No tech bubble this time? Arrington’s thoughts on 2011 versus 2010 in Silicon Valley. Then a few comments of my own after the jump.
From techcrunch blubble:
A perfectly reasonable 2000 tech startup business decision ““ spend $10 million on a massive advertising campaign that may bring in $500k in revenue. The “branding“ value makes up the difference, and those few new customers will continue to spend money and tell their friends! Grab territory while it’s there to be grabbed, the thinking went. We’ll figure out the business later. Money was so easy to come by, it made sense to some.
In the most innocent cases Company A would buy a bunch of ads or whatever from Company B. Maybe a $5 million deal over 24 months. Company B would then buy a bunch of stuff from Company A. Say $4 million over 18 months. As long as the deals weren’t mirrors and they were separate and binding contracts the accountants were high fiving everyone.
versus the 2011 Blubble:
2011 Blubble: Drag blubbering angel investors into Series A rounds valuing your company at $6 million instead of $4 million. Hire engineers, lots of them, as many as you can. Don’t hire non-engineers or other overhead people unless you absolutely have to (thus the dearth of VP Biz Devs around). Your APIs are your sales team!
I’m not in Silicon Valley today, although we have an office there, I am not the one in the coffee shops on a daily basis and I don’t understand “the game.” I do think the author makes a good point about 2011 not being the same type of tech bubble as 2010. The investors have matured to the point that triangular deals aren’t a source of revenue and people actually care about revenue. As a small business I care much more about profit than revenue. Profit is your future cash which controls your growth. If you aren’t profitable you die in short order. Thus we grew 12% last year profitably. Not an easy task in this economy.
The post also highlights one of the biggest challenges with tech companies. Salaries will KILL YOU. It’s not the rent. It’s not the insurance, although health insurance is approaching the deathly-expensive-zone. It is salaries. You can’t cut billable employees as they generate profit. Programmers build your product. Sales hunts and drives profit. The one thing you generally don’t want to be is admin as that is the first thing that gets cut. But if you can automate any of it, you are better off.
Two common methods of automating and outsourcing something that historically has been done in house.
- APIs. As Arrington says, if other companies program to your API you don’t need sales. But you need to convince those developers to spend their valuable time working with your API and that isn’t easy.
- Open Source. If programmers on the Internet extend your product to meet the needs of more customers then you are more likely to sell more. But you need to convince those developers to spend their valuable time adding new modules to your products.
Think about that. If you are going to automate to increase profits you have to change your business model to include remote developers as a primary audience. Or at least one strong constituency that your messaging goes to. Maybe all of those events we have sponsored in the past will pay off as I have thought of them mostly as “supporting the community” rather than seeking an ROI from a sponsorship. Hmmm.
Hopefully we can explore that more at SchipulCon with a few leaders in the open source community. More on that as it approaches.