Saturday, March 19, 2011

What If Every Developer Focused On Lifestyle Businesses?

I recently ran across this post from Justin Vincent, where he argues that entreporn--the overwhelming focus on chasing "the next big thing"--holds developers back from their full potential. Instead, he writes:

"The absolute truth is that each and every one of us can build a business that can support us."

That's bullshit.

While Vincent makes some great points about flaws in the startup ecosystem (TechCrunch prefers to write about outliers like Zuckerberg; VCs chase the next Facebook because that's how their model works, corporations don't want their employees to leave to become entrepreneurs) his fetishizing of the lifestyle business does more harm than good.

Would Vincent believe me if I said, "Each and every one of us startup marketers can build a consulting practice that can support us?" Or what if someone said the same thing about IT administrators? Or accountants?

The statement is absurd on the face of it. So what magical powers do developers have that make all of them capable of building their own business? Sure, thanks to Amazon Web Services and the cloud, a solo developer can build a great app in their spare time. But thanks to WordPress, every would-be writer can start a great blog in their spare time. That doesn't mean either of them can build a business of it.

According to the U.S. Bureau of Labor Statistics, in 2002 there were 612,000 software engineers and 457,000 computer programmers in the US (not sure the distinction between the two, but whatever). That's over a million developers.

Let's imagine that only 1/10 of those developers decided to build $10,000/month web app businesses. If they all succeeded, that would mean that there was a $12 billion/year market for this kind of web app (100,000 developers x $10,000/month x 12 months/year)., the world's largest and most successful SaaS company, which has taken over a decade to build, generates annual revenues of just $1.66 billion.

Is there room in the marketplace for 100,000 new web apps that would collectively represent 7's worth of revenue? Call me skeptical.

"If you genuinely have the spirit of an entrepreneur inside of you, it’s perfectly possible to build a $10k/month webapp business that can set you free."

Think about how often you hear the maddening statement, "It's easy to raise money for your startup." Most people who have tried will agree that it's BS. Sure, it's easier than before, but that doesn't make it easy.

The same holds true for this kind of "Law of Attraction" pep talk for developers--it is perfectly possible. Just highly unlikely. Maybe not as unlikely as starting the next Facebook, but still darn unlikely. All you have to do is prowl the threads at Hacker News to find hundreds of horror stories about developers who built apps but could never generate a lick of revenue.

Look, I've got nothing against lifestyle businesses. I've observed that you don't need a ton of money to live like a billionaire. I've written about a friend who managed (through years of toil) to build a $50,000/month blog empire. I'm in favor of developers building apps to solve real problems, and I wish I had development skills like my friends Brian and Paul, who can build awesome apps over a single weekend.

But the fact is that even though it's hard to start the next Facebook, and even though it sometimes sucks to work for someone else, the Silicon Valley startup system works. Google now employs over 24,000 people (mostly engineers). Private companies like Facebook, Zynga, and LinkedIn have well over 1,000 employees.

I encourage any developer who has a great idea for a web app to pursue it, and I hope that he or she succeeds. But I'm glad that people are still trying to start the next Facebook, and I'm glad that there are companies that hire people, because I just don't believe that there's room in the world for 100,000 lifestyle web app businesses.

Friday, March 18, 2011

Investors Are Job Applicants

Start thinking of investors as job applicants.

Many entrepreneurs make the mistake of investor promiscuity--they'll get in bed with anyone with an open wallet. You need to be as picky with potential investors as you are with potential employees, if not more. Remember, you can't fire your investors.

Conversely, investors should figure out how they add value to their deals and sell that value. If an entrepreneur doesn't think you add value but still wants your money, he is either dumb or desperate. Either way, you shouldn't invest.

Here's a great example from my own portfolio. I started working with David Weekly and Ramit Sethi long before I ever invested. I offered product feedback and helped them with free advice. We even worked on a few experimental projects together. By the time PBworks* raised its first round, the company knew I would add value, and made sure there was space for me in the round, along with much more renowned investors like Ron Conway.

So it you're an entrepreneur, don't be frustrated if the investor you meet with doesn't write you a check on the spot (though certainly, such investors are much appreciated). Instead, appreciate the opportunity to conduct multiple rounds of job interviews to determine if *you* want that investor on your team. See how he or she works, and figure out if you'll enjoy working with them.

