Craig Wilcox

Ideas

Ideas…Where they come from and where they can go.

  • Sub-Ventures (Part III): Open Source vs. Proprietary Software

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    Craig

    A third critical distinction between a normal venture capital deal and the sub-venture model is in the type of software built and used.  When I approached a VC a number of years ago with an RSS venture idea, one of the factors he mentioned that was a deal-killer was that I was licensing software in the business plan instead of building (or “rolling”) my own software.

    Most of the VCs I pay attention to (for example, Brad Feld and Seth Levine of Mobius VC) are loathsome of software patents, but they still want to have their companies building their own customized online applications and back-end administrative systems.  The thinking surely goes that you don’t want others to be able to build a copy too easily or cheaply.

    They’ve done very well with their model, which included an investment in Feedburner.  It sold to Google for $100 million.  I talked with Seth about this one time when I was saying a start-up I worked on should build an ad network that would incorporate a new ad unit I was proposing.  His face turned white, as his recent experience with doing the same thing with Feedburner showed it wasn’t so easy to do.  (Ironically, I believe the system Feedburner built was scrapped in favor of Adsense and Adwords for Feeds.)

    In the sub-venture model, the idea is to use open source software instead of creating a system from scratch.  Using a good content management system (CMS) like Drupal, which is constantly adding features for implementing new applications and is infinitely extensible, is the idea behind building out the public face of a sub-venture company.  Of course, Drupal is by no means easy to master.  It’s best to have a PHP guru and a UI expert who have worked with Drupal to help build out the feature set you want on your site.  But there’s the rub.  Instead of taking multiple people to build a site and the applications it will incorporate, you probably only need one or two other people, and they could likely even be outside contractors.

    Even better, Drupal is now part of most hosting plans, so you can work on it and have it hosted for almost nothing while you’re starting up.  There’s no need for expensive servers while you build up the business.  Companies like Bluehost have plans that are completely sufficient for building up a site and driving decent amounts of traffic to, and those plans start at under $10 per month!

    If you don’t need something as sophisticated as Drupal for integrating all sorts of Web 2.0 features, you can always go with WordPress.   (WordPress is also available easily through Bluehost.)  If you’re selling an information product or just trying to monetize traffic from SEO, you can try even easier systems like BeBiz or Sitesell.

    Here’s the main point in the sub-venture model that’s different in terms of the sites and software you’ll build.  In the sub-venture model, you need to build it cheaply and quickly, and then focus on seeing if you can get and monetize traffic using that open source software.

    Recently, this distinction between the sub-venture model and the normal VC modus operandi was blurred.    Nowpublic.com, which was a venture-backed company, actually built its system on Drupal.  They were just acquired by the parent company of Examiner, which is a hyper-local news site.  The Now Public sale to a larger company is great news for the open source community and for the sub-venture model.  (It was also great news for the founders, employees and VCs involved, too, I assume!)

    The reason for the success of Now Public is obvious in hindsight.  They built their brand and their community instead of their software.  (A lot of customization and money went into their application, but the backbone of the system is still Drupal.)  If money can be saved on engineering and used to build traffic and community, then that’s the method of choice for the sub-venture model.

  • Sub-Ventures (Part II): Capital Requirements and Exit Strategies

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    Craig

    The second tenet of the sub-venture model is that it should require only about 10% of the average venture capital outlay to get to profitability.  As such, it will fall under the radar of normal venture capital firms and put your squarely in need of angels instead.  This makes it a little less sexy to most entrepreneurs, but a lot more practical for those who can settle for making a lot of money instead of making sexy amounts of money.

    If we follow the other tenets of the sub-venture model, then most of the money can be spent on marketing, with little going to development, network engineering, servers, trade shows, and free catered lunches for employees.

    So what level of funding am I talking about? I’m seeing the sub-venture model as something that requires between $50-300k to get to profitability.  Venture capital deals run about $500k to $3 million to get going, and that’s usually not expected to get the venture to profitability, so maybe 10% is on the high side of what it will cost in the sub-venture model.

