The Future of Startups

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Location: Mahalo HQ, Santa Monica, CA
Monday, November 5th, 6:27PM PST.
Word Count: 3,267
Jason’s List Subscriber Count: 10,282
List management: www.jasonnation.com
Message type: Startups
Forwarding instructions: startups, VCs
Republishing: PLEASE DO NOT REPRINT

The Future of Startups (or “The Opportunity: Experiences over Expenses”)
===================
In the last e-mail, we discussed the “group belt tightening” effect.
I’m not sure if I like that term, but it was the best one I could come
up with to describe the psychological phenomenon that occurs in times
of mass financial panic. The impact is being felt everywhere and the
reaction has been strong across the board. Many of you e-mailed me and
said that you’re tightening your belts even though you don’t have to.
It’s safe to say the 10,000+ folks on this list are way above the
median when it comes to net worth.

In other words, many of you are penny-pinching for no reason other
than it “doesn’t feel right” to spend.

This is totally understandable, and as I mentioned, it’s part of
coming to grips with the fracked up balance sheet of not only the
United States, but the entire world. (Note: about 20% of the
subscribers on Jason’s list are not from the US, from what I can
tell).

Two quick proof points:

1. “Dim Days for Luxury Hotels,” New York Times
“Since mid-September, almost in parallel with the stock market
turmoil, demand for fancy hotel rooms has plummeted…[with travelers
becoming] more defensive about conspicuous consumption. Public
indignation over big paydays and the lavish expenses of top executives
has also hurt the luxury hotel business. Companies are now concerned
about perceptions — worried about how it looks to others when
employees stay in hotels whose very names evoke images of opulence. In
part because of those concerns, there has been a sudden rash of
cancellations of corporate meetings.”

2. “Rich tighten purse strings on luxury goods,” Financial Times
Milton Pedraza, chief executive of the Luxury Institute, a research
group that tracks the luxury market, says the financial crisis has had
a “paralysing effect” on the US luxury market [the world’s biggest
single luxury market] during the past few months and sales were likely
to fall more sharply than they did in the past two recessions. “Jets,
jewellery or apparel – everyone has seen declines,” he says.
“Consumers are going back to classics and price is very important.”

Bottom line: The death spiral has made it to the super-rich already.
This is a good sign in some ways. It means that everyone is trying to
correct their bum balance sheets–even if it’s just for show and out
of guilt.

The Future of Startups
===================
As many of you know, I spent the better part of August preparing for,
and co-hosting, the TechCrunch50.com event, which has become known as
“Sundance for the technology industry.” The conference featured 52
presenting companies as well as 130 “demo pit” companies. The 52
companies presented their products for up to eight minutes in front of
an in-person audience of 1,000, as well as 5,000 folks watching the
live video remotely.

In order to select these ~180 companies, our team sifted through
1,000+ applications in July and August. I did 250 phone interviews of
10-15 minutes each personally, followed by 2-3 rehearsals with each of
the 52 companies. These rehearsals were 20-45 minutes on average. As a
result, I’m in the unique position of seeing where our industry is
headed. Being pitched by this many people in this short a period of
time is, frankly, dizzying. My brain has been filled with so many
ideas, inspirations and trends that I’m quite literally overwhelmed by
them.

Beyond the technology trends, we all witnessed some trends for startup
companies. I’d like to use this e-mail to discuss emerging trends for
startups in a recession-to-depression environment.

1. Centimillionaires on JetBlue
==================
Back in 2001 or 2002, when I was bi-coastal (living in New York and
LA), I was rocking out my $199 round trip ticket on JetBlue when I saw
something extremely odd. An extremely wealthy couple I knew were
queuing up to take the same flight. Now, this wouldn’t seem especially
odd, except for the fact that I knew they a) owned a jet and b) were
worth well north of $100m. They were older and they were never going
to spend all the money they had.

There was a wonderfully bizarre moment of discomfort as we exchanged
greetings. Neither of us said anything, but the statement was floating
out there above my head: “What they hell are you guys doing on JetBlue
when you own a plane?!?!” I didn’t have to ask. The women leaned over
and said, in my ear, as if we were both in on something amazing: “$199
round trip… and TVs…  amazing!”

