Dollars and sense: tech startups discover revenue is good
No business model is so 2001
Open...and Shut During the dot-com bubble, making money was optional. Given enough eyeballs, all investors are shallow, went the refrain, and money poured into silly startups that had little chance of ever making money except in equally silly IPOs and acquisitions.
Today, by contrast, revenue seems to be sexy again.
Not everywhere, mind you. A friend of mine recently talked with several startups about their revenue plans. These are name-brand web services that you likely use every day, yet their plans to make money were amazingly weak: "Our plan is to get lots of users, and we figure that sales will automatically flow from our large user base."
Except that it doesn't, as anyone from YouTube to Pets.com can tell you. In fact, the more free-riders on a server, the harder it may be to convince people to pay for the service or software. This may be why roughly one per cent of Skype's 560 million registered users ever pay the company anything.
All of which makes Opscode's decision to hire a Chief Revenue Officer refreshing - and wise.
The company, which provides open-source server management tools, suggests that it's looking for revenue to match its adoption:
When we started Opscode, we assumed it would take 1-2 years for enterprises and larger organizations to begin using the Opscode Platform, and that it would take us 6+ months to actually close the first big deals. We'd use that time to staff based on what we had learned from self-service signups and organic growth. We planned to start slow, grow incrementally, and tune along the way.
Since launching the Opscode Platform a few weeks ago, we learned that we were wrong about how long this would take. Instead of months - it happened instantly, which means that we need to ramp up our business operations now.
I don't buy this "surprised by success" line completely, given how much money Opscode raised relative to its closest open-source competitor, Puppet Labs, and how actively it has used that money in various business development activities, but even that is indicative of Opscode taking a grown-up approach to its business. That is, the company has always recognized that it's building a business, and not a fan club, and acted accordingly.
Opscode isn't alone. While revenue may not be the top priority at some web startups, it's increasingly Priority Number One at open-source startups like Riptano, which offers software, support and other commercial services around the Apache Software Foundation's project Cassandra. In a conversation I had with Riptano chief executive Matt Pfeil, he indicated an increased emphasis on marketing and sales to bolster the company's already solid engineering base.
Riptano is building its business while simultaneously building its community of developers and users, whereas yesterday's open-source startups often delayed revenue-generation until they had established a large user base.
This is the new model, and it's the right one. Why? Because cash is a hugely powerful feedback mechanism. No, it's not the only one, and in some cases may not be the most important one, but it's a fantastic signal that what you've built has real value.
That's a signal more companies need earlier in their lifecycle as the economy peters out (again). The companies that survive will be those that generate code or services for which customers are willing to pay. Everyone else will vanish. And should. ®
Matt Asay is chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfreso's general manager for the Americas and vice president of business development, and he helped put Novell on its open-source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears every Friday on The Register.
Scene: Int. Boardroom
<SFX: cups and teaspoons>
Board Member 1: I...I've just had an epiphany!
Board Member 2: Really? What is it?
BM1: I think we should... (dramatic pause) ...make some *money*.
*Rest of Board gasps*
BM2: This is preposterous! An outrage!
*Rest of Board murmurs agreement*
BM1: No, really! Instead of spending millions in venture capital on servers to support a freeloading piss-poor bandwagon with a limited lifespan, we should look to provide a product/service that a smaller number of people will actually be happy to pay for!
Board Member 3: Eeek! (Faints)
BM2: You just don't get the Web 2.0 concept, do you. Go on - get out of here.
Wow, business needs to earn a living, to be as business...
... news at 11.
@"This may be why roughly one per cent of Skype's 560 million registered users ever pay the company anything."
So 5.6 million paying customers. That is still, for any company, a lot of paying customers. I bet most of us would be happy owning a website with 1% of their 1% of paying customers! :)
Joking aside, the core principle of any business is to spend less money than they earn. So its not rocket science, so they can see what they need to do, yet I've lost count of the numbers of companies that have wasted vast amounts of money. So I can't help thinking at times the real money is being the top executives milking the investment money out until the company collapses, then they blame market conditions etc.., then go into another company to do the same.
But then the start up companies are not the only ones that suffer from these effectively parasite like executives that are basically leaching out the money from the company. For example older strong companies end up being broken up, as the executives sell off its parts, then they go for selling off the remaining core of the business to some other business, then the parasite executives still walk away with vast sums of money (For example Cadbury sadly suffered this fate).
All to often the executives hot air ideas and speeches end up being just cover stories for their real scam plans of milking the money out until the company dies. :(
Are there any dotcoms from 2001 which started off without a real business model
except eyeballs. And went on to survive and make money ? It shouldn't matter if they were bought by a bigger fish - as long as they started making money at one point.
Only ones I can think of are:
imdb.com [now amazon]
cricinfo.com [now ESPN]
(not sure if they are profitable now, but they are still around and supposedly going strong).Google probably doesn't qualify as they supposedly always had the plans of the adword model.