Great comments, Fred. I agree that there are harsh truths to capitalism.
However, I disagree that layoff + hiring freeze + cutting low ROI marketing + salary freeze is "what good experienced managers do in times like this". I think some or all of those things could be the answer, but the larger solution lies somewhere in what you said a little later: "When capital is scarce, smart people figure out how to do more with less."
But doing more with less is not the same as "stop evolving and changing". That fundemental distinction, over time, seperates the companies who become success stories from the ones labelled "also-ran".
For example, if Tumblr's two developers you mentioned were not the right people in their roles, no amount of hiring/salary freezes would cure that cancer. In fact, it would flourish, unchecked.
Layoff helps, but layoff + hiring/salary freeze can only produce results in the short-run. The wheels fall off that bus very quickly as time goes on, no matter who is on board, or what seats they fill.
fredwilson
· 1 year ago
I didn't mean to suggest that what works for that company will work for everyone. I meant to suggest that good managers don't sit on their hands. They act.
robertmerrill
· 1 year ago
Thanks for the clarifier. Great post!
Christopher Golda
· 1 year ago
I particularly enjoyed the title of Howard Lindzon's latest post: "Too small to fail"
Nowadays, as a web startup, you have to try pretty hard to not be capital efficient. We just came out of the latest YC batch with the majority of their investment still intact. With a few thousand dollars, entrepreneurs can develop and launch products with room for several small, follow-up experiments. If you're able to create real value in the first X months, capital, business model, etc will all fall into place.
Diego
· 1 year ago
Hi Fred! I heard about you last week watching the 4th episode of "Download: The true story of internet" on Discovery Channel, googled your name and found this site. I just gotta say that you have some very interesting reads here, i`ll be following your posts.
On the subject, i couldn't agree more with you. I`ve been running web sites for almost 10 years here in Brazil (i`m 25 now), and since it`s not as easy to get capital here as it is in the U.S., i had to deal with efficiency all this time. In 2004, i started with one single partner a fotolog service called flogao (flogao.com.br). We spent like $1000 on the first three months to keep it running, and became profitable on the 4th month (combining adsense and payd subscriptions as revenue sources). In 2 years, the site grew to a peek of 20 million unique users (monthly) and we still were 2 guys running the service. Needless to say, by that time, despite of all difficults of doing bussiness here (high taxes, inadequate infra-structure, etc) we were making the site very profitable, since our expenses were basicly with hosting services (from US providers). Beeing a two-guys team we surely had to work very hard, but i still had time to go to college and go out to have some fun on weekends. I believe is this model for start-ups. You won`t become the next google with a small team, but you still can run sucessfull and popular web services/apps with one or two mates.
By the way, i`m looking forward to start something new next january. This time i`ll actualy have money to invest (we sold flogao in 2007 to an half american half brazilian start-up funded by dfj), but i`m going to stick all the way with the 2-person-team and seek-for-early-profit goal.
CoryS
· 1 year ago
Poverty breeds creativity (a 23 year old New Yorker taught me that right out of college). I've become a believer that modest starvation forges better R&D and marketing initiatives, even during the go-go times.
During tough times, larger companies like Amazon and Google also start to look at capital and retool the things that they use as "low ROMI" projects as well. I'll be curious to see how Amazon's Web Services and Goog's AppEngine get tweaked for some form of for-fee service over time. Still freemium, just on a shorter leash.
I'm curious on how you feel about the revenue side since ad spend will go down in the next couple years in a couple ways. First is obviously on monthly cash burn, but the second is the implied value of a consumer ad supported business model that relies in some way on CPM or CPC metrics to create a valuation.
zackmansfield
· 1 year ago
Interesting commentary in today's WSJ which basically says the govm't needs to follow your advice and practice it's own capital efficiency.
That was actually a disappointing read -- I agree with your interpretation of the article, but I'm not sure the author really laser-beamed in on it. He was talking about all these institutions that were "too big to fail" were simply "too big." Then he tossed off HUD as a prime example of whale flesh.