JetBlue became the company it is today because of the down market.
Penny-pinching folks of all stripes were drawn to their deal, which
was, as my friend pointed out, “amazing!”

The Opportunity: What can we learn from this? In down markets, cheap,
stylish products are in, and carrying airs about you is out. Can you
build a product that appeals to the cheapskate in all of us?

2. The Zero Cost Startup
==================
The major cost of a startup company today is very different today than
it was five short years ago. Five to ten years ago, the major costs
associated with a startup were servers, marketing, software,
infrastructure (i.e. office space, phones, etc) and, of course,
staffing. Today, many startups have little to no costs associated with
their servers because they are either hosting on cloud computing
platforms like EC2 and Google Apps or they are running commodity
hardware (i.e. $1,500 servers) at co-location locations (i.e. they buy
a rack for $2-5k a month). Previously, companies would fork over
$2,500 per server per month rental fees at “managed hosting” services.
That era of a $20-30k a year server is ending as folks realize they
are not getting full value from managed hosting services and that they
have cloud computing and co-location options.

Additionally, today’s startups don’t seem obsessed with office space
and associated infrastructure. This means the marginal cost of a
startup company is now, essentially, the time of the people involved.
Five folks can co-locate/co-work at a Starbucks or their homes, build
a full application on a cloud computing platform and market their
service on StumbleUpon or AdBrite and be done with it.

3. The Age of the Microstartup
==================
The zero cost startup has led to the age of the “microstartup.” It’s
no longer two folks in a garage hoping to build a prototype in order
to land a huge VC round, then getting millions of dollars to build out
an office. Microstartups are sustainable from prototype to launch and
on to a core user base, all for around $5-10,000 in costs.

We first witnessed the microstartup in blogging: My second company,
Weblogs, Inc., was a great example of this. We had a couple of
full-time team members working from home, a couple of servers and a
lot of freelancers. We monetized with a virtual sales force for most
of our life. The result was a large business being built in 18 months,
and when we sold the business to AOL/TW, there were no long-term
contracts to unwind. There were no leases for office space, computer
equipment or servers. Today’s startups are even lighter!

Microstartups are amazing because they can try ten different things
over a year with very little pressure to “break out.” This leads to a
lot of people taking a lot more risk, stating a lot more crazy ideas.
Which leads me to my next trend.

4. The “Try Everything” Era
==================
If the marginal cost of a business is people’s time, a lot more ideas
are going to be tested. There are a lot of technical people out there
who either have some free time after their day job, or who live on
Ramen noodles, having already quit their day job. The result of
everything being tried will be that every startup with any level of
traction will be copied. I’ve seen dozens of folks “riff off”–as
opposed to “rip off”–ideas from Twitter, digg, Mahalo and FriendFeed.

I’ve personally seen at least 20 folks trying to solve the noise
problem in FriendFeed, including TC50 presenting company Popego. Now,
the fact is, there is no guarantee that FriendFeed will work.
Startups “riffing off” FriendFeed could end u following FriendFeed
right off the waterfall–just like the Spanish mercenaries followed
the Guarani over the waterfall in “The Mission.”

Everyone is “riffing off” Twitter today, including the winner of TC50,
Yammer. Yammer is, truth be told, a much more monetizable version of
Twitter, and that is the reason why we Michael and I selected them as
the winner of TC50. Yammer might be derivative of Twitter, but anyone
who has ten people from their company in Yammer right now can tell
you, it’s a MASSIVE game changer. Is it the most innovative of the
TC50? Of course not, but we give the award for the winner of TC50 to
the company we think will be the most successful. Last year, we
selected Mint, and they are clearly one of the two most successful
companies from the TC40 event (along with Powerset, which was bought
by Microsoft).

Bottom line: Everything will be tried, everything will be “riffed
off.” In this environment, your job as a startup founder is to monitor
as many products and feature sets in the marketplace as possible, in
order to figure out what is working–or could work.

5. Longevity is Innovative
==================
Since everything will be tried, and everything tried will be riffed
off, then how will the market select a winner? The main factors in the
success of companies riffing on a common goal will be longevity and
innovation. Yammer will only win the “enterprise Twitter” race if they
exist for five years, innovating all the way.

If launching a microstartup is a sprint, building a business around a
brand is a marathon.