    Getting to profitability with just $300k means a lot of possibilities are open to you at the end of the start-up cycle – when you’re looking for the exit strategy everyone likes to think about.  If you take venture capital, then the VCs are generally thinking you will be acquired for 10x the total funding you take.  So, if you go after $3 million, then you need to be acquired for $30 million or more.  If you have follow-on rounds that take you to $10 million in funding, then you’re up to $100 million as a necessary exit.

    Now, let’s be clear, a lot of acquisitions these days aren’t based on making a profit.  They’re much more based on acquiring eyeballs or capabilities.  Twitter just completed a round of financing that takes it to a valuation of $1 billion.  It doesn’t have any obvious revenue at the moment, though it would be easy to monetize the site with search ads almost immediately.  Instead, the valuation is based on growth and potential and traffic.  It could be acquired anytime, as could Facebook and others, without ever showing a profit.

    These companies are the ones you’ve heard of, and I hate to say it, but if you’ve heard of it and you’re not a tech geek, it’s a very rare bird, and your odds of creating something similar are near to nil.

    In the sub-venture model, an exit of 10X means you could sell the company for $3 million and keep your angels happy and ready to finance your next venture.  And at $3 million, there are a lot more buyers out there.  Of course, you could hit it big and sell it for $30 million, which is what I’m shooting for with most of my ventures.  Then you’ve got some very happy people all around.

    If you figure that you’re actually shooting for profitability in the sub-venture model, and you can sell for about 10X earnings, then you’re talking about a business that spits off $300k to $3 million in profits per year.  That doesn’t seem so out of the realm of possibility if you can buy and sell the traffic you’re getting at even a small margin.

    Essentially, then, the lower capital requirements methodology of the sub-venture model can include the following advantages, among others:

    1. Less time spent raising money.
    2. Greater chances of actually getting the financing.
    3. An order of magnitude less pressure to be acquired.
    4. More buyers available.
    5. A business that will be profitable even without being acquired.

    Those seem like pretty good things to me.  If what I’m giving up is more sex appeal, well, I’m old enough to know that’s not all it’s cracked up to be anyway.

    Next we’ll cover open source versus proprietary software, which is *big* in the minds of venture capitalists.

  • Sub-Ventures (Part I): Execution Risks

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    Craig

    Here’s the theory at its most basic.  The fewer people involved in the project, the lower the initial execution risk.  Yesterday was 09/09/09, so let’s use nines to discover execution risks.  If there is one founder of a sub-venture, and that founder operates at .9, or 90% efficacy, then the chance of that founder succeeding in the tasks set before him/her is 90%.  When we add another person at 90% efficacy, we lower the chances of success to 81%, or .9 times .9.  As we get more and more people involved, the chances of all tasks being completed goes down precipitously.

    Is this proven in practice? I have no idea! Of course, there are chances of everyone operating at 100%…or even “giving it 110%” in some dreamland where coding software in the middle of the night changes the realities of mathematics.

    The trick is to get the work done with the fewest number of people, and that’s where the magic of the internet comes into play.  It used to be that a huge team would have to work night and day to create an online venture that had a complete web site and content management system.  Now, there are open source tools such as Drupal, that are free and dependable for creating massively scalable social networks and sites without even having an engineer on staff.  If you want to go even easier than that, you could try Ning, where you just add the content and start driving the traffic.

    For my next venture, Rebound Dating, I paid just $29 per month for the software I’m currently using, and I’ll upgrade soon to a package that is much more robust for just $1,000.  Building software like that 10 years ago would have cost at least $20,000.  And it works!

    For other parts of the business, there are also very easy ways (no brainers really) for getting up and running.  Need traffic? Go to Google Adwords, set up an account, and you’ve got traffic flowing to your site within hours.  No creative staff or advertising agency needed.

