|
|
|
|
 |
 |
February 2006 Viewpoint: Internet Babies
|
|
|
Anyone starting a new tech company a few years ago could count on one thing: It would be really expensive to build the product and just as expensive to market and sell it. Not to mention that it would take 18 to 24 months or longer, to go from idea to first sale. Not so today according to what I learned last summer while working at venture capital firm Mohr Davidow Ventures.
Today’s entrepreneurs are taking online businesses from concept to revenue in a few months using new tools. It used to be that you first had to raise money, hire a team, then hope and pray that you were building something customers would buy.
Now you can write up a few pages describing the functionality you want, post it to one of the many online software contracting sites like Rent A Coder or Elance, and in a matter of a few weeks you’ll have a working prototype for well under $1,000.
The entrepreneurs I talked with no longer buy much, if any, of their equipment upfront. Instead they use computers that are already on the internet and operated by existing companies. They just pay for the time, space, and computing power they need. One guy told me he went from prototype to fully functioning, revenue-generating product for under $100,000 using offshore development and outsourced computer systems.
Spending on online advertising will grow to an estimated $16.1 billion in 2009, from $8.4 billion in 2004, according to Jupiter Research. Many new entrepreneurs are capturing a piece of that advertising spending. One Business School alum, an example of a new breed of online marketers, told me he is making tens of thousands a month from online gambling sites. He’s not a gambler himself. Rather, he creates simple websites that promote online gambling by providing information, comparisons, and reviews. When people click on the links on his sites, he pockets $50, $100, sometimes as much as $300.
Another entrepreneur is generating over $30,000 a month from online advertising. He creates websites on many different topics and then pays people to promote his websites online. He makes an initial investment to get the sites built and listed in search engines. The money flows in when internet users click on the ads on his sites.
Rather than the entrepreneurs searching for customers, customers today are looking for the entrepreneurs. In the past, a new company spent a vast portion of the venture money it raised to build a direct-sales force. These individuals would then knock on customers’ doors, typically, customers did not want to hear from, let alone buy from, a small, unheard-of company. Today’s entrepreneurs buy keywords on Google, Yahoo!, MSN, and other websites that make their ads appear in front of people who are actually looking to buy their products.
Collecting payments was another difficult task. You had to wait for a purchase order or be able to accept a credit card payment into a special and expensive merchant account. Today for a fee, technology from PayPal, Clickbank, and other companies means electronic products can be downloaded and paid for instantaneously.
When a company is ready to hire its own technical staff, talented software engineers and product managers are available. “Troubling Exits at Microsoft” was the headline of the cover story in the Sept. 26, 2005, issue of BusinessWeek. I asked the engineers at one of my portfolio companies why they had joined a startup rather than a large company. The number one reason they cited was the opportunity to have a direct impact on a growing business. The number two reason, of course, was the possibility of making a lot more money.
Great executives are available, too. They spent the last few years holed up in the security of their stable jobs at large tech companies. Now they’re looking to make their mark.
Lastly, venture capitalists are actively investing, especially in online-related businesses. Thanks to the internet, a three-, five-, or seven-million-dollar investment goes a further than it used to, and large companies are looking to purchase practically anything they can get their hands on.
There is one thing, however, that’s in short supply: People with the talent and experience to take great ideas and turn them into billion-dollar companies.
David Feinleib, a second-year MBA student, wrote this essay in a seminar on business writing taught by Professor John McMillan.
Personal Finance: Investing for Retirement
Viewpoint: Internet Babies
|
|
|
|
