2008 / December 20/ Give me large sums of money

It seems the standard of practice around the States lately is to ignore all basic business principles (read: make more money than you spend) and just demand people give you large sums of money. It’s like we learned all the wrong lessons from the first web bubble. Instead of building businesses based on making money, we’re just building businesses for the sake of having a business.

This all came about as I was reading that it costs digg roughly $13-15 million a year to run their business. This is an absurd number, you should take a good note of this. The majority of their costs have to stem from staff — all 80 of them. That’s right, 80 people.

I just have a really hard time coming to terms that a pre-profit company is hiring 80 people for maintenance on a completed product.

The old model

It used to be, back in the olden days that companies followed a simple formula for growth:

1. Acquire some capital for startup costs.
2. Make a product/service.
3. Grow or evolve this service until it becomes profitable.
4. Continue to grow the business, making more money along the way.

This model is absolutely brilliant — you borrow some money to get started, and then you start making money. Once you’re making money, you can keep paying your employees, your suppliers and build more and more products/services.

The new model

But it seems we’ve devolved into quite a different model now. I just don’t understand it.

1. Acquire huge sums of capital.
2. Make a product/service (optional step).
3. Hire staff based on cash on hand, not need. Buy crazy offices. Purchase yachts for signing bonuses. Throw ridiculous parties. Go on lavish executive getaways.
4. Hire more staff. Claim your product/service is revolutionary/necessary.
5. COMPLETELY FREAK OUT when you somehow run out of money.

There is no growth towards profitability today. Not in Web 2.0. Not in industry. Not in anything. It seems businessmen are more content demanding large sums of money “or else.” That or else might be laying off hundreds of thousands of people, or it might be taking down a website that’s become an icon of Web 2.0.

Bullshit, focus on stuff that matters

The truth is building websites is pretty damn cheap. There’s no warehouses to build. No fiber cables to run. No parts to manufacture. No minerals to mine. No pipelines to build. No rockets to launch. No space exploration required.

There’s no reason that companies like digg need to be sinking $15M a year, when companies like GitHub seem to be doing just fine and making money (gasp) without any outside investment.

Focus on the stuff that matters. The stuff that makes you money. The stuff that is financially viable. Take risks, but for god’s sake: open your eyes before jumping and make sure there might be some earth you can land on.

1. 

   Pablo Impallari

   December 20 | #

   Well… The old model have no fun.
   Instead just look at Point 3 of the new model. Parties, Yachts.. come on.. its really cool :)
   Point 5 its really the problem here… all you have to do is ignoring point 5 and all will be alright :)
   Life is short !!!!

2. 

   Chris Tingom

   December 20 | #

   Great post. I don’t get it either. What’s so difficult about making a product that even has a chance of earning money? With so many of these sites they totally fail on the revenue model. Or think it’s wise to build a base of users and then 2-3 years later introduce the revenue part. Crazy.

3. 

   Bilal

   December 20 | #

   I just don’t believe in “credit” .. I can’t grasp the thought of spending money I don’t have! .. it just doesn’t make sense to me! ..

4. 

   Geof Harries

   December 21^st | #

   It’s likely the new model continues to exist because it’s relatively simple to acquire huge sums of capital from a like-minded investor (quick, easy money!). When that cash injection isn’t available, you are forced to walk the old road. There’s many people who don’t want to work, don’t want to put in the effort and don’t want to go through the hard times, but it’s those experiences which build character and the strength to survive when the going gets rough.

5. 

   Web design and development blog, focusing on web design web development latest trends and frameworks

   December 23^rd | #

   [...] read a well written article on warspire, which described the way new start up businesses are struggling to stay afloat due to a rise in the [...]

6. 

   Colonel Nikolai

   December 23^rd | #

   Well, just a second here. I’m not defending Digg, but…

   If we always did what we knew would make money, we wouldn’t do very much at all!

   When you know the price of coal is somewhere between x and y, you know exactly how expensive it is to start a coal mine, how long it will be before it’s profitable, etc, etc. Coal mines aren’t very interesting. In fact, coal mines are, at this point in time, a probably very bad thing to be building, even if they are in fact profitable!

   What if you want to build something you’ve never thought of before? What if you’re not sure what you’re building has a financial payback in the near term? So that means just flat out ‘forget it’? The computer you are typing on right now wouldn’t even exist if that were true. Look, there are a lot of stupid ideas out there. Very stupid. But some of the greatest ideas are unique, rare and did not have a proper business model at the beginning.

   Woz was told that the idea of a microcomputer was “stupid”.

7. 

   JP

   April 14^th | #

   I hate to be the annoying pedant in the crowd, but it’s a sickness! Anyhow…here goes. The sentence “There’s no warehouses to build” should be “There are no warehouses to build”. Feel free to delete my comment…once you’ve fixed the error :)

   By the way, I liked the artice! I just can’nt think straight when there’s are lots of teh grammer mistakes.

Name

Email (will not be published)

Website (optional)