• Now is a Great Time to Join or Found a Startup –says Bob Warfield, friend and fellow Enterprise Irregular.
  
• Now is a Terrible Time to Join or Found a Startup  -says Charlie Wood, friend and fellow Enterprise Irregular.

Now what?  Who is right?  And the debate does not stop here, it sparked a pretty good discussion in the Enterprise Irregulars group.  In fact I was facing the same dilemma advising a startup-CEO friend the other day.  But I really think launching a new business as Founder or joining one as an employee are two very different animals, so I’ll split the two and talk about Founding (or join as co-Founder) here.  I’ll try to some up the pro’s and con’s here:

It’s a Great Time:

• The recession is “like a treadmill EKG for companies” – survival of the fittest
• Can hunker down, develop now unnoticed
• Cheap resources: hire “rock stars at rock-bottom prices” ( OK, that sounds good, but I actually don’t believe in putting on too much of a squeeze, you get employees that way, not team-members)
• Your competitors won’t get funded either
• The recession won’t last forever, and when the tide comes and all the wannabe’s jump on board, you will already be a seasoned survivor, in fact a potential M&A target.
  

It’s a Terrible Time:

• How will you get funded? (you won’t)
• You won’t be able to sell (who’s buying?)
• How do you pay yourself? (have reserves for a year?)
• In other words, how do you survive financially? (this sums up the previous points).

It’s a Great Time and a Terrible Time - my take:

• It’s a terrible time to leave a safe job to launch a startup.
• It’s always a good time to start a bootstrapped business on the side while keeping your job (you need to look at the current job, contracts, IP ownership, whether your job performance would be impaired ..etc.)
• It’s a great time to launch a startup if you are not employed anyway.

Let me expand on that last point.  Unemployment is at a record high and growing. It’s close to impossible to get hired now.  Anyone can get the axe, and it’s not your fault, it’ the economy.  If you find yourself out of a job, and have been doing the kind of ongoing, active outbound marketing, self-branding I’ve discussed before – perhaps you already are on somebody’s wish list and get a job offer soon.

If not, and you’re now scrambling to update your resume, reach out to contacts, browse the job sites and apply for posted jobs – I’m sorry to be the bearer of bad news, but it likely won’t happen.   I know you need income NOW, not some long-term solution.  I know it, because I’ve been there, done that.  And I can’t tell you how much I regretted looking back on wasted 6-8-10 months, chasing job opportunities that just did not materialize when I could have actually created something in that period.

So think about it this way: job search is a full time activity.  You can “feel good” about doing your best, chasing phantom opportunities.  Or you can have a working prototype, a service … a small business of your own half a year from now.  Yes, it will require living on reserves for an extended time.  But you will likely be forced to anyway – might as well make the best of it.

• Time to join a startup? - An academic exercise
• More Reasons Why Now Is The Time For Hatching Something New
  

Today I’m continuing a mini-series started 3 weeks ago with the intro: How Software Can Be Resilient to Recession which I wrote before the bottom fell out of all markets in the world, and recession-doom-talk became popular.  Since one of the key conclusions in the first piece was for software startups to turn towards business, offer value and charge for it, it only made sense to follow up yesterday by a more detailed post on How to Sell to Enterprises in a Recession. 

Yesterday in a corporate context I used Rod Boothby’s Taxi Fare metaphor, i.e. flying in below the radar screen, at prices that are expensable, not approvable as the recipe for ongoing enterprise sales in a recession.  But today we’ll look at revenue-generation on the consumer market, where the taxi-fare is too expensive… we better find a new metaphor.  How about lunch-money?  Nothing fancy, just cheap fast food.

But wait, you can’t charge consumers, web 2.0 is about getting it all for free, isn’t it?  While I never particularly liked it, let’s face it, the free, ad-supported model worked for a while – but it’s about to come crashing down fast.  That leaves us  with the fundamental rule in business: deliver value, get paid.