If the US government were serious about helping our country, they would focus on cutting costs within their own shop. They should come up with a plan to lower headcount. Hey, I'll vote for a reduced military if it is matched by a smaller domestic footprint. Saying "it ain't going to happen" doesn't cut it. If our financing costs on $9T in outstanding federal debt start to go up, we'll need to make the tough choices.
andyswan
· 1 year ago
Excellent post. There will also be a lot of opportunity for capitalist vultures. Precisely because of these "capital efficiency" initiatives of other startups, there will be some really really good deals on human capital in the next 6-12 months.
Keep your eyes open for orphaned talent.
John Caddell
· 1 year ago
One thing that has changed in the VC world, by my reckoning, has been the role of VCs in marketing their portfolio companies to the wider world. VCs have always introduced companies, encouraged alliances, and so forth, but it's new to me that VCs actively promote their companies publicly.
For example, you regularly discuss your portfolio companies in your blog and use their services in visible ways (e.g., your Tumblog). It's fascinating, it must work to some degree, and "it don't cost much."
regards, John
Ted Murphy
· 1 year ago
I think its a very healthy thing. Its making the other elements that a VC can offer -- connections, exposure, etc -- even more important to the startup.
Chris Dodge
· 1 year ago
Great post, as usual.
I can't help but view everything as an opportunity here. To throw in a metaphor here, it's may be viewed like a forest fire. The landscape is mostly cleared, the ashes leaving fertile ground and ample light for small seedlings to grow into the next forest.
Besides getting back to capital efficiency, what will be the next set of major innovations after Web 2.0's contributions of Social Media/Networking, mainstream adoption of Online Video (which was around but not popularized in 99/00 as well)?
My bets: use of technologies to enhance transparency, continuing replacement of low-value-adding gatekeepers with automated systems (think re: Real Estate agents in Web 2.0). I think financal markets are highly opaque with poor information flow (one party using information to gain advantage). Are they ripe for innovate in the next time around? Fred, with your investments in Covestor, I assume you may feel the same. Could something like Kiva (perhaps without the social goals) work on a larger scale?
However, I'm not sure I agree with your assessment of cloud computing as an antidote for these issues. As a Developer/Technologist, I wouldn't want my application stack based on a proprietary framework that could only be run on a single company's hosting structure (i.e. Google AppEngine).I am more interested in Amazon's offering which can support standard LAMP, and soon .NET, stacks.
Interesting times indeed.
Andy Freeman
· 1 year ago
> As a Developer/Technologist, I wouldn't want my application stack based on a proprietary framework that could only be run on a single company's hosting structure (i.e. Google AppEngine).
There's already a django port of the GAE environment. It isn't quite to the point that you can run the same exact code or automatically transform your GAE code to run on django, but it's getting closer. In other words, GAE apps aren't tied to google.
No, the django version doesn't use BigTable as its store, but the code works the same and it can run on any service that hosts django (including AWS). And, as soon as someone clones BigTable (GFS has already been cloned), even that difference will disappear.
fredwilson
· 1 year ago
Andy not to beat the drum too much, but check out 10gen and let me know what you think. There's a link in the post
Chris you are right about AppEngine. That's why we funded 10gen which is a completely open source cloud computing platform. Check it out and let me know what you think.
RacerRick
· 1 year ago
Why has it taken this long to embrace small?
Jason Fried has been beating the "small" drum for years.
infoarbitrage
· 1 year ago
Fred, terrific insights. Much of what you are saying is currently driving my investment thesis. Lightweight. Scalable. Leverages open source and the cloud. And, in my case, involves an ROI-based sell. Thanks for writing this. Well-articulated.
fredwilson
· 1 year ago
I'd love to understand better how you do enterprise sales capital efficiently. That's the piece we haven't figured out.
