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September 17, 2004

Oh, the difference a decade makes

First off, let me say that I'm just flabbergasted by what Bradford did on The Apprentice last night. What an idiot to give up immunity from being fired by The Donald. I shudder.

I've been reflecting on how different it is to start a company in 2004 vs. 1993. While I still break out like a nervous teenager, which looks awfully strange with graying hair, at a professional level, there are three substantial cost differences that make it much easier to start a business on much less capital. I think this is a great trend for entrepreneurs and has a not-so-clear impact on the venture business.

Cost Difference #1. The tools to develop software cost nothing now.

This isn't a new or radical point, but it makes a difference. When we (me and my partners) started Excite we were buying compilers, development environments, web servers, etc. The software infrastructure costs were real. Now, the open source community has done such a good job of making rock-solid infrastructure that this cost is all but gone.

Cost Difference #2. Hardware costs are approaching 0.

Also, this isn't a new point, but when combined with #1, it's powerful. One of the biggest problems we had at Excite was that we could not afford to increase the size of our search index. Why? Because we ran on Sun hardware and EMC disk arrays and the revenue we'd likely generate from an increase in index size was dwarfed by the hardware cost needed to support it. This burned a lesson in my brain: focus on lowering your operational costs -- it is one of the most significant barriers to scaling your business and it can be a serious competitive advantage. Google certainly learned that lesson early...

Now, with Intel hardware and cheap RAM operational costs are an order of magnitude (if not more) lower.

Cost Difference #3. Start-ups have access to global labor.

This is the biggest difference and one that I think is perhaps most revolutionary yet most untapped. Today, I've got folks in Romania, Russia, Germany and India. I reached them through Craig's List, eLance and various open source projects. Ten years ago, a start-up accessing labor in far-away places was unheard of. Today, it's simple.

Here's the good news: you can save money and get very specialized skills.

Here's the bad news: most start ups are filled with people who do things. Management skills have never been highly valued or utilized in small companies. When you're working with 10 other people, it's just not that needed. Also, entrepreneurs tend to get excited by doing -- coding, writing, designing, etc; Not by managing people who code, write and design. But, with today's ability to work with people all across the world comes the the great responsibility of needing to manage them to get what you want. It's going to change the required skills for successful entrepreneurs. Successful management ability early on, not just great drive and persistence, is going to become an absolute must.

What's it all mean? More done on less money. Sounds good to me.


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» Startups Then vs Now from brianstorms weblog
In Joe Kraus's new blog Bnoopy, he posted an essay called Oh, the difference a decade makes that resonated powerfully with my own experience. Joe writes about the great expenses of hardware and software that were a part of the... [Read More]

Tracked on Sep 20, 2004 10:46:18 AM

» Starting a Technology Company in 2004 vs. 1993 from Business Opportunities Weblog
Joe Kraus: I've been reflecting on how different it is to start a company in 2004 vs. 1993. While I still break out like a nervous teenager, which looks awfully strange with graying hair, at a professional level, there are... [Read More]

Tracked on Sep 20, 2004 10:46:33 AM

» Oh, the difference a decade makes from CommonMe
Bnoopy: Oh, the difference a decade makes Joe Kraus, co-founder of Excite, gives some perspective on what has changed since... [Read More]

Tracked on Sep 23, 2004 3:22:38 AM

» Entrepreneurship 101 from Relax, Everything Is Deeply Intertwingled
Ross Mayfield's post on Venture Capital blogs reminds me of a few of my favorite entrepreneurship blog posts... The Torturous World of Powerpoint by Bradley Feld -- what to include in a startup pitch You Are Only A First Time [Read More]

Tracked on Sep 25, 2004 5:20:31 PM

» Why Bradford wasn't so stupid from Dingo's
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Tracked on Dec 4, 2004 1:38:08 AM

Comments

What was Bradford thinking ? Everybody knows the secret of elimination reality TV is to fly stealth at the begining. They shoot whatever pops it's head up at the begining. I think the Donald is a loose cannon. The poor guy didn't deserve to get the axe yet. I am trying to start a business now "rateyourdaycare.com". All I have is an Idea.

