Startups are everywhere. They are the hot ticket item. Get millions of people to join your website, and you are a rich man. I’m not deeply tied in with the startup community, but I personally know a few people doing startups, and I can see flaws in their business model. Still, the market has shown recently that they will still “violently fund” these startups without any plans for profits. All this sounds too familiar.
I apologize in advance since this is veering far from my expertise and diving into the business world. I am by no means qualified to make such broad, sweeping statements about the web industry. Sometimes, I just like to rant. Also, notice the question mark in the title? Consider me Fox News. I’m just asking questions.
Seed Money Business Plan
Software prototyping tools are prevalent. The days past of creating prototypes in C++, creating thousands of lines of code just to throw them away are gone. Web developers can use Rails, Django, CakePHP, or ASP.NET MVC (depending on your language preference) to create simple examples of their idea.
So what do some of these companies start with? Trying to find seed money. In general seed money can be great for a startup. It’s good when you can play with “Other People’s Money (OPM).” But, creating web applications can be done so cheaply that you wonder why these people spend months trying to find money to fund their development when they could have used that time to create the product in the first place.
Businesses always require a solid business plan, so I don’t expect startups to give up on the idea of creating one. However, a solid prototype or production application can sometimes sell itself. If it can’t, the business plan should write itself once you put some code to work. Trying out your product can quickly show you flaws in your business plan and even more or better ways to make money.
Many of the people I’ve talked to about seed money see it as the way to personal profitability and lack any real plans of future profits for the company.
The idea is solid enough. Build it, and they will come. If you’re trying to make another social networking site, let me stop you here. If you build it, it will sit idle. You have a catch-22 here. People drive content, but you can’t intice those people until you have that content. So, if your business plan requires your content to be created by others, you have to find a different way of bringing in these users.
Now, think about your business plan. Do you have a good way of bringing in these users without Tweeting, FaceBooking, or whatever the verb format of Google Plus is? If you don’t, your idea is probably doomed to failure. Go back, look at a different way of generating content or bringing in those users.
The internet is full of users that could be described as having Attention Deficit Disorder (ADD). And, because of how easy it is to create simple web applications even for non professional programmers, there are tons of social sites available. You have to find a way of not only bringing that user to your site for the first time, but also keep their attention long enough for them to care about coming back.
There are a ton of web startups out on the internet. The chance of getting a new user to commit to your site without them jumping from another site is probably pretty slim. This could be good news for you because that would allow that person to use your site that much more. The reason that person would jump from the older site is that it no longer fulfills their needs.
And this is the heart of the problem. Popularity will always be cyclical. You need to grow your business horizontally, not just vertically. What this means is you need to move into other opportunities before your business popularity drops. Web companies seem to be so focused on a niche market that it’s very difficult to expand. Many of these companies wind up dying out instead of moving on.
So if a company is doomed to die out if they don’t expand horizontally, what is their ultimate goal? From what I can gather, it’s the infamous initial public offering (IPO) or the sell. This is overly prevalent recently with the IPOs of LinkedIn and Groupon.
I’m going to use Groupon as the example here since it’s the epitome of my points. When they had their IPO on November 4th, 2011, they raised $700 million, valuing them at close to $13 billion. And this is for a company that loses $100 million a quarter. The founders and early investors got filthy rich off of this business that has no chance of making money, and the late investors are stuck holding the bill. When things looked dim for the Groupon company, when their capital was running out, they rushed the IPO to make sure they weren’t the ones dealing with the bill.
Another Dot-com Bubble
It seems a lot of these companies are falling down the same path as the original dot-com bubble. These companies have very high P/E ratios, bright red balance sheets, and no real future of profitability. Yet money is still grossly injected into these startups. There are ways of making web companies profitable, and I hope to see more of it.
For those companies that are already over invested? My only question: who will be the ones holding the toxic assets in the end?