four bean soup

So you build web apps and maybe you recently decided it’s time to strike out on your own? When deciding on a direction for a business it is important to understand what you are selling and where it’s limitations lie. There are four basic ways to bootstrap a new business:

1. Build web apps for others
2. Build web apps with ads
3. Build web apps with subscriptions
4. Build web apps for others while you build your own

While these all might sound like a great way to get started, you must consider the real product of each of these - how much time you spend on them to earn your money.

Web apps for others

Contracting can be a very fun and exciting business to run, but the key thing to consider is that you are directly selling the hours you have each day. In a perfect world, you could sell 40 to 50 hours a week at $150/hour and live a great life! In the real world, you spend a ton of time doing other things such as finding and meeting potential new clients, writing proposals, closing deals, etc, etc.

Building web apps for others can be fun and offer a chance to change what you are working on week to week. One of the only ways to grow this type of business is to hire sub-contractors or employees. You can offer your workers a fraction of what you charge your clients, and free up a bit of your time in the process. If you decide hiring people might be too dicey for your startup, you will always be limited by your focused billing time.

This is a 1:1 growth model, comparing hours spent to money made.

Ad web apps

You’ve built this great app, but you don’t know how to charge for it, so you decide to slap AdSense on the site… If you’re lucky enough, you might break 6 or 7 digit pageviews per month, which will pay for your monthly iPhone bill. Not very ideal.

Growing an ad business leaves you with two choices: hire an ad sales guy OR build a custom affiliate ad system. Either choice, you are taking money or time away from your primary focus of building a web app and spending it on finding better ways to sell your pageviews. Hiring a sales guys, even if it is