You’re going to see most of the “riff offs” get off to a big, splashy
start–typically with a Robert Scoble and TechCrunch post–then fizzle
out as they run out of steam. Steam in this metaphor is the passion
and interest of their founders–not just capital.

Bottom line: Longevity will be, perhaps, the biggest innovation a
startup can have over the next five years.

6. The Rising Feature Bar
==================
Another undeniable trend at TechCrunch50 was the quality level of the
websites being produced. BirdPost.com is one of the most beautiful and
complete websites I’ve ever seen. It’s got maps, photo sharing, custom
printouts and the obligatory iPhone application. All of this from a
tiny little startup.

Me-Trics.com also had an amazing website, complete with SMS, fancy
charts, imported feeds and iPhone integration–and they build it 100%
on Google App Engine! That’s another trend we’ll talk about below.

The rising feature bar is based on one thing and one thing only: open
source. Almost everything you could want to do with your startup has
not only been done, it’s available as a service or with free code. You
want weather, maps, message boards or social software integrated into
your product? No problem, it’s all available to you in the form of
open source products or software as a service.

Microstartups are not creating code bases, they’re connecting them.
This is why Devunity.com and FairSoftware.com were such an important
part of TechCrunch50. Devunity.com is building a system for folks to
collaboratively code across APIs and FairSoftware.com is creating the
business infrastructure for microstartups.

7. Features Over Brands & Businesses
==================
Microstartups and the “riff off” culture have created a new category
of startup based not on a brand or a revenue stream, but rather a
feature. Many of the startups at TC40 were features–kick-ass
features, but still features. I suspect that many of them will turn
into product over the next year, and at some point a brand.

Until you have 10,000 folks a day coming directly to your domain name,
you’re not a brand.

iCharts.com has amazing charting features, but until 100,000 charts
are created with one million chart views a day, they are not a
brand–they’re a feature. StockMood.com has an amazing set of features
to track the sentiment around a stock, but until they have 10,000
return visitors a day, they’re just a feature waiting to be added to
Yahoo Finance. The same holds true of EmergInvest.com, which is
helping people understand international markets.

It’s going to be an amazing year for these companies as they take the
credibility, userbase and PR generated by their launches and translate
them into either brands or business–in some cases, hopefully, both! I
wish them all the best, and I know they all have a great chance of
doing so.

Bottom line: The difference between good entrepreneurs and great ones
is the ability to build a brand. Brands can’t be commoditized, and
features inevitably are.

8. Focus on Revenue or Rating?
==================
There is a long-standing debate in the internet industry about where
you should focus your time: building traffic or building revenues.
This, of course, depends on many factors, including the amount of
funding you have, the competitive landscape and how the entrepreneur
likes to live his or her life.

If you’ve got a lot of runway (i.e. funds) and lots of competition,
you should probably focus on user adoption (think YouTube and
Facebook). If you have less funding and less competition, it’s clearly
virtuous–if not essential–to focus on revenues early.

Mark Cuban was focused on revenues during his talk at TechCrunch50,
while Roelof Botha of Sequoia Capital (and the Mahalo board) seemed to
focus on first building something that delighted users. They are both
right–it’s two different approaches. Broadcast.com become a huge
business with $25m in quarterly revenue when they were bought, and
Roelof is on point about making a product that delights folks–he
helped build out YouTube.

In fact, Mark and Roelof both built similar businesses in video that
both had billion-dollar exits. So, it can be done both ways–you just
better be sure you know which one you’ve adopted and that everyone on
your team is on the same sheet of music.

9. The End of Servers?
==================
Folks are building on cloud computing platforms despite these
platforms being only a couple of years–or months–old at this point.
It’s only a matter of time before someone builds a Twitter or
Facebook-level service on EC2 or Google App Engine. I just can’t tell
if it’s one or three years out.

Bottom line: Cloud computing might be unproven, but it’s proving to be
effective.

10. The Oversourcing of Crowds
==================
Everyone wants something for nothing–that’s the bad part of American
ethos–and every business plan seems to revolve around recreating the
success of Wikipedia and digg. Truth be told, Wikipedia and digg
might, in fact, be one-time events. Truth be told, they are only
partially crowdsourced.

It’s been proven over and over again that Wikipedia is run by a small,
secretive cabal of administrators. Additionally, folks have busted the
top digg users over and over for selling their influence to marketers.

