The Essential Ingredient for Every Start-up's Home Page: Proof

If you're working at a start-up and you're finally, finally, finally ready to launch your product or service, be sure to ask yourself this hard-nosed question: why should anyone visiting your Web site believe that what you're offering is worthwhile?

Sure, you're convinced you've created something great or close to great (otherwise why would you be toiling in a start-up?). But why should anyone else give your company more than a moment's notice? There are hundreds or thousands of new companies launching every day, each convinced that they've created something unique and compelling. No one, not even industry analysts or business journalists, can possibly give all these companies due consideration. So what specifically are you putting on your home page to seize your prospect's attention and prevent him or her from clicking away?

You need proof. Proof that you really have created something valuable to others (not just to you). And to be credible, that proof must be offered by somebody else (not you).

Here's a list of the types of proof you should post on your home page to demonstrate that you really are as worthwhile as you say you are:

• Customer testimonials - The ultimate proof—and if this doesn't appear after a few months, it doesn't really matter what other proof you offer. Preferably the customers you're citing paying customers, rather than users of a free version of your product or service. Ideally, they're leaders in their markets, so that when other companies see that these guys have bought your product or service, they'll interpret that investment as a serious endorsement.
• Major partners such as OEMs - While perhaps not as compelling as direct customers, evidence you have signed with resellers and other partners can suggest that you've passed a minimum level of scrutiny. Of course, the partnership has to be meaningful. Simply joining the partner program of a major network equipment vendor or database vendor, for example, doesn't mean a lot. These companies have thousands of partners. You may have passed some minimal level of scrutiny, but you're not necessarily valuable.
• Independent studies or benchmarks - Objective evidence that you really achieve the results you claim to achieve. Even better if the study or benchmark shows you outperform major players in your market.
• Praise from industry analysts - Again, nice to have, because it suggests that you've passed a certain level of scrutiny with people who know your market well. But some analyst firms have a reputation for selling their praise, so some members of your audience (especially engineers) may be skeptical.
• Investors - Like analysts, investors study markets closely. Their investment signals a vote of confidence. Their approval can at least make you a company to watch.
• Management Team - If your co-founders are recognized experts in their respective fields, the whole company gains some creditability. Eventually, though, you need to offer evidence of market traction—proof that your talented team has really delivered on their promise.

Take a look at your home page. How are you proving your value to visitors? Assume your visitors are lingering for just a moment before clicking away to Facebook or some other site. Can you hook them and compel them to learn more? If not, it's time to go back to the drawing board. You're probably not ready to launch.
Updated: April 23, 2012

What Cloud Computing Offers Startups, Part 2

In a previous post, I discussed the operational and financial benefits of cloud computing for start-ups. Today I'd like to discuss another benefit that's just as important, and that has far-reaching implications for the direction of IT development in the coming years.

Cloud computing makes it easier than ever for software companies to deliver innovative, business-critical services to Small and Medium-sized Businesses (SMBs).

Until recently, most software start-ups avoided the SMB market. Selling products and services to SMBs seemed daunting for several reasons:

• Limited Budgets: SMBs are well known for having spartan IT budgets. Beyond buying basic networking gear, Microsoft Office, and perhaps an accounting system, a small business may make hardly any IT investment at all. Even larger, mid-sized businesses tend to be conservative spenders, leery of risk and demanding a clear ROI from a new product—even though it's often difficult or impossible to demonstrate an ROI with a brand new product.
  
• Distribution Overhead: Reaching SMBs has traditionally required a channel (e.g., a distributor who served SMBs in a given area or industry) or, worse, many channels and lots of advertising. Channels require a lot of attention in the form of training and support, and they take a bit out of a start-up's profit margin.
  
• Deal Flow: To achieve sufficient revenue, a start-up would need to close tens or hundreds of small deals to equal the same amount of revenue possible from one or two large enterprise sales. With limited staff, attention, and marketing funds, most start-ups (with the hearty encouragement of their investors) have preferred to pursue opportunities in the enterprise market.
  

But in the past couple of years, cloud computing has knocked down all these barriers. In fact, cloud computing solutions often start with the premise that the customer has limited time and money for managing complex, but important IT operations. The cloud computing vendor rushes in as the SMB hero, managing everything behind the scenes, while offering the customer an easy-to-use, comforting Web interface.