The genius in the Freemium model is that it allows new services to gain traction, essentially using us, free users as the marketing vehicle, then is we get hooked, we’re likely upgrade to enhanced services for a fee.  This is neither “free” nor “bait-and-switch” – a completely acceptable, normal business model.  In fact I think – especially in bad times like now – a switch by a popular service after their beta period to a fully paid model is also reasonable, albeit not easy.

Josh Kopelman @ Redeye VC laid the difficulty out in his excellent post, the Penny Gap, arguing that that assuming consistent price elasticity is a trap: going from $1 to $5 or $5 to $20 is easier than getting the customer to pay anything at all: 

The biggest gap in any venture is that between a service that is free and one that costs a penny.

Perhaps.  Or not.  The case he cites, that of the pay-per-download music sites of the late 90s vs. Napster or Kaza certainly proves him right, but I believe business or productivity-focused applications are different. Different, because we need them every day.  If I am hooked enough on a good service that I really don’t want to lose, there must be a price point low enough to entice me, and another one where paying for it becomes a no-brainer.   For mass appeal, it should not be a “business decision”.  Do you think twice before grabbing a coffee at Starbucks, or grab a quick sandwich for lunch?

 Would you spend lunch-money (or just the price of a coffee) on a service you “can’t live without”?

Random examples:

• I started blogging on free BlogSpot, but a week later switched to a paid platform, and never looked back.
• I’m finding Zemanta tremendously helpful (OK, it’s great with finding relevant textual content, not-so-good with images).  If tomorrow I had to pick between losing them or paying $3, I would not even blink.  (I’d probably pay $10, but that may be too high for a bigger crowd)
• Twitter’s lack of business model has been discussed a lot: if tomorrow you’d have to make a call, would you really not cough up a dollar or two to keep it?
• Last year while helping select participants for the Under the Radar Office 2.0 event, I previewed Timebridge and a few similar services – all heavily VC-backed. To my greatest surprise I discovered Timetomeet, a tiny bootstrapped competitor, that was good enough for my needs, and the Pro version sold for less than a buck/ month.  I signed up for 6 month for $5 without thinking.
• Jott was a very popular free service for two years before they introduced paid services.  After the initial revolt they are quite happy with the conversion rate.

The list could go on, and I’m sure most of us has a shortlist of 5 (10?)  services we just “can’t live without” and would rather pay than lose them.  

Now let’s consider this from the Web startup’s point of view:

• Traction: you still need the viral spread, and for that nothing beats free.  I don’t believe charging out of the gate is an option.  You need traction and an established brand first.
• The no-brainer price: is it $30… $10… $5?   For any one service $10 may be reasonable, but since we likely have a few favorites, those dollars add up.. which is why I think the $3 and lower range (coffee price) works best. Of course to make a living on that, you need a large user base (see previous point)
• Convenience: make it really, really easy to pay.  The combination of convenience and some incentive works wonders: I picked the $5/6mo plan @Timetomeet, rather then the monthly one, and Jott’s CEO was surprised at how many users picked the annual prepaid plan…
• Measure: Jott did a fair amount of data analysis which allowed them to create price packages matching the usage patterns they observed.  All Web 2.0 services can do this – a key benefit of the SaaS model
• Communicate: Introducing prices may very well represent a change. A change from your original business plan, a change from user expectations.  Tough.  Everything changed overnight, and you / we have to adapt. Discuss the plans openly, solicit user feedback, make your users feel they create your pricing plan together with you.

So, if you are a user of Web 2.0 services (and who isn’t?), would you spend your coffee change to save your favorite ones?

