For every YouTube, Facebook, and MySpace, there are a hundred applications out there which will never have enough users to pay the founder's living expenses.
So, to everyone who would say that the low capital costs of startups are a boon for founders: you are not avoiding pain through low capital costs, but merely switching from one kind of pain to another, like a person who chooses to work for a big company for twenty years and invest the money to get rich instead of starting a company at all.