Bottom line: My guess is that 50% of the “crowdsourcing” on these
sites is really just an underground economy being masked as community
based.

The age of crowdsourcing your way to success is over, and we’re
heading back to the age of expertise and curation. Startups like
GoodGuide.com are not crowdsourcing–they’re paying experts. When
faced with two options–a professionally produced version of a product
and an anonymously gamed version of the same product–it’s fairly
obvious which one users will select. Wikipedia has operated without a
competitor for a very long time, and there is no guarantee that they
will be number one forever. ;-)

11. Social Network fatigue & data portability
==================
After building out their social network five or ten times in the same
year, users are starting to give up. Services going forward are not
going to have an easy time convincing folks to build their networks
out again. As such, using Google, Yahoo and Facebook’s shared social
services are going to be the future.

Bottom line: Data portability is going to move from a conversation on
the Gillmor Gang in 2005 to a consumer reality in 2010. I suggest you
get your act together now before users put you in the “evil” category.

12. Meetups & Professional Accounts
==================
In a down market, people want to socialize. Sites like Meetup.com are
going to boom during this recession. How do I know? Well, I watched
the company explode in 2003 when thousands of disenfranchised young
people leveraged the service in Howard Dean. Additionally, Meetup.com
is on right side of the revenue conflict: users value their product so
much, they are willing to pay for it.

Prediction: Twitter will launch a $20 a year professional version this
year and have 50,000 sign-ups in under a year.

Bottom line: Meetup.com is the model for Web 2.0 service-based
businesses. If you’ve built a web 2.0 company that has some user
traction but has no advertising revenue, stop everything you’re doing
and beg Scott Heiferman to join your board (or buy your company).

13. Make Media Time
==================
In a down market, people with free time get creative. The blogging
boom was not born out of a technological innovation–far from it. In
fact, blogging-style software existed for almost 10 years before the
boom. Blogging broke out because so many folks were laid off–and
pissed off–that they took the time to write down their thoughts.

Flickr didn’t boom because it was the first photo-sharing site. It
boomed because in the 2003-2005 period, a lot of underemployed folks
were traveling and wanted to share their photos.

Bottom line: In a down market, folks get fidgety and look for
something creative to do. What startup can you create that will
inspire the recently unemployeed? Perhaps collaborative filmmaking
software? Maybe a screenplay-writing community? Maybe fotonauts.com
will take off in this recession and become Flickr 2.0?

14. Game time
==================
As I mentioned above, folks are going to have a LOT of free time. In a
down market, folks level up their World of Warcraft characters and
build out a website for their clan. Some of them might even want to
participate in the games being run by TechCrunch50 startups Akoha and
Atomosphir.

15. Hookups
==================
When people are stressed out about work, and tired of trying to get
rich, they put relationships, and potential relationships, on the
front burner. My guess is that services like eHarmony and Match.com,
as well as startups like Mixtt, will boom in the down market. Again,
when folks don’t think they can get rich starting a company, they look
for other things to fill their time–like a significant other.

See Meetup.com above for the related example.

Bottom line: when people are feeling blue they like to socialize.

Wrapping up
==================
If you’ve made it this far, I’m impressed. Hit the reply key and tell
me what products and services you think will take off in a down
market.

Even with the down market, a looming recession and global instability,
there’s never been a better time to be an entrepreneur. Fortunes are
made off companies that are built–or that build marketshare–in the
down market. Be brave, be bold and go for it!

That’s what I’m doing right now: I’m head down, creating new features
and services for Mahalo. Traveling around the world, I’ve seen the
innovation in Seoul, London, Paris and Athens. I’m sure, next week,
I’ll be blown away by the startups in Japan. (Any tips for Tokyo?).

Get excited about this opportunity… or give up and leave the
marketshare for the rest of us! :-)

A lot of folks have been asking for yesterday’s email newsletter. Now, this is a one time thing… if you want to get these in the future you have to signup for Jason’s email listwww.jasonnation.com

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  • http://rivals4ever.com/ Abhishek

    Hey Jason,
    Why don’t you just post an article here on your blog instead
    of sending email and after posting it again in a blog. I mean what
    difference does it make to email or put a post once or twice a
    month?? that is also called blogging and it is same as email
    newsletter!! I fail to understand difference between blogging
    and sending newsletter. Neil Patel is another popular blogger
    and he posts twice or thrice a month on his blog so isn’t it
    the same thing? Can’t you have the same model? I really feel
    you should do this.