    Need to monetize that traffic? Google’s got your back on that one, too, with Google Adsense.  Other ad networks are available, and there are affiliate programs and other ways to monetize content, as well.  That eliminates the need for a sales staff who may or may not be able to convince advertisers to spend money on your site.

    If a young company can have just one or two people doing all the work, then the chances of your idea coming to fruition is significantly higher than it used to be.   My formula is this: figure out what you’re best at and make sure you’re spending the most time on that activity.  Outsource the rest.  Now, there’s a good chance your outsourced tasks are going to actually work and cost you next to nothing.  That’s one of the advantages of the sub-venture model.  We’ll move on to the next one soon!

  • 09/09/09 – Doing it to the Nines…Again

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    Craig

    It was 10 years ago yesterday that I incorporated one of my most successful businesses, Stilman Adanced Strategies.  Unfortunately, it didn’t end up going so well for me, but the other founders and employees are enjoying some of the fruits of my labors there, and I’m glad for them…mostly! 🙂  That includes contracts that should be paying them somewhere in the range $1-5 million per year.

    I’ve always remembered 9/9/99 fondly, and so I made sure to incorporate my next great success, Rebound Dating, on the same day, 10 years later.  There seems to be something right with me about doing something “to the nines”.

    Odd how much my focus has changed in ten years.  I’ve gone from a sophisticated artificial intelligence software package to trying to help recent divorcees (like myself) try to get through the muck of the process with some semblance of a life to look forward to.  I’m thinking this new venture will probably impact many more lives positively, and I can’t wait for the funding to come rolling in to make it happen!

  • Sub-Ventures (Introduction)

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    Craig

    A lot of software/online venture activity these days is going “small time”. Instead of investing millions in startups, some venture firms are placing multiple small bets with small teams.  Sub-ventures, which we’ll discuss soon more in depth after setting the tone here, differ slightly from the small bets placed by venture capital firms, and they differ greatly from the traditional model for venture capital.

    I participated in the first Startup Weekend, in Boulder, CO, where the idea was that you could gather together a group of about 100 people from different specialties, work really hard for a weekend, and come out Sunday night with a fully formed company.  That first one failed, but the idea caught fire, and there have now been dozens of them.  The success rate is tagged at about 20% – success here meaning still operational – which isn’t too bad considering most of the people attending the events are employed full time elsewhere.

    Another idea out of Boulder is Techstars, which I nearly participated in but got edged out in the final round.  This idea took 10 small teams and gave them a few thousand dollars per founder to get a fundable company together over the course of a summer.  Three of the funded companies have been sold to date – Brightkite, SocialThing and Intense Debate, and several more have gone on to receive venture backing.  While Techstars teams receive top-notch mentoring and a contact base to die for, the total initial investment is only up to $18,000.  Assuming the companies sold for well over $500,000 and most only had two very young founders, that’s a pretty good ROI.

    Contrast these successful ideas to the “typical” venture backed model we saw 10 years ago.  Most ventures then required investments of several million dollars, hiring at least 10 people, and developing a product from scratch with much more limited software tools.

    Now, software tools for rapidly prototyping and getting to full deployment are readily available.  Languages and platforms have advanced so much that putting together an application can be done well and quickly with far more limited resources.  The power of the Internet makes it possible for these quickly developed applications to be viewed and used by millions of rabid fans hungry for the next big (or fun or funny) thing.

    And this brings us to an idea I’m pursuing now called “sub-ventures”, which are a hybrid of the super-small and super-sized venture capital models we are seeing out there.  I see four main differences from the super-sized model and one critical difference from the super-small ventures.

    Here are the points we’ll cover:

    1. Execution Risks.
    2. Capital Requirements.
    3. Open Source vs. Proprietary Software.
    4. Exit Strategy.

    In subsequent posts, I’ll go through these differences and we’ll see where we might learn something about creating ventures with low risks and high returns based on the model.  I’m putting together at least one of these right now, and others will follow…so stay tuned.

