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Monday, March 24, 2014

A $32,000 Startup That Was Sold for Millions 03-25

A $32,000 Startup That Was Sold for Millions

I meet entrepreneurs all over the world who think that venture capital is a prerequisite for starting a company. They write business plans and ask for introductions to venture capitalists. I tell them that they should instead bootstrap their startups. That what would have cost millions of dollars a few years ago now costs thousands.
Think about it. Today’s laptops have the same processing power as the minicomputers which cost millions of dollars in the 1980s. For storage, you once needed server farms and racks of hard disks. Today you have cloud computing and cloud storage—and these are cheap.
You can also bootstrap hardware companies like Nest (which Google acquired for $3.2 billion). Sensors such as those in our smartphones would have cost tens-of-thousands of dollars a few years ago. They now cost practically nothing. Entrepreneurs on shoestring budgets can build smartphone apps that act like medical assistants and detect disease, body sensors that monitor heart, brain and body activity, technologies to detect soil humidity and improve agriculture.
Entrepreneurs can also participate in the genomics revolution (here is an article that explains this). It cost more than $100 million to sequence a full human genome about a decade ago. It now costs $1,000. Genome data will soon be available for millions, then billions of people. Anyone anywhere can write computer code that compares one person’s DNA with another; learns what diseases people with similar genes have had; and analyzes the correlation between genomes and the effectiveness with which different medications or other interventions have treated a given disease.
There are similar advances in robotics, artificial intelligence, 3D printing and many other fields.
In 2011, I mentored a startup called Beat The GMAT that figured out how to rebuild and bootstrap itself on just $32,000. The company was acquired last year for millions of dollars by Hobsons. Its founders Eric Bahn and David Park say they are really enjoying their financial freedom and are glad that they took the risk. It wasn’t easy, but was the most incredible experience they have ever had. Below is a version of an article I wrote for Bloomberg BusinessWeek about how they did this. There are valuable lessons that you can learn.
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After graduating from Harvard Law School in 1999, David Park founded discussion forum service It took more than a dozen software developers, product managers, and quality assurance staff 18 months to build the company's core technology. To fund it, Park raised $10 million in venture capital, of which $4 million was spent before the company was launched. It went down in flames in 2003, a casualty of the dot-com bust.
In 2005, Park partnered up with his friend Eric Bahn to launch his next business, MBA admissions social network Beat The GMAT in San Mateo, Calif. Rather than take venture capital, they limited startup costs, spending just $119,000. The site steadily gained traction, but they were nervous that technologies like Facebook and Twitter would make it obsolete. So they chose to make it obsolete themselves.
In 2011, the team decided to rebuild the site and the company. Their goal was to create a social network for business-school applicants that had features such as aggregated GMAT-prep and MBA-admissions news; a way for members to connect with one another; and social gaming elements to keep members motivated. It makes money advertising test prep services. Amazingly, the new site took only four months and cost just $32,000 in total.
I was skeptical when Park and Bahn approached me last year to ask for advice on business strategy for the site. They were convinced they could build a bunch of sophisticated technologies in months—on a shoestring budget. They were determined not to raise venture capital. I had doubts. My two software companies had taken years and cost millions. Yes, technology is much easier to build today than it was during my tech days. But I meet Silicon Valley startup founders every week who tell me about their ideas and their plans; and no one says they can build their products for less than the cost of a BMW 328.
But Park and Bahn did. How? To start with, they crowdsourced the design. Instead of hiring a bunch of marketing people, as tech companies usually do, they asked their user community for volunteers to help conceive a new site. Then they selected a handful of the most eager users and trained them on the basics of Silicon Valley–style product management. Next, Park and Bahn needed to find a designer. They used, which hosts design competitions, for a two-week contest that attracted hundreds of designers, yielding a design they used as the theme for the new site. The contest, prize, and designer's time cost $9,200.
They broke up Web development into two tasks: front-end engineering (turning design artwork into code) and back-end engineering (making the code actually function). They built their technology on top of WordPress, phpBB, and Drupal—free, open-source platforms. Front-end engineering usually requires sophisticated coding done by contractors who earn as much as $100 an hour.
 Instead, the Beat The GMAT team turned to a service called, which converts Photoshop design files into HTML and CSS code. The cost of this service, at $160 to $220 per Web page, totalled $4,500. For back-end engineering, they hired four developers from Hungary and Ukraine on the outsourcing website oDesk. They paid $15 to $20 per hour. The back-end engineering cost $18,000 in total.
In software development, things don't usually go as planned. Park and Bahn had their share of missed deadlines, buggy code, and product problems. Outsourcing always makes things more difficult, because developers are in different time zones, speak different languages, and don't always understand what is expected of them. It took many sleepless nights and lots of caffeine to surmount these obstacles.
In the result, a company that later sold for millions cost its founder just $32,000 because the relevant technology now is so inexpensive. The ability of entrepreneurs to build sophisticated technologies so cheaply in the Web world is even foreshadowing the marginalization of venture capitalists. Software startups often spend the first few months of their existence polishing business plans and pitching to investors. They can instead be working with smart people all over the world, focusing their energy on perfecting their technologies, as Beat The GMAT did. When a law-school grad (Park) and a sociology graduate student (Bahn) can build successful technology companies, the notion that website founders need computer-programming backgrounds too is outdated.