There’s a LOT of talk these days about how cheap it is to build a product, specifically a software product. So yes over the past 5 years managed hosting has driven down server costs and the need to hire a DBA. Ruby on Rails has made prototyping quick and easy for the masses, and it doesn’t cost that much test out your product idea using a marketing channel like Google.
But for some reason people have completely discounted the other side of running a business… marketing, cost of customer acquisition, and that elusive word monetization.
Competition is Heating Up
Literally everyone and their mom (including my own) is working a startup. People are building iPhone apps, mesh businesses, and e-commerce sites. Needless to say there’s a lot of disruption going on today. However, the increased interest in high tech is causing the market to be flooded with products. The result is that it costs more to market your product. People are discovering SEO + SEM, Content Marketing, Social Media, and buzz wordy online channels that are out there. So while it might be cheap to build out a prototype, it’s definitely more expensive to sell the product because of all the channels and making sure your product’s message can sift through the noise.
The corollary to the competition heating up is trying to get at meaningful demographic data. Life used to be simple. Market to people based on gender. Then market based on gender + age maybe income + race. Now its more nuanced gender + age + race + income level + geography even sexual orientation. Where does one go to find these people? Facebook alone is not enough. There’s behavioral analysis that needs to take place to determine if people are at the point they can make a decision i.e. ready to buy. So then you have to track them… AdWords, re-targeting, email campaigns… now you see the costs are adding up!
If your message isn’t clear and you haven’t discovered your distribution channels yet, which most early stage startups haven’t, there will be costs incurred to run these experiments.
Even if you do find a channel its very likely that there will be copycat looming in the midst. Keep in mind that as technology makes things go faster, it also means competition has faster access to your marketing campaigns as well.
Even if you’re able to outdo your competition by building a better mousetrap there will be those customers who want something for free.
Cost of Human Capital
Any Jane or John Doe coming out of a decent college is getting offered a six-figure salary to write code! And then of course there is the cost of a designer. Not to mention that technical jobs are getting more specialized. You cannot expect a developer to do both front-end and back-end work, or an interaction designer to create some landing pages.
Yes you could offshore your initial prototype, and make the landing pages yourself. But at some point the product needs to be maintained so you’ll need to hire at leave one developer and possibly a designer. If you’re smart you’ll know where to look, and how to pitch your company to a potential recruit. And if you’re successful at building you’re startup, you’ll need to scale hiring, and at this point the best way to do that is by looking for a recruiter. What’s 20% of a six-figure salary?! Ouch.
Finally, even if you do decide to offer that developer or designer a six-figure salary, don’t expect them to stick around for long. While you can protect yourself from competitors with a non-compete clause, the person most likely to poach your prized recruit is themselves. People will get itchy to start their own startup.
But maybe you can dissuade them by having them read this post
OK I realize I’ve been a little negative in this post, which I didn’t really intend to be. I just wanted to shed some light for those who are considering a startup. My parting words: stay scrappy, stay happy