The VC-free startup

The big-bet model works on occasion in Silicon Valley, but it seldom works elsewhere.

A couple of items caught my eye in the notes from Paul Graham’s Y-Combinator talk on trends for the future (circa 2009):

  • There should be an O’Reilly book for business. It would be really short. “Make something people want, charge them money for it. Advanced: charge more money.”
  • B-school is West Point for industrial capitalism. It trains generals, not foot soldiers. Market now rewards people who can do stuff.

Much of the discussion about tech entrepreneurship focuses on the courting rituals of venture capital — effectively pitching VCs for funding. The Silicon Valley startup model depends on VC money, and one might argue that entrepreneurs are judged more by their ability to raise money than to succeed in the business the money was raised for. I wonder if the Silicon Valley startup fits a narrow set of Facebook-sized opportunities — high-growth businesses that demand a lot of capital in a short period of time. The big-bet model seems to work on occasion in Silicon Valley but it seldom works elsewhere. Yet a lot of energy goes into trying to figure out how to get the right conditions for a Silicon Valley model to emerge outside of Silicon Valley. Startups outside Silicon Valley wonder if there’s any way for them to succeed. So I got to wondering about opportunities for VC-free startups.

How can you start a business that a) has low capital requirements; b) begins producing revenue quickly and c) becomes self-sustaining? Such businesses won’t necessarily grow into great big, scalable businesses. However, they could provide the opportunity for small teams to work independently and for the founders to do something they care about. Such startups would be mission-driven, organizing around a core set of values. They don’t need an exit strategy because the goal is to keep doing the work you want to do.

One idea is that these businesses should try to fit into an existing ecosystem; they don’t have to create the ecosystem. If you develop an app for Facebook, Android, or iPhone, you can take advantage of an existing ecosystem for marketing and distribution. That ecosystem allows you to get pretty good feedback quickly on whether enough people like what you’ve made. You shouldn’t require more than a small team of people to develop a product for these platforms. Mitch Waite’s iBird app for the iPhone is an example.

The hype around Silicon Valley may distract us from the basic business idea that Graham emphasizes: make something other people wish they had. If you can do that and you can reach people who will buy, then you can have a successful business. I’m seeing makers who are creating products for other makers to buy. Limor Fried’s Adafruit Industries is one example and so is Nathan Seidle’s SparkFun Electronics, both businesses that were started without venture capital. Makers of physical goods have some advantage in that people seem to understand paying for them. Makers may also find good opportunities making things that businesses need rather than selling direct to consumers.

Paul Graham writes about the organic startup in much the same way I think of makers getting into business unexpectedly. He uses the example of Apple where Wozniak built a computer for himself, only to find out that there was a market for building computers for other people as well. He had intrinsic motivation to make something; he wasn’t motivated by extrinsic goals such as money or status. Graham says that “organic startup ideas usually don’t seem like startup ideas at first.” It’s because a lot of ideas seem like hacks, a quick and dirty solution to a problem. He also recommends that startups should focus mostly on developing the idea and worry less about being a startup.

O’Reilly has been an organically grown private company, starting as a technical writing company that morphed into a publishing company. Tim and I wrote our first book, “Unix Text Processing,” because it grew out of our experience of using these tools for writing computer manuals. In many cases, we tried to write the book we wish we had when we were learning a new technology. What made me want to work with Tim over 25 years ago was that he wanted to create a new business, not just be a business. Over time, we succeeded not just by building products but by developing a network of customers who are our colleagues. It’s amazing that we’ve been able to be self-sustaining and use the business as a platform to keep doing what we love doing. The business connects us to a lot of really interesting people — inside and outside the company.

Today, there’s a good degree of disillusionment with VC models and even more so with Wall Street’s brand of few-take-all capitalism. I find there is a lot of interest in creating a business that looks more like O’Reilly than the Silicon Valley startup: building a business as a foundation for creating value and meaning. How can people pursue their own ideas and interests while developing a product or service for real customers? How can they maximize the value of their work and gain more control of their future? Perhaps the answer is to think small, as in small business. I’m reminded of the wonderful title of E.F. Schumacher’s book: “Small is Beautiful: Economics as if People Mattered.”

According to SCORE stats, there are almost 29 million small businesses in America. These small businesses “hire 40 percent of high tech workers, such as scientists, engineers and computer workers.” A lot of consulting businesses fit this profile as well. Do something you’re good at, provide a useful service to people you know and get them to pay for it. Programmers, sysadmins, graphic designers and others run their own firms, providing services to existing companies. Think of how web development and design firms flourished in all kinds of markets. Today, it’s social media marketing and SEO firms.

Web-based business services can make running a small business easier, lowering administrative overhead and increasing collaboration. There are tools for project management, customer relationship management, billing, shipping, and more. Many of these lightweight services are much better than their enterprise equivalents. Being smart about social media allows you to develop and maintain your own network of potential customers, partners and clients. But none of this matters unless you have a good idea and you set out to do something about it.

If O’Reilly were to develop a business book, I’d like to see us explore new alternatives to creating and managing businesses, looking beyond business as usual.


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