Startup founders don’t need to become billionaires to be successful

If you wrote down the name of a failed tech startup on a piece of paper and then stacked those pieces of paper you would have a stack that would reach all the way to the moon.

Okay, I made that last bit up, but you get the point. We all have an expectation that startups need to be hugely successful, and that failing to do so is a personal failing.  

Facebook, Uber, Groupon, Alibaba…. we all love the success stories of those who succeed. The media is full of articles about great success (unicorns) in the hi-tech industry. The problem with these stories is that they are dealing with the outliers. 

When you realise that you don’t need to build a Unicorn company from the beginning that frees you up to build a successful business in the tech game that will last for years. There are plenty of precedents to this, and here are three of the classic business models out there.

Consultant

Get other people to pay you to do work and learn as you go. Release your own product from time to time.

Many startups either start this way or end up this way to earn money when they find they aren’t getting the volume of sales required to support their overheads.

Graphic design, furniture design, clothes design, jewellery design and the industrial design industries all work this way to a large extent. They all put out some of their own work in their own name, but they mostly work on contract for other companies.

This is a model that can survive decades as it not only allows you to spread costs but it also ensures that you are being forced to keep up to date on languages, technology, and understand customers and consumers.

Artist in residence

Many of the famous artists of history had wealthy patrons. They were provided with an income, materials to work with and a canvas, ceiling or wall to paint on.

There is a lot of money rolling around in the enterprise sector and B2B sectors just looking for solutions to their problems.

Through working with companies to solve their problems you will learn a lot about what companies actually need – trust me, not many in the startup game understand this sector. And if you are lucky, you will develop a solution that could be sold to other companies. You might need to share the IP and equity on your great solution, but then you would never have developed it unless they brought you on board to solve their problems.

Go help them out. Try getting 3 days a week paid work to be a developer in residence at a major company.

Farmer

Farmer’s take a lot of risk. They seed, grow and harvest a crop each year. They take the risk that yields mightn’t be high every year, but they earn enough to keep going.

Many artists do this too. They hold a show every 6 months and in between shows they create a whole bunch of works, which don’t all sell. They earn enough money to keep going.

For app developers this could be a good model. Focus on putting out a bunch of useful and relatively low cost apps each year.  Do it right and you might be able to earn enough to work for yourself, but you could do this in your spare time too.

You are more likely to find what works and make a successful app via this route than spending years working on a single killer app.

Artists too don’t often spend years on a single work, fixing it up when they have inspiration. They take the lessons learned and put them into future work. This is called growth.

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When you learn to recognise the different paths to success you will be more likely to succeed in the long term. And if you manage to hit the big leagues through doing this, then we hope you can become billionaires too; but don’t count on it.

Apps are disposable– embrace it

How often do you use an app for? Days or weeks at most for the majority, some may make it a few months, but there are probably few we use for longer than that. Disney Chief Michael Eisner this week said that the thing he likes most about his smartphone was the flashlight (or words to that effect).

I would like to challenge you all to consider apps as disposable items, and when you accept this you can build a more sustainable business model for yourself and your company.

Let’s start by looking at the music industry. A radio station can only play 300-400 songs per day, let’s call that 2100 songs per week. Each week they will play maybe 4 new songs – that’s 208 new songs per year. Many of those are from known artists with a smattering of breakthrough artists. Compare this to the millions of tracks recorded by musicians in their bedrooms and small studios right through to the major studios.

The odds are really shit.

What makes a hit? First, it needs to get played on the radio or Spotify or whatever your favourite streaming service is. Then people have to like it. Some songs are instant hits, everybody likes them; they somehow tap into the zeitgeist at that moment. Very few of them become classics. How many hits do you actually want to listen to again and again… not many I’ll bet.

It’s interesting listening to bands talk about this process. Most of the time they have no idea which song will take off, it’s the public’s reaction that makes it take off.

So, to all of those of you in app development, I’d say that this makes a good analogy for what you should be striving for.

1. Accept that people will consume and then delete your app.
2. Find ways to make sure people know your app exists. Hit up your local newspaper for an advertorial; most local papers are keen to promote local innovation. Get creative, use word of mouth, tv /youtube interviews, Google adwords campaigns, submit your app for review with respected reviewers. Marketing is essential.
3. Make sure your app is simple and easy to use. Don’t make a Swiss Army Knife – make a carving knife or a pair of scissors. Think like a user – anything that is frustrating, complicated or requires a learning curve to use will not work well. Could your grandmother pick up how to use it in a couple of minutes?
4. Don’t try to put out a killer app – put out the whole album. Do a portfolio of apps, hopefully one of them can be a hit.
5. Release the same app for different market segments under different titles and branding. There are a lot of products on the supermarket shelves that are identical but are branded for different users. Think of shampoo – you can get the same brand for 8 different hair types – even though it is all the same product. A lot of things are branded differently for men, women and teenagers even though they are the same. How about you release a rebranded version of your product (different name, different look) every couple of months. After all, your initial app listings will have sunk by then, so when someone is looking for the functionality you offer a newer listing should come closer to the top. If one of them becomes a hit then ride that tiger for all its worth.
6. Games designers in particular should be looking at a portfolio approach. Put out a bunch of games, and then further develop and refresh those that are most popular. The guy in Vietnam who put together Flappy Bird was more surprised than anyone at how popular it became. You should be so lucky.
7. Just like people buy albums of music from movies (Frozen anyone?) how about making your app work with a product or service to make people want to buy it. For just a couple of bucks people can unlock the potential of their product or service with your app. That might have a bit of lasting power.
8. Price your app like a cup of coffee – another consumable item; used and discarded. Don’t expect to get rich. You want as many sales as you can, and given that the odds of success are staggeringly small, don’t make price a barrier to sales.
9. You need to be lucky. And yes, you can make luck, to a degree. Meet the right people. Create a buzz and follow up on any momentum. Keep up the PR and marketing. Accept that you are running a business and don’t just rely on a ‘build it and they will come’ mentality.

