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End of the (Bottom) Line
Does the -aaS market mean an end to CAPEX for startups?
To keep up with the times, the art of reading books has had to evolve from the physical to the virtual – and that includes the accounting books.
Before the as-a-service (-aaS) era, startups could not talk about expanding out without considering the CAPEX, which stands for capital expenditure. Some bootstrap startups also refer to it as “How on earth do you expect me to find that kind of cash lying around?”
This was because expansion used to mean that significant funds must first be generated to acquire the physical infrastructure and capital required to meet growing operations. This could be anything from new software licenses to an entirely new building. No supplier will ever sell half a new server – the company must pony up for the whole thing. Think of it like leveling up in a computer game. You could only progress to the next stage after you’ve accumulated enough funds. In short, CAPEX is clunky and often translates to an unfathomably large upfront investment.
For the big guys, CAPEX may not be a bad thing: new infrastructure represents new assets and a higher book value that keeps stockholders happy. But the huge outlay was also cruel to the small bootstrap startup entrepreneurs whose cash flows were not enough to generate the hundreds of thousands of dollars in retained earnings needed to make the step forward.
But then came the pay-as-you-go -aaS vendors, thanks to new cloud technology. By paying for services month-to-month based on usage instead of buying new hardware and software, this has enabled businesses to shift their CAPEX onto their monthly operating expenses, or OPEX.
Having services on tap via the cloud effectively means two things. First, the upfront costs can sometimes become much lower. Secondly, costs become scalable with revenue. In low seasons, slower sales mean fewer services purchased from the –aaS vendor and, hence, lower expenses and healthier profit-and-loss statements.
That depends on where you are in the business lifecycle. For broke bootstrap startups just trying to get off the ground, low or no CAPEX allows for smoother growth. It can be otherwise impossible to raise the free cash to purchase new infrastructure without winning the lottery. Reducing CAPEX makes it much easier to pull startups up by (and off) their bootstraps.
But as the business matures, there’s an argument to be made for weaning off cloud services – beyond the increase in reported assets and book value.
Are we seeing an end to CAPEX in startups? Perhaps, and for the better in terms of operational versatility.