Going it alone: Why one web firm shunned accelerators and started investing in its own customers
We're thousands miles away from the Google offices, and there are no shiny lofts and game rooms à la Facebook headquarters. Not yet, at least. In the north-western suburbs of Rome, on the fourth floor of a residential building, is where web and software development startup EgoRego has set up shop.
The three-room apartment is bustling with activity, surrounded by hardware, boxes of high-heeled shoes (samples for an upcoming project) and young professionals sipping coffee through the long afternoon.
Raffaele Pizzari and Luca Giallombardo are both not far north of 30. They started their company back in 2007, as young entrepreneurs with lots of ideas and a limited budget. But while it might be tempting to turn to VCs, accelerators or the government for financial support, EgoRego would rather carve out its own niche.
The company didn't want credit, nor financing. "Once we were €36 overdrawn," Giallombardo said. After counting out the notes and coins needed to pay off the overdraft at the bank, that was the company's last external financing. EgoRego does not believe in borrowing money, and would prefer not to burden itself with installments to be paid back monthly or in accelerators and startup hubs to help cover its back.
Many feel that the government has not done enough to help out Italy's fledgling startup scene and that the country's accelerators are only fitting into the existing system, not trying to change it.
"Acceleration is fictitious," Pizzari says. "Grants and access to credit… it's all very well, but it's not what's going to make a business self-sustaining."
Alternative approach
EgoRego has its own approach which it hopes can work for young companies — both itself and the startups that make up its client base.
EgoRego has created a network of microbusinesses (initially, a coalition of individual web and graphic designers, programmers, and online media and PR professionals) with each bringing their own existing pool of clients and sharing expenses and an accountant, a lawyer, office space and so on. So far, so standard.
However, the company's strategy for growth is somewhat novel: it offers what it thinks of as a sort of workforce microcredit. Rather than charge clients for their work in the traditional way, EgoRego staff work in exchange for a share in the startup's revenue.
It offers an all-inclusive package for startups: business plan, branding, web design, accounting, print and typography, software programming and more. The package is offered at well below cost and in some cases practically free, in exchange for a share in the new-born company.
While EgoRego is technically an investor in its startup clients, what is being invested is not cash out of anyone's pockets, but rather hours of work. As a result, it has to ensure that its time and commitment are spent on projects that staff truly believe in.
As the company discovered in its early years, sometimes a lack of external financing can actually make it much easier to grow — no accelerator required.
"Accelerate, yes, but towards where?" Pizzari asks. "Access to credit is a fantastic opportunity, but it fuels you up into a business world that you won't realistically be able to survive in as a startup."
But with slow and steady growth, avoiding falling into debt, young companies can get the time and financial robustness to learn from any mistakes.
Accelerator pros and cons
For a newborn enterprise with VC money, a decision to use that funding to invest in a big office, a fleet of top-of-the-line PCs and a large number of promising young creatives could easily turn into a catastrophe.
"If we had been 'accelerated', so to speak, we would have grown too fast, expanded beyond our realistic means and we would have then collapsed."
Growing from a startup to an established small business and onto into stable mid-sized company is no mean feat — and even the definitions themselves can prove problematic.
Italy recently introduced the idea of simplified limited liability company (known as an SSRL) which can set up with an initial capital of €1 by those under 35, tax-free, with no stamp duty and other related costs.
"It's a beginning and it got us all talking and discussing, but what truly worries me is the gap between the concept of 'startup' and 'actual ‘business'… and the use of the word 'startup' ends up differentiating it from 'business', and that shouldn't be the case."
After all, startups still pay tax in the same way and in the same proportions as other small businesses – there are no advantages to bearing the startup tag, however hip it may be considered in some circles.
If the government wants to help startups, perhaps it would do well to look at such companies' prospects of failure – which are obviously higher in the first few years of business. Failing is costly. Bankruptcy procedures are costly. Should there be a plan that provides for such eventualities – if the government makes it easy to start and somewhat easy to fail, with no life ruining consequences, then more people might give it a try.
"If I am to be called 'startup' then it should be taken into consideration what that entails. Otherwise, I might as well be called a 'small business'," Pizzari says.
So how does Pizzari think the system could be improved? "Let's rethink the whole strategy… Even if that means cutting back on the promises of incentives and financing, it would make sense if in exchange we get measures that will make it easier to start up and grow. Cut taxes. Teach the government how to make it feasible for a startup to become a full-grown, true and profitable business."