Are You a Seesmic or Balsamiq Entrepreneur?
March 19th, 2009 by jeremychone
In the software industry, and probably in other industries as well, there are two types of startups: the scale-first type and the monetize-first type (sometimes called lifestyle business). Any organization needs to eventually do both, but in the beginning, a startup needs to decide to focus on scale or monetization. Seesmic and Balsamiq are great 2008 examples of each type of startup. (Good comment from Vasudev Ram, Not everyone needs to or wishes to becomes a Google or a Yahoo! or a Microsoft)
For those who do not know yet, Seesmic is a typical Web 2.0 Silicon Valley startup, with a famous founder, a vision to revolutionize something on the Internet (in this case video conversation), a $12 million dollar investment, and a primary (or exclusive) focus on growing the community (i.e. no revenue plan yet). The service successfully established itself as a leader in its own space (video conversation) and seems to drive some interest from traditional media companies (e.g., BBC).
While Balsamiq addresses a different but equally promising space (i.e. the designer-developer workflow), the company has taken a completely different approach. Balsamiq is a self-funded entity, mostly a one-man show (coder and marketer) with a clear and simple revenue plan from the start (already generated $160K in 2008), and it even managed to get some great marketing buzz thanks to the founder’s marketing ingenuity in sharing what other entrepreneurs do not want to share (e.g., revenue, customers, and detailed strategy).
Which one is better? Which one is most likely to succeed? Well, both have pros and cons, and mostly depending on the entrepreneur.
Some entrepreneurs care more about creating the next Internet phenomenon while others care more about creating a self-sustainable organization. The good news is that the software industry has (or at least had) room for both types.
Scale-first pros & cons
“Scale-first” startups such as Seesmic definitely have the potential for a higher return on investment, which often explains their significant cash infusions. They often focus on creating a phenomenon, which can be very invigorating for the founders, investors, employees, and even the community. This energy can fuel some great innovation and even dedication from the community. The other significant advantage is that “scale-first” startups are often seen as the visionary ones, and their founders can use their celebrity status cleverly to maximize their marketing activities. Loic Lemeur is definitely a master of this art.
The catch, and there always is one, is that “scale-first” startups are inherently riskier and can sometime solve a need that does not have a market (I am calling this a “market false positive”). The biggest risk probably comes from the exhilarating nature of the business, which can drive entrepreneurs and even investors to lose sight of the real business opportunity, resulting in a great waste of time, money, and personal life for all parties involved. Last but not least, there is also a lot of narcissism (often an unavoidable side effect of frame) in this community, which can bring lot of confusion regarding what the real market opportunities are (BTW, I am not saying it is the case of Loic).
Monetize-first pros & cons
On the other hand, “monetize-first” startups tend to be more down to earth and usually only bite off what they can chew (as Peldi so sophisticatedly put it on his Balsamiq company Web page). While still risky, the risks are much lower, as the whole strategy is to invest in proportion with the market demand. I also think that lifestyle startups provide a higher personal satisfaction, as the entrepreneurs feel more in control of the execution (100% vs. 30% or so). Also, the low-key nature of the business usually attracts more practical and humble parties to the table, which can optimize the company operations quite a bit.
However, even the humble route has some catches. First, investors are harder to find. While the current market conditions might help a little, software venture capitalists are shooting for bigger investments ($4+M) with high multipliers on exit (x10 to x15), and given that buyout has become the only realistic exit strategy for most investments, making revenue the first priority will implicitly base the value on it and consequently limit the possible outcome (x3 to x6 of revenue depending on the business). Comparatively, in the dot-com and even in the Web 2.0 era, exit strategy has usually involved around $7 to $30 per user, which is obviously a much bigger and faster return opportunity. However, as John Prendergast noted, monetize-first enterpreneurs might not need or want an exit. Recruitment can also be an issue, as second-level talents tend to gravitate more to bigger ideas than to small or local ones.
While it might be easy to be sarcastic about one type or the other, each has its share of pros and cons. At the end of the day, it is about the entrepreneur’s style more than anything else. The worst move for an entrepreneur is to try to avoid following his or her own style. I learned this the hard way when I started Sportner (a social network for people who play sports). I started a “scale-first” business though I am fundamentally a “monetize-first” entrepreneur.
