Blinded by the light,
revved up like a deuce,
another runner in the night
— Bruce Springsteen
Humans are exceptionally bad at calculating odds. We let our limited experience strongly influence our perception of the likelihood of an event. For instance, we tend to vastly overestimate the odds of dying due to a terrorist attack, accidental firearm discharge, or a hurricane, and vastly underestimate causes of deaths like falling, drowning or the flu. The reason for this is that the media constantly reminds us of the dangers of terrorism, hurricanes or flash stories about children who were accidentally shot. Seldom do you find stories about a person drowning, falling, or dying due to a flu being reported on the national news channels. News stories have a tendency to be sensationalized, so as to capture one’s attention and hook in large audiences, and as such they contribute to peoples’ bias when it comes to estimating what is, and is not, likely to occur.
Likewise, overexposure to blissfully happy lottery winners holding up their over-sized checks on TV and in the papers tends to distort peoples’ perception of the likelihood of winning by buying a single ticket. A more mathematical and objective approach to the problem would quickly reveal that the odds are much worse than they appear to be on the surface. [1]
I can’t help but notice that this is exactly what’s happening to the development/startup world, too. It’s the new gold rush. Far too many developers are trying to build the next big social network, be the next Facebook (or YouTube), gather crowds in the millions, in the hopes of being bought for a ridiculous sum of money by a large company. The media loves these sorts of stories.
As a consequence, developers who are trying to build the next Facebook are akin to lottery ticket buyers. A few of them will succeed and win, but most will fail miserably. How many social networks do we really need? The ad-supported model works for some lucky companies that manage to attract huge crowds while keeping their expenses to a minimum (e.g. PlentyOfFish) or which get acquired (e.g. YouTube, who is otherwise costing Google money). Everyone else is burning cash and wasting the money and good faith of VCs in the process.
I fear that a lot of developers are blinded by the light. Their perception of the actual odds of “making it” are skewed by the media’s continuous coverage of million – if not billion – dollar acquisitions and success stories. And some VCs encourage this behavior in the hope of seeing great returns on their investments. After all these are very wealthy people, and they’re are not interested in small scale success.
Aside from the obvious waste of time and resources, I think that many developers are leaving excellent opportunities on the table in order to pursue a highly unlikely outcome. The ratio of the likelihood of making 10 million with a traditional business plan and the likelihood of making a billion a la YouTube, is not proportional to the different quality of life that those amounts can afford you. If you are broke, have $30K in credit card debt, or are middle class, you’ll find that 10 million dollars could increase the quality of your life much more than going from 10 million to a billion ever could. And it’s important to understand that aiming at a more likely, albeit smaller, outcome does not in any way prevent you from “dreaming big” afterward, once you’ve already achieved success with your first (or first successful) venture.
Would you rather enter a draw for a million dollars with a 1 in 20 chance of winning, or a draw for five hundred million dollars with a 1 in 50,000,000 chance? A rational person would opt for the first, yet most startups today are leaning towards the second draw. They do so because they vastly overestimate their odds of being successful with the second draw.
Create a product and charge people for it. Unless you really have to, don’t take VC money, instead consider bootstrapping your company. One of the main advantages of the software world is the exceptionally small amount of capital needed to get started. If you want to stick to Web applications, use the Software as a Service (SaaS) model and make your users pay for the software and service you provide. You’ll have a much smaller audience, less scalability problems and expenses, and a whole lot more revenue and a greater chance of being profitable. Joel Spolsky (with his gorgeous office spaces) makes millions in revenue thanks to a company that, for most of its existence, has sold a web bug tracker. How many free bug trackers do you know of? How many competitors exist in that market? Many, I’m sure. Yet while Joel’s popularity no doubt helped his company, it still showcases how a business can be successful by building a better mouse trap.
But like David Heinemeier Hansson mentioned, there are countless under the radar companies making money like that. [2] If you take your eyes off the spotlight, you’ll see that many companies are very successful at what they do, though they’re not famous or making news headlines. Some of them actually strive to not attract too much attention to their success (often measured in millions of dollars), in order to prevent competitors from springing up.