infoarbitrage
· 1 year ago
i guess i think of it two different ways: using a small, targeted force of sales engineers who crack a single enterprise vertical in a siloed organization (e.g., equity research at a wall street firm), and use that win to leverage the sale into other verticals at the same firm (e.g., private wealth management, investment banking, etc.). this provides maximum leverage by spending lots of time on the initial win, and that win then makes the subsequent wins much easier. The second way is to work with channel sales partners, where you use really good documentation, materials and training to get a channel partner to help you scale without adding lots of heads (e.g, IBM WebSphere working with a mobile data collection company, where the mobile company doesn't need lets of people to service IBM). These were my thoughts.
fredwilson
· 1 year ago
That's right, but I have found you have to get some direct sales momentum before you can get channel sales. And direct sales momentum takes time and salespeople are expensive. I've always thought one super great sales guy (maybe a founder) and a bunch of young hungry right out of college kids who the top guy trains and manages might be a good model. I've seen that work once.
infoarbitrage
· 1 year ago
Totally agree about the direct sales momentum. This is generally garnered by the Founder/CEO and perhaps the Co-Founder. Once they crack a few key accounts, they can train a few super bright, consultative sales types to push the ball forward. If the accounts selected are rich, multi-seat accounts with lots of expansion possibilities, such a small team can make a lot of hay in a very short period. After these successes and learning how to sell the channel can be engaged.
caddidy
· 1 year ago
sorry guy, but i go with ron's analysis. sounds like yours is more wishful thinking than a sober reflection of where we are - and, unfortunately, where we are heading.
btw, you incorrectly used "it's" in your post. should be "its"
:)
fredwilson
· 1 year ago
Thanks for the correction. I fixed it
Sam
· 1 year ago
Interesting post although I'm continually disappointed that a recession is what it takes to talk about curbing low ROI capital expenditures. During the tech boom of the late 90's, companies spent like drunken sailors. It took the "nuclear winter" to encourage fiscal discipline, and in the process we learned to conduct business more efficiently.
I'm curious though... Why do facility expenses get ignored when times get tough? I see layoffs, salary freezes, reduced marketing budgets, but nothing about the rent. It's a huge check that gets written every month, yet it's dismissed as "Not feasible" when it's time to tighten the belt.
fredwilson
· 1 year ago
Rent should be on the table, but many companies have locked into long term leases that they can't just leave
scottelkin
· 1 year ago
"could computing" = "cloud computing".
then delete this comment...it sucks to just point out errors on an otherwise good post :)
fredwilson
· 1 year ago
I fixed it but I don't want to delete comments. Thank your for your catch
vruz
· 1 year ago
where you said "Open source software makes it less cheaper and easier to build an app."
you probably meant "less costly", right ?
fredwilson
· 1 year ago
Ugh, that was one badly written post
Mrinal
· 1 year ago
Having my student visa to come to the US rejected (95), then finally making it here in 99 for B-School with SGI experience and graduating in 01 to be "CEO, Vocationally Challenged, Inc." during the dot-com bust days for almost 3 years, I strongly believe that crisis or challenges, imho, is absolutely the best opportunities - competition withers away, it becomes less noisy and its a chance to stop being a commodity through creativity. Its definitely the time for the hungrier and to thrive for some!
michels24
· 1 year ago
Hey, no mention of Yahoo! BOSS in the list of platforms/services that dramatically drive down operating expenses. Open access to the entire Yahoo! Search index for web search, news, image and spelling correction is pretty dam cool.
this is an important evolution and will become an important marking point in history for radical enterprise innovation (esp business model innovation).
such dramatic reduction in cost structures (partnering, outsourcing, new suppliers) is going to mean a tidal wave of experimentation of business models in all kinds of flavors - most of them coming from college kids bedrooms!
Murat Aktihanoglu
· 1 year ago
I agree, the question now is if innovation will be 'the' competitive advantage. Yes, starting a tech company used to be hard. You needed lots of developers, lots of resources, lots of money and more money. Then web APIs made it easier to start companies. ProgrammableWeb has at last count 861 APIs available for use, and 3257 mashups created using these. Now instead of creating your own map application for your rock concert website, you can use one of 88 mapping APIs available and slap your concert listings on top of that.