    Anyways I am great fan of your thinking, keep up the good work.

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  • http://webscorecard.wordpress.com/ webscorecard

    Well, thinking about startup’s…
    As you write about people being on the computer a lot, my idea about a startup feels a lot better….

    I have a cat, as many people do (huge market), and we catowners know cats love sitting on our laptops/ computer keyboards for some reason.

    So I was thinking about creating a “SitTop” for cats, which would be a laptop without a keyboard, but a kind of wii-fit so the computer can feel when the cat is sitting on it. The screen will be touch sensitive (will become a standard feature for computers soon). Together with this hardware I’d sell games software for cats, like find the mouse, catfishing etc :-) The computer will have wireless and a “catcam”, so cats can play against eachother, or collaborate in catching the mouse. For the cat’s owner there will be a separate keyboard and mouse (wireless) so he can download new games to the catlap.

    As far as my market research goes, there already ar cat-computergames, but non-interactive and there are cat-keyboard blockers, so your blog doesn’t get deleted while your cat is sitting on the keyboard. But the cat top, I haven’t found yet!

    If you get to lauch this product before me, please let me know, I want one for my cat!
    I’ll use this my example in my blog about starting a business and website using a webscorecard (webscorecard.wordpress.com) , but you can have the scoop, as I really enjoyed this blog.

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  • http://www.murdog.com Murray Williams

    The idea that I can’t shake is the coming rush of underutilized talent. What are the companies that will be able to leverage that talent. Gone are the days when Google has a corner on the market on talent. I will be watching to see the companies who can make a big move in this downturn.

    There is more to this downturn than simply fear. There are real problems, but there are also people who have money and need a place to invest it. There is a slack slingshot that is slowly being pulled back. Smart people will get in position to be launched.

    When the crowd is running for cover, there are bargains to be had.

  • Gregory Gopman

    Enlightening article.

    I’ve heard a lot of VC is pulling funding on Valley tech startups though. Apparently, Sequoia is pulling a lot of funding and cutting some people out completely. At Ad-Tech NY last week, I saw a lot of companies that were struggling and will probably be out of business in the next year. The age of VC funding un-monetized dream is over. From what I understand, this economy is no time to be exploring ideas that aren’t ground breaking and aren’t making profits.

    I’d say, while there is opportunity, the funding is getting tighter, and the technology is moving too fast for company’s to really make profits on all their hard work.

    Web 3.0 or bust

    -The Realism Advocate

  • Col

    I really think everyone is gauging this twitter thing completely the wrong way. My take on it is this- if twitter were to introduce a paid service, no matter how small a fee, their numbers would half. Accounts under the guises of Barack Obama, Al Gore and Britney Spears would disappear because targeting a paying audience is not as beneficial (and easy) to them a free account on facebook. People will get fed up wondering why they’re now paying for something that was free yesterday and desert to pownce or similar (pownce is slowly working away and once the technology is there that type of company is where its at). The future of twitter is search.twitter.com and i cant believe no-one can see this. They’re moving into current news (digg, reddit territory). Go to search.twitter.com and put in something currently relevant, say dick cheney for example and see what you get. What you get is second-correct info. Twitter arent going to monetize twitter.com! they’re going to monetize search.twitter.com by serving ads.

  • http://artpredator.wordpress.com artpredator

    wow–so many ideas my eyes are spinning
    and my head is floating around the stars

    what products & services do I think will take off?

    I’m working on a wine, learning, social media, and mixer idea
    for millenials, women, and singles–that’s the need I see
    and have ideas on how to meet! Sounds like it fits right in!

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  • http://byteful.com/ byteful traveller

    Hello Jason, I’ve been a subscriber to your mailing list since July and I gotta ask, are these steps truly applicable to every startup? I’m currently building traffic on my travel-centric blog Byteful.com, and I don’t see how all of this applies.

    What if I’m not trying to build a tool, what if I’m trying to sell an experience?

    Any help would be greatly appreciated by this new entrepreneur. :-)

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