The following is a guest article by Philip Crissman.
OnStartups partially sponsored Philip's trip to Startup School 2008 in exchange for sharing some of key lessions for those of us that could not make it. -Dharmesh
---
David Heinemeier Hansson's Startup School talk was probably one of the most
popular, and the most out of sync with the rest of the day's talks.
Where most speakers took for granted that the entrepreneur would be
seeking VC funding, David took the opposite approach; he wanted to talk
about how you could start making money on your own, growing your
company without needing to go look for funding.
David opened with the canonical "business model joke", made famous on Slashdot:
1. Brilliant Product
2. ???
3. Profit!
His answer to this, was:
1. Brilliant Product.
2. Price.
3. Profit!
He
went on to argue against the Venture Capital model, in general, in
favor of simply building a business by the somewhat revolutionary idea
of just charging money for your products.
Ironically,
he was immediately preceded by Greg McAdoo of Sequoia Capital. McAdoo,
naturally, was telling the audience what VCs were looking for and how
to build a presentation or a company which would get their attention.
Following this, Hansson's message seemed nearly the opposite.
I enjoyed both talks, and thought that they were simply talking about two very different ideas.
McAdoo
is a venture capitalist, so a large slant of his perspective is going
to lean towards the investors. This is not to say that Sequoia or other
VCs are not interested in the entrepreneur's best interest --
obviously, VCs need entrepreneurs in order to do what they do. However, they also need to represent
their investors. Without capital, they would simply be business
consultants, whose attention and advice the entrepreneur would need to
pay for. Since their beholden to their investors, it's well known that
they are looking not just to double or triple their investment, but
quadruple or quintuple their initial investment.
Heinemeier
Hansson, on the other hand, is thinking about the developer. He's
asking: wouldn't you rather simply run a profitable company with a
product you enjoy? Why do you need to be a billion dollar company when
you can more easily be a million dollar company?
From
where I sat, they were both saying some of the same things. Both acknowledged
the same odds -- how relatively few startups would be those huge
winners, the billion dollar ideas.
The difference is,
- McAdoo and the
VCs are specifically, on purpose, looking for those top few percent;
that's their role. That is what they do.
- Heinemeier Hansson is looking
at all the other successful-but-not-necessarily-world-changing
businesses you could start, and asking "Why not just build something like this?"
We
do want to be realistic; it's important to acknowledge the risk we
might be getting ourselves into. It may be that, like Hansson suggests,
we'd rather take a 1:10 chance of making a million versus a 1:10,000
chance of making a billion.
What seemed to
have been skipped is that the nature of the idea will have a lot to do
with which path you decide to pursue. It's difficult to see how a
business idea like Google, for example, could have succeeded without
seed capital. It's hard to imagine Google starting and succeeding with
a 37Signals-style subscription model; especially in the time when
Google launched, having to "pay" for the privilege of searching the web
would likely have been a recipe for failure.
On
the other hand, it's just as hard to see Basecamp as a ubiquitous piece
of software that simply everyone uses -- not everyone needs to manage
projects. There's a much smaller pool of people who would need to do
that, but they are much more likely to pay for a good way to do it.
What
I took from the contrast between Heinemeier Hansson's talk, and the
majority of the other talks, was the importance of having a healthy
dose of realism.
Some
ideas might well have that billion-dollar potential, and may need that
VC funding to get going. A lot more ideas really can be put together in
10 hours per week (as Hansson mentioned Basecamp was built), and then
run as a profitable business. The
important thing is having the ability to tell one sort of idea
from the other.
Article has
9 comments.
Click To Read/Write Comments
The following is a guest article by Philip Crissman.
OnStartups partially sponsored Philip's trip to Startup School (hosted by Y
Combinator) in exchange for capturing some key insights from the session to
share with those of us that could not make it. -Dharmesh
Startup School Takeaways
This is
my attempt at a broad overview of the whole day; what I took away from each
speaker. You'll notice that some of the takeaway's may contradict each other.
Well, a few of the speakers seemed to contradict each other, which is a topic
for another post. Here's a very broad summary of the
day.
David Lawee, VP
Corporate Development, Google; founder, XFire.
Main take-away: Hurry Up. David emphasized the role of speed in a startup,
and how the modern timetable is considerably shorter than a more traditional "2
years until product launch" strategy. Your ability to turn on a dime and do
things quickly is highlighted as a major advantage for the startup.