In the meantime, there was still one big hurdle for startups: deploying and maintaining a backend that could scale if the startup actually indeed succeeded. Not all startups hit millions of users but still, every startup had to be ready for the onslaught or they could kiss their exits goodbye. This required buying/leasing servers, architecting, rearchitecting and then maintaining clusters of servers, replacing burnt hard drives, backing up, adding more hardware as more customers showed up and keeping an army of sysadmins fed and appropriately caffeinated during the process.
Google and Amazon’s big advantage was their infrastructure. Especially Google’s big competitive advantage was their MapReduce/BigTable-based seemingly-infinitely-scalable infrastructure that could support huge amounts of traffic and data, running on low-cost hardware.
Amazon opened the flood gates to offering this big competitive advantage to any company in the world by becoming the book store that sold cocaine out the back door. As Larry Dignan said “Books will be just a front to sell storage and cloud computing”.
Not a day goes by now without an announcement from another industry giant (Intel, HP, Yahoo, IBM, Verizon, AT&T) offering scalable compute clouds. Dell even tried to trademark the term ‘cloud computing’.
Now that cloud computing is going through what web APIs has gone through and capital efficiency is peaking, it will be interesting to see if the competitive advantage for startups will be purely innovation.
fredwilson
· 1 year ago
I think so
rah33ls
· 1 year ago
a nice read. thank you.
Ben
· 1 year ago
it's "Salary Efficiency Finds Its Moment". Meaning, VCs will invest in founders taking home less than $100K post A round. All those CEOs who are in the +$250K mark don't seem like a good idea these days. Hence, the type of businesses one will invest in are very low in terms of business development intensiveness, and are not aimed at IPO whatsoever. There are many deals like that, yet I believe that at least one of your portfolio companies (in the financial services space) can't survive without serious management , i.e. the +$250K guys. Hence, you either kill those companies, or make very big bets.
fredwilson
· 1 year ago
Not sure which company you are referring to
But each company is unique and has its own set of issues
No two companies are exactly alike or face the same set of issues
SophisticatedD
· 1 year ago
Hmm. I am a developer for a recently funded (01/08, by a well known group) SaaS company. Our revenue depends on our customers making money by investments. 6 months ago we were a company of 17, we now are a company of 27, with two more hires hopefully coming soon. Company meeting today and CEO says nothings changed, and in fact were told by the vc's not to worry, there is plenty more cash.
fredwilson
· 1 year ago
³nothing's changed² is just not right
The VCs will probably be supportive
But that doesn't mean ³nothing's changed²
John Pollock
· 1 year ago
I went to school in the town where E.F. Schumacher lived and we'd occasionally see him wondering around, a seemingly serene old man. Having more interesting things to do, I only registered the title of his masterwork, "Small Is Beautiful" (something self-evident when you're young, small yourself, and closer to the small whether it's the grass, something under the microscope or the way someone knotted his tie). The subtitle - Economics As If People Mattered seems deeply pertinent at the moment.
As ever, a fine blog entry Mr Wilson: but I've taken as much pleasure from your tweets about showing your kids where you went to school and so on (though some of the American sports stuff passes me by!) as your thoughtful economic insights - obiter dicta, perhaps, but a reminder of what really matters...
I seems to me that 'Capital Efficiency' needs more off setting, goal setting...some kind of expresion of output for capital input to really be an effective phrase. For example, Tublr has a lot of visitors for expense, and I wouldn't be surprised if Twitter was in the same ratio, so if users is the key metric then they are effecient. Why not look at Craig's List, PlentyofFish and HotorNot though as companies that have a lot of profit for the expense?
furniture stores
· 2 months ago
With very little money these days entrepreneurs can develop and launch products with room for several small, follow-up experiments.
All Comments
However, I disagree that layoff + hiring freeze + cutting low ROI marketing + salary freeze is "what good experienced managers do in times like this". I think some or all of those things could be the answer, but the larger solution lies somewhere in what you said a little later: "When capital is scarce, smart people figure out how to do more with less."