Old Obstacle	Cloud Computing Solution
Limited Budget	Cloud computing solutions, such as SaaS applications or hosted storage, can be delivered cost effectively. There's no need for on-premises hardware and time-consuming installation and configuration services. Customers buy just what they need, when they need it. Delivery on popular platforms such as Force.com and QuickBase greatly reduces customer-acquisition costs, which normally the vendor would have to pass along to the customer.
Distribution Overhead	Cloud computing services are marketed, sold, and delivered over the Web. Customers can discover point solutions built on cloud platforms offered by vendors they already know and trust (e.g., Amazon, Intuit, Microsoft, Salesforce.com). There's no need for a large sales team and offices scattered around the country, nor is there a need to sign on and train large numbers of resellers. Sales and marketing take place online.
Deal Flow	Through promotion in established platform communities, as well as through viral marketing, blogging, and targeted marketing efforts, vendors can find tens and then hundreds or thousands of new customers. At a time when enterprises are cutting their IT budgets, reaching SMBs who are looking for cost-saving, operational improvements and strategic advantages offered through new capabilities, seems like an attractive idea.

Cloud computing has changed the nature of the typical start-up. Instead of a capital-intensive organization building "enterprise-class" solutions for large companies, today's start-up is more likely a small, nimble team, taking full advantage of the economies offered by platforms like EC2 and open source, and delivering online services that are valuable to companies of all sizes—even another five-person company down the hall.


Photo of man and clouds by donabelandewen, Creative Commons License, some rights reserved.

What Cloud Computing Offers Startups

At the Intuit's mini-conference on "Startups and the Cloud," the discussions, which varied from investment to technology, repeatedly raised the question of what advantages, if any, cloud computing offered startups.

To answer that question, we need to know what cloud computing is. I'm going to borrow the definition developed by NIST, which Longworth Venture Partners analyst Vishy Venugopalan cited in his overview of cloud computing, which kicked off the day's events:

Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, storage, servers, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.

Five or ten years ago, it was not uncommon for a newly-funded start-up to spend tens or hundreds of thousands of dollars on infrastructure. Servers, disk arrays, back-up power supplies, management and monitoring software, an air-conditioned room with a raised floor—the list of capital expenditures could be impressive, and this investment needed to be made before engineers could begin any significant work developing products.

Cloud computing changes all that: it minimizes infrastructure investments, so that companies only need to invest in IT services when they're needed.

Cloud computing eliminates the need for that air-conditioned room filled with expensive server racks. It eliminates the need for the local IT manager to watch over them. And it shortens the management team's list of headaches, by sparing them the details of back-up tapes and server upgrades. IT can be provisioned cheaply and immediately—today, this afternoon, now, and development can begin right away.

Todd Hixon from New Atlantic Ventures put it this way:

Cloud computing gives you a sandbox for delivering solutions while assessing demand. It enables you to avoid needless investment in infrastructure.

Jeffrey Beir from North Bridge Venture Partners agreed:

Cloud computing allows developers to focus on the IP (intellectual property) that's unique to them.

After all, it's that unique IP that's ultimately going to make or break the company. It's the unique IP—not a rack of Dell servers in a computer room—that's going to be the quintessence of the start-up's brand, differentiating the company from the hundreds of other start-ups and thousands of larger companies already crowding the market.

By minimizing infrastructure costs and infrastructure management costs, cloud computing enables young companies to spend its precious capital on what's most essential. For young companies in this time of tight budgets and hard decisions, cloud computing is a financial and operational boon.

Two SaaS Companies that Solve Business Problems for Customers

In a couple of recent blog posts (here and here), I raised the question of what type of cloud computing start-up would be likely to succeed in today's business environment, in which companies of all sizes are interested in cutting costs and minimizing risks. I suggested that business customers would feel comfortable with new programming paradigms (e.g., Salesforce.com's Apex) offered by large, stable companies, but shy away from similar offerings from smaller vendors. It's not that the smaller vendors won't get any customers; they just might have a hard time getting enough to stay in business.

Cloud Computing Opportunities for Start-ups and Other Small Companies

But, aside from infrastructure offerings, there are lots of great business opportunities for small cloud computing vendors. I believe that most of these opportunities share these traits:

business domain expertise + effective execution + cloud technology

Being small and new won't be problems (i.e., risk factors in the eyes of customers) for small vendors who demonstrate that:

• they thoroughly understand business process problems that are important to the customer, and they are dedicated to solving these problems
  
• they have a solution that directly addresses these problems in an immediately effective way
  

Getting Down to Business

Here are two software start-ups that offer examples of what I mean.

