Web 2.0 Crashes: When Eyeballs Don't Pay The Hosting Bills

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Web 2.0 Crashes: When Eyeballs Don't Pay The Hosting Bills

 


I came across this article on the web today.  It describes the death of “CouchSurfing” (an Internet business).  What was the issue?  Not lack of user interest or running out of cash or strong competition or any of the usual reasons that startups die.  It was because of a series of infrastructure problems

http://www.techcrunch.com/2006/06/29/couchsurfing-deletes-itself-shuts-down/

It describes how a software entrepreneur basically lost his business because of a hard drive crash and the lack of proper backups and a recovery plan.  He had thousands of users and what seems like a relatively popular offering.  If you haven’t heard of the story yet, it’s worth reading.  It’s quite depressing.  I’m sure Casey Fenton, the founder, like many entrepreneurs, poured his heart and soul into his company.  To see it washed away so quickly and easily is sad and depressing.  But, there is a lesson to be learned here for the rest of us.

Some time ago, I wrote an article titled “Startup Reality Distortion #5:  Web Hosting Is Not Free” where I discuss how startups should recognize the reality that web hosting is not free.  One of the biggest challenges with many Web 2.0 startups is that they are relying on the classic “attention economy” dynamics to grow their business.  

Unfortunately, I don’t know a single web hosting provider that is willing to be paid in eyeballs.

I’m wondering now what percentage of the current generation of Web 2.0 companies out there are taking adequate measures to protect their businesses and their customers?  I’m guessing precious few.  When I read about someone claiming to start a Web 2.0 business in a week and less than $500, I can’t help but smile at the reality distortion.  I mentioned in that last article how the hosting costs for my new startup, HubSpot, are now up to about $2,000/month.  Trust me, if I didn’t think this was a necessary expense, I wouldn’t be spending it.  But it is, so I do.

Reasons Why I Spend $2,000/Month On Web Hosting
 
  1. Real Customers:  I have real customers that I charge real money (i.e. cash).  They pay me to provide a service, I owe it to them to do what I can to continue that service and recover from disasters.  In the “attention economy” of Web 2.0, eyeballs don’t pay the hosting bills.

  1. Restful Nights:  As a startup entrepreneur, there are enough things that keep me up at night (like competition, market movements, early-stage product issues, etc.).  I don’t need yet another thing to worry about.

  1. Competitive Advantage:  I rarely ever think that one can “outspend” the competition as a way to win.  This is one of the exceptions.  Maintaining a reliable infrastructure costs money.  You don’t want to overspend on hardware and infrastructure too early – but what’s worse is spending too late.    Customers can often smell unreliability.

  1. Playing The Odds:  If you are in the web software hosting business long enough, you will have a disaster (minor or major) someday.  It’s just a matter of time.  To not have a reliable recovery plan (including backups, multiple servers, etc.) is simply foolish.  What point is there in building a user community of thousands of people, if it can all be washed away?  I’m just playing the odds, and I don’t like the risk of having something I’ve poured my heart and soul into die for stupid reasons (there are enough good reasons for my startup to die out there).


Don’t let what happened to CouchSurfing happen to you.  Save money elsewhere, but make sure you are doing right by your customers and your business when it comes to infrastructure.  It’s painful, but that’s reality.  Closing your eyes and hoping it won’t happen to you is not a particularly effective strategy.

Posted by on Fri, Jun 30, 2006

COMMENTS

Dharmesh, I absolutely agree with your views on infrastructure, but this company did not go out of business simply because if that - that's pure BS. My argument became too long for a comment, I posted it on my own blog:
http://www.zoliblog.com/blog/_archives/2006/6/30/2077022.html

posted on Friday, June 30, 2006 at 1:15 PM by


Dharmesh, I really liked the "pricing discontinuities" section of your previous article, where you talked about each of the points in time where you had to jump to a more expensive hosting environment. Would you mind going into more detail about when you knew you were ready to make each jump, and the cost associated with each? (I guess I'm kinda wondering, what exactly are you paying $2,000 for right now? And more generically, when should I forecast moving up each level in my early-stage business plan?)

posted on Friday, June 30, 2006 at 2:24 PM by Ryan


I think your point #1 misses a crucial part of the "Web 2.0 attention economy": advertising. If you run some effective ads, eyeballs do in fact pay the hosting bills.

posted on Friday, June 30, 2006 at 3:14 PM by Stefan


Ryan - what "previous article" are you referring to? I would like to know about the $2,000 hosting fee too to help me plan. Thanks.

posted on Saturday, July 01, 2006 at 12:13 AM by Stacy


Stacy, I'm thinking of "Startup Reality Distortion #5: Web Hosting Is Not Free" from May 26, which is available at http://onstartups.com/Home/tabid/3339/articleType/ArticleView/articleId/620/Default.aspx

posted on Saturday, July 01, 2006 at 8:12 AM by Ryan


You're getting ahead of yourself. HubSpot doesn't need a $2,000/month host, it needs a $10/month host. A closed beta doesn't need a host like that, you're simply throwing money away. I agree that to an ESTABLISHED business with a customer base a $2000/month host is very important but not a startup without paying customers. That money is better spent improving your product and getting the word out. The time will come when you need a dedicated server, it's just not right now.

posted on Sunday, July 02, 2006 at 4:03 PM by Nolan


Nolan: Though it may not seem that way from the current website, HubSpot does indeed have paying customers. These customers already justify the hosting expense.

Initial customers take more hand-holding than I would like (hence the delays in a wider beta). But, that's a topic for another day.

posted on Sunday, July 02, 2006 at 4:20 PM by


OK I believe you have paying customers and that's great but again I go back to the heart of my point, startups don't need $2,000/month hosting, they need the minimum. CouchSurfing was online for awhile and did need a better host and a better plan. I agree with most of your posts but your views on startups and money sometimes baffles me. Get the product, then the customers then spend the money. It's easy to spend money before you need to, if you don't spend that $2,000 when you don't need to that is $2,000 more to your product or even better, $2,000 less debt.

posted on Sunday, July 02, 2006 at 7:45 PM by Nolan


Nolan - that's easy to say but it's not reality. You can't get "paying" customers without a working site hosted somewhere. The type of hosting you NEED depends upon the web application. Simple sites can use cheap shared hosting, I agee. But if your app requires things like a windows service running, or programmically creating folders and such, shared hosting won't work. So without knowing specifically the needs of the app, saying that $2000 is out of wack - is out of wack, my friend.

posted on Sunday, July 02, 2006 at 9:06 PM by Stacy


You're right Stacy. It does depend on the needs of the application and highly complex applications need appropriate hardware, bandwidth and storage as do small applications. I said startups need the minimum, in some cases that will be a $2,000/month host, in most other cases it will be cheap, yet well managed shared hosting until they need more.

I am trying to advise some of the less technically proficient readers that don't quiet understand the subtleties of what they do and don't need as a startup. You wouldn't believe how many businesses I have worked with whose first order of business is buying a server and spending extravigant amounts of money on hosting before a single line of code is written.

posted on Sunday, July 02, 2006 at 9:20 PM by Nolan


I'm the last one to advocate spending money too early on things like web hosting.

HubSpot is a special case (we've been writing code for over a year, have paying customers and adding new ones every month).

The application itself is also relatively robust (it does more than just track bookmarks). So, it takes a bit of horsepower to make the magic happen.

But, I'll repeat: If you're a startup and have not "launched" a product yet, you should be able to get by with < $200/month in hosting fees.

posted on Friday, July 07, 2006 at 11:21 PM by


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