February 6, 2006 4:00 AM PST

Small is beautiful for Web 2.0 start-ups

Jason Fried, president of start-up 37signals, is a bona fide software entrepreneur. But he wants nothing to do with the traditional model of starting a software company.

Rather than try to crack into the business market with a complicated, pricey product, Fried and his colleagues chose to stake out a fairly narrow sliver of the software world: hosted personal organizers and project management applications.

To Fried, the old way of doing things--where a start-up's success hinges on a few well-heeled customers willing to shell out big dollars--is history.

News.context

What's new:
More software start-ups are launching with relatively small upfront investments and niche products delivered via the Web.

Bottom line:
Some investors and entrepreneurs contend the traditional model of starting companies--multi-million dollar VC investments, long product development cycles, and big price tags--is waning.

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"I think the idea of enterprise software is dead. Enterprise software is kind of a dirty word--big bulky things that never work, were never delivered on time, and are too expensive," Fried said.

The enterprise software market is a multi-billion dollar industry that's still growing--albeit more slowly than in years past. But changing industry dynamics are making it a less attractive market to try to break into, say some investors and entrepreneurs.

"Investors are less excited about the tough sledding of that (enterprise software) business model," said Mark Hildenbrand, general partner for enterprise applications and infrastructure software at Onset Ventures. "There's no question that it's a challenged area."

Instead, the past two years has seen a proliferation of smaller companies building Web-based applications, sometimes referred to as Web 2.0, as well as open-source companies. Many of these firms can get off the ground with relatively small up-front investments, not the tens of millions of dollars that venture capitalists pumped into new software ventures in years past.

The business plan at 37signals, for example, is to build simple hosted applications and charge a monthly subscription fee to small businesses and individuals.

In the two years since launching its first service, the self-funded company has signed on hundreds of thousands of customers and it has no debt, said Fried. It has also founded a successful open-source Web development project, Ruby on Rails.

"You can build a great business on a niche product because with the Internet, you can reach a million or a half-million people," said Fried.

Sharp focus, wide angle
A number of technology changes are making very focused product offerings more viable, according to entrepreneurs and investors. Most significant is the growing popularity of hosted applications, or software delivered as a service.

CONTINUED: Building with AJAX…
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8 comments

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I looks like
I looks like the web 2.0 companies will not end up as pets.com and others
There is no big vc money wasted, for example Digg only got a couple of million dollars in VC funding and doesn't have a staff of 500 people who are doing nothing all day

<a class="jive-link-external" href="http://otherthingsnow.blogspot.com/" target="_newWindow">http://otherthingsnow.blogspot.com/</a>
Posted by SqlserverCode (165 comments )
Reply Link Flag
It's different this time.
Most of the web2.0 companies seem as thought they'll be here a
lot longer than the first .coms that are now gone. They seem to
be staying small, and generating money like most businesses
do. I've been finding a few small interesting .com companies as
of late, one that i thought was kind of cool was <a class="jive-link-external" href="http://" target="_newWindow">http://</a>
www.wuraweb.com it's basically like a yellow pages, except you
can actually see prices.
Posted by nyte3k (19 comments )
Reply Link Flag
i agree
i think they will b here a lot longer than the originals but some of the social sites r following in the same path, by just being exact mocks of each other. the only reason i think they will exsist longer is b/c more ppl r on the internet. sites like flicker, vimeo,and etc. i dont think we will c long. as 4 that wuraweb site, its ok, havent seen sites like that b4, if ppl start copyin them tho, they me b short-lived as well, unless they bcome a leader in their sector. prime example, the netflix and blockbuster war, even tho netflix is not short lived, if it wasnt 4 blockbuster undercutting &#38; advertisin like they do, netflix wud c lots more money.
Posted by cnetaphobic (1 comment )
Link Flag
Jason Fried is a legend in his own mind
It pains me to see Jason Fried get positive press when in reality his techniques are very much like a cult leader and he treats his customers like crap. Just check out his forum and see how many times he dismisses customer requests with a "I know better than you" attitude.
Posted by PragmaticIdealist (10 comments )
Reply Link Flag
It is about time...
The idea that a company needs to have millions of dollars and giant customers is a myth perpetuated by the similarly bloated VC firms who have to have large investments to move their needle.

There is a niche for second or third-tier VC firms working on churning out these small companies. They may not ever go public, but they can provide a nice dividend for the owners.

Mark Brandon
Sustainable Log - News and Views for Socially Responsible Investors
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Posted by 208mbrandon (23 comments )
Reply Link Flag
Change is Opportunity
The Software sectors of the VC industry are changing...I opportunities are there for those who WANT to change. I have not seen much evidence of WANTING to change yet...though things are begining to stir and I suspect it is only a matter of time...

<a class="jive-link-external" href="http://www.michaelmcderment.com/" target="_newWindow">http://www.michaelmcderment.com/</a>
Posted by 2ndsite--2008 (2 comments )
Link Flag
Longer Market
One of the big things about Web 2.0 is monetizing the long tail. That used to cost big money.

The long tail is waht Jason is on about with the "fortune 5 million". I kind of like that as a catch phrase...
Posted by 2ndsite--2008 (2 comments )
Reply Link Flag
Great article
The guys at 37Signals are right on the money. I posted their article at my site www.softwarebizexchange.com m
Posted by SoftwareBizExchange (2 comments )
Reply Link Flag
 

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