Compli is a SaaS company based in Portland, OR, that offers a software platform that enables car dealers to measure and manage their compliance with industry regulations. Through the Compli SaaS platform, car dealers can deliver compliance training to employees and employee test scores on compliance tests. As regulations evolve, and new state-specific regulations appear, dealers can distribute new compliance content to the appropriate employees and demonstrate "good faith" efforts at compliance.

Compliance is an important issue for car-dealers, an operational head-ache of sorts, and Compli's SaaS solution gives them an easy way to stay on top of the issue in a cost-effective way.

If you visit the Compli Web site, you'll have to hunt hard to find any references to SaaS and cloud computing. The words "SaaS" and "cloud" don't appear on the home page at all, and in the video featured on the home page, President and CFO Lon Leneve mentions SaaS only after discussing the scope and importance of compliance for car dealers. The company is focused on solving a business problem, and they're leveraging SaaS technology to do it. How's Compli doing? Last year was a record year.

I've written about Liquid Planner before, and I'll be writing more about them next week. LiquidPlanner offers a hosted project management solution that brings probabilistic analysis to project planning. In another words, while other programs like Microsoft Project force project planners to give a fixed estimate for how long a task will take, Liquid Planner lets planner input ranges and probabilities, so they identify risks up front. The result is planning software that's more detailed, more accurate, and more informative.

The solution includes other collaboration features, as well, but I'd like to point out that once again we have a SaaS company focused on solving an important business problem—project management—in a new and compelling way. Factoring probability into project planning makes so much sense, I think LiquidPlanner would be an attractive offering even in a traditional, in-house deployment; delivering LiquidPlanner as SaaS, so it can reach all members of a distributed project team while lowering hardware and software costs, only makes it more compelling.

And how's LiquidPlanner doing? Quite well. Business is growing. The company itself is a small, lean-and-mean team of ten people whose founders have extensive experience in data center management from Expedia. Steve McConnell, who has written authoritatively on rapid software development and software estimation, is an advisor to the company.

These two companies, Compli and LiquidPlanner, demonstrate the business opportunities available for SaaS start-ups. Both companies are focused on solving important business problems (regulatory compliance and project management) in new ways. The problems they're addressing will remain important to customers even in an economic downturn. The companies are leveraging SaaS to deliver their solutions broadly and cost-effectively. Both companies share share these characteristics:

business domain expertise + effective execution + cloud technology

Disclaimer: Neither Compli nor LiquidPlanner is a client.

Empathy, Market Research, and Product Design

Product Development: Real-World Examples

Over the years, I've had the good fortune to work with many different software development teams, all populated with bright, talented people. While equally smart, these teams sometimes took very different approaches to designing and developing products.

• Flying blind. One group of developers had really no idea how customers used their complex software product. The developers understood the basic idea of the product, and some of them had a thorough understanding of the technical minutiae underlying certain screens and tools, but over the years, as features accumulated and screens became ever more cluttered, the developers themselves lost track of what was important, what was useful, and how the customer, trying to solve a problem quickly, would use the various features of the product in a particular sequence. They were grateful whenever a field engineer spent an afternoon showing them how customers would actually go about using the product to solve a specific problem. Even with this understanding, though, it was difficult to undo the complex product architecture that had evolved, or accreted, rather, over time. The product remained a cluttered collection of screens that often bewildered new users.
  
• Academic certainty. Another group of developers based their product design on ideas from their academic research and from a very early Beta test of the product that occurred two years earlier. They were certain that the product's interface couldn't be improved, until a seasoned UI designer was brought in as a consultant, questioned their assumptions, and showed them how their pretty good interface could be made even better.
  
• Proud of complexity. Another group of developers was very proud of how complex and sophisticated their software was. Company slide presentations would boast, "Over 500,000 lines of code!" The software was so sophisticated (or perhaps so complex and finicky) that even whip-smart sales and marketing engineers had trouble getting it to work without assistance from the engineering team. Because the software was so complex, it had to be sold with lots of consulting. When the price of consulting equaled the cost of the software, and when deal sizes began reaching six figures, customers balked. Deals fell through. Complexity meant difficulty, and that didn't serve the business goals of customers.
  