Regardless of whether you’re a household name or not, you don’t even have to create Web applications to be majorly successful. Mobile apps for smartphones, including the iPhone, come to mind. But good old-fashioned desktop applications keep a wide range of software companies in business. That’s why the skewed perception that you can’t make money with commercial desktop software anymore, or that desktop applications are dead, is utterly ridiculous. As a developer/micro ISV/startup, your chances of making money with well designed desktop software are much higher than building any sort of YouTube, Flickr or Facebook clone.
To understand how skewed our perceptions are, you just need to talk with companies who are open to sharing their software sales statistics. You’ll be shocked by the amount of money that’s being made with relatively common software. Balsamiq makes a UI sketching application that sells for $79. The author managed to make $100K in revenue in the first 5 months, mostly by selling the desktop version of his application. And he is certainly far from being one of the biggest winners in this industry. I mention this though because it shows how a decent idea that’s well executed can quickly bring in revenue when you charge your users. And if you think that $100K in five months is small, let me ask you how many free web sites manage to net a comparable monthly income. If you are looking for larger revenues, check out Omni Graffle, which earned The Omni Group millions of dollars, or set your sights on B2B applications (in which market some applications sell for thousand of dollars a piece).
While many developers are blinded by the light, wise ones with a mind for entrepreneurship are building actual software businesses. I invite you to get out there and do the same.
Footnotes
[1] The concepts I summarized here are much more eloquently illustrated by Dan Gilbert in this TED talk.
[2] David Heinemeier Hansson makes a similar point in a post of his which inspired this one.
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I think one of the reasons is obviously the glory but also the idea effect plays its part. Going after a social network means reinventing nothing, zip. To build a successful desktop/web application and sell it means having an *original* idea (and the skills and motivation to go to the end) to sell.
The kind of idea most of the people don’t have.
I don’t know Lawrence, at this time I see many interesting application possibilities (two of them already cited, bug tracking and prototyping) that could be done with just a good design and development process. I’m quite sure that some managing space exists, even without “original ideas” but just with “excellent design/work”. 🙂
For the rest, another great piece Antonio. I agree on everything… if only I could be able to came up with a decent business plan for one idea or the other. 😀
Oh man, you’re killing me with the credit on the quote. Blinded by the Light was written by Bruce Springsteen!
http://en.wikipedia.org/wiki/Blinded_by_the_Light
Good post though.
I didn’t know, Jamie, thanks. It’s duly amended now. 🙂
I agree with Lawrence, it’s too easy to copy the social web/new media market leaders and create another facebook or another youtube.
Thinking about a niche market, a real and useful product that people are willing to pay for is much harder and that’s the real challenge.
Good post Antonio, hope it will inspire more people to innovate 😉
I had the same thought last year when for the third time a ‘global market’ application I was working on was going to be competing with many other similar apps by the time it was ready. Instead I looked for a niche that would enable me to make a good living and stop trying to win the lottery. The downturn hadn’t even happened, but I decided that it was just too big a risk to rely on advertising revenue to fund my life.
A related idea is to charge people only what you need to charge, rather than what you believe the “market will bear”. A lone developer CAN and SHOULD create viable application software. They should then sell that application software – cheap – as many times as possible.
Many developers work on staff for < $100K per year. Many more work as consultants for slightly more. Let’s average that out to $50 / hour. If you spend 500 hours building a small but viable app, you should expect to get paid $25,000 – eventually. How many copies will you sell? Maybe 100, if it’s sorta viable. But if it’s really useful and elegant, you ought to sell at least 1000 – eventually. What’s the right price?
I’ll argue that the right price for such an app is $25.
The benefits you’ll gain exceed the sales revenue. You’ll learn lots about building an app that people actually want. Your second one will be better – and will sell more. Your 10th one might be a winner and make some real money.
But – don’t quit your day job until your 20th takes off.