But doing more with less is not the same as "stop evolving and changing". That fundemental distinction, over time, seperates the companies who become success stories from the ones labelled "also-ran".
For example, if Tumblr's two developers you mentioned were not the right people in their roles, no amount of hiring/salary freezes would cure that cancer. In fact, it would flourish, unchecked.
Layoff helps, but layoff + hiring/salary freeze can only produce results in the short-run. The wheels fall off that bus very quickly as time goes on, no matter who is on board, or what seats they fill.
everyone. I meant to suggest that good managers don't sit on their hands.
They act.
Nowadays, as a web startup, you have to try pretty hard to not be capital efficient. We just came out of the latest YC batch with the majority of their investment still intact. With a few thousand dollars, entrepreneurs can develop and launch products with room for several small, follow-up experiments. If you're able to create real value in the first X months, capital, business model, etc will all fall into place.
On the subject, i couldn't agree more with you. I`ve been running web sites for almost 10 years here in Brazil (i`m 25 now), and since it`s not as easy to get capital here as it is in the U.S., i had to deal with efficiency all this time. In 2004, i started with one single partner a fotolog service called flogao (flogao.com.br). We spent like $1000 on the first three months to keep it running, and became profitable on the 4th month (combining adsense and payd subscriptions as revenue sources). In 2 years, the site grew to a peek of 20 million unique users (monthly) and we still were 2 guys running the service. Needless to say, by that time, despite of all difficults of doing bussiness here (high taxes, inadequate infra-structure, etc) we were making the site very profitable, since our expenses were basicly with hosting services (from US providers). Beeing a two-guys team we surely had to work very hard, but i still had time to go to college and go out to have some fun on weekends. I believe is this model for start-ups. You won`t become the next google with a small team, but you still can run sucessfull and popular web services/apps with one or two mates.
By the way, i`m looking forward to start something new next january. This time i`ll actualy have money to invest (we sold flogao in 2007 to an half american half brazilian start-up funded by dfj), but i`m going to stick all the way with the 2-person-team and seek-for-early-profit goal.
During tough times, larger companies like Amazon and Google also start to look at capital and retool the things that they use as "low ROMI" projects as well. I'll be curious to see how Amazon's Web Services and Goog's AppEngine get tweaked for some form of for-fee service over time. Still freemium, just on a shorter leash.
I'm curious on how you feel about the revenue side since ad spend will go down in the next couple years in a couple ways. First is obviously on monthly cash burn, but the second is the implied value of a consumer ad supported business model that relies in some way on CPM or CPC metrics to create a valuation.
http://online.wsj.com/article/SB122351041598817...
If the US government were serious about helping our country, they would focus on cutting costs within their own shop. They should come up with a plan to lower headcount. Hey, I'll vote for a reduced military if it is matched by a smaller domestic footprint. Saying "it ain't going to happen" doesn't cut it. If our financing costs on $9T in outstanding federal debt start to go up, we'll need to make the tough choices.
Keep your eyes open for orphaned talent.
For example, you regularly discuss your portfolio companies in your blog and use their services in visible ways (e.g., your Tumblog). It's fascinating, it must work to some degree, and "it don't cost much."
regards, John
I can't help but view everything as an opportunity here. To throw in a metaphor here, it's may be viewed like a forest fire. The landscape is mostly cleared, the ashes leaving fertile ground and ample light for small seedlings to grow into the next forest.
Besides getting back to capital efficiency, what will be the next set of major innovations after Web 2.0's contributions of Social Media/Networking, mainstream adoption of Online Video (which was around but not popularized in 99/00 as well)?
My bets: use of technologies to enhance transparency, continuing replacement of low-value-adding gatekeepers with automated systems (think re: Real Estate agents in Web 2.0). I think financal markets are highly opaque with poor information flow (one party using information to gain advantage). Are they ripe for innovate in the next time around? Fred, with your investments in Covestor, I assume you may feel the same. Could something like Kiva (perhaps without the social goals) work on a larger scale?