Posted by: Robert Dobbs | Sep 17, 2004 11:52:09 AM

Some of us supercool high-tech nerdy prosumer types have newfangled time-shifting devices for our TVs, yo. Please pre-warn when proffing "Apprentice" spoilers. :)

Posted by: Lingo | Sep 17, 2004 5:03:19 PM

One definitive advantage of lower costs for software, hosting, bandwidth, and now even marketing thanks to ppc and the like is everyone stands some chance.

Before you needed serious money to host a site, which stopped many people who could have written brilliant sites from doing so.

Its downside is every school child with rich parents is setting up sites left right and center using expensive tools, and zero knowledge of how to use them, but thats always been the case, most if not all sites that are very successful come from people with money.


Perhaps now the playing feild is a bit more level, we will see some good competition ;)
from the masses.

Posted by: ken | Sep 18, 2004 8:35:28 AM

On cost difference #3, you seem to be suggesting that a startup can outsource everything these days, using services like eLance, rentacoder.com, or designoutpost.com to contract out all the work. In this scenario, the entrepreneur becomes a coordinator, combining the skills of far-flung resources with his local network and capital to build a company.

But, what is your competitive advantage? If you outsourced everything, you have nothing that someone else can't just pick up and use. What stops a competitor or another startup from building the same product using the same technique? After all, you have nothing that can't be bought on the open market.

Posted by: Greg Linden | Sep 18, 2004 12:14:34 PM

Good point on costs - yet there are still [still!] oodles of companies floating around seeking masses of funding which is virtually unfundable - one suspects Joe [and most others reading this at the sharp edge] know where this leaves vendors of large capital [as in, left out!].

Well done and a welcome blog. Balutations!

Posted by: Sam Perry | Sep 18, 2004 7:08:57 PM

The other thing that has changed is the speed and accuracy at which code can be cut these days. Whereas as little as 3 years ago, web applications would take months to scope, build and debug, we can basically have entirely new client-server applications up and running and delivered to the customer, bug-free inside of a week. And in many cases still charge through similar fees.

This means an idea can go from concept to reality in a very short period of time. Perhaps the concept of IP is also becoming commoditised; leaving management skill as a singular driver of a business opportunity(?)

Posted by: Daniel Barnett | Sep 20, 2004 4:36:57 AM

Ok, this one really hit a sour spot or two:

> Ten years ago, a start-up accessing labor in far-away places was unheard of. > Today, it's simple.

This is far from reality in my opinion. 10 years ago, I was home in Moscow, coding yet another contract for US company. Moscow contract poll for US jobs was pretty well developed even then. Keeping in mind this was before ICQ, with $/minute rates for internet access, etc.

6 years ago we started outsourcing consultancy in Valley, and had good run during bubble. Good, but not great. Why? Because the problem really was never the access to global labor or some technical reasons. Problem always was pure physiology. Despite lemming mentality so often attributed to VCs, entrepreneurs have fair share of it just the same. They want to do what others do, and don't want to risk something new (they have enough risk with startup own business model) On virtually any deal we outsourced I come to expect that first month or so, I had to do all sort of apologetic back flips for the client, to shoot down couple hundreds misguided notions about outsourcing as whole and Russia in particular. “no, you money won’t go to Russian mob. no, you will get your code deliverable, they not going to steal your money. no, there is no dancing bears on Russian streets”. Outsourcing was dirty little secret companies were trying to hide and avoid. if it was unavoidable for bootstrapping present, they would drop it like hot potato as soon as they get to open fields of VC funded mainstream burn rates and starting living large on “internet time”.

Events took quite dastardly turn starting late 2000 when lots (and I mean LOTS) of companies were diving with no landing gear. I have been weaving red flag (no pun indented) for quite a few clients: “unless you cut your head count and outsource NOW you will have no company in few months”. Alas, unknown to me at that time was unofficial VC guideline that +1 engineering head onsite meant +1 Mln in valuation. Silicon Valley ethics quiz: how many VCs you know would allow company to save itself by outsourcing and drastic reduction of accepted “rule-of-the-thumb” valuation OR let it run into the ground by the rules? :)

Ok, this getting too long for comment…. Anyway, bottom line is – nothing changed beside some marks on VC checklists. Global access to labor was always there for anyone who wanted it, actually it was knocking on the doors of anyone in the Valley who were willing to listen…alas, valuations were probably singing louder then cash saving rationale. The only change I have seen over last few years, is that by necessity of hungrier times outsourcing slowly moved from “dirty little secret” peg to more mainstream role, and finally crossed the critical point of mass adoption. Now, its cool to outsource, VCs have outsourcing as checklist item, entrepreneurs love the cash-saving aspect (what stopped you from loving *that* 10 years I may ask?) and lemmings on either side are happy to follow suit.