So the only advice of this article is that the right style is your own style!
Personally, while not a customer, I am a big Balsamiq fan. Peldi is really one of the great examples of a successful “monetize-first” entrepreneur. Just check out the Balsamiq Company Blog (especially the 2008 flash back).
I also like to describe Seesmic as a great example of the first category. I think Seesmic investors eventually will make a relatively successful exit for around $25M to $50M to a media company that wants to get its feet into Web 2.0 or to a Facebook or Google based on the new Seesmic social-desktop strategy (which could become Seesmic new main strategy).
March 19th, 2009 at 9:57 pm
Jeremy – interesting topic. I’d say that your “monetize-first” entrepreneur is going to be the choice of most going forward. Why? It just doesn’t cost as much to get started. You say that “investors are harder to find” but that’s because they haven’t woken up to the reality that a one man band can start a very successful company on their own (without big time investors and real, paying customers).
BTW, I think Peldi is going to surprise us with where he can take his “monetize-first” company. Watch out Loic!
March 19th, 2009 at 10:17 pm
@Adam Agree. In fact, VCs are already experimenting. For example, Ext-JS, a typical monetize-first organization got some good VC funding. I also think that during the .com and Web 2.0 eras we over prioritized community over revenue (buzz over biz).
March 19th, 2009 at 10:20 pm
Ok, continuing from Twitter conversation (highly annoying and impractical to have real discussion given the limits), we all hear about the big ‘scale first’ wins, but rarely is the scale of the failures and *post exit* failures covered. Everyone cheers when some utterly dumb idea, or good idea with zero business model, gets bought out for a billion by some large company. The founders are rock stars, living large. What is often ignored is the very real downside many of these acquisitions have on the parent companies, or, investors left holding the bag in an IPO bubble.
Really, did Broadcast.com help Yahoo or its shareholders and employees? Was Skype really a good acquisition for eBay? A lot of the deals make little sense, and vast sums of wealth and cash are destroyed in the process, money that could have been better spent.
I think in this economy, any company that can organically grow is going to be even stronger when the market recovers.
March 19th, 2009 at 10:42 pm
@Ray Very good point, it would be interesting to see the *post exit* failures covered.
But I am sure that there are as many *post exit failures” in the scale-first type than in the monetize-first one.
Many successful services would not have been possible without the scale-first model. Amazon is a great example.
March 19th, 2009 at 11:13 pm
[...] Jeremy Chone’s post about “Are You a Seesmic or Balsamiq Entrepreneur?” today. I love Balsamiq Mockups and have been using it for more than 6 months now. Peldi – [...]
March 20th, 2009 at 12:12 am
Hi Jeremy, wow thanks so much for using my little startup as an example! It took me a while to figure out where I had read a similar article years ago, but I just found it: http://www.joelonsoftware.com/articles/fog0000000056.html – so if I’m like Ben & Jerry, you’re definitely like Joel Spolsky!
March 20th, 2009 at 12:26 am
@Peldi, tx for dropping by. Thanks for the link too, very relevant.
BTW, Balsamiq Mockup is gaining ground. Great job, keep at it!
March 20th, 2009 at 11:31 am
Excellent post, I like the points you make.
I do think the one-man company example is a little bit extreme, there are many successfully bootstrapped businesses out there that have 3-5 people. I wouldn’t recommend anyone to start a business alone, that’s for sure!
As usual, the right answer probably lies somewhere in the middle. If you don’t have enough ambition, your company will remain a minor project. If your ego is too large, you won’t notice that you aren’t solving a real problem.
March 20th, 2009 at 11:47 am
@Alain ho yes, does not have to be one-man show to be a “monetize-first”. And yes, I would not recommend anyone to start alone. I did it once, it is extremely hard. The first focus should be to build and sale, then, later is to market and grow.
March 20th, 2009 at 1:17 pm
Jeremy,
Great post, clear thinking as always. I think one interesting facet of the distinction you make here is that its not at all clear that the profit first company ever needs or wants an exit. While obvious, its because its often absurdly financially rewarding for the founders to simply run the business.