That’s how to make a living – rather than a killing – writing apps.
j
Liked your opening para /very/ much 🙂
It’s true and written beautifully too.
/HS
Good write.
I’ve seen a faire share of startups whose business model is to be bought or to make money with ads. So they aim to get a large user base. At the end of the day, they make little to no money, even worse, they lose money with every new user.
I mean are facebook, myspace, youtube et al profitable? I somehow doubt that.
I think a lot of this depends upon the start-up and the reasons behind why they have built the website.
Let’s go back in time a little…
Why build another Search Engine? We have Yahoo, Alta-Vista, Hotdog etc. Walk in Google…Why? Because Yahoo couldn’t even search for “itself”. An obvious need for something that worked better than what was already out there.
Why build another Social Network? We have Facebook, MySpace, Bebo etc. Walk in nobody yet…Why? Because the current Social Networks are adequate at what they do. They allow people to socialise at a level they are comfortable with.
However, there is something different about both what Google and Facebook have done. They have become platforms. Developers can “bolt their applications” into Google Maps, Facebook Apps etc.
When you have a platform, then a whole new movement of applications come to surface. In order to build on those platforms, you need something that interacts with them (search for a product+map, share a video+facebook user).
The best thing about these platforms is that you can build a sub-network that slots into the bigger social networks. If your sub-network works, then you can grow the user base much, much quicker than through something like adsense on Google search.
The bigger the user base, the larger the crowd you have to source your next killer business idea. Crowdsourcing is changing everything and in order to source an idea, you need a crowd, in order to build a crowd, you need either a large social network or a #1 search engine.
Why give it away for free instead of charging for it? Take a look at the opensource movement. Get good at a particular opensource product and you can earn a living from it. The crowd takes the product forward in a democratic direction, you earn by being skilled in your particular niche.
There is room for both models you have both argued against and for. There will always be winners and losers. The losers are usually always the ones that are chasing a bandwagon that has already left, that are looking for a huge payback from doing very little. The winners are usually always the ones that either create the bandwagon or improve upon it by listening to the crowd…
There’s my New Year’s eve rant over for now 🙂
Happy New Year everyone !!!
I think there are two things making it difficult for developers to make a profitable decision.
The first one is the human tendency to jump for the money by cranking something out quickly. “Web 2.0” as a whole generally suffers from that. The idea of a startup being able to make quality software in a month or two of work has led to….a lot of arrogant startups that either limit their scope drastically (leading to a non-useful product) or get humbled after crunching for a few months straight. It also leads to gold rush mentality – for example, the current rush to saturate the iPhone. Yes, there is a new market open for developers. But your chances are best in the market YOU chose to specialize in. That could be a new market. Or it could be one you’ve worked in before.
The second one is sort of the opposite extreme – being engrossed in the technical world and not knowing where to stop and build a business. The idea of building platforms, frameworks, or other massive challenges. These are the things that Google, Yahoo Facebook, etc. put out after they became larger companies. If you are starting out and have no or few employees, you can’t expect to make any sort of platform. You can make something focused and popular and grow from there, though, and that’s exactly what those companies did.
David H. Hansson is making a similar argument in one of his talks which can be watched here:
http://www.omnisio.com/startupschool08/david-heinemeier-hansson-at-startup-school-08
Well worth viewing (like most of his talks, actually).
Great post! The guy who started Balsamiq is a friend of mine from Adobe and I was pleased to read here he is doing so well. He’s a smart guy who is very passionate about what he does. You should see the photos of him playing Ultimate when he was younger.
And that is my point about developers and startups. Antonio is right that you can’t just sit down and create a company to make you rich over night. Instead, ask yourself this. If you are going to spend the next 3 years working extremely hard and spending all of your time on a single purpose, shouldn’t it be on something you really want to do? Would that really be making a new way for people to share photos and messages over the Web? Do we need another site to sell something? Nothing is more rewarding that coming up with a great new idea that other people like, use, admire and ultimately try to emulate.
I think 2009 should be the year of the new idea!
In other words, why make billions, when we can make millions!