Sam Altman, Founder, Loopt.
Main take-away: If you can avoid having to raise money,
then don't do it. If you do need to raise money, get it out of the
way and get back to work; many startups have been sidetracked by the
money-raising process, even fizzling out along the way.
Jack Sheridan, Lawyer, Wilson Sonsini.
Main take-away: Some legal decisions that you may make
early on never go away; pay close attention to these sorts of issues.
Know:
- Who owns the company
- Who owns the technology (IP)
- Who controls the company
- Who gets what in a liquidity event (sale, IPO, etc.)
Paul Graham; Founder, ViaWeb,
YCombinator.
Main take-away: Build something people
want + Don't worry too much about money = Non-profit. Doing "good" is
a strategy. The "Tamagotchi" effect -- making
something that attracts users and a community gives you something to take care
of; this can be a powerful motivator.
Greg McAdoo, Partner, Sequoia Capital.
Main
take-away: Greg's wave & surfer metaphor. It takes a great surfer
(entrepreneur) to ride a great wave (business/social/technology trend). The surfer has to pick the wave, but can't control the
wave.
Know your market; as
much about it as possible.
Have a market "whose hair is on fire" --
who needs your product badly, now.
David
Heinemeier Hansson, creator, Ruby on Rails, partner, 37Signals:
Main take-away: Your odds are better to not try to be the next Facebook/YouTube/billion
dollar acquisition. You can do very well just creating a great
product and charging money (gasp!) for that product.
Don't be in such a hurry, don't try to be so big, don't look for a wave.
Paul Buchheit:
creator, Gmail, founder, FriendFeed.
Main take-away: On listening to
users; listen != obey. Listening to your users, you
don't necessarily do exactly what they tell you they want; interpret their feedback to try to determine what the real problem
is. Then find a solution to that problem.
Jeff Bezos, Amazon.
Main
take-away: Cloud computing will be increasingly important, and doesn't need to be an industry with a single winner.
Unfortunately, aside from this, his talk was largely a commercial for Amazon Web
Services. The insight into why cloud computing could be important
was more interesting than the commercial; would have been nice to have more of
that, or more practical entrepreneurial advice.
Mike Arrington, blogger, TechCrunch.
Main
take-away: Getting press for your startup: have a compelling
story. Stand out; stand out in a different way than other people have
stood out (used Seth Godin's purple cow analogy).
Marc Andreesson, Founder, Netscape, Ning, etc.
Main take-away: Be so good they can't ignore
you (via Steve Martin).
Be prepared for everything to
look like it will fail... and nearly doing so. Don't quit.
Have a
business model that doesn't depend on a great economy (especially right now).
Peter Norvig, Director of
research, Google.
Main take-away: Start small, go fast, iterate
rapidly. Leverage data; especially other people's
data. A challenge: anyone can go out onto the web and get 1.7 billion words. Go
get them and do something (analysis, algorithms, searching, etc.) with them.
Of course, there was much more in each talk. But
those were the highlights, the main points, from where I sat. Full recorded
talks can also be found at Omnisio.
Article has
9 comments.
Click To Read/Write Comments
This week (Monday, April 2nd) was
the deadline for startup founders to apply to be selected for the upcoming batch
of startup companies to join Paul Graham's Y Combinator group. If this year is
like past years, YC will likely have received lots of applications (which means
Paul's going to be a busy guy for at least a week). And, if this year is like
years past, then not all great hacker-entrepreneurs will get
selected.
If you applied, and didn't get
selected, this could be because of one or more of the following
reasons:
1. You lack a co-founder: YC leans
heavily towards startups with at least two co-founders. It's possible you tried
to find a co-founder, but couldn't. Or that you found one, but it didn't work
out. Or that you just don't believe in co-founders just
yet.
2. The idea doesn't fit the
profile: YC seems to lean towards consumer internet ideas, or ideas for which
an early user community can be built quickly and monetization can be done
later. If your idea is to develop enterprise software for the steel industry,
chances are, you're not going to get picked.
3. Your application didn't stand
out: Paul's an awfully smart guy, but he's still not clairvoyant. If your
brilliance and passion didn't come through in the application, it's possible he
just fundamentally missed it. It happens.