• Experience-focused. Another group of developers had the privilege of working from a thoroughly designed and discussed stack of PowerPoint slides that walked users and developers through all the common tasks the application needed to support. How did they come up with slide deck? The company's founders interviewed CIOs at major companies, looking for an important problem to solve. Once they identified the problem, they began designing the interface and software architecture. Coding didn't begin until the interface had been thoroughly designed. By then, the team knew what was needed on the back-end to support the features customers would be accessing through the UI. Because the UI was "finished" relatively early in the process, documentation and training materials could be developed in parallel with the software itself. Customers knew what they were getting, and management knew that customers wanted the product being built.
  

Of all these approaches, I liked the last one—the experience-focused one—the best. The company did follow a Waterfall model of development, which doesn't offer the flexibility of more modern agile development methods, but by focusing on the end user's experience, it ensured that every software release delivered a complete set of features for performing important tasks.

This latter team certainly avoided the problems of the first team, who wasn't sure about the workflows the customer would use, and who allowed the software interface to become cluttered and confusing. Ultimately, this clutter limited the appeal of the product. Technical people didn't mind it, but non-technical people did. Even though the product had real potential as a reporting tool for management, its busy, nuts-and-bolts-first interface restricted its user base to technical end users. That limitation proved to have economic consequences.

Empathy

One of the biggest challenges all kinds of businesses face is really understanding what their customers need and want. We all approach this problem with our own particular skills and work histories which illuminate some aspects of customer needs and obscure others. And, off course, customer wants and needs are not static. They change, as technology and markets change, and as customers themselves develop new capabilities, becoming more Web-savvy, for example.

The challenge for vendors is to find a way to systematically see through this clutter and find, not merely what customers will tolerate or find useful, but what they will find empowering, indispensable, and worth paying for with hard-earned cash.

It's all too tempting for company founders to sit around a conference room, discuss their past experiences, throw up some feature/benefit charts, and decide what to build right then and there. Mostly likely the arrow they design will hit somewhere on the target, rather than flying off into the trees, but it probably note strike the bull's-eye itself. Instead, there will be enough interest and heading nodding from prospects, reviewers, and journalists, that the company will proceed with its plans, which are only 65%-75% right.

A better and more cost-effective approach is to step out of that conference room and live with customers for a while. Here's a table offering a hierarchy of investigative approaches for better understanding customers.

Research Method	Advantages	Disadvantages
Online Survey (e.g., Survey Monkey)	Fast, cheap, and easy	A poor format for questioning underlying assumptions or reading visual cues from live responses. Provides at best limited insight into physical, cultural, and political factors that may ease or retard adoption of your offering. Also, requires a good list. If you're a social media expert, and you're surveying the people who follow you on Twitter, you're really learning about yourself, rather than the vast pool of potential customers who are not like you.
Phone Interviews	The more free-form format allows you to dig deeper, explore tangents.	More time-consuming, and you'll likely have to pay the person you're interviewing for his or her time.
On-site interviews and presentations of prototypes at your office	A good chance to see how people really react to what you're building. Richer, more accurate data than you can get from a survey.	Time-consuming and more expensive. Again, you'll likely have to pay people for their time.
Interviews at the customer's site (office or home)	The best way to research a product or service to understand the customer's world. Being there is the best way to gain that understanding. You may also discover other factors and business opportunities that you would have overlooked if you had kept your distance and communicated only through surveys and forums.	Expensive and time-consuming.

What's ironic (and somewhat frustrating) is that founders and investors will often dismiss face-to-face interviews and prototype-testing as too expensive and not worthwhile. Loic Le Meur, for example, for whom I have a lot of respect, once compiled a list of suggestions for start-ups that included:

7. Don’t spend time on market research. Launch test versions as early as possible. Keep improving the product in the open.

I think this approach can work with public applications like Twitter applications and social media networks like LinkedIn. I don't think it will work with more complex applications, such as business workflow or, say, healthcare payment acceleration applications, where the number of variables to get right is high, and the development costs are likely to be significant. And obviously, if your solution involves on-site hardware, giving away free test versions is expensive, even if customers agree to install them, which is doubtful.

