Startup fad diets
Just got through reading this article on Appirio in Forbes online.
Essentially Forbes holds Appirio up as the new paragon of startup thrift. The founder’s taken such overhead reducing steps as:
1. No physical office space except for a rented cube.
2. A team distributed throughout the country, mostly in low-ish cost US states like Arkansas
3. The company owns no hardware. Everything is by the drink from Amazon ECC
4. The company spends no money on PR. Everything is word of mouth.
For all this, Appirio is able to bid for projects at 20% less than competitors (which seems like an underwhelming cost advantage after all that fasting) and often does fixed bids.
O.K.
Let us all agree that being thrifty is good.
Let us also agree that advances in technology and business practices allow startups to run leaner and meaner than they could have 7 years ago.
But some of Appirio’s stuff is just shortsighted, and by the way, it’s been tried before.
Consulting/software hybrid businesses. So many failures in this regard it’s hard to count all of them. ICG Commerce comes to mind as one good example.
Fixed fee consulting projects. This works when you’re a small company but falls apart as you grow because of underbidding which either burns out consultants or creates perverse incentives to under-deliver to clients so they might hit the target budget. Cambridge Technology Partners is a good example.
No physical office space, just a distributed team. A nice over-head saver but typically these sorts of companies have very little cohesion and turnover becomes rampant, especially as you get into crunch time on one of those fixed-fee projects that you underbid. A notable failure example here would be Gemini Consulting that tried to go 100% virtual with just one physical office in New Jersey.
No hardware. Well, this is a matter of degrees in my opinion. Clearly the old days of buying hundreds of thousands of dollars worth of Sun servers is over. But are you so hard up you can’t spend $10,000 on a couple of Dell boxes? Or at least some dedicated servers from a hosting company? The difference is a couple of hundred dollars a month for some added consistency and reliability. Isn’t a business worth at least this much?
No PR. Hard to argue with this one, I don’t recall ever getting much value out of the money I’ve spent on PR.
It seems like every startup era, the business press profiles some startup that takes the current zeitgeist to the perverse extreme like some sort of fad diet.
I recall articles in 2000 during the dot com boom where they’d profile a startup that raised $20 million in the series A and bought a Superbowl ad the next day. Get big fast and build the brand immediately. THAT’S the future of the startup.
A few years later I was reading articles of startups that threw everything to India except a skeleton crew in the US. Quotes from VC’s saying “I’m not interested in any business plan that doesn’t have an India strategy.” Go to India. THAT’S the future of the startup.
Now it’s “buy nothing, own nothing, hire no-one” future of startups.
Every era a number of businesses get weaned on the new fad diet, but just like fad diets, they typically last for a couple of years before becoming dysfunctional and flabby.
P.S. - From when I started writing this post we're apparently already moved onto the new "don't fund anyone over 40" diet.
posted by Charles @ 2:08 PM
4 comments
4 Comments:
Great blog, Charles. I found you on a recent Deal Architect thread. A bit of advice: You look like you're 15!! If you want a bit more credibility, especially when compared to someone like Vinnie with a terrific CV, at least try to look like an adult!! (Of course, I'm saying this and I wear a stupid-looking IBM hat with a Microsoft jacket in my MyBlogLog photo. But at least I look older -- and probably am a lot older, which also means more experienced, Vinnie's advantage, especially in a B2B/enterprise software context where youth is not an advantage.)
The fact that Appirio is able to bid at 20% less may be misleading. It might be that Appirio chooses to bid at 20% less but can bid much lower. If they're winning accounts with a 20% cost advantage, why bid lower?
Also, the fact that something has been tried before says nothing about whether it might work today. For example, Second Life should be DOA since Worlds, Inc. was a bust. Even though I think very little of SL, it's certainly a lot more successful than Worlds, Inc. We could both come up with numerous examples of where technological advances are making things practical that were impractical a half-dozen years ago.
Regarding virtual teams, Gemini was too early. And perhaps it's still too early. But there are enough tools that it might, indeed, be doable.
I'm also not so sure why you think investment in hardware is so critical. EVERYTHING-as-a-Service model seems to have legs.
I agree that there are business fads, and this might be one of them. But it's way to early to tell. Also, pieces of their strategy might fly. Besides, this very well may be the future for micro-ISVs. Read the book; it's pretty good.
BTW, regarding his hybrid business model of consulting and software, I agree with you.
Finally, on the virtual team concept, note that visionary Robin Good is all over this stuff. That's a good sign to me; Robin is a reliable bellwether.
Hi David, thanks for your thoughtful response.
1. I am 15. Ben Casanocha's got nothing on me :)
2. I'm kind of past the experienced argument. I could name drop the companies I've worked for, my years in the industry, my education or the products I've helped to ship, but that's not the point. The best argument wins the day. "I've been doing this for 20 years" is what rhetoricians call "appeal to expertise" which is known as a rhetorical fallacy.
3. "The fact that Appirio is able to bid at 20% less may be misleading. It might be that Appirio chooses to bid at 20% less but can bid much lower"
Fair point.
4. "Also, the fact that something has been tried before says nothing about whether it might work today."
Also a fair point. Nevertheless, all the same arguments for why this stuff didn't work before still seems to hold in my mind. I just didn't have the time/space to break down WHY software/consulting hybrids don't work or WHY completely office-less virtual companies run into limits very quickly.
5. "But there are enough tools that it might, indeed, be doable."
Logistically it is doable. I do it every day. But consulting firms in particular are very poor candidates for permanent virtual-ness. It's very debatable in a consulting firm why the whole (a group of consultants) is better than the sum of its parts (a bunch of freelancers). IMO, a sense of culture and team is a necessary condition to build a firm. This is why McKinsey fights so hard to bring their consultants back to the home office every Friday. To bind consultants to the firm and the firm culture.
6. "I'm also not so sure why you think investment in hardware is so critical. EVERYTHING-as-a-Service model seems to have legs."
I don't place a huge premium on buying hardware per se, but I think companies are doing "EVERYTHING-as-a-Service" just to say they're doing it. My conversations with other folks using EC2 leads me to believe it is good for some stuff but is far from comparable to a dedicated hosted system.
7. "Also, pieces of their strategy might fly"
Pieces of their strategy almost definitely will fly, but it's the faddishness of the whole thing that leads me to believe they won't be long for this world. Same with the startup that said "throw it all to India." Those guys definitely failed but the startup that said "throw some of it to India" probably succeeded.
I'm not familiar with Robin Good, do you have a link?
Thanks for your reply, Charles.
Regarding the experience factor and rhetorical fallacy, I agree and disagree. Sometimes intuition is a key part of one's thought processes, but intuition based upon little experience can be a danger thing. And sometimes those with a lot of experience may not be good at articulating their arguments, so they may lose a debate when in fact they're right!! I've seen this happen on numerous occasions; I'm sure you have, too.
Robin Good. After Winer, probably the number 2 guy in RSS history. His current gig is B2B collaboration. See http://www.kolabora.com/ .
Cheers ...
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