4. You really don't have what it
takes: It's possible that you simply are not particularly suited for a startup
at this time and the smart folks at YC were able to figure this
out.
Lets assume for a minute that you
didn't make the cut at YC for reasons #1, #2, or #3. So, what
now?
I'm going to make you an interesting
offer: A chance to show off your hackepreneur
skills.
Basically, what I'd like to do is
find exceptional individuals that are really committed to building cool
technology and are determined not to go work for "the man" and want to do
something entrepreneurial (if you applied for YC in the first place, chances
are, you fit this profile).
Here's a high-level look at what I
have in mind:
1. You don't necessarily have to
have a co-founder.
2. You'd still have to be move to
Cambridge (or
already be in the vicinity).
3. I'll give you $15k to work for
the summer and impress me with your talent.
4. You have to be willing to work
on an idea that is not your own (we have a few laying around).
It's basically an opportunity to
join a small, highly entrepreneurial group working right on the MIT
campus and work on an interesting project -- and get paid a bit of money for
it. After the summer is done, either we talk each other into doing something
more permanent, you talk me into funding your original idea or we part ways as
friends and hopefully had a shared positive
experience.
If you're intrigued and think you
might fit the profile, send a detailed email to hackepreneur (at) onstartups.com. Ideally, you'd send me the same kind of information you sent in for your YC application (you can get an old YC form here, if you need it). If you're worried about revealing your idea, leave that part out. I've got the capacity to accept three or four of
you (assuming there is enough interest and we can work out a deal), but chances
are, I'll only pick one or two. I've got really high standards too.
Hope to hear from some of you. But
in the meantime, I wish you the best of luck with your Y Combinator application.
It would be great if you are one of the select few that make it in to Paul Graham's Gang For The Gifted. But if not,
perhaps I can provide an interesting "Plan
B".
Void where prohibited, no purchase
necessary, your mileage will vary and all the other usual
disclaimers.
Article has
15 comments.
Click To Read/Write Comments
I am one of the many thousands of raving Paul Graham fans
out there. I’ve read most of his content (Paul doesn’t write
blog articles, he writes
essays). He
is clearly a very gifted writer. He is also very, very smart (and I
rarely use two verys). But, at least on one point, I humbly submit that
he is very wrong.
In the most recent essay, titled “
The 18 Mistakes That Kill
Startups”, Paul identifies (as you might expect from the title) the
common causes of startup failure.
I’d like to focus on point is #17: Choosing The
Wrong Platform
I agree with Paul that picking a wrong platform can indeed sometimes
kill a startup, but I’m not yet convinced that this is always the case. History
is replete with startups that picked what were widely considered to be the “wrong”
platform and still survived to tell the story (and make a ton of money in the
process). One example would be MySpace and their use of ColdFusion (not
that Cold Fusion is a
bad
platform, but most hacker-types – and particularly those that follow
Paul, would likely categorize it as a sub-optimal platform). There are other
examples of startups that succeeded (some modestly, some spectacularly),
despite having chosen the “wrong” platform. One additional example
that comes to mind is eBay’s early use of Microsoft’s platform
(ISAPI DLL written on top of IIS).
But, this is not my primary point of contention with the
article. Little harm is done by identifying wrong platform selection as a
potential mistake that startups should try and avoid (in fact, I think it helps
to raise awareness of the importance of this decision). My issue is with
how Paul advises startup founders go about actually
picking a platform.
Paul Graham: “How do you
pick the right platforms? The usual way is to hire good programmers and let
them choose. But there is a trick you could use if you're not a programmer:
visit a top computer science department and see what they use in research
projects.”
I agree with the first half. A great way to pick a
platform (if you’re not a programmer yourself) is to hire great
programmers (not just good ones) and let them choose. But, I don’t
think visiting a computer science department and seeing what they use in
research projects is an effective strategy. Here are my issues with this
particular approach:
- Being a prior computer science student
myself, I have a bit of a feel for how platforms get picked for research
projects. Rarely do these coincide with how startups in the real
world work. People in academic research projects are often solving
for a very different problem with very different motivations than a startup.
Lots of research projects are a learning
exercise. Most startups are a building
exercise. The desired outcomes are often vastly different.
