Time to start a business or not?

Caterina, one of the super-smart founders of Flickr, says it’s not a great time to start a business on her blog and gives six reasons:

  1. Everybody else is starting a company.
  2. Your competition just got funded too.
  3. Talent is scarce again.
  4. You can’t operate in obscurity anymore.
  5. Web 2.0 isn’t all that.
  6. There’s too much going on.

Now, Flickr was similar to Weblogs, Inc. on that we both started when the market was flat (2003/2004), and we both sold when the market was hot (2005). Timing isn’t everything of course, but it is very, very important.

Looking at her list, and I never like to discourage anyone who starting a company, the reasons for not starting a company in my mind right now are:

  • a) A flooded marketplace (Caterina’s 1 & 2): When we started Weblogs, Inc. there was only one other person trying to make money from blogging and that was Nick Denton. He was doing porn and gossip, and we did consumer and tech–we overlapped on two or three blogs. In today’s market any decent idea instantly generates 5-10 *funded* competitors. Look at all the “Weblogs, Inc.’s of podcasting” space: there are dozens of folks trying to evolve the Weblogs, Inc. model to podcasts and there is only going to be room for three (at least as big businesses–we’re not talking about hobbies here folks). Watching the “Microsoft Office” for the web companies has been another particularly interesting event. Everyone and their brother seems to have a “WORD for the Web” project, and the Web 2.0 Powerpoint concept is everywhere. When everyone does the same thing there is a good chance that everyone loses.
  • b) Buyer indigestion: Yahoo, FIM (Fox Interactive), AOL, Microsoft, and Google have been buying a ton of companies over the past 18 months. It takes a solid six to 12 months to get a startup company stable and growing inside these big companies, and there is only so much the management team of a company can focus on. You also have the culture issue to contend with. Buy too many companies too quick and you lose the identity of the company. For example, I still haven’t met everyone at AOL, and I know that the new acquisitions have even gotten to the point at sitting down with us to think about collaborating. This isn’t anyone’s fault of course, you have dozens and dozens of senior people fighting to make their business units profitable, and you’ve got to get stable before you start collaborating. I’ve heard Yahoo’s had a hard time integrating Flickr and Delicious at times–no surprise there. So, even if Ross at FIM has been saying he’s gonna buy 10 more companies, the truth is he might only do two or three a year and stop at four or five–and he’s in total build mode. My guess is that AOL, Yahoo, and Google are going to be in primarily build mode not buy mode for much of the next 2-3 years. They’ve bought a bunch of talent and that talent is incentivized to stay and build. So, look for home-grown projects over acquisitions at the big five.
  • c) Stock market pullback: I’m not an expert on the stock market, but the fact is consumer confidence is gonna take a hit soon and that will slow things down. When the market slows down it will lower investment in startups, promote more competition with startups, and less the chance of buyouts.

The advertising networks also make me nervous. That space is jammed up big time. You’ve got BlogAds, Federated Media, AdBrite, Tribal Fusion, Tacoda, and countless others all trying to get small to mid-sized publishers to give them their adspace. The fact is there isn’t the need for 100 ad networks, and the pre-web 2.0 ad networks aren’t going anywhere (and they are strong). The result? A crowded spaces, increased spending in order to compete, price wars (Federated Media wants 40%, Blogads takes 20%, someone will do it for 10%, etc), and too many people fighting over too few clients. Look for a huge roll-up in the AdNetwork space–like a Razorfish or iXL style roll-up for all you old schoolers out there.

I’d say we’re on the brink of a huge startup implosion, but the truth is most of these startups are not that big and don’t have a ton of expenses. When Internet winter comes back–and it always does–many of these companies will just move to skeleton crews or quietly shut down. It won’t be big pain like it was the last time, when startups were laying off 50-500 people a day for months.

One of the folks at 37Signals claims it’s a great time to start a business. In all these pieces you have to consider the source. Caterina sold her company and is in earn out land, and 37Signals hasn’t sold out (and I’m sure the could), they are a tiny operation by design, and they are building really simple stuff (again, by design–they are doing light applications). So they are coming to it from tiny-startup designed to stay tiny world. Their reasons for it being a great time are:

  1. You don’t need VC diesel to get your motor running.
  2. You can actually charge money for valuable services.
  3. You don’t need mainstream tech to make a dent.
  4. You don’t need to live in San Francisco to make it big.
  5. You don’t need a swarm of worker bees to take off.

My reaction to those five points:

  • a) Number one is true in slow markets, but it becoming less and less true as the market heats up (to Caterina’s point #2 above). You don’t need VC money if you’re *alone* in a market or if you’re goal is to be a tiny business–like 37Signals. However, if three different VCS put $10M each into three 37Signal competitors Matt would change his position on this one. With resources those competitors would build as good or better products, and they would spend millions on marketing their products. They would take away a portion of 37Signals current clients, and certainly the majority of future clients. Those competitors would offer more product for less money–or make it free–and 37Signals would be *jammed* — big time. I’ve watched people get jammed up like this before–they never see it coming.
  • b) Dead wrong in this case. Try charging for 2Gigs worth of email or photo sharing and see how far you get. In markets that are not competitive it’s easy to say you can charge, but when the VC-backed startups come to town they will go free to the point of running everyone of the cliff–Thelma and Luise style. Check the Urban Fetch and Kozmo battles back in the day (free delivery, 50% off ice cream, make it up in volumn!).
  • c) Absolutely correct. This is stunning to me having been a Web 0.0 guy for so long. Server software is free, email software is free, phone calls are free, SQL software is free, etc. Any Web-based startup that doesn’t use open source solutions is run by an idiot–trust me, I was that idiot not long ago. I’ve since seen the performance increase and larger talent pools associated with PhP and MySQL, I’ll never go back.
  • d) Amen! Hiring folks in San Fran, L.A., or New York is the last resort in my startup handbook. Living in those cities is so expensive and the markets are so competitive that you can suck all the live out of your startup by paying for rent and high-paid talent. Our best folks come from D.C., Orlando, Long Island, etc. Let people work from home and trust them to do a great job–that’s key.
  • e) Correct again. Small is the new big for startups. Offices are best at c
    re
    ating three things: politics, commutes, and distractions. Again, find great folks and do regular in person meetings, then let them go home and work. They’ll be happier, you’ll have less expense, and there will be much less drama.

So what’s my bottom line?

  1. Real entrepreneurs see opportunities and take them–regardless of the market. The fakes show up when the market is hot. The market is hot right now, so there are a lot of fakes buzzing around. However, fakes are easy to spot and even easier to beat.
  2. Timing is most important when it comes to raising money, picking a space to go into, and selling.

Anyway, I can’t wait for winter… I love the cold. 🙂

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