However, I'm not sure I agree with your assessment of cloud computing as an antidote for these issues. As a Developer/Technologist, I wouldn't want my application stack based on a proprietary framework that could only be run on a single company's hosting structure (i.e. Google AppEngine).I am more interested in Amazon's offering which can support standard LAMP, and soon .NET, stacks.
Interesting times indeed.
There's already a django port of the GAE environment. It isn't quite to the point that you can run the same exact code or automatically transform your GAE code to run on django, but it's getting closer. In other words, GAE apps aren't tied to google.
No, the django version doesn't use BigTable as its store, but the code works the same and it can run on any service that hosts django (including AWS). And, as soon as someone clones BigTable (GFS has already been cloned), even that difference will disappear.
what you think. There's a link in the post
completely open source cloud computing platform. Check it out and let me
know what you think.
Jason Fried has been beating the "small" drum for years.
efficiently. That's the piece we haven't figured out.
before you can get channel sales. And direct sales momentum takes time and
salespeople are expensive. I've always thought one super great sales guy
(maybe a founder) and a bunch of young hungry right out of college kids who
the top guy trains and manages might be a good model. I've seen that work
once.
btw, you incorrectly used "it's" in your post. should be "its"
:)
I'm curious though... Why do facility expenses get ignored when times get tough? I see layoffs, salary freezes, reduced marketing budgets, but nothing about the rent. It's a huge check that gets written every month, yet it's dismissed as "Not feasible" when it's time to tighten the belt.
leases that they can't just leave
then delete this comment...it sucks to just point out errors on an otherwise good post :)
"Open source software makes it less cheaper and easier to build an app."
you probably meant "less costly", right ?
http://zooie.wordpress.com/2008/07/10/yahoo-bos...
such dramatic reduction in cost structures (partnering, outsourcing, new suppliers) is going to mean a tidal wave of experimentation of business models in all kinds of flavors - most of them coming from college kids bedrooms!
In the meantime, there was still one big hurdle for startups: deploying and maintaining a backend that could scale if the startup actually indeed succeeded. Not all startups hit millions of users but still, every startup had to be ready for the onslaught or they could kiss their exits goodbye. This required buying/leasing servers, architecting, rearchitecting and then maintaining clusters of servers, replacing burnt hard drives, backing up, adding more hardware as more customers showed up and keeping an army of sysadmins fed and appropriately caffeinated during the process.
Google and Amazon’s big advantage was their infrastructure. Especially Google’s big competitive advantage was their MapReduce/BigTable-based seemingly-infinitely-scalable infrastructure that could support huge amounts of traffic and data, running on low-cost hardware.
Amazon opened the flood gates to offering this big competitive advantage to any company in the world by becoming the book store that sold cocaine out the back door. As Larry Dignan said “Books will be just a front to sell storage and cloud computing”.
Not a day goes by now without an announcement from another industry giant (Intel, HP, Yahoo, IBM, Verizon, AT&T) offering scalable compute clouds. Dell even tried to trademark the term ‘cloud computing’.
Now that cloud computing is going through what web APIs has gone through and capital efficiency is peaking, it will be interesting to see if the competitive advantage for startups will be purely innovation.
There are many deals like that, yet I believe that at least one of your portfolio companies (in the financial services space) can't survive without serious management , i.e. the +$250K guys. Hence, you either kill those companies, or make very big bets.
But each company is unique and has its own set of issues
No two companies are exactly alike or face the same set of issues
The VCs will probably be supportive
But that doesn't mean ³nothing's changed²
As ever, a fine blog entry Mr Wilson: but I've taken as much pleasure from your tweets about showing your kids where you went to school and so on (though some of the American sports stuff passes me by!) as your thoughtful economic insights - obiter dicta, perhaps, but a reminder of what really matters...
http://en.wikipedia.org/wiki/Small_is_Beautiful