- The platform selection process
is sometimes domain and/or user specific. For example, though Python
is a cool language (and I’m sure there are many academics that like
it), if you are seeking to build the next big killer desktop application
to run on Windows, it will likely prove to be a fatal choice. The
reason is simple. From a user’s perspective, they expect a
Windows application to look and feel like a Windows application. Chances
are, your Python desktop app won’t quite feel “just right”
(the user’s dog will bark at it). This is a case where the
users do care about the
platform choice because it actually impacts what they experience. Similar
arguments can be made for other target areas like mobile applications.
- There may be other dependencies
(i.e. integration points) that influence your decision. As a
startup, if you are building an application that will be an extension of
an existing application (or consume its services somehow), it often helps
to pick a platform that is conducive to that integration. For
example, if you’re building an Outlook plug-in, you probably don’t
want to use Ruby for that (even though it might support COM).
Basically, it seems that Paul thinks that all startups are
going after “change the world” strategies and don’t need to
concern themselves with user preferences, business domains or the need for
integration with existing systems. Though it would be great if this were
true, it’s really not.
What do you think? Am I off-base here? Are all
of you writing world-changing software applications that need to use the higher-end
languages and platforms from computer science research groups? Or, are at
least a few of you taking a less glamorous (but practical) approach?
Article has
39 comments.
Click To Read/Write Comments
I came across this article on Dead 2.0 this morning:
YCombinator Says YProfit? Besides the clever title, and I’m a fan of clever titles, I think some of the points were dead-on. This gave me the needed push to write an article that I’ve been mulling about in my brain for some time now.
Web 2.0 Revenues: Not An Oxymoron My background is primarily technical. I’ve been developing commercial software products for all of my professional career.
In the software development world, many of us have discovered the value of the “release early, release often” approach. This is based on the experience that given the choice between trying to write detailed specs and requirements and
then building a product around it (often months or years later), the odds of actual success go up if you can get
something out there early, determine what your users have to say and then adjust your product accordingly. The beauty of this approach is that you end up investing in features that people actually use and care about (and hence complain about). I’m a big fan of this approach, for one simple reason. It works.
I think too many Web 2.0 businesses decide to “aggregate users now, worry about making money later”. With all due respect to Paul Graham, who advocates this to startups (and who I have a lot of respect for), I don’t think this is the right idea in most cases. Like a software product and it’s features, I would argue that a business model and its execution also needs to be “experimented” with and adjusted. The sooner you can get your business model “out there” the sooner you can figure out what works and what doesn’t (and do something about it).
For the same reason you shouldn’t keep your product away from the market for too long, as the feedback is crucial, you should not keep your business model to yourself too long either. Simply relying on the “we’ll make money on advertising” is not enough. What
kind of advertising will work? Will you invest in finding individual advertisers – or go with one of the larger platforms? Do you need something more exclusive – or will one of the large platforms like AdSense work for you? What’s the CPC/CPM or other metric going to be? How much traffic will you need (based on
your users) to make any kind of money? The point is that even advertising has its nuances (and this is coming from a layperson that knows almost nothing about advertising-based revenue models).
My advice to Web 2.0 startups: Charge early, charge often Don’t let the fear of scaring your early users away (because of things like advertising). If 95% of your users are not willing to stay on your site if you put ads on it, that should tell you something.
The most common counter-argument I expect to get is: “But we need to build up a certain critical mass. It’s easier/smarter to do this by not charging anything, and not putting any ads up.” We can
then figure out the best way to monetize after we hit this critical mass”. I’ll concede on that point. If you’re smart enough to be doing this as a
strategy and you have at least some knowledge of how all this works, more power to you. But, I’m guessing that most Web 2.0 startups are deferring discussions of business models and revenue simply because they’re clueless or it’s convenient to do so and they are working under the misguided belief that it’s not necessary. It is. Always has been.
Article has
7 comments.
Click To Read/Write Comments
For those of you that have been watching the auctioning process, the results are in. Kiko sold its assets on eBay for what seems to be $258,100.
Candidly, this is much higher than I thought it was going to be. I was actually a bit doubtful that even the minimum bid of $50,000 would be reached. I'm not so sure this outcome can be considered a "failure" at this point Just a relatively low price-point exit. If you weight this against the time and money invested in the project, it's not really that bad.