Another limitation of this approach is that more or less consigns you to a freemium business model, because it requires lots of users testing a product to refine it. This strikes me as the tail wagging the dog. Companies should select their business model (how they'll make money) independently of how they'll conduct research. I would advise against automatically adopting a freemium model merely to avoid the expense and hard work of upfront research. Yes, by all means, always listen to customers and improve your products and services accordingly (as the freemium model encourages). But adopting the freemium model—or any other revenue and distribution model—should be considered a strategic and game-changing chess move, made at the proper time and the proper circumstances, not simply a default behavior (like P-K4 [a conventional chess move, for you non-chess players]) of young companies.

A third problem with this approach, as I mentioned in an earlier blog post, is that refining over time takes time and money. It might be more cost-effective to sit down with prospects up-front, really narrow down what the product or service should be, then refine it over time, having started from a position much closer to the bull's-eye.

A fourth problem is that some customers are simply not going to try your offering, even if it's free and it looks cool. Good luck getting someone in upper management or on a busy factory floor to even look at what your small, unheard-of company is offering. More likely, you're going to have to approach them, perhaps in the company of a third-party research or design firm, and there's going to have to be a financial incentive. You're going to need to buy their attention, but chances are, the expense will pay off for you handsomely. You'll reduce development costs and bring your offering to market faster, perhaps even with some endorsements from the customers you've interviewed.

The goal, here, is empathy. Not just a list of features, but a real understanding of the environment in which your product or service will be used, an understanding of the pressures your customers are facing, the cultural factors driving or inhibiting adoption of what you're offering, and the best language and visual interface with which to present your solution. No matter how talented a founding team is, they're simply not going to derive all that from a few long days locked in a conference room. Getting in front of customers repeatedly, gauging their reactions to prototypes, and really listening are what's required.

Outcomes

So how did the companies I mentioned back at the beginning end up faring?

• Flying blind. This company's core technology that the business continues, though opportunities have been missed, and a major engineering project (developed by a senior programmer who was unfamiliar with the market) ended up getting scraped. Recently, though, under new management the company upgraded its old flagship product and aced a major product review. So, somehow, they're soldiering on.
  
• Academic certainty. Product delays, in large part caused by outsourcing to the wrong company, resulted in lost sales, dwindling revenue, and dwindling staff. Eventually the company was sold. The product had to be rewritten (mostly from scratch, I believe) to catch up with current technology trends.
  
• Proud of complexity. The impressively complex product never turned out to be a big seller. Fortunately, the company had acquired other related products, and the company's engineering team developed these into the best products in its industry. However, the company itself never became profitable. It had gone public during the bubble. It stock price hovered in the $1-3 range for many years. Eventually the company was acquired.
  
• Experience-focused. Within a few years, this start-up, while still private, was acquired by a major Silicon Valley technology company. A happy ending.
  
  

Twilight for Ad-based and Freemium-Model Start-ups

A recent article in the New York Times breaks the news that "Angels Flee From Tech Start-ups": angel investors (wealthy individual investors) have lost money in the stock downturn and are no longer as willing to fund early stage companies. Angel investors typically make investments ranging from $10,000 to $1 million to help companies when they are just beginning. Once a company, applying its angel funding, has built a functioning prototype and perhaps even won a few customers, it can proceed to ask for more substantial funding—perhaps $1-5 million—from venture capitalists (VCs).

But, of course, getting VC funding is getting a lot harder, too. Ask anyone in a start-up these days, and they'll tell you that the spigot of VC funding has been turned almost entirely off. VCs like Sequoia Capital recognize that difficult times call for tight fiscal management (see Sequoia's famous Presentation of Doom to get a sense of the VC community's apprehension about the economy).

Even aside from the plummeting economy of the past few months, the angel/VC model for starting a company has been becoming increasingly problematic. Angels and VCs put money into a company, of course, hoping to get a substantial return, often 10x or more, on their investment. But as Om Malik pointed out in his recent post, "IPO Drought Hides Bigger Tech Woes," only a handful of companies from any industry have gone public over the past few years. He writes:

Look at some of the numbers: in 2008 there were nine IPOs in the technology, telecom and media (TMT) sector vs. 77 in 2007. In 2008, there were only six VC-backed IPOS and only one from Silicon Valley.

Without a viable IPO market, the only way a start-up can deliver a big return to investors is by being acquired. But if acquirers know the start-up has no alternative but to be acquired, they can stall negotiations and work out a low price. And large companies, of course, can only acquire so many small companies. Many small, worthy companies will likely go begging for suitors. Which is another way of saying that many VC investments, however well managed, will not deliver their expected returns.