Update (10/30):  Here we go now, just as predicted:

• Freemium Services Coming to a Website Near You
• Revenue Crisis: Here Come The Pro Accounts
• The end of the $0.00 FreeConomic model - again....
• 
  

Three weeks ago when I wrote How Software Can Be Resilient to Recession I was very careful using the “Big R” word – since then the bottom fell out,  the doomsday-chorus started.  On my personal blog I suggested we should Turn the Doom-talk into Constructive Business Model Ideas, and that’s what I intend to do now.  Here’s the gist of my intro piece:

The Web 2.0 economy went sideways, focusing on things that were:

• useless (superpoke?)
• consumer-only
• ad-driven

Here’s what works (as has always worked) instead:

• go where the money is, and that’s businesses (“Enterprise” vs. consumer, even if it means small business)
• deliver value – useful functionality that improves business
• charge for it – companies actually prefer to pay for reliable, good service. 
• SaaS : OPEX vs. CAPEX,  Sell to User vs. Economic buyer

So let’s talk about that last part – how do you deliver software and get paid for it.  Selling to the corporate world has just become a lot more difficult, if not impossible.  The standard knee-jerk corporate reaction to any downturn is freeze, freeze freeze:  hiring, travel, and spending on new contracts all get frozen.  These blanket freezes are blind: it does not matter how innovative your solution is, how much it increases productivity, or  -most importantly in a downturn-  how much cost it saves, you can’t get in as a new vendor.

Fellow Enterprise Irregular Anshu Sharma’s advice to ISVs is to partner with anchor tenants, i.e. vendors already in contract with your target customer and try to get in under their umbrella.  Sage advice, probably works for larger organizations, but partnering with the biggies can be quite painful.

What else then?  You may want to revisit your pricing, and also how, and to whom you’re selling.  Just as I was thinking about this post, we had a lively discussion in the Enterprise Irregulars group about  Forrester’s report predicting the dramatic fall in price for Enterprise 2.0 applications. Jive Software came up as the obvious example: everyone loves ClearSpace, everyone hates the price.

Ironically, just as we were discussing how Jive’s prices will have to come back to Earth, news of Jive’s dramatic layoff came in: the company let about a third of their workforce go.   Within minutes the CEO of competitor Atlassian announced they were still hiring, in fact he invited the ex-Jive team to check them out.

They are in the same market, so how come one fires while the other hires?   Since I don’t have a crystal ball (or inside information), I can only speculate:

• Jive has experienced aggressive, VC-fueled headcount growth, which they now cut back preparing for the downturn, while Atlassian has grown organically, without any funding. (They like to say they are “revenue-funded”)
• Jive has the heavy Enterprise Sales model, which will hit a brick wall with the corporate freezes now, while Atlassian does not really sell: they let customers buy.  Unlike Jive, they did not have to fire their Sales VP – they don’t have one.

But I don’t want to get into a Jive vs. Atlassian game here, especially since I really don’t know the details – let’s just stay on a general level for now. Update (10/18): Fellow Enterprise Irregular Bob Warfield asks: Why Are Startups Running at a Level Where They Can Lay Off 1/3?  I think it’s clear that only the VC-funded ones (some?  more?) are.

Another Irregular, Rod Boothby had a good writeup which is now two years old yet every word is valid: The Taxi Fare Secret.  His key point:

Sell Directly to the End User at a Price They Can Expense…

How do End Users Pay in an Enterprise Setting?

If you charge $9/user per month, but bill for the whole group, the bill for 30 people would be $270.   That requires sign-off, which requires approval, which gets you back to the CTO / CIO.

If you charge $9/user per month and make each end user pay their own way, then each person has to get the company to cover just $9 in expenses.

$9 is cab fare.

Taxi cab fare doesn’t require approval.

or… $9 might be just cheap enough for people to be willing to cover it themselves.

Very well said – and similar to my own experience of flying in below the radar screen, at prices that are expensable, not approvable.   That’s the recipe for ongoing enterprise sales in a recession.  Next we’ll look at revenue-generation on the consumer market, which will likely take us from the realm of taxi-fares to lunch-money … in fact cheap fast food.