  • Niche Thinking – What Profitable Online Activity Does Your Niche Already Do?

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    Craig

    In online marketing, the niche is the thing for entrepreneurs.  Find a good niche, build a site, hammer away at the search engines with relevant copy, and you may just have a chance at making a living online.

    The niche concept, however, has been around long enough for just about every niche and cranny to be filled.  Should you spend all your time trying to figure out if you can find one that isn’t filled yet?

    Maybe you should, or maybe you should try this instead: find a group of people that represent a niche and figure out how to market a service to them that’s proven profitable in the past.  In other words, get into a profitable niche of your niche.

    To do this, you’ll want to know a couple of things.

    1. How to dig into segments to find niches.
    2. How to figure out profitable things that niche engages in. 

    Now you’ve got a business.  As soon as I actually get my “main idea” on doing this online I’ll talk about it more.

  • Business Ideas…Getting Frustrated is a Good Start.

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    Craig

    One thing I excel at is dreaming up new ideas for businesses.  (Too bad I’m less great at implementing them, but I’m working on it!)  I’ll share some of the ideas I’ve come up with, but a larger question is: where do they come from? For me, they come from all angles – it just seems to be the way I’m built.  But if you’re not the “idea type”, how can you come up with new ideas?

    Usually, the best ideas I have come from getting frustrated and then thinking “there ought to be a way to (fill in the blank here).” 

    Just the other day, I was trying to apply for a job through Monster.  It looked like a decent fit for me, so I clicked on “Apply Now”.  After clicking many subsequent “Apply Now” buttons, I finally made it to a field where I was required to log in to the company’s proprietary job application system.  Then, after registering, instead of uploading my resume, I had to fill out what amounted to a “build your resume” survey system.  I eventually made it through to actually apply for the job, but the company definitely learned a lot less about me than they would have if they just let me upload my resume after that first “Apply Now” button.

    If you don’t sense a problem with a system like this, then you’re never going to be an idea person!

    Yes, the company probably thinks they don’t want to have anybody that’s not passionate enough to go through the nearly hour-long application process.  Yes, when they see a fully filled out application, they probably have someone who IS a good candidate.  Or, on the other hand, they may just have found someone who is so comfortable with corporate bureaucracy that they get excited when there’s a rigid process that takes all day to complete when it could take just a few minutes.  OK, maybe you can tell I’m not a big fan of corporate bureaucracies!

    Back to the idea here.  That application process just took so long that it even took a long time to write about it.  (Anyone still reading?) What if there were a super simple service that did just one: uploaded job openings and resumes.  That’s it! No fancy “job applicant management systems”, no huge fees to post a job, no waiting to actually apply for a job.  OK, let’s add two more features: seach and apply.  Users can search for jobs or applicants, and they can also apply or express interest in a candidate.

    There’s a simple job system.  It’s probably the way most complicated systems like Monster and CareerBuilder started in the first place.  But now they’re huge corporations themselves, and their main customers are other huge corporations.  But small businesses often can’t afford Fortune 500 solutions.  They have a simpler need: finding good applicants quickly without spending a fortune. 

    You’ll see here that the idea is just the first thing.  Then, you have to think about the specifics of how it would and – perhaps more importantly – wouldn’t work.

    So, the idea process here was:

    1. Get frustrated with a process.
    2. Have the thought that “there ought to be a way to (fill in the blank here).”
    3. Think through how you would implement that service and who would use it.
    4. Write an overly long blog post about it!
    5. Decide if you’re really interested in doing it and start researching whether it’s been done well before.
    6. Start building…or not.   (I decided not to, but please tell me if you think it’s brilliant and eventually become a billionaire from it!)

    Now, when you get frustrated, view that as a sign you’re onto something BIG and start dreaming up ways to avoid that frustration.  It’s a great place to get ideas!