Using Balsamiq (I’m a customer and love it) as an example, as the business scales to $1M then $5M costs will increase but the margins will usually expand. Often you get to a point where the business has a 30-40% Cash flow margin. At $5m that’s $2M pretax to the owners and its often %100 percent the founders. That’s a heck of a lifestyle!
One additional thought is that Fred Wilson the VC had a good posting on what makes for a good venture return. Its nuanced and dead on with every early stage VC I know. http://tinyurl.com/d8gawb
March 20th, 2009 at 2:19 pm
Scale first strategy in a post web 2.0 bubble is a very risky stratégy because of not exit opportunity. Traditional media have no cash to play the game anymore.
March 20th, 2009 at 2:58 pm
Nice balanced post.
I disagree with this part near the start of the post, though:
“Any organization needs to eventually do both”
Why do you assume that? Specifically, those words sound as if you think an organization (i.e. entrepreneur, in this case) *needs* to scale. What’s wrong with growing a company to a certain level and then staying at roughly that level of revenue and profit? It’s likely many or even the majority of businesses do that. Not everyone needs to or wishes to becomes a Google or a Yahoo! or a Microsoft. And they can still make a good living for themselves and their employees.
– Vasudev
March 24th, 2009 at 8:09 pm
@John Prendergast, yes, you have a good point, not every entrepreneur wants an exit, especially, the “monetize-first” type. I did update the post with a reference to your comment.
Also, very good link your shared about the good venture return (http://www.avc.com/a_vc/2009/03/what-is-a-good-venture-return.html), I like the 1/3 angle.
March 24th, 2009 at 8:26 pm
@Vasudev Ram, ok, very good point. I think there are different scale of scale. In the monetize-first case, I would agree that Growth is a more appropriate description. And yes, at some point it will plateau (either by design or by the market dynamics).
March 26th, 2009 at 11:28 pm
[...] his post Are you a Seesmic or Balsamiq Entrepreneur, blogger Jeremy Chone gives a good roundup of the pros and cons of both these approaches, using two [...]
March 27th, 2009 at 9:53 pm
very good point. I was the head of Six Apart Europe when WordPress launched. Typepad 100% paying against WordPress free, so I know the topic a little bit. Fascinating debate. Let’s make all the Twitter apps paying tomorrow and be Balsamiq, will make my day.
April 6th, 2009 at 5:10 pm
@Ray Good point. I was precisely thinking about broadcast.com and how Mark Cuban pulled it big, barely a year after its hugely successful IPO & just months before streaming technology went mainstream, pushing down costs & reducing Yahoo’s investment of $5.7 billion to zilch. Most blatant “market false positive” ever? (To be honest, Yahoo never quite knew what to do with their biggest acquisition.)
Mark (and Todd Wagner, the founder) got lucky yet another time: Yahoo’s stock almost tripled in value between April ’99 and January ’00. Seismic.
Meanwhile Tim Koogle played guitar in Yahoo!’s ’99 annual report [http://tiny.cc/Lk5sI](so ’90ish… worth a look for the design itself.)
June 3rd, 2009 at 10:03 am
Thanks for this informative post,still some things i don’t understand because of my low english level but i’m working on that..
June 23rd, 2009 at 8:42 am
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July 4th, 2009 at 3:58 pm
[...] drugom mjestu, Jeremy Cherone pita svoje čitatelje Are You a Seesmic or Balsamiq Entrepreneur? Seesmic i Balsamiq su dva startupa, u podjednakoj fazi razvoja ali i s vrlo različitim pristupom; [...]
July 12th, 2009 at 7:42 am
Hi, i liked Balsamiq example. Simple and profitable product – mockup… people need it, people like it.
July 27th, 2009 at 1:54 pm
Having grown up in the bay area in the 90s, I have to say that those people that focused on the monetize first business model found the success they were looking for in the end. It might have taken multiple times, but eventually they found a good income. However, those that went from next big thing to next big thing are still jumping around, looking for the next ‘quick’ money, 10 years later (gee, not so quick then, is it?).
August 15th, 2009 at 10:09 am
@PamLMartin, yes, this is my feeling as well, the scale first seems to be build to flip ventures, and it is much more of a probability game.
December 4th, 2011 at 2:19 pm
silicone watches…
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