The era of the disposable startup ?

Joe Kraus has a thoughtful post:  It’s a great time to be an entrepreneur, in which he rightly points out that the startup costs of a software startup have dramatically dropped. He cites the example of JotSpot vs. Excite in terms of investment required to move from the idea to the initial product: $100K vs. $3M, a 30X difference.

Why ?

• Hardware is 100X cheaper: Cheap Intel boxes vs. Sun gear
• Infrastructure software is free: LAMP vs. Solaris and super expensive development tools (was that $5,000 or $14,000 a pop for the Sun compiler ? can't remember)
• Access to Global Labor markets: elance.com rules
• SEM changes everything: you can economically launch multiple campaigns and adapt them almost in real-time - and engage with your audience through blogs and forums.

My own, focusing more on consumer Internet startups (eh, that's what I do after all):

• Advertising dollars are shifting online: search is booming (check out the coverage of Vertical Leap).
• Eyeball/usage monetization works: create a valuable service for a niche community that is of value to advertisers/sponsors, and get them to use it - a lot - and dollars will follow.
• Bandwidth is cheap: unless you are dealing with hypersized multimedia downloads (like Doug's 380 GB last Tuesday - the iTunes 4.9 effect).
• Web services integration: lots of web services out there that can be integrated very quickly (Maps, Payment, Printing, E-Commerce Carts,...).

We had the same discussion on the Investing panel at VL (which I have yet to blog about) and I actually quoted $50K as the initial cost to bootstrap a service (and no, people don't get paid US salaries in that model - they work for equity) to a point of being able to launch, or lure angel investors - or even VCs - to invest a few hundreds of $K in their venture. Think how much del.icio.us must have cost to bootstrap (and yes it might be an extreme - one server with a database and a bit of code - and the tagging meme got started), or the award-winning Dogster.

So is it the era of the "disposable startup" ? A company that develops niche functionality of value to a community that will monetize through advertising, and will ramp quickly to being cash-flow positive and recoup the modest investment it took to start ? And then run for a while, and either grow enough to be acquired by one of the "big boys" or actually create a real opportunity that VCs will fund and help grow to $50M to $100M in revenues ? And if it does not work, well it was "just" $50 to $100K - trash and move to the next ?

Hmmm, don't think so. First, it is not because it is cheap that it is easy. Second, not everyone will be bought be Yahoo or Google for top dollars (some might get a few million dollar acquisitions, and have an interesting job building their product with the means of a larger company - nothing wrong with that - but noone makes money on these). Third, you still need to build some level of defensibility and differentiation - and not shoot for the path of least resistance (distribution was cited often as a key factor for search engines). Fourth (anyone) ?

We had between 15 and 20 vertical search startups at VL, stealth or having just launched a beta site, and they were busy pitching - and being pitched to. This is both encouraging, and concerning.

Amusing anecdotes ? One startup founder asked a question during the VC panel starting by "Hi, we're a couple of Stanford students and we are just launching a (vertical) search engine" - yes, they were duly noticed. Also, I was shown a one- from an angel investor who was seeking investment opportunities, and who left his coordinates for startups to get in touch on tables and chairs in the break area. Clever (?).

What do you think ?

Comments

[Charlie Wood]

Jeff,

Where do I find these guys who are willing to work for no salary, then just "trash [their equity] and move to the next" if it doesn't work out? I need some free labor.

:-)

[Pelle Braendgaard]

I like your additions particularly the last one about web services integration. When I was at Altavista almost 10 years ago the mantra was partner, partner. That's what was important. Now you can "partner" with google, ebay, amazon, yahoo all without sending your head of business development on 3 trips to Seattle or San Francisco.

I added the following on my blog as differences:

* Simpler services are more successful
* Big is no longer cool
* Better frameworks

Which I expand on on my blog post. I and many other people are trying to bootstrap without Angel Investors, which is something you will see a lot more of as well.

Charlie,
The difference with many of these startups is that they bring very few people in and no or very few investors, this means that they receive a much greater share of the company and revenues. Rather than sharing 2% between 40 developers as was often the case during the late nineties.

[Chris Yeh]

I think that entrepreneurship is here to stay for one simple reason:

It's more fun to build a company than to work for the Evil Empire.

I do what I do because I enjoy working with small teams in a fast-paced environment. And I'm never going to work for a company with more than 30 employees when I get there.

[James Prudente]

Pelle makes a great point. Great frameworks are enabling small teams and individuals to do the work that required tens or hundreds of people back in web 1.0. I've created a complete podcasting platform singlehandedly with the help of Ruby on Rails and the Microsoft .NET Framework.

Check out the demo:

http://bigfeeder.com/demos/mcl095

[Clarence Wooten]

A lot has been said about Joe’s post during the past few days. Which made me think — is it also a great time to be an investor?

I think so and provide reasons why in my post, Web 2.0: It’s a great time to be an investor. It would be great to get feedback to see if others feel the same. It’s clear that Web 2.0 is not only changing the rules for entrepreneurship… it is also changing the rules for angel and venture investing.

[Steven Cardinale]

The disposable startup is a great idea, but as Jeff has pointed out, there are some serious drawbacks. However, I think the idea of a disposable startup is not too much off the mark and with some tweaking an entrepreneur can take advantage of the lower barriers to entry (see my thoughts on Disposable Startups vs. Organic Cash Cows)