In the final lap, it looks like there were about five active bidders in the final stages. Not much else to write about, the original auction was terminated by eBay (so it had to be restarted). If you’re curious to see the details, you can look here:
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&ssPageName=ADME:L:LCA:US:11&item=120024164593 At this price point, my guess is that the investors likely made some money and the founders did OK too. I’m happy to see that there was a positive outcome here. My congrats go out to the Kiko guys. My guess is that they’ll likely “double-down” and be using the proceeds to work on their new idea.
Article has
8 comments.
Click To Read/Write Comments
Certain circles are buzzing with the news that Kiko is on sale on eBay. I first heard the news last week, but it wasn’t public until today so I didn’t want to write about it.
For those that don’t know who/what Kiko was, it was one of the prototypical Web 2.0 companies (a free online calendar with AJAX, written in Ruby On Rails and funded by Y Combinator). It doesn’t get much more Web 2.0 than that. I was actually present at the “coming out” party when Kiko presented at the local Web Innovator’s meet-up last year here in Cambridge (USA).
For those interested in tracking the eBay auction: http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=120021374185 (starting bid is $50,000).
Now, I actually like the people behind the Y Combinator companies . The ones I have met are smart, passionate, hacker types. As such, this article is not the Kiko guys from pursuing their idea. But, in my book, Kiko seems to have been a failure and it’s important to reflect for a bit and see what we can learn from it.
Lessons From The Death Of A Web 2.0 Startup
- Google Is The New Microsoft: Back in the day, lots of software companies made sure that their business models kept them out of the cross-hairs of Microsoft. They didn’t want to get stomped on. Today, though this is still the case in some sectors, Google is a much more formidable (and scary) competitor. Google has all the power of a multi-billion dollar company, but a lot of the nimbleness and energy of a startup. With Google’s introduction of Google Calendar, Kiko really didn’t have a chance with it’s original business model. Of course, they didn’t necessarily know this was coming, but if I had been them, I’d given this decent odds. That is, it shouldn’t have been that big of a surprise.
- Be Realistic: When original news of Google Calendar came out, the Kiko founders didn’t seem particularly worried. This is ok. You don’t have to look scared to survive. But you do have to be scared and make some adjustment in the light of an oncoming train. Chances are, there was something that could have been done with the Kiko business that would have shifted them away from competing with Google Calendar. They likely needed a small dose of reality.
- Factor In A Plan “B”: Lets say you’re calculating the expected value of your startup pursuit. The primary driver should be “Plan A”. That is, we have a small probability X of a large outcome Y. But, it helps to have a “Plan B”. That is, we also have a reasonably large probability Q of much smaller outcome R, should the need arise. This way, they could have made some money from the exercise. Some would argue that having a Plan B is a bad idea because it defocuses you from Plan A (burn your bridges and all that). If that’s the way you like to play it, that’s fine. I personally like to understand the tradeoffs and have some idea of a Plan B, if possible.
- Even With Web 2.0, Popularity Won’t Save You: Kiko had a fair amount of buzz when they launched. It’s not like they died because nobody heard of them and they lived a life of quiet desperation writing code in some far-off place. They were a Y Combinator company. They were one of the “chosen ones” by Paul Graham. They got a huge amount of visibility and free PR. They had a Google PageRank™ of 7. They likely got a bunch of registered users. But, nowhere in the eBay listing do I see a value associated to those assets (what they are valuing primarily is the domain name and the source code). I find that somewhat telling.
- Hindsight 2.0 Is Still 20/20: Of course, it’s easy for me to pontificate on how Kiko may have been doomed to failure from the beginning (and I personally thought it was). But, the reality is, I didn’t know what those guys had in mind and I have to give them credit for trying. I just wish all that talent had been spent doing something that was almost as fun and cool – but would have actually created something of value.
It’ll be interesting to see if anyone makes a bid (starting price is $50,000). I won’t be one of them.
Any other lessons you think we should all learn from this small example? The part that worries me is that I see nothing particularly anomalous about Kiko. That is, this is likely one of the early ones, but we’ll see a lot more.
Update: For a more factual look at what actually happened (from an insider's perspective), please see Richard White's article. Richard takes a much more in-depth look at the situation. I plan to follow-up with an article next week that responds to many of the comments.
Article has
52 comments.
Click To Read/Write Comments