The classic Silicon Valley model of investing in a company, growing it over some number of unprofitable years, and then exiting through an IPO or M&A activity is looking increasingly sketchy.

Here, then, is the lunar landscape start-ups find themselves inhabiting:

• A moribund IPO market
  
• Declining consumer spending
  
• Business spending curtailed
  
• Inventories growing
  
• Non-essential purchases by consumers and businesses deferred indefinitely
  

No wonder VCs are holding onto their cash. Pouring $5-20 million into a company that remains unprofitable for years just doesn't make a lot of sense in this environment.

Web 2.0 Business Models

The lack of angel and VC funding for has several implications for the types of business a software start-up can pursue. Or perhaps, without wanting to sound too catty, I should say that the lack of angel and VC may force a growing number of start-ups to behave like traditional businesses.

Far too many start-ups these days build technology (typically a Web site) and assume that they'll find the business model later, maybe much later, years later, if ever. I'm not opposed to this approach outright. Twitter came about this way because a company was willing to invest in a technology without a clear business case, and I think the communication on Twitter can be powerful and useful. But I think the high tech industry loses something—more than a lot of money, I mean—when the normal model for launching a business is, "We'll figure that out later, and besides, we can start selling ads next quarter." The industry's business acumen is becoming dull or at least severely constrained.

A friend recently directed my attention to a blog post, "Web 2.0, Revenue Models and Profitability: A Web 1.0 Comparison," which summarily points out that the Web 2.0 Emperor of Revenue is looking a tad bare:

"As we recently learned that Digg was still losing money on revenue numbers that look quite paltry, it occurred to me that Digg and some of Web 2.0's other hot young startups really aren't hot young startups anymore.


Facebook was launched in February 2004. Digg was launched in November 2004. Twitter was launched in July 2006. Facebook is almost five years old, Digg is just over four years old and Twitter is two and a half years old.


They all share a common trait: none has developed into a self-sustaining business whose financial future seems assured.


One of Web 2.0's biggest myths: it's far easier and far cheaper to get a startup off the ground today than it was a decade ago.


Citing the wide range of mature, open-source technologies and the abundance of talent available today, Web 2.0 proponents have told us that taking an idea from concept to reality, getting it launched and growing it can be a cheap affair.


If that's the case, one would logically assume that today's Web 2.0 startups would have developed into lean, mean revenue-generating machines. Instead, we see the exact opposite."

The ad revenue many of these companies generates almost seems like an afterthought to me, as though the management team was saying, "Well, we've got all these users on our site. We might has well make a little money off them by advertising." Revenue isn't built into the business; it's tacked on, literally as far as HTML goes, in the form of banner ads and text ads. These companies have a technology model, they also probably have service and community models, but they don't really have a business model, per se. The business aspect of their businesses is decidedly an ancillary concern.

Risks for Freemium Businesses

A popular business model among Web 2.0 companies is the so-called freemium model, based on a coinage by Jarid Lukin of Alacra. As Amy Shuen explains in her book, Web 2.0: A Strategy Guide, the term "freemium" was first introduced by venture capitalist Fred Wilson on his blog, A VC, where he described the model this way:

Give your service away for free, possible ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced value added services or an enhanced version of your service to your customer base.

The word "freemium" is a portmanteau word combining free + premium. Offer a free service, then charge for Pro services you develop over time.

From a business point of view, the freemium model has clear advantages over simple ad-based models, in that Pro features can deliver real value that customers will pay for, regardless of whatever's happening in the pricing and ROI of online ads.

But the freemium model poses its own risks, which are exacerbated by the tight money market and the widespread disappearance of discretionary spending:

• It can take quite a while to develop services to the point where add-on Pro features are worth paying for. If it takes a start-up 12 months to develop its community, 6 months for its Pro features to mature and begin gaining traction, and another 6 months for the Pro features to catch on with users (in an economy where much non-critical spending is being cut), does the start-up have enough money in the bank to survive? Have its investors run out of patience?
  
• While the company is growing its community to attract enough purchasers of Pro services, its data center needs and operating costs continue to grow. If not managed shrewdly, these mounting costs, along with increased tech support costs for Pro services, may erase any financial gains realized by revenue from Pro services.
  
• The company has to find the right dividing line between free and Pro. Give too much away, and the company won't make enough money from the Pro. Give too little away, and the company won't attract a sufficient number of free users to sustain the community and its services in the first place.
  

