Mom and Pop, At Web Scale
January 26, 2011
One of the first questions venture capital investors ask people who make tech products and tech startups is if the entrepreneurs behind them are just trying to have a "lifestyle business". It's a euphemistic term, usually used with a slightly derogatory tone, that indicates an entrepreneur is "only" trying to make a company that will keep them in a happy lifestyle, providing for their family's needs and their friends' employment.
But my heart lies with the lifestylers, the mom and pop businesses. Even well-known businesses can basically run like lifestyle companies, with examples including functional sites like Craigslist and 37signals' various apps (though 37signals has taken some outside funding), and media startups like MetaFilter and Dooce. Each of these sites reaches audiences of millions and has community memberships that can range up to the hundreds of thousands or even higher. For even for the good VCs that don't see "lifestyle business" as an epithet, these kinds of businesses don't represent a success that they can participate in; lifestyle businesses provide great returns for their founders if they succeed, and they almost always delight their community of members, but they don't make tons of other people rich.
Where they do succeed on a large scale has been in innovation, in creating the cool new ideas or thoughtful choices in user experience that help influence larger companies and later efforts.
So historically, lifestyle businesses in the tech realm have only had impact in the narrow niche that they focus on, limited by either geography or demography. Even the most wildly successful basically plateau at a million users. They change the future of the web through the influence of their innovations, not through the direct impact of amassing large user bases.
Except that doesn't have to be true anymore.
The Web-Scale Lifestyle Business
One of the reasons that lifestyle startups have had to avoid scaling too large is because resource constraints limited either the total size of reachable audience, or the richness of the interactivity that could be supported for a user base. For example, running a site with an enormous user database used to require a significant up-front investment in servers, databases, load balancers, and even simple physical infrastructure like contracts to power providers and hosting facilities. Those costs followed a stair-step pattern where each subsequent round of growth was followed by a huge required outlay of dollars. Even some of today's biggest-scale bootstrapped startups, like Craigslist, are relatively modest in the level of user experience innovation they offer. That's not because they lack the technical chops to do so, but because enabling the cutting-edge realtime features that many sites use today would have been prohibitively expensive during the time when their sites were first scaling up.
The fundamental economics of reaching a large audience don't work that way today, though. Cloud computing, more efficient infrastructure, and delivery as a service offerings change the math, particularly by not requiring large up-front investments. If your community takes off and you're built with a contemporary architecture, you can scale your costs along with income. This has some implications which are subtle but profound:
- Being able to succeed with slower growth means you can respect your community members by not having to have an onrush of too many new users at once. Preserving a site's culture is good for the whole web.
- Lifestyle businesses have much more flexibility in revenue models, often being able to combine membership, advertising and merchandising into enough money to pay the bills. Gradual growth lets the entrepreneur experiment with these different models instead of having to shake down the community all at once through a paywall or intrusive ads.
- Not having to face the looming threat of a precipitous increase in infrastructure costs lets the startup's founder stay focused on product and community, instead of splitting time between keeping the site running in an environment it's about to outgrow and pounding the streets looking for money.
- The single biggest value that investors would offer other than money itself was connection to a network of established entrepreneurs that could help the startup survive. But if you're building a web startup today and don't already have a network, there's probably little hope for your startup anyway. Your business is predicated on having the resource that you used to have to rely on others to provide.
And You've Got Peers
The last thing that traditional investment would offer was expertise on what to do when your company succeeds. But these days, there's an entire community of other successful scaling experts who are willing to share their lessons. Just a few years ago you could count the number of people who'd built a website with a million users on one hand, but several of the best non-VC-funded startups have bootstrapped their way to a million users already, and the people who made it happen have moved on to new jobs since then, where they're allowed to share not just their experience but often the code and technology they created to make scaling possible.
Getting past the millions of users mark and into the tens of millions level is going to become increasingly common. When LiveJournal bootstrapped its way into becoming what was likely the first richly interactive social site with a million users in the early part of this century, much of the initial technology to do so had to be created specifically for that purpose. Today, using the much larger social networks and app stores that exist for distribution, social apps are getting to a million users in weeks, using largely off-the-shelf tech.
Getting Past Goldilocks
Right now there is often a "Goldilocks" problem in traditional VC-funded companies. You can either be big enough to fit into the classic funding model, where everyone's not-so-secretly hoping for The Next Google or The Next Facebook, or you can be small enough that you're dismissed as a lifestyle business which will never impact a huge audience. If you had enough ambition to want to reach millions of people with your work, but enough sense of control to want to keep ownership of your site, though, there was never a good solution during the web's first two decades that was just right.
Entrepreneurs faced with the choice between only having a small impact, or not owning their own work, can be left wondering which one is less painful.
I don't pretend to know enough about the venture capital world to know what the implications of this change are going to mean for that industry. But I know more than enough about people who've built important, world-changing lifestyle businesses to see that having the ceilings of potential audience size removed from their work is going to have profound and positive impacts on the web. I'm not much of one for predictions, but if I had to bet, I'd say we'll see a social application reach 50 million users without having had any outside funding within the next two to three years. And that business will have a fundamentally different set of goals and values than today's large-scale sites, because of it will have been built in a fundamentally different way.