I went to Dave McClure's Startup2Startup last night and we listened to Mark Fletcher recount his current startup commandments. Mark has had a great history in startups, having built ONElist back in the day which merged with eGroups and got acquired by my old alma mater Yahoo. Then he built Bloglines which sold to IAC in 2005. Now he is working on another startup called SnapGroups, which got announced and was supposed to launch last night, but unfortunately also came out with a nasty bug and kind of stifled the launch..!
One of his slides had to do with startup business models, which was more in the area of talking about startup business building strategy than just strictly revenue models. For his 3 startups, including his current one, he listed his startup strategies (me paraphrasing here and imperfect memory at work):
ONElist: Raise lots of money (~$46MM), grow big fast, hire a lot of guys, dominate the market before anyone else, go IPO
Bloglines: Raise a bit of money ($200K), hire small team, build great product, flip it.
SnapGroups: Spend as little as possible ($6K) using lean startup methods, outsource everything, work on something he's passionate about, no exit strategy to shoot for.
It was a trip back in history for me, as I came into the startup world via Yahoo, and lived through the times as Mark had. What was amazing to me was the difference in strategy given what was in vogue at the time.
During the dotcom boom years, it was just build as fast as possible and get huge before everyone else, and then go for IPO. This of course didn't work anymore after the dotcom bust, and the introduction of Sarbanes Oxley which basically killed the IPO market even as it attempted to fix the bad accounting problems and protect the shareholder. Also, the excesses of the dotcom era were completely gone, and also gone with it the ability to IPO on little or no revenue.
Then along came the post dotcom bust years and it seemed that the M&A market for startups heated up. So now it was cool to get a bit of investment, and then build something that a Yahoo or Google wanted, and then get bought. At this point, we saw that it was getting cheaper and cheaper to launch web products, and over time, a lot of people jumped on the flipping bandwagon.
Soon, flipping became tough also because it was easy to copy somebody else and now the market was flooded with me-too products. Everybody called on the corporate development teams of the Googles and Yahoos of the world and it became impossible to get their attention. They didn't want to hear about you if you were too small; they only had so much time and only could focus on those opportunities that yielded the largest results for them. Yeah you thought you were cool, but against that kind of competition you weren't cool enough.
Somewhere in there, along came Ycombinator who proved that you could build something with so little capital and get it launched that it started being copied everywhere. Also, the world shifted to providing so many outsourced services and resources that you could build something by using other peoples' servers, open source code, and even excellent coders from other parts of the globe. Other companies would do the heavy lifting on commoditized services while you could focus on the core differentiator of your service.
Enter the economic downturn of 2008 and now M&A was difficult because major companies were pulling back to conserve cash and survive. They were also questioning their M&A strategies prior to this because they were buying startups for huge sums of money but wondering where all that hockey stick growth had gone to, after destroying the incentives of the brainchilds of the startup by making them rich and then watching them leave. Flipping became not so easy.
College kids couldn't find jobs any more; nobody was hiring. Plus, they keep hearing from their peers that working at large corporations sucks. Enter also the rise of a ton of resources like Ycombinator to jumpstart tech startups in a number of locations. Starting up became the in-thing and now we see tons of people trying to do this in a super cheap, fail fast, be adaptable way.
Despite the obvious indicators, I have found that entrepreneurs still are sticking to last era's strategies. Mark was smart; he watched the market and then built quickly to exploit the advantages of the era he built in. But today, I still meet entrepreneurs who are building to pre-dotcom bust year concept of building users fast and then thinking they can raise money later!
Even investors are stuck in last era's strategies. The consequence of raising ever larger funds meant that they were hoping for the huge deals that were present in dotcom boom years, but now that strategy doesn't work so well with the IPO market so slow and the presence of large enough startups worthy to put that much capital in so scarce. They add in the fact that initial capital requirements are so low, that often they find great startups who don't need or want their enormous amounts of cash.
I also changed my investment criteria. Many startups I funded before the 2008 economic downturn still had dotcom boom year or flipping strategies, and had burn rates to match. But then as we crossed into 2008, I started seeing that either strategy now created enormous downside risk of failure, and so had to now go for startups who were smaller, followed the lean strategy, and looked seriously at producing revenue sooner than later.
Mark's message was incredibly insightful, which is that this world is a constantly shifting place, and that you have to be nimble enough to switch strategies when the world changes on you. You also have to be observant enough to know when to make those changes, and not get locked into past views which may not be valid in today's world.