Posted by: Max S. | Sep 20, 2004 1:32:38 PM

Doing more for less money - does it apply to non-tech startups too?

Posted by: Mark | Sep 22, 2004 2:24:34 PM

i liked this article a lot, and given that i operate within a growing nonprofit (a church!), you just have to master this basic principle of keeping your operating costs tight, because it's not like you can go sell more widgets in a hurry! although, maybe we could sell off problem people?! :-)

Posted by: ob1 | Sep 24, 2004 6:11:53 PM

Last time I checked, a real startup meant working for little or no pay till the first product got in customers hands and they agreed to pay for it. Curiously enough, I've never heard of any outsourcing firm that would work for equity.

Posted by: Derek W | Sep 28, 2004 11:23:17 PM

Since 1996 I have been compiling low capital startup strategies for technology companies at www.antiventurecapital.com. Where there's a will, there's a way. One can start to become very creative after wasting 6 months or more banging his head against the funding wall.

Posted by: Peter | Oct 2, 2004 7:34:02 PM

I run an IT company based in India, and I guess we would be classified as an outsourcing Company. Actually we have done a couple of projects for equity, generally hasnt led anywhere, but if we think its a worthwhile business model, and we are allowed to contribute as genuine partners, than we would do it.

Posted by: Amit Doshi | Oct 13, 2004 1:49:30 AM

It's indeed very easy to outsource tasks in nowadays, but it's not easy at all to outsource creativity. It takes *years* to build this 'backbone' of your outsourced team.

I'm entrepreneur and manager and I'm here in US, so are couple of my partners.

ALL of my developers team is for now outside the US, it has a constant component of 10 people and some 20 (from time to time this number reaches 100) temporary programmers which are being hired for particular tasks.
YES, you are definitely RIGHT, that it takes *a lot* of managerial skills to manage this kind of company. And by saying that I mean *a lot*. I can even tell you the clue to how it can be done (at least I do it this way myself):
1. Develop a 'style' of your own! Amazingly the 'style' in which your company leads its business ALWAYS soaks your team and is visible even in the code your programmers are developing.
2. Keep them in touch with the system they've built AFTER it starts servicing clients. As a radical measure you can even build a provisionary support team out of the people who has just developed the business-system! You'll see what happens! I did it several times. In this way you inject the knowledge about real world and real situations inside your system into your layer of developers (programmers).

In general I think that the company I'm heading right now is exactly what happens next with Hi-Tech start-ups - 1-3... up to ten people here, 10-20 people representing 'backbone of creativity' which are outside US on a start-up stage, and up to 100 'temporary labor' people hired from everywhere. AND... startups will be making their first money... outside US :) because of a *tremendous* treshold of legislation and terrible cost of *any* possible litigation. Where are VC on this blueprint? Nowhere! That's where they are heading right now.

Keeping this kind of company will cost you less than 50-100k per month, but, it is capable to deliver a real *product* every 2-3 months (at least every year if it is something *really* complicated, mission critical etc. etc.), why bother with VC guys?

Posted by: Alex | Oct 26, 2004 5:30:54 PM

Labor costs are equal for your competitor as well. But, if my competitor does all the things you list in order to cost manage their operation, I'll beat them. I never pay to productize technology. I find a client to do that and to serve as my reference customer.

Cash cow management techniques are for post-IPO institutionalized companies that can staff themselves with MBAs.

Software is different. Unlike e-commerce operations, marketshare matters. Market dominance matter. Markets are not free, nor is market dominance. These are the real cost in a software startup. You can lower these costs by using your development efforts to fund your market building efforts.

Posted by: David Locke | Jan 16, 2005 7:10:04 PM

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