Paul Graham of Y-Combinator on how the entire environment for doing start-ups has changed. I don’t need to elaborate- just read the post. Brilliant and incredibly important for any entrepreneur.
If anything validates our virtual business model this is it.
The current situation with domains as a business model has led to comparisons with real estate, the Western land rush in the 1860s, the gold rush and other opportunities. Lately, as our focus has increasingly been on our domain portfolio, I’ve been trying build a comparison model between a classic investment portfolio and a domain portfolio. There are similarities:
And there are significant differences:
I’m pondering this because I’m interested in raising money to expand our portfolios. This is a very different value proposition than raising venture money in exchange for stock. An investor might invest in a specific domain or family of domains and that investment would be used to grow that portfolio’s traffic and revenue (which might be distributed as a kind of dividend or reinvested). At some point the portfolio is sold and proceeds distributed to the owners. We might keep a management fee in addition to our own ownership portion.
I don’t know the legal implications of this kind of offer- these are not securities. When you think about it, we’re in wholly new territory here.
“The other good thing about the tech sector is that it is mostly debt-free. If anything, tech firms are over-capitalized, which is why they’ve been using their huge cash piles to buy back stock during the last few years.
Tech firms don’t have to borrow to fund their growth, which means they aren’t likely to get hurt if corporate credit standards tighten.”
That’s John Shinal from Marketwatch. His point is that in a market meltdown like the one we’re currently experiencing, tech stocks are a refuge because they don’t depend on debt to run their businesses. Why am I writing about this? Because the companies we’re building, and I speak collectively for any Internet-enabled start-up, are fundamentally different than businesses whose ability to function is largely based on their ability to borrow. We don’t make things, nor do we use debt to leverage investments. And neither does Apple, Google, Cisco, etc. They make things but they don’t really. Wha…?
They design and market things. Their computers, iPods, switches and server farms are not made by them, they’re made by contract fabrication companies in Asia. What they make is intellectual property. The interesting thing about IP is it is not capital-intensive, it is brain power-intensive and environment-intensive. By environment-intensive I mean that these companies have created a business environment that nourishes focused creativity, creativity that has a basis in market reality.
The businesses going down this week are banks, mortgage lenders, M&A companies, hedge funds, etc. These businesses are little more than gambling operations. They borrow (or convince investors) and gamble that the can resell the money at an incrementally higher rate. The past few weeks the house has called their bets and the markets have swooned. In the meantime, the tech companies have accumulated piles of cash from selling superior technology and automated digital services and are relatively separate from the fluctuations in capital markets.
Our business model is the same thing, albeit on a microscopic scale in comparison. We provide services that don’t require a lot of bodies and hardware to scale. We don’t need a line of credit, in fact we probably don’t need a real venture round (I may regret committing that to print- wait, there’s always Delete!). We really don’t need anything except time, energy and imagination (and a broadband connection).
So, the next step in the seed capital exercise is something called ‘Use of Funds’, i.e. what are you planning on spending our money on? It’s a fair question and one we’ve thought about. We don’t need a lot of equipment and we are not building a data center so we are not hardware intensive. We have programing needs but the app is not rocket science- it does have to scale so we will need a good DB programmer and we should build in the ability to gather as much data as possible for future uses. So developer skills are an important expense but not a huge one. Let’s do a quick breakdown of where we might spend capital (assume one year of spending- goal is revenue positive in six months):
Founder’s salaries $140k
Developer Contract $50k
Editor/shopper contracts, 9 months $18k
Rent $6k (it’s cheap here and we have a friend who offered us a deal)
Office Supplies $.5k
ISP $.6k
Hosting $3k
PR (6 months) $18k
Insurance $1.2k
Professional Fees $6k
PPC (assumes all revenues first six months are recycled into PPC) $12k
Travel $5K
Total: $242,300., leaving us about 8k for unexpected stuff (like hosting spikes, a good thing) or more PPC.
I did not try to make these numbers fit the budget- I simply picked numbers that seem reasonable. We’ve already spent some money of our own and brought some assets to the table, principally domains and experience (and computers, software, furniture, etc.).
What the $250k gets us:
Freedom to pursue this 24/7 without having to do other stuff to pay the bills.
Much faster ramp to revenue
PR campaign at least up to pro standards (we will be going after consumer media so we need help)
Scalability
Strong business model for expansion