Web 2.0: Soft Landings vs. Hard Crashes

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Web 2.0: Soft Landings vs. Hard Crashes


I’ve gotten a bit of criticism for a couple of my prior articles about the Web 2.0 startup crashes of  Kiko and HuckABuck, both of which listed their companies for sale on eBay.  [Note:  Kiko sold for $258,000 whereas HuckABuck was not able to reach its $20,000 reserve price.]

Reflecting on this a bit more, I think the criticism around my use of the word “crash” was well placed.  Indeed, I think the term “crash” was not particularly accurate of what actually happened (such as in the case of Kiko).  If the companies had raised tons of VC and gone down in burning flames, the term crash may have been appropriate.  But, given that they did manage a graceful exit (well, at least Kiko did) and didn’t burn a bunch of capital in the process, they had more of a soft landing than a hard crash.

In Support of Soft Landings
  1. Capital Efficiency:  Startups are raising less money.  Gone are the days of tens of millions of dollars being shoved into many early stage startups.  Without anxious investors involved, a real crash is less likely, as nobody is pushing for the “grow fast” strategy. 

  1. Lower Price Requirements:  This is related to #1, but since startups are raising less capital, the price acquirers need to pay is lower.  As such, there are a larger pool of possible acquirers. Had Kiko raised $4MM in VC (like many VC-backed startups), they would have had a harder time finding an exit.

  1. Features vs. Companies:  Many of today’s startups are focused on building features instead of full companies.  As such, they are more attractive to specific types of buyers that are looking to enhance their product offering.  This seemed to be the case with Kiko’s acquirer Tucows.

  1. Quicker Market Results:  A majority of Web 2.0 startups are focused on traffic/user aggregation.  As such, they are usually closely watching the “uptake” in the market.  If they don’t hit the numbers they want, they may lose hope and decide to move on to something else.  Basically, they’re playing the Web 2.0 lottery.  Once the results are in, and they know they likely don’t have a winning ticket, founders may decide to just try something different.  In this case, they just generate what cash they can and move on.

  1. Efficient Channels:  It seems that there are now more channels out there for startups to find an exit path.  One striking example is eBay (the path chosen by both startups I recently wrote about).  By using more “efficient” markets online to sell their startups, founders have the option to not get up in the quagmire of locating a buyer and negotiating a price.  This makes it easier to “land softly”.

So, I think we’ll probably see more of these “soft landings” in the future.  One point I’ll still hold firm on (despite the criticism) is that no matter how you slice it, these outcomes are not really “successes”.  Sure, the founders learned a lot, had fun building something cool, were able to serve some number of users and have a great story for their friends and family (all good things).  But, it’s still a landing and not a take-off.  The good news is that these founders (like those from Kiko) will likely take another shot at it.  And that’s always a good thing.  We need more people taking risks, trying out new things and defying the odds. 

Posted by admin_onstartups.com admin_onstartups.com on Mon, Sep 11, 2006


Nice little note there - I especially have to agree with your point on Capital Efficiency.

Incredibly low costs will make the current crop of web start-ups much more immune to crashing. This could mean some will take exit strategies on the cusp of success (when, with more money committed, they may have slogged it out), but by and large it will only encourage more people to dive in and try it.

The difference between a landing and a crash? You can take off after a landing...

posted on Tuesday, September 12, 2006 at 12:33 AM by Jacob Aldridge

Dharmesh, not everyone has (or maybe needs) to become Bill Gates or Steve Jobs.
Building a concept you have, having a chance to work freely and be creative and then earning money that many executives would envy, by selling your product (or feature), does not sound like a bad scenario to me. Especially for someone at his 20's.

posted on Tuesday, September 12, 2006 at 3:56 AM by Harry

Lee: I'm generally an advocate for going th e"organic" route (bootstrapping) for as long as possible. Most software companies, and particularly Web 2.0 companies, are not usually very capital intensive. As such, it is usually in the founders interest to grow organically and get something out there to see what market acceptance is.

But, this is not necessarily specific to Web 2.0 (I'd advocate bootstrapping for most software companies). Of course, there are always exceptions.

posted on Wednesday, September 13, 2006 at 1:25 AM by

Couldn't agree more. Most of the start-up nowadays actually builds up with an exit strategy in mind, less and less people want to build an empire like Microsoft or Apple. I mean that is not a bad thing at all, you get to do what you believe in, get a hefty pay check if it work out, even if it don't, you don't really lose much, and there is always next try.

posted on Wednesday, September 13, 2006 at 6:43 AM by kahfei

Once again, I completely agree with Dharmesh here. I am anxiously waiting for the person whose new Web 2.0 idea is an "Ebay for Web 2.0 Companies/Assets". To answer Lee with my own 2 cents - Organic growth, offset by Friends and Family/ Angel investment is really the only way to go to build a sustainable business in the Web 2.0 space. The amount of money you should raise is equal to your reasonable burn rate until you have reached positive cash flow. Once you're at that point, second round "professional" money makes much more sense for both the comapny and the investors for both valuation and potential exit purposes.

posted on Friday, September 15, 2006 at 9:36 AM by Marc Nathan

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