The good news is, if you enjoy working with the investor, chances are, that investor will decide the feeling is mutual, and invest in you as well.

* And sometimes, the metaphor becomes more--in the case of PBworks, I eventually ended up accepting an offer to become an employee!

Wednesday, March 16, 2011

Jason's Made-up Songs

One of the things Jason enjoys is making up fake song titles. Here the list he came up with today:

Granpa [sic] was an ape
Lovely Spleen
I twink - Mel Gibson
Sour Barty
Lunch Meet
Son of a, Diddle, Exhausting, Stinkin' Eggs
Sunk Bat
Magical Thieves - Return of the Lean
Mini Ha Ha (The Joke is on you)
Matter Bald Top
Mr. Revere
Anything Sneeze
Astronaut on a snowy evening

I'm particularly interested in the R&B grinder, "Magical Thieves - Return of the Lean," and the sensitive ballad, "Astronaut on a snowy evening." But the biggest hit will probably be the party song, "Mini Ha Ha (The Joke is on you)".

Tuesday, March 15, 2011

The Parable of the Waves

This insight comes from famed TV producer Stephen Bochco (Doogie Howser, NYPD Blue) by way of Neil Patrick Harris, who told the story on Kevin Pollak's chat show.

Harris became a TV star at a very young age, thanks to Bochco, but after his run as Doogie Howser ended, he went through a long dry spell. (Remember "Stark Raving Mad"? Neither can anyone else.). At loose ends, he talked with his old mentor, who had this advice, which is as applicable to the startup life as it is to Hollywood:

"Success is like riding a wave. It carries you along, and you feel unstoppable. But eventually it's over, and you end up crashing on the beach. At that point, you have to decide whether or not to swim out through the pounding surf to try to catch another wave."

Do you still have the will to swim out for that next wave?

Monday, March 14, 2011

Can We Ever Have Too Many Startups?

My recent post on the diatom bloom in the startup ecosystem prompted calls for me to dig deeper and provide more data. Far be it from me to disappoint!

Chris Tacy asked, are we seeing too many startups? It's a loaded question, but a good one.

My instinctive reaction is that it's always good to have more startups. When I was younger, and people asked me about the value of startups, I would ask them, "Who do you think will produce more innovation and value? Microsoft and its 40,000 employees, or 10,000 four-person startups?" (this was back when Microsoft had only 40,000 employees...and was still a widely admired company).

The answer, of course, is 10,000 startups. (I hope I'm not giving Dave McClure any ideas for his next fund....)

Yet the incredible recent explosion in startup numbers does give me pause--and not just because AngelList solicitations threaten to outpace Viagra ads in my inbox.

10,000 startups working on 10,000 different ideas is wonderful for innovation. 10,000 startups working on the same idea--not so much.

The reason that a diatom bloom is dangerous is that it's a monoculture that crowds out the rest of the ecosystem.

The danger we face with today's startup explosion is that we could end up in a situation where there are too many startups pursuing the same ends.

For example, just how many local deal sites do we really need?

And don't forget that even startups are still subject to the laws of supply and demand. If there is an excess of supply, the price drops accordingly. Too many startups pursuing the same market tend to compete away all the value in the market. It's hard to charge a fair price for your product or service if there are 10 other people trying to penetrate the market, and are willing to discount to get an advantage.

Startups are a force for good because they have proven over time to be the best vehicle for pursuing innovation. But not all startups are innovative.

We can never have enough startups that are pursuing unique solutions to important problems. But a profusion of "me-too" startups can actually damage the startup ecosystem by consuming the sunlight (funding, engineers) that would otherwise go to more unique and innovative startups.

The Diatom Bloom in Investing

You can think of the startup ecosystem as a food chain, with different species fulfilling different ecological niches. Angel Investors feed on tiny early-stage deals, while VCs gobble up bigger deals. Private equity, corporate buyers, and the public markets make up the higher reaches of the chain.

What we're going through now is the equivalent of a diatom bloom; conditions are perfect to allow a thousand startups to spring up. But a diatom bloom has a dark side; an imbalance in the ecosystem can cause problems further up the chain.