Ramblings on my MBA thesis: Framework for creating a successful dot com with minimal capital

Technology and Design Development

“Bootstrapping is a potentially very exciting prospect to an entrepreneur. But it is fraught with risks - and the primary risk you need to guard against is software development failure. Two thirds of outsourced projects fail, so there is a high likelihood of failure.”[i] (Matt Rogers, 2005) What Matt is saying here is: Be very careful with your development, it’s the core of your company so do not screw it up. And for our thesis’ sake, don’t screw it up meanwhile doing it with the lowest cost as possible.

Development of tech and design will be, in most cases, the biggest bulk of the cost of your startup. To try to cut as back as much as possible the following are low cost options:

Developer Founder

A major plus for any start up is to have one of its cofounders be a hands on tech or design person. This will not only allow for lower cost but it will also give the startup a sense of security that the technology or design are heading in the right direction since the person that has the most to win (and lose) will give his/her best to up the odds of success. There are also many cases where the founders will build all the technology or design from scratch and there may not even be any cost to either hire personal or outsource.

“I’ve come a long way in the last 3 years, today I’ve single handily built the largest dating site in the world with no employees. The site generates more relationships than match.com yet only makes a tiny tiny fraction of Match.com’s 300 Million a year. So today I sit at a turning point, the site has over 1.1 billion pageviews and 45 million visitors a month”[ii] (Markus Friend, 2007)

These are the words of one (if not the) of the biggest success stories from a one-man company, PlentyOfFish.com, built by Markus Frind to be one of the 50 largest sites in North America and generate revenues of more than 5 million per year[iii].

If it is not your case that you got the tech or design skills, not to worry, there are many options out there to build your technology or design even though you understand nothing about it.

Outsourcing

A relatively common practice is to outsource your development, either in full or parts, to external development teams that will charge by the hour, pack of hours or by project. In this cases it is always best to provide the external development team with as much information as possible. If you can prepare all the use cases, thorough test cases, most aspects of the usability experience and such, you will end up saving tons of money. First, you will be saving the hours that the outsources will be charging to do the application design for you and second, you will have thought of (almost) all the possible scenarios so that there will end up being less modifications translating into a lower cost.

To spend as little as possible outsourcing, try to have the developers give you a final price for the package for the whole development. This modality has the upside that you will know how much you will be spending and there are also plenty cases where the develops will do more than asked.

Comic by www.doubtsourcing.com

If you are looking to spend next to zero cash and are willing to forego a bit of ownership, there are developers or small consultancy companies that are willing to work for equity. If you will be going down this route, make sure that they will make a darn good job and that you have all the legal paperwork in place so there aren’t any future issues, specially in the case there might be a sales exit.

Most companies outsource to developers or companies that they know and trust, which in most cases means that they are in a close proximity geographically. If you don’t live in South America, Asia or Eastern Europe, this means you will be paying more than you necessarily have to. Of course it is always recommended that you outsource to companies you trust, but this might not be the best option economically speaking, although it might be the best option value wise.

Something that you don’t often see a lot written about in new media is the strong trend by startups to outsource their developments.

“I was sitting around thinking about how this would play out. My background in school is in computer science. I wrote a scoping document to a friend, who is a developer. The friend said it would take two or three weeks to create and cost 700 bucks, so I said, ‘Let’s go for it.’”[iv] These are the words of Kevin Rose (2006) on how he first built Digg by outsourcing the job through elance.com for 10$ / hour for a grand total of $2,000. He also paid $1,200 for the domain Digg.com and $99 / hosting per month. Nowadays Digg has over 30 millions of unique users monthly and has signed an advertisement deal with Microsoft worth $100 million in revenues for three years. Although Digg ended up taking over $11 million in funding, they did receive a buyout proposal by Jason Calcanis for $5 Millions before taking any money.[v] Other sites such as Slideshare, illumobile.com have gone down a similar path.

In-House Teams

Hiring developers and building an in-house team to grow the technology and design is probably the most common route startups take, although it is not the cheapest of the options. Having an in-house team allows the startup to work at full throttle with closer communications all under one roof with all the benefits this brings, but on the other side of the spectrum your costs rise exponentially since you will need a bigger office, the payroll rises (this will be discussed in a later chapter) and other hidden costs such as office supplies and so forth.

Inshoring, Nearshoring and Offshoring

In our context, x-shoring means having contracted employees working on a full time basis but physically outside of the company headquarters (although in many cases the company’s HQ is a one man ops in his apartment). In inshoring these employees are located in the same country as the company’s HQ, nearshoring that they are located in a near country and offshoring implies that they are further away. In many cases x-shoring works wonders meanwhile keeping the costs as low as possible.

Pre-Built Scripts

If you are looking to build a site that does not have any extraordinary features, there might be a pre-built website script out there that might suit your needs, for a very low cost. There are pre-built scripts for forums, social web 2.0, search engines and so forth that with a simple download and install a bit of customization are ready to run. There are many downsides to using pre-built scripts, specially when it comes down to website performance and scalability. These scripts are in most cases pitiful when it comes down to performance, meaning that if your site grows, you will have to spend a lot of time and money either to improve the performance or rebuild the site from scratch. Now if it is the case where you need to upgrade your performance, then great news, you are having some success.

You can find success stories among all the above options, but there is no one solution fits all, it simply comes down to which way the founders are most comfortable working while keeping inside the budget.

[i] “How to bootstrap your startup”, Matt Rogers, September 2005, http://www.readwriteweb.com/archives/how_to_bootstrap_your_startup.php

[ii] “Time to sell?”, Markus Friend, August 2007, http://plentyoffish.wordpress.com/2007/08/03/time-to-sell/

[iii] “PlentyOfFish Owner Has the Perfect Bait For a Huge Success”, Lee Gomes, May 2007, http://online.wsj.com/article/SB117987775136211487.html

[iv] “Web 2.0 financial success: Easy as ‘two weeks and $700 bucks’?”, Donna Bogatin, July 2006, http://blogs.zdnet.com/micro-markets/?p=191

[v] “Report: Al Gore’s CurrentTV Offered $100 Million For Digg In 2006″, Michael Arrington, May 2008, http://www.techcrunch.com/2008/05/14/report-al-gores-currenttv-offered-100-million-for-digg-in-2006/