The advantage of understanding this approach is that you will get product out faster and go through the learning curve of product development, release, marketing, maintenance etc. You’ll also develop the skills to be better next time. The odds of making it big the first time you try are lower than winning the lotto. It’s great if you can do it, but can’t plan on it. Plan on being disposable instead.

The limits of the sharing economy and on-demand services

AirBnB and Uber are great companies, and with only a few quibbles I hope that they will succeed for a long time. (My quibbles are mostly along the lines of them offering a service without the regulatory requirements and attendant overheads that the businesses they are disrupting face, i.e. hotels and taxi drivers are complaining that the playing field isn’t even.)

For a while now, I have had the opinion that many of these businesses, while a great idea, are sooner or later going to hit the wall of established human behaviour and existing business practices.

Let’s go through some of these.

1. People will go for the free option over the paid option most of the time. If they like your service but can work around it to get a similar result for free, then they will.
2. If they find a great service provider through your service then it makes economic sense for both them and the service provider to cut you out of the middle. Once you get rid of the middleman making 15% to 25% in the middle, then even if the agreed price is lower when they cut you out, both parties get a better deal.
3. Many of the services being tapped into already exist. They are the cash economy, which in case you don’t understand the attraction of it, is tax free.
4. Enthusiasm on all side decreases over time. It only takes a few average to bad experiences to go back to the mainstream provider. For example, I really like the cheap self-published sci-fi books on Amazon. But for every good author I find there are four average ones and a dozen more that are really, really bad. I have begun to really appreciate the role of publishing houses and editors – they select the best out of a huge range of average, humdrum and just crap. It is the same for music – as much as we all like to hate the ‘Labels’ once you are out of your teens to early twenties I think most of us are no longer interested in going through hundreds of indie songs (probably pirated from festivals like SXSW) to find one or two good new artists.
5. One of the major themes of the 1990’s was ‘disintermediation’. That is, the internet allowed many industries to get rid of all the intermediaries sticking the finger in the pie.  This is well recognised as one of great benefits of what the age of the internet has brought us. But, here we are celebrating putting more intermediaries in the market. Go figure.
6. Availability of services is no guarantee of good service. The team at TechCrunch.com recently published a great article on the demise of HomeJoy. To summarise the key point. HomeJoy offered on-demand cleaning services, kind of like Uber or AirBnB – book online, pay online, and all will be happy. The only problem is that the market sets what rate is acceptable for cleaning, so after HomeJoy took a 25% clip qualified cleaners weren’t greatly interested in the work and many so-so cleaners entered the market. The service offered a guarantee on time and price, but not quality of service.
7. Anarchism is good, anarchism is bad. Much has been made of the rise of the anarchic mindset in Silicon Valley in recent months. As a businessman I love anarchism in the sense that there should be no sacred cows, you should always have a tilt at the incumbent players, and anytime legislation is introduced to favour those in power it needs to be attacked with vigour. Where anarchism doesn’t work is where you rely solely on the good nature of the masses participating in your venture. If there is no consequence for bad behaviour (or conversely, reward for good behaviour) then your service will likely head towards the lowest common denominator. Uber and AirBnB figured this out early and rate both the service providers and the customers.
8. It works where it works, and it doesn’t work where it doesn’t. Not every opportunity is ripe for intermediation, especially B2B. I’ll share my painful personal experience on this. A couple of years ago I set up a little site called FreelanceHotDesk.com to allow business owners (like me) to list unused desk space available for rent. When I started it I had grand plans to go AirBnB style, offering an amazing service, customer ratings, all the bells and whistles and most importantly with a payment gateway allowing us to take a clip of the fees paid (If the money doesn’t flow through your bank account then the business model is dead). The dream didn’t last long. You see, business owners hate paying intermediaries, and I can’t put in writing the vitriolic responses I had from business owners when I said that I would be sitting in the middle. I am still blushing at some of the things I was told. Business owners don’t stay in business if they pay everyone in the middle, and if they can smell it, they will avoid you like the plague unless the convenience of service outweighs the costs. Now I run a simple listing service, and will put in a payment gateway one day for people to pay a small fee to list. I think a lot of opportunities exist for such services where the business owner may make a small amount of money, but the press and VCs aren’t interested because it isn’t likely to become a billion dollar publicly listed unicorn.
9. The disruptors will be disrupted. If you prove a new business model it will be copied. Some of the current Unicorn companies will be around for a long time because of first mover advantage and brand, however, I predict that their market share will shrink and many competitors will move into the same space. Given that you can accept payment by card on your phone, how much longer will people accept Uber’s pricing and service? An alternate site allowing customers to rate drivers, and for drivers to accept callouts will come soon – it’s inevitable. And, with all respect to the VCs and the tech companies, they are, as a retired old school entrepreneur friend of mine put it, ‘but novices in the ways and means of making money from people. For every method they are trying, there are twenty other proven strategies they haven't figured out yet.’  

Personally, I think of the sharing economy startup scene as being a bit like junior miner scene in Australia and Canada. They are out exploring new territory, and every now and then one of them will hit the jackpot, but the majority blow all their capital and end up with nothing of particular interest to anyone.

Speaking of which, isn’t it interesting that the latest trend for junior miners is to reinvent themselves as tech startups right now – that shows where the speculative money is going… and some of them will work, but most of them will remain ‘penny dreadfuls’. Caveat Emptor!