The Start Of The Start-ups
Today’s economy is all about start-ups. The 1990s saw a massive boom in the start-up segment, which resulted in the ‘.com’ bubble bursting. By the early 2000s, many companies had collapsed due to a lack of funding. This gave rise to a number of smaller start-up companies that focused on user-based content. They were all part of the Web 2.0 movement.
Jessica Livingston, the author of Founders At Work (2007) had interviewed a number of founders of these start-up companies such as Blogger.com, Flickr, and Hotmail – and about 30 influential US start-ups, from the days of the early Web 2.0 generation. She learned about the trials and tribulations they faced while making their dreams a reality.
The stories of these pioneering founders are still relevant in today’s times, despite the fact that technology has zoomed far, far ahead. Her book discusses a few business mantras that aren’t commonly discussed and guides entrepreneurs towards understanding the past, the stories that have made history while charting a course towards a successful future.
One of the commonalities Livingston noticed during her interviews is that a number of successful start-ups had products and ideas that were completely different from the original ones they started with.
One such example is PayPal. When Max Levchin started out, he was originally working on emulator software for a hand-held computer similar to the Palm Pilot in the late 1990s. The software would make multiple passwords and multiple device systems obsolete. However, the market wasn’t that big.
Levchin thought that users mostly needed secure credit card information. This led to creating software that enabled users to securely ‘beam’ money between two Palm Pilot devices. However, the software maxed out when they managed to get 12,000 users only. They however noticed that their online money transfer demo on the website had attracted about 1.5 million users. Thus PayPal’s web-based money transfer was born.
Once they shifted focus to online web-based transfers, they started getting about 20,000 users a day. This eventually led to eBay purchasing PayPal for $1.5 billion in 2002.
Another example comes from Bloggers.com. Founder Evan Williams and his team of partners were working on making project management software in 1999 and had started Pyra Labs. Their blog was only one of the tools they were working on.
However, the tool they created made it far easier for anyone to log in, write, and publish their work for everyone to see from any computer. The tool had no connection to project management, and Williams was almost broke. Yet, determination and the tool’s fan following made Blogger.com a success, eventually gaining millions of users and formidable revenue. Google then acquired Blogger.com in 2003.
The Difficulties Of Innovative Ideas
While innovative ideas are great for start-ups, the difficulty with them is that is not that often well received by others, at least not in the initial stages of the business. people could find them a little tricky or confusing, especially if they involve spending funds.
Steve Perlman’s innovative WebTV idea was at first difficult to comprehend and even execute. In 1995, Perlman was a known name for helping Apple develop its first colour display MAC already, and his ideas for an interactive TV seemed difficult to sell.
His idea was brilliant, yet at times when TV didn’t have program guides even, an interactive TV seemed far-fetched as there was no hardware to support it. Moreover, the absence of interactive content in the market to prove that there even was a market for such hardware was tough.
The people he approached just weren’t convinced that people would want to do anything more than just change channels on their TV’s. Perlman however, proved the naysayer’s wrong, and after Microsoft purchased his idea, the new MSNTV generated $1.3 billion in revenue in its first 8 years.
In 1996, email accounts were primarily given by one’s employer. Additionally, firewalls would prevent people from accessing their email from anywhere outside the internal network of the workplace.
Sabeer Bhatia and Jack Smith, the founders of Hotmail, understood the benefits of accessing their emails from any web browser. While the idea was a great one, it was rejected by many investors. One investor, however, gave them just enough funding so that they could bring their idea to fruition.
Their smart idea of adding a link at the bottom of their Hotmail website started garnering about 5000 users per day, resulting in 7 million subscribers in just one year. Soon, Hotmail was acquired by Microsoft for $400 million, and the rest they say is history!
A Great Team Is Better Than A Great Idea
Start-ups often succeed because of a great idea. However, most of the successful start-ups have succeeded because of the great team behind their great idea. At times, many businesses don’t have an idea, to begin with at all.
An early web-search tool, Excite, was started by Joe Kraus and his five friends in 1993. He and his team proved that a great team is better than a great idea. Sharing similar passions with his Stanford University friends, Kraus knew it was but a matter of time before they pooled their intelligence to come up with a great idea for a business.
It was during one of the brainstorming sessions that they understood that people needed to have an easier way to search for the hoard of digital information that was being published. Initially, they focused on digital encyclopaedias but realised the real money was on the web. They got around to developing a tool that could scale to search massive databases. With a $3 million financing, Excite became the primary tool used for search in the then-dominant browser – Netscape.
Similarly, in 1996, Arthur van Hoff and his three other colleagues from Sun Microsystems had teamed up together. While they had no idea, to begin with, they were all a part of developing Sun’s Java programming language. Each of them decided to invest $25,000 into their own business venture.
Van Hoff trusted his team to be able to quickly pivot from one idea to another. He also knew that not all first ideas get accepted. Finally, van Hoff and his team came up with Marimba, a subscription-based software distribution model. The model enabled faster software updates for everyone all over the world simultaneously, a boon for large companies like Morgan Stanley.
Thus, Van Hoff’s belief in the ability of his team to pivot quickly was far more important than their ideas.
The Value Of A Personal Project
Many ideas have become successful mainly because they were solutions to problems personally faced by founders. While Hotmail is an important example, Yahoo is the most famous example of how a personal project can become highly valuable.
Jerry Yang and David Filo, two Stanford grad students, made a collection of online footnotes in the form of web links, to make references easier for their PhD thesis papers. This site of references grew fast with new links and categories getting added, with suggestions from enthusiastic fans. The site’s popularity was increasing at such speed that Yang and Filo roped in Tim Brady, their friend, to write up a business plan. Thus Yahoo was born.
What started as a hobby, soon became a real business garnering $1 million. In 1996, Yahoo went public, it went on to become one of the pioneering empires.
Around the late 1990s and early 2000s, finding things on the Internet wasn’t as easy as it is today. Joshua Schachter, then a Morgan Stanley analyst, began a collection of online bookmarks in the late 1990s. By 2001, he had gathered around 20,000 bookmarks with the help of suggested links from others.
Schachter then needed to keep his huge collection of bookmarks organized. He started using short categorical descriptions with tagged links such as ‘food’, ‘math’, etc. As soon as he made this collection public on a server, he gathered around 30,000 users within a year. Its popularity got him a $1 million funding. Soon the site deli.icio.us, which was created by Schachter to address his personal organization issues, was purchased in 2005 by Yahoo for a whopping $30 million.
Keeping It Simple Is The Best
Often, the best solutions are the simple ones, like Schachter’s descriptive tags for the organization of data. Even for Apple, simplicity has been the basis of all their business solutions.
During the nascent stages, when Steve Wozniak worked out of his apartment, his focus was always to generate more and better outcomes by working with lesser. For example, as a high schooler, he would take gadgets apart and try to put them together using as few parts as possible. He would try to make things work more elegantly with lesser parts and cheaper costs.
For Wozniak, entrepreneurship entailed creating things with limited resources, all while trying to make them better than what was available in the markets.
Philip Greenspun, the founder of ArsDigita, used a similar thought process in 1997 while starting his web design company. Many companies started requesting him to build their company websites after he developed the popular community site called Photo.net.
As he worked on more projects, he developed and published a free design framework that anyone could use, called the ArsDigita Community System. In 1998, after his book Database Backed Websites was published, the request for web designing work increased.
The aim of Greenspun’s business was two-fold – to offer clean, quick and simple design solutions and to change the perception that people held of programmers from mere human robots who wrote code, to problem solvers. ArsDigita, with an annual growth of 500 per cent was working for clients such as Hearst Publications and Levis.
However, too much growth, too fast, can also prove to be a liability. As soon as Greenspun opened his doors to venture capitalists, all founders, but one of them, were squeezed out. The new leadership wanted the start-up to become an expensive and slow company like IBM. ArsdDigita collapsed and became an example of the disadvantages of venture capitalism.
Keeping it small and simple is sometimes better than trying to get big!
The Disadvantages Of Investors And Venture Capitalists Funding
Opening the doors to more investors and venture capitalists sure has its disadvantages. Like Greenspun learned it the hard way, venture capitalists come with their fair share of strings attached. More often than not, it involves either handing over company shares, or a percentage of the profits made by the company. In addition to that, one has to deal with the investor-approved executives that come in.
For a start-up, staying in control of the business is paramount, even if it means reducing cost or even finding ways to avoid involving investors.
Joel Spolsky, the founder of Fog Creek Software, understood the issues faced by ArsDigita. Thus, while he focused on planning his company on the lines of ArsDigita, he also focused on avoiding those same mistakes Greenspun had made.
Building on the philosophy Greenspun followed at ArsDigita, Spolsky too, wanted to build a company that not only had great programmers but also had an environment that respected them. His office was designed to make sure that programmers were comfortable, with their own office, comfortable chairs, first-class travel, four weeks of annual vacations, etc.
Such comforts and expenses are often deemed unnecessary by investors. Hence, Spolsky planned his business to avoid venture capital. He founded a bug-tracking software called FogBugz. Additionally, he even understood a vital aspect of software sales – that software can appear more valuable if it has a higher cost. Therefore, when he increased the cost of his software to $999, he ended up selling more units.
Many founders opine that another way to avoid investors and venture capitalists is to stay cheap. The co-founder of Viaweb, Paul Graham who designed the startup incubator, the Y Combinator, advises that for every bit of investor money one makes, one is at the mercy of others, and has lesser autonomy.
Be Honest With Products That People Need
The most important aspect of any business is the customer. Hence the most common advice most founders give is to listen to the customer and focus on creating real value for them.
This was the ideology that Paul Graham believed in. “Make something people want”, was in fact, printed on the Y Combinator t-shirts too. He believed that every business should focus on making people happy and that happiness can then be converted into profits.
Graham also believed in honesty. Along with co-founder Robert Morris, he decided to make the best e-commerce software available. With their focus firmly placed on customer satisfaction and on the quality of competitor products, they were able to, with all honesty, claim that their software was indeed the best!
It’s simple. When an entrepreneur is honest about the fact their product or service is the best available, the customer will know that it is the truth. Additionally, if one doesn’t have what it takes to be a great salesperson, truth and honesty are the best backings one can have to win over clients. After all, it is tough to compare or put a price on honesty.
For Graham, salesmanship was never a natural ability. However, he saw that his honesty about his product was a very persuasive and valuable quality. He knew that truth and honesty can overpower any amount of natural salesmanship virtue!
It Is All About Timing
The success of any start-up also depends on the timing. If the product or the service enters the market just at the right time as it did with Flickr, the chances of success shoot up.
Flickr’s founders Caterina Fake and Stuart Butterfield, her husband, hadn’t really planned for the idea of Flickr. As with many other companies, Flickr wasn’t the original idea they started out with. In 2002, they were working on a videogame based on the popular pet game Tamagotchi. Called Game Neverending, the game involved a feature that enabled players to share their photos with each other. In the process, Fake started working on a feature that eventually enabled players to share their photos on a webpage.
While other photosharing programs were already doing the rounds, by 2004, the social media wave had already hit with Friendster, Myspace, and personal blogs, making photo-sharing popular with users. At the same time, digital photography had also made it easier for users to post their photos online.
The timing, according to Fake was just right for Flickr. Back then, services such as Shutterfly were online paid printing services, with a very small market. Had Flickr been their main project, the research data would have suggested that there was no market for a tool that enabled people to simply share photos on the web, without making prints.
Soon, however, the market shifted towards photo-sharing becoming the main ‘fun’ activity on the web. The addition of personal blogging made the idea of sharing personal photos publically more comfortable, thus making the time of arrival of Flickr just right!
The decades between the late 1970s and the early 2000s indicated a huge paradigm shift for start-ups. With the focus firmly on user-generated content, start-ups had their business plans set.
The experience of the founders of the most successful start-ups of that era is valuable, relevant lessons for any start-up trying to place their footsteps firmly in the industry even today.