Building a (sustainable) business

One of the highlights at Bar camp Sydney, held on March 3rd 2007, was a presentation by Martin Wells and Mike Cannon-Brookes on “How to Start a company”. Both men have a lot of wisdom to share, which was worth every penny (no pun on the fact the event was free). However despite an awesome presentation that covered a lot of ground, there was one slide that in particular annoyed me. It bothered me so much that I wanted to say so, but I thought it might be better to let it be because the guys were doing an otherwise great job.

My problem was slide number two. It listed four companies as ‘ideal’ start-up businesses for all those in the room. Those companies were Flickr, Del.icio.us, YouTube, and MyBlogLog. Why I had a problem with that, was because if that is what web entrepreneurs are being told to look up to, then we have a bit of a problem.

What creates a sustainable business – understanding your cashflow

But before I get into that, let me share with you an observation I made earlier that day, which I found rather peculiar. A talk had ended, and it was announced to a full room that the next topic was “Privacy and Advertising”. Immediately, the room emptied with all but a dozen or so people left. It was one of a few forums for that day on the funding side of a business – others centred around venture capital and grants. Despite packed rooms for “how to start up a business” and “bootstrapping your start-up” – an indication that the techies present do aspire to start a business – no one seemed interested in understanding privacy and advertising.

I’ve spent a lot of time thinking about privacy, and if you have as well, you will know how critical it is for web advertising. A few years ago I had a business idea of creating a new advertising model, and although I haven’t pursued it, what I learned still has a lot of relevance. The reason I mention it is that the reason I was keen on an advertising business because I recognised that web start-ups all require advertising to fund their operations – and so any innovation in this sphere would be a no-brainer.

I think it’s fair to say that in 2007, advertising is relied on by 90% of web-services, and even those that have diversified their revenue stream, they still take a major reliance on advertising. Given that the culture of the internet is that everything should be free, and the web is a communications medium where consumers give their attention, it’s natural web services can count on advertising as a revenue model. So if all this is so blatantly obvious, why don’t developers care?

Convincing someone to buy you is not real success

So back to the pin-up start-ups. I have a problem with Flickr, Del.icio.us, YouTube, and MyBlogLog because none of them are sustainable businesses. YouTube didn’t (and still doesn’t) have a decent revenue model and was bought by Google for a billion dollars of funny money; the other three have also been acquired, with only Flickr having more than one revenue stream at the time (or in Del.icio.us’s case – none at all). Those three web services were also bought out by Yahoo! for $10-30 million each.

If the ‘pinup children’ of web2.0 have a market cap of $10-30 million when they were acquired, then that is a joke. I work at a firm, where $10-30 million dollars is what we charge each year to companies like CBA and Telstra. Now I know you can’t compare an established professional services firm with a history of 140 years, to a web start-up that’s been around for a few months – but it’s a dangerous role-model if you aspire to be a company that:

  1. is a success because they were acquired
  2. didn’t have a positive cash flow when it was acquired, and is still struggling to find a revenue model that works post-acquisition
  3. had a market value of no more that $30 million, which is peanuts (I am excluding YouTube on this, because there is no way Google would have paid $1.2billion in cash)

I think it is established all four of these companies were not acquired for their cash-flow. Three of the four were not even acquired because they had innovative technology (MyBlogLog is somewhat unique). All four of them were acquired for one simple fact: they had established a community. Afterall, Yahoo! photos already existed, Google video already existed, and Yahoo! bookmarks already existed. It’s true that Flickr and Del.icio.us pioneered tagging, but is that enough reason to buy a company? I never heard anything about the founders patenting the concepts of folksonomies.
It’s not Marty or Mike’s fault for putting those companies up, because techies globally do it constantly. Nor am I saying any of those four companies are bad companies, or that the founders didn’t do well – what I am proposing, is that there is a mentality problem generally in the web start-up sphere of what is success.

Both Mike Cannon-Brookes and Mark Zukerburg have something in common, which I respect: they are both building sustainable businesses. Mike at barcamp was very proud of the fact that Atlassian is “revenue funded”, and you can just sense he is in no frame to sell his baby. Zuckerberg, has rejected offers to acquire Facebook that have rumoured to be as high as a billion dollars, because he wants to build an independent business with long term viability. Some can call them arrogant, like they have for Zuckerberg – but for me, that’s what the real web2.0 pin ups look like.

Building a genuine business

If the yah-goog-soft acquisition train never existed, and the VC money dried up, would your business be still around in 10 years? Anyone can be creative, and build a feature like Kiko – but a feature is not a sustainable business.

One of the most valuable things I heard at Barcamp, was Phil Morle (former Kazaa CTO) saying that it’s dangerous to not have a revenue model when you start a business, because then you rely on advertising (and that’s someone that would know).

If you are not going to make money when you launch, and you will rely on advertising later on – why aren’t you learning more about privacy? And if you are relying on advertising as your sole revenue source, remember that a sustainable business needs more than one revenue stream. You might not be charging anything now, but factor it in just like you are factoring in the features, because at the end of the day, the cash has got to come from somewhere. VC money is short term cash – more an expensive loan than actual cash flow

So if you are thinking of starting up a company, break the web2.0 trend and try to actually build a real business.

Links: My Bar Camp notes

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