I think there's lots to admire about freemium sites like Flickr, but less mature, freemium-based start-ups may find themselves racing against an unforgiving clock.

What Start-ups Founded in 2009 Will Likely Look Like

Without the luxury of $5 million in the bank (or even $1 million in the bank, courtesy of angels) to grow a user base that doesn't cover its own costs, new start-ups will have to focus intensely on revenue generation and profitability from the get-go.

This is not a bad thing. It is, oddly enough, an unfamiliar thing to many people founding start-ups. The requirement for short-term revenue might even strike some founders as mind-bloggling, unfair, and needlessly constraining.

To me, such a reaction signals how dependent the high tech industry has become on VC funding—on having a sinecure, more or less, for creating and selling advanced technical solutions. I'm not against VC funding by any means, but I think it's troubling that so many people in technology have difficulty even considering building a company that, like most companies in most other industries, actually makes money sooner than later. And I think, as the Centernetworks author noted above, it gives lie to the Web 2.0 idea that it's faster and easier to build a business thanks to LAMP stacks, affordable hardware, etc. People using those technologies aren't building profitable businesses. They're delivering services to growing communities, and often as not losing money hand over fist.

Striving for short-term revenue (perhaps, 6-12 months, based on the credit limits of the founders credit cards and the balance in their savings accounts) and possibly even short-term profitability (12-24 months!) will require significant changes in the thoughts and actions of founders.

But the high tech industry has worked through transformations of similar difficulty over the past decade or so. Remember when you could take 18-24 months to develop your first product? Now it's weeks or a few months, at most. Remember rigid waterfall development cycles? Now agile development is becoming the norm. Remember lavish tradeshow booths and offset-printed brochures? Now you if you market through tradeshows at all, you're likely using a popup booth and telling people to download the PDF. Or you're reaching customers through Web seminars, forums, Twitter, and Skype. I expect that, having endured the brutal realities of 2009, a growing number technologist will come to embrace the new, old way of thinking about business and revenue.

Focusing on proximate or even immediate revenue generation has several implications for a company's business model and its founding team.

1. The company may need to begin with consultative selling, so the founding team may need to include one or more people who can sell services and manage client interactions. Instead of waiting 6-12 months to hire a salesperson, the company might include one in the founding team.
   
2. Companies will not have the luxury for long iterative development cycles; they'll still likely use agile development and iterate, but it now makes more economic sense than ever to invest in customer experience analysis, really analyzing what customers need and want, rather than trusting the founders' hunches and correcting misperceptions over a matter of 6-9 months.
   
3. Faced with curtailed spending by businesses and a wealth of sophisticated technology offerings from both large and small technology vendors, a start-up's best bet may be to focus on narrow problems specific to a particular industry. might be a good idea to tackle a difficult problem that requires domain expertise and tenacity—more expertise and tenacity than large vendors have been willing to contribute. Implication: the founding team will likely then include one or more members with deep expertise in a vertical market.
   
4. If start-ups have adequate resources, they should consider a blue ocean strategy, creating a new uncontested market that solves problems not addressed by other products and services currently available.
   

These implications and market pressures apply to start-ups that don't have the luxury of having millions of dollars in the bank. They obviously don't apply to existing companies that are already well funded. And I'm far from expecting or hoping for the demise of any big-name Web 2.0 companies like Digg or Twitter. In fact, I expect Digg and Twitter and other big-name Web 2.0 properties to survive, in part because they're important enough in the technology ecosystem, which includes the business managers who effect M&A transactions, to last until they find some sort of shelter. (I'm titled this blog post "twilight," not blackest midnight and not noon. Some entities will linger for a long time. But things that were possible earlier, will likely not be possible again soon.)

But for every Digg or Twitter, there are probably dozens of smaller, less well-known Web 2.0 companies that will find it increasingly difficult to survive. I wish them well. At the same time, I hope that most of the teams founding start-ups this year will not follow their example. Instead, I would encourage founders of new start-ups to think more like traditional business people.

If you're not taking in VC funding (because you can't get any), you don't have the pressure of delivering a 10x return in a few years. Instead, you face the different, but still daunting challenge of growing a profitable business. That's hard to do in any market, but it's a worthy undertaking, no less noble, and no less difficult.

Founders, listen: Business is hard. You're smart and motivated. Get on with it.