Just because I wrote How Software Can Be Resilient to Recession doesn’t mean I’m naive enough to declare that all SaaS businesses are recession-proof – they just have a better model to weather the storm, which is now inevitable. 

VC Preps Portfolio Companies for Survival Mode

OM Malik, who is now a VC Partner himself reports:

Sequoia Capital, arguably the smartest venture capital investor in business, is sounding the alarm and asking its portfolio companies to buckle down for what could be the worst economic downturn of their relatively short lives.

Senior Sequoia Partners got their portfolio CEO’s together and warned them the downturn would be worse than they might expect, then proceeded to lecture them on how to cut costs, business function by function. 

In other words, Business 101, which probably many other startup Founders should take quickly. You see, it’s one thing to call yourself CEO in the good times, living the fun startup lifestyle on your VC-funded salary in what’s your first real job, and it’s entirely different thing to manage a business to survival in tough times. 

But it’s not Game Over, as today’s sensationalist titles would suggest: IT’S OVER! POP GOES THE BUBBLE, Sorry, Startups: Party's Over.   No, times are officially tough, but the truly strong businesses will survive, and I also trust some of the whiz-kid baby-CEOs  will come out of this as battle-hardened Entrepreneurs.

Entellium Wrecked by Fraud

Who needs a financial crisis, “smart” Executives can wreck the business on their own… 

On-demand CRM provider Entellium’s CEO and CFO gave a new meaning to double-entry bookkeeping: they had one (real) set of books for themselves, and another (fake) one to show their Board and investors.  The Board believed Entellium had annual revenues of close to $4 million, while the real amount was $582,789.  The CEO and CFO are now facing prosecution, and some of the $50M in VC funding still has not been accounted for.

There have been rumors of Entellium trying to sell itself for a while – now it’s down to a garage sale, potentially selling assets and some IP.  I feel sorry for the honest employees, but mostly for the customers. 

I strongly protest the sensationalist title found @ InsideCRM: Entellium execs charged; is SaaS next to go on trial?  Entellium’s demise had nothing to do with their business model.  This company was wrecked by two crooks, period.  No reason to taint the entire SaaS sector.

This company clearly did not falter due to the recession: two crooks brought it down.  This can happen in any industry.

You Can’t Re-Architect Forever

The next two stories are not failures … but something isn’t quite right.

The InfusionSoft blog, where I first saw the Entellium news also cited NetBooks, which halted new customer registrations.   This is my post title from February 2008: NetBooks: Integrated SaaS Suite for Very Small Businesses. Almost.   Almost being a key word.

Other than missing a few key business processes, their UI wasn’t just boring, it had shortcomings that rendered the whole system quite useless.  CEO Ridgely Evers reached out to me, we met, he revealed future development plans and showed me screenprints of the revamped UI.  I was optimistic, and really liked the concept of giving small businesses an integrated system (mini-ERP) at $20 per user, a fraction of the next step up, NetSuite.  I also liked Ridgely’s deep passion and understanding of small businesses.  Not only was he the guy behind the original Quickbooks, but he ran an actual small business along with his wife.  Finally a business owner bringing solutions to his own…

So receiving Ridgely’s email response (which he says got nuked by the InfusionSoft blog’s comment spam filter) was a surprise:

The reason we stopped was that we discovered some pretty deep flaws in the software architecture, flaws that would not allow us to scale.  Rather than subjecting new customers to what would be a less-than-positive experience, we made the tough (and, I think, correct) decision to stop adding new users while we re-tool.
As you might imagine for a product with the scope of NetBooks, re-tooling is not a simple process, and will take another quarter or two.  But rest assured, we're in this for the long haul and will absolutely be back -- better than ever!

I hope they will be back. But how can you discover deep flaws in your architecture after years of development?

This story reminded me of another conversation I had with Dean Carlson, CEO of ViewPath, an On-Demand Project Management tool company, in preparation to my Office 2.0 Panel.   I was surprised to find they had been in business for 7 years, yet hardly any information is available and their competitors barely know about them.

As it turns out the first few years were spent developing the original product, then a year or so went into trying to sell it when they realized their architecture woudln’t scale. You can guess the rest of the story: back to development for another two years or so, and now, finally the launched ViewPath 2.0.  

The first look at the product is promising, in fact we will cover it later in our PM 2.0 series. So this is not a failure story – or is it?   I can’t help but have some doubts about the company’s ability to execute, if it took them years to discover the architectural flaw, and altogether 7 years to bring a real product to market.

The common thread between ViewPath and NetBooks: both are founded, run, and funded by former Executives who are passionate about their business, but probably not too hungry.  Unlike the whiz-kid baby-CEO’s I was somewhat teasing early in this post, this is not the big break they need in life – and it shows. It shows on the pace of business.  I whish them success, but am worried they will be left behind.

Ingredients of the Entrepreneur Recipe

If you’ve been wondering how all these stories are related together, well, there’s one common thread: the Founder / Entrepreneur often makes or breaks business.  I think these stories bring up a list – a very incomplete one – of traits a Startup Entrepreneur needs to have – or shouldn’t have.  But instead of spelling them out, I leave the conclusions to you. They are all in the stories, after all.

Update:  Want to get off the "Sky is falling" treadmill? Need inspiration?  Find it here.

Even better, get really inspired at Defrag.  Use discount code zoli1 to get $300 off.

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3 weeks ago we launched CloudAve in turbulent times, so barely a week later I ended up writing about How Software Can Be Resilient to Recession.  The summary:

• go where the money is, and that’s businesses (“Enterprise” vs. consumer, even if it means small business)
• deliver value – useful functionality that improves business
• charge for it – companies actually prefer to pay for reliable, good service. 
• SaaS : OPEX vs. CAPEX,  Sell to User vs. Economic buyer

Back then I was still a bit hesitant to use the Big R word, but by now it’s obvious… what a difference three weeks makes.  Naturally the “how to survive” discussions, focusing on business models heated up.

Fred Wilson quotes his friend:

Free is over, I am only investing in services that customers pay for.

Oh, thank you, I strongly agree.  I admit I’ve never truly understood Clickonomy, and did not care for the ad-based business model.  Of course not everyone  believes that the ad-supported model is about to collapse.  I don’t have a crystal ball, I just prefer to be conservative in harsh time, and charging for value delivered sounds like an ultra-safe model.

So yes, I predict turning to business, (the “enterprise” in the widest sense) will be the way to survive.  There’s just the small issue of how much you charge and how easily (and to whom) you can sell.

As Fred Wilson notes:

We've struggled with early stage investments in enterprise oriented web services. Sales to enterprises often require expensive sales teams and it's much harder to know if you've nailed the product/service with feedback from a limited number of enterprise customers.

Need proof?  Just look at how SAP’s deep dive today: 

On a conference call with analysts Kagermann said customers put planned IT investments on hold to focus on more near-term issues. Financing was also an issue for some customers–especially small to mid-sized companies.

SAP is a strong company, it can weather the storm better then most, but software businesses dependent on a front-loaded, long, high-touch sales process that require CAPEX approval will inevitably falter.  The customers are simply not buying.

Which takes me back to Fred and his Freemium model.  Freemium is not free.  Freemium is paid, the free part is your marketing:

It's much better, in my opinion, to go with the freemium model, give a version of the service away for free to all comers, get a lot of users, get good market feedback, then develop a premium version of the product/service for sale to enterprise customers. If your free version is popular with a lot of users, your customer base is the target for the upsell and you might be able to live without an expensive sales force initially.

In summary, freemium is far from dead, in fact it may be the business model de rigueur.

Free (forever) is dead.  Long live Free that leads to pay = Freemium.

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It looks like I may have started ( actually, just re-started) a trend discussing How Software Can Be Resilient to Recession. 

Sramana Mitra @ Forbes talks about 'SaaS-ing' Back At The Economy:

Fellow Enterprise Irregular Ismael Ghalimi makes a very similar point, and his not as hesitant as I was using the "Big R" word (emphasis mine):

Very well said.  Ismael then uses the opportunity to make a cocky offer to his competitors:

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Are we heading into Recession?  The “Big R” talk of early this year quickly subsided, economic growth returned, the markets appeared to vindicate the optimists.  US Presidential Candidate John McCain repeatedly said the economy was fundamentally strong… until just days ago, when he quickly switched to declaring a crisis.  The Wall Street Journal says we’re in the Worst Crisis Since '30s, With No End Yet in Sight. 

I don’t claim to be an expert economist, so whether the Big R is looming is not my call – but if you believe we’re in a strong economy, I have a bridge to sell you.  Let’s just focus this discussion on how Software businesses can survive in a financial crisis, which is undeniably here.

Not all will survive, and it’s probably healthy they won’t.  Tim O’Reilly, Father-of-all-things-Web-2.0, asked the question at the Web 2.0 Expo last week:

The poster-child of the Web 2.0 boom may very well become the symbol of what went wrong:

• useless
• consumer-only
• ad-driven

Actually, the problem is not what they do, but how seriously they were taken.  Will Price, a very smart VC said long ago:

• go where the money is, and that’s businesses (“Enterprise” vs. consumer, even if it means small business)
• deliver value – useful functionality that improves business
• charge for it – companies actually prefer to pay for reliable, good service. 

The last point brings up the price issue.  Credit will dry up. Whether we’ll officially declare Recession or not, the fear of the Big R is enough for corporate budget cuts, the disappearance of any CAPEX spending. Even worse, an entire sector almost disappeared as IT buyers.  Did you know that Lehman Brothers spent over $300M on IT in just the last quarter, right before declaring bankruptcy?   How do you sell in this environment?

The after-bubble nuclear period of “no IT spending at all” found me at a startup in 2001-2003. We did not exactly hit it big, but did not go under, either, and that’s because our model allowed us to get in the door way below the threshold that would have required higher authorization. Not classic SaaS, rather SES (Software Enabled Service), we were essentially data providers and often got into an “enterprise” account at $3k for the first month … eventually ramping up to annual $60-$100K.   Anyone familiar with Enterprise Sales knows the term Economic Buyer:  typically getting involved later at the sales cycle, approving or nuking the deal.  Well, we saw no Economic Buyer: being under the threshold, we sold to the User directly.

Of course my little business is not the only proof: Salesforce.com & WebEx thrived during the last recession. The secret is the business model: pay-as-you-go.  SaaS offers lower risk to enter, no initial cash layout, the subscription fees come out of OPEX vs. CAPEX, and is often approved by the User, not the mysterious Economic Buyer.  The barrier of entry is much lower: once you’re in, it’s up to you to grow.

In fact I suspect the looming downturn will accelerate the structural changes in the software industry: SaaS players will thrive,  traditional on-premise vendors will shrink, many will disappear.

That leaves a final point to discuss: financial solvency.  For startups, it will be increasingly hard to find investors.  For larger businesses the lack of late-stage investment, the credit crunch may be a serious impediment to expansion.   Discover the beauty of bootstrapping – you actually get to do what you believe is right for your business, not what your Board tells you.  Do less, take small steps.  Frugality is key to survival.  Small is beautiful will get a new meaning.

In summary, Software businesses that combine good old business sense: frugality, spending wisely, delivering value to businesses and getting paid for it, with a new business model, SaaS are likely winners in the downturn.  The rest are playing musical chairs. (Oh, and the bridge is still available)

Update (9/27): A much-related article by Sramana Mitra @ Forbes: 'SaaS-ing' Back At The Economy.

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