condor 24 May 06

I saw that B2.0 article. What a bold article, trying to quantify what it takes to build a successful “startup”, like it’s an assembly line. Too bad they don’t define what a “great” company is, because I’m pretty sure their definition and mine are different. I would guess there definition of a great company begins with funding and ends with a liquidity event … more of a transaction than a company. I felt like I was reading the Onion.

Lincoln 24 May 06

We all realize there is a web 2.0 bubble and its a bit silly to repeat the mistakes of 1998 all over again, but I can’t help that some silly people are being lead down the golden brick road, yet again. The only two bulletproof things you’ll need for a successful business is:

1) a solid gold idea
2) a talent to create the reality of that idea

Will 24 May 06

Seriously, it’s the bubble all over again.

Who wants to build a “startup?” I want to build a company.

George 24 May 06

Since 37signals is listed in the CNN article as a “top 25” company to watch for, should we also not belive that?

Parand 24 May 06

Why is this one bad advice:

“Although it�s shrewd to source talent globally, your core product-development team should be local”

I’ve generally found max efficiency when everybody’s in the same place, sitting in the same room. If you have people that work very welll together in a small team you can do email/IM/chat and still do well.

But outsourcing development right off the bat is generally bad news. What does it mean to have your “core product-development team” not be local? That you have a bunch of product/business/marketing folks dictating what the product is?

I think you’re assuming the company is started by a bunch of techies who drive the product forward, whereas Biz2.0 is assuming it’s started by biz/marketing folks (remember, you need 20 people) who hand work to code monkeys, in which case you’d at least want the code monkeys near by.

Splashman 24 May 06

I hate to puncture your snark, but neither 37s nor CNN/Money is telling you what to believe. You’ll just have to make up your own mind.

Parand 24 May 06

Why is this one bad advice:

“Although it�s shrewd to source talent globally, your core product-development team should be local”

I’ve generally found max efficiency when everybody’s in the same place, sitting in the same room. If you have people that work very welll together in a small team you can do email/IM/chat and still do well.

But outsourcing development right off the bat is generally bad news. What does it mean to have your “core product-development team” not be local? That you have a bunch of product/business/marketing folks dictating what the product is?

I think you’re assuming the company is started by a bunch of techies who drive the product forward, whereas Biz2.0 is assuming it’s started by biz/marketing folks (remember, you need 20 people) who hand work to code monkeys, in which case you’d at least want the code monkeys near by.

George 24 May 06

To be fair to CNN, they did seem to get the “5 deadly mistakes when starting a business” correct.

http://money.cnn.com/2006/05/08/smbusiness/five_mistakes/index.htm

The 5 reasons are almost identical to what we often hear from web 2.0 entrepreneurs.

Also,

“To develop a beta you�ll need a T-1 broadband connection�”

This is in reference to YouTube, who is listed in the top 25 web 2.0 companies. YouTube spends a reported $1 million per month on bandwidth.

“The assumption these days is that software and Web companies should break even after $20 million in investment”

Now that is true for the large number of web 2.0 companies who have VC money. Getting VC money is a preference choice and if taken, you need a much larger return.

I could keep going on and on about why what CNN makes sense, and IS correct, from their presective.

Geof Harries 24 May 06

I’m all for Getting Real, but building a web app is not the same as starting, for example, a credit union, hotel or mobile phone service provider.

While I don’t agree with all of Business 2.0’s statements and recommendations, they do raise some important points worth considering. Simply because the philosophies are “traditional” doesn’t mean they’re outright wrong.

Doug 24 May 06

I completely agree with George.

Once you look at the top 25 web 2.0 company list.

http://money.cnn.com/popups/2006/biz2/next_net/frameset.exclude.html

You quickly realize why CNN said what they did and why they are correct for what they say.

Michael Egan 24 May 06

A typical response from big business: �I�m not confident in this plan. Let�s throw money at the problem until it goes away. Blackberries for everybody!�

If you want to try and bludgeon your competition with all that overhead and startup money then this guide might work for you - but why be a heavyweight when you can finesse?

I’d rather rely on original idea that I’m confident I can realize. If you don’t think your idea can be successful without outside help then it might not be the best time to launch your startup.

Anonymous Coward 24 May 06

You quickly realize why CNN said what they did and why they are correct for what they say.

Oh? How many of these are businesses with profits? I’d say less than 25%. Seems like a pretty weak list.

Devin 24 May 06

I saw the article and realized, “Shit, they can ‘summarize’ this into HOW many pages?” Promptly skipped on by.

condor 24 May 06

Their philosophies are anything but traditional. Do you think In-N-Out burger “started up” like B2.0 suggests, or even that $50 million in sales enterprise software company in the business park down the street that you’ve never heard of? The vast majority of startups in the US, tech or otherwise were not started by the B2.0 guidelines. Usually when you start a company the number one rule of business is make enough money to cover your monthly payroll and operating expeses, at any scale (that is if your goal is to have an operating company). The B2.0 list has obvioulsy worked for some “start up” co’s which is why they can publish them and have people buy their magazine, but failed for soooo many more, it is way too soon to suggest those guidelines are anywhere near the mark in craeting a bulletproof business.

J 24 May 06

I�m all for Getting Real, but building a web app is not the same as starting, for example, a credit union, hotel or mobile phone service provider.

No it’s not and that’s not what 37s said. B2 said “The assumption these days is that software and Web companies should break even after $20 million in investment.” They also said “A rule of thumb is that a company should have about 20 employees at the time of launch.” What rule of what thumb for what company? B2 is painting with a wide brush, not 37s.

Doug 24 May 06

@anonymous Coward

“Oh? How many of these are businesses with profits? I�d say less than 25%. Seems like a pretty weak list.”

And how many companies that follow 37signals mantra are making profits? Who knows?

Making profits comes down to the business model of the company and not what “advise” a company takes.

Just because a company might not be generating postive cash flows doesn’t indicate they “took” bad advise, look at Amazon and others who went years in the red and now are banking huge.

J 24 May 06

And how many companies that follow 37signals mantra are making profits? Who knows?

Hundreds of thousands or millions. Small companies that start small and keep their costs down reach profitability quickly. They have a much better chance than a company that staffs up to 20 and won’t break even until they hit $20,000,000 in revenues.

Doug 24 May 06

@J

“B2 is painting with a wide brush, not 37s.”

J, I think what Geof is getting at is that 37signals “paints” with an extremely narrow brush but presents their philosophy as though it is a much wider brush.

Take this for an example. How many companies who follow a 37signals philosophy are getting bought out for $10s or $100’s of millions. I think the current count is at 0.

The philosophy that CNN presents is based on most of those companies on the top 25 list who have taken VC money are have, or are about to, be bought out by Yahoo and the likes for millions and millions of dollars.

condor 24 May 06

Amazon earned $359M on $8,490M, a blistering 4% net income last year. I would hardly say they are “banking huge”. Though they are covering costs which is very admirable. That’s the business, some AMZN owners did “bank huge” but that had nothing to do with the money the company earned, but everything to do with sentiments of other AMZN stock owners. There are many ways to make money, there’s only 1 way for a company to be profitable.

Anonymous Coward 24 May 06

Are people actually DEFENDING B2s claim that you should spend so much money and hire so many people that you won’t even break even until $20,000,000? Are you seriously defending that?!! That’s some of the worst advice I’ve ever heard from a business publication that considers itself hip to “business 2.0.”

Doug 24 May 06

I was simply trying to state that I believe the philosophy of both CNN and 37signals is correct, even though they differ.

It’s all about prespective. If you want to go the VC route, much of what CNN has to say is correct.

If you want to start small etc, the philosophy of 37signals, then what 37signals has to say is in the most part very good/great advise as well.

This comes all down to prespective. And simply saying that CNN is wrong is somewhat out of context because they really are focusing their attention on the small startup but are moreso summarizing what they see happening with those web 2.0 VC companies.

BRet 24 May 06

> To develop a beta you�ll need a T-1 broadband connection and enterprise-strength email�

They might have a point about email? In my experience, email can easily become your biggest resource sink—especially when you rely upon it for marketing and such.

Anonymous Coward 24 May 06

100 Job Board postings!

Yipeeeeeeeee

Ben Askins 24 May 06

Nice post David. If we needed $1.6 to $4.5 million to launch we would have given up before we started. Fortunately we feel confident we can launch a sucessful product on a budget of under $5,000 (AUS) — just by giving up our weekends for the next 3 or 4 months to build a great product.

Mike Rundle 24 May 06

Totally fucking spot-on David, I’m so glad you wrote this. By following B2’s advice regarding funding/spending, you’re pretty much guaranteeing that your new for-profit company will forever remain a “non-profit”.

Whatever happened to starting a company on money you save, and then building something that actually makes you money?

Ebrahim Ezzy 24 May 06

Couldn’t agree more!

Although finance, employees and the rest of the resources are required, but at a later stage and not certainly in a way that B2 describes.

Cliff Spence 24 May 06

I enjoy reading Business 2.0; its articles are usually interesting and refreshing. But reading this article today has left me questioning why the hell I even subscribe.

It is the worst article they have ever published, and not just because of Om’s grammar-iffic comma skills. If nothing else, the article is dangerous. It’s nothing more than a call to repeat the mistakes of the past.

Brandon 24 May 06

Wow. Thanks for posting this David. I agree that this does not apply to a web-based business. In terms of developing a software app, if you drop that kind of money to launch a product you’re insane. We used opensource software at every opportunity, put in long hours and a lot of sweat equity and were able to get to over $1 million in sales in one year, we were (and remain) profitable, and we did not have 20 employees at that time - it was closer to 5. It is now 3 years later and we’ve recently raised funding, but only took what we needed to achieve our current goals. By carefully watching our expenses in the beginning and every step of the way, bringing people on board with a range of talent and utilizing viral marketing we were able to achieve a lot with very little. You’ll find that when starting a business online (especially a web app) you’ll have a ton of leverage that’s tough to emulate “offline”. Definitely don’t listen to Business 2.0’s advice if you’re launching a web app.

Ben 25 May 06

As I remember, most VC funded ‘web1’ companies were vaporware aimed at making money for the VCs through IPO hype. The vast majority of business plans had no evidence of ever being able to break even or survive more than a year without regular dollops of investment capital. Advertising was and still is the main source of online revenue. But one thing that all that hype afforded the web was examples of what doesn’t work, presumably making it easier to avoid those mistakes yet again. I admittedly only skimmed the article but it seems like they’re just trying to reinstill the stock market hype from before bubble pop v1 in order to remotivate their target market/readership, which is more geared towards investment than anything tech. I’m sure the VCs are all thrilled about the (presumably free) marketing provided for them by this article. Does the average investor really have such a short memory?

Jaydee 25 May 06

Oh I see. This leaves me short for about $2.99M short before starting up on my own. Man, I need to ramp up my side jobs to raise enough money!

Donnie 25 May 06

I firmly believe and will argue with anyone, that a good web developer/designer can start their own successful, profitable business for less than $100. No shit.

Kyle Maxwell 25 May 06

@Donnie:
That’s only if you don’t value your time.

John Topley 25 May 06

�To develop a beta you�ll need a T-1 broadband connection�

This is in reference to YouTube, who is listed in the top 25 web 2.0 companies. YouTube spends a reported $1 million per month on bandwidth.”

The critical flaw being the assumption that all Web 2.0 companies stream video, or any sort of media for that matter.

anonymoustroll 25 May 06

> @Donnie:
> That�s only if you don�t value your time.

Time is money… but the first thing to remember is that it’s essentially given to you for free (assuming that you’re at least able to put food in your belly, sleep, bathe, shelter yourself and plop your butt infront of a internet connected computer for at least 5 hours a day).

The second thing to remember is that you’ll never get rich (or as rich as you could get) working for someone else (also known as selling your time for money) this fact even applies to working for yourself… hence the 20 people.

Mark 25 May 06

Om writes a great deal on gigaom about broadband, video, mobile, and large-scale social network sites. These things are not born on a mac in the corner of your bedroom using a cable modem. 37s has the market cornered on advice for web-based niche startups and launching an idea but, without even reading the B2.0 article, I can be pretty sure that they’re talking about ideas that reach a market of millions and need acquisitions/partnerships to succeed.

J 25 May 06

I can be pretty sure that they�re talking about ideas that reach a market of millions and need acquisitions/partnerships to succeed.

Sure, when you have to hire between 20-60 people and spend $20 mil before you can break even! Most companies are NOT like that. Most companies in the US are small companies and many are very profitable staying small.

Peter Cooper 25 May 06

Even the bandwidth points are reasonably flawed here. You don’t need millions of dollars to host high bandwidth content either. DropSend (Ryan Carson’s company) proves this as they’re sending large files around all day long.

Furthermore, you can get a good server on an unmetered 100Mbps connection at a colo or reputable dedicated server company for $2-$3k per month. That’s a lot of money, but it’s not in the league of even needing $100k to start, and you’re looking at 500,000->1 million 10MB streams per day on something like that. If you can’t monetize a million media hits a day, then you shouldn’t be in business anyway.

Anonymous Coward 25 May 06

B2s article is a mess. First they say “New technologies are creating new business opportunities, and radically reducing costs for startups” then they tell you you need $20 mil to break even. HUH?

T Hebert 25 May 06

Seymour Cray (of Cray super computers) had specific metrics he applied to business development, but he made room for flexibility. As I recall he once said something like, “I once thought a 3 to 4 person team was the perfect size for super computer development, I now think it’s about 7…”

Brad Garland 25 May 06

LOL, had this setup read later today, thanks for the executive summary and not wasting my time with it.

Josh Williams 25 May 06

My favorite quote:

“Get used to giving away ownership: In a venture-funded startup, the original founders may ultimately retain as little as 5 to 10 percent of the original equity.”

Sounds like a rockin’ good time to me.

e1 25 May 06

if you are all so smart, you should zip your lips and let this article slide by. om just did you a favor. it’s easy to realize this is aimed at old capitalists, not young makers-of-things. just ignore it and let the moneybaggers read it.

what this article does is make you designer’s and dev’s time seem more valuable and relevant. where as DHH likes to spend his time making people think that they can replace all their well paid programmers doing the HARD work with skateboarding, high-school, ROR’ers doing easy fun sh*t.

also, profitability is easy. any joke webdude is profitable out the gate. its building a scalable business which is hard. one that you can step away from eventually and keep living off the cashflow. this is often capital intensive unfortunately.

Ken Rossi : CivilNetizen.com 25 May 06

I burned this edition in my backyard.

Chef 25 May 06

It just goes to show (once again) that journalists have little understanding what really happens in the real world. That article is so off the mark it is laughable. It describes one way to be a ‘startup’ (ooooh, just like 1998!) but reality dictates many other options they fail to even consider.
Overall a pathetic article.

Clair 26 May 06

There are different factors that come into play and I recall listening to an entrepreneur’s words: “It depends on what you plan to do. There is no formula to start something.”

What I remember the most in the talk I heard was that those who plan to start up something must be good at risk management. And that you would able to work with whatever you have.

There might be different approaches to doing things and sometimes a mixture of those approaches would be best. Hmmm. May the B2.0 article was written with a certain bias… (Then again, don’t we all have some sort of bias?)

Paul 26 May 06

I had a name for that type of “thinking” that was so prevalent in the late 90’s: Entremanureship. Watch your step!

Kris 26 May 06

If you can learn anything from the history of business, is that “real” break throughs make it easier and not harder, cheaper not more expensive and most importantly simpler not more complicated. If they didn’t we would never be able to grow organizations to the levels we have today.

Don’t drink the kool aid and you will all do fine. ;)

Daniele 29 May 06

The only way to avoid another bubble is not burn milions of dollars, a web 2.0 startup must be cheaper…

Derek K. Miller 29 May 06

Don’t worry everyone, I have it figured out. Business 2.0 was talking in Linden Dollars.

David Neawedde 29 May 06

I AGREE WITH YOU!!!!

David Peterson 30 May 06

Sounds like a recipe for building the next startup-version of WebVan!

And we all know which way that went! ;)

I am involved in two startup companies (I own one and am the technology director of another). Startup business is hard, there is no two ways about it. That said, prudent advice for budding tech entrepreneurs would be: (1) keep your costs down, and (2) get to market as quickly as you can.

Spend $4.5m to get to market at which point you find out whether what you have built is marketable or not sounds like terrible advice to me!

Maurice 30 May 06

Ime sorry WTF problems do you have with thier sugestions a bit gold plated but not totaly out of touch we reality..

You seem to have fallen into the trap of i can knock up somthing in php and my sql on my home pc - yes but.

Building somthing that HAS to be used by a large number of people to make a buck is not as simple - going beyound the 2 guys in a garage is going to cost.

You relise that the overheard rate is around 200-300% for employing people.

$1 mill doesn’t go that far when you look at it in the real world if you start out with too little cash you run out and your company goes BUST!!

And i’me soory not co-locateing you developers soory to sould rude - have you done any real development work at all?

Anonymous Coward 31 May 06

I don’t agree with David.

The Business 2.0 article is about startups, more like companies which hope and plan to rapidly become big in a few years. Think mass-market. Think Google, YouTube, etc.

37Signals is a profitable small-business and while that may be good enough for you, you are not rapidly accelerating. Indeed, you look set to be a small-business for the foreseable future.

Don’t be too smug. You have better ideas and talents that some of the other folks out there, but while they will either go boom or bust, will either strike it big-time or not, you would be chugging along because of this mindset.

Think big.

VC 31 May 06

I don’t agree with David.

The Business 2.0 article is about startups, more like companies which hope and plan to rapidly become big in a few years. Think mass-market. Think Google, YouTube, etc.

37Signals is a profitable small-business and while that may be good enough for you, you are not rapidly accelerating. Indeed, you look set to be a small-business for the foreseable future.

Don’t be too smug. You have better ideas and talents that some of the other folks out there, but while they will either go boom or bust, will either strike it big-time or not, you would be chugging along because of this mindset.

Think big.

Paul Hepworth 03 Jun 06

It is such a joke to see how the size of a company/business is measured by how much you spend or raise.

If “thinking big” means being enslaved by a VC, acquiring unnecessary overhead, being more concerned about image or ego than profit, I will think small. :)

I do agree however that different markets require different business structures and growth strategies, but I don’t think thats what David is talking about.

The bottom line — 90% of startups will stay relatively small because the market they serve in most cases is also relatively small.

Otto Andersen 04 Jun 06

Having read the comments above I would like to add a few myself on starting a company - a consulting company and not a software / products company though.

I think that a lot of the various opinions with respect to starting up a company and how you should fund the activities are related to cultural (national) aspects.

Personally I would never �sell out� of the shares in an early stage of a company�s lifecycle. Work on your idea at night time or cut your cost to an absolute minimum in order to �survive� with no income for a while, if you want to work full time on your idea.

Back in January 2004 when I / we started up it was with a clear goal not to invite any external investors and not loan any money in the bank. Either of these ultimately leads to loss of control of the company you just started. Imagine being down to e.g. 50% ownership before you have your first customer!

We started up being 1 person. Today we are 15 consultants on the payroll. Still there has been no need for external funding or loans. Just a continuous balance between revenue and cost. Never spend more than you earn. Very simple. This gives us full control over the company some 2� years later. We have managed to get some great customers, some really great people and we have no other plans than growing the business organic. Having said that we also realize that we will never be global or make an vast amount of money, but then again this has never been the goal.

Mark 06 Jun 06

Can someone please point out examples of startups which were 5-10% owned by their founders before IPO/buyout, and which are household names today?

For comparison I’d like to see a list of startups with those characteristics which were driven into the ground when the founders left or were forced out. I guess fuckedcompany.com would suffice. Apple also comes to mind.

Mark 06 Jun 06

Can someone please point out examples of startups which were 5-10% owned by their founders before IPO/buyout, and which are household names today?

For comparison I’d like to see a list of startups with those characteristics which were driven into the ground when the founders left or were forced out. I guess fuckedcompany.com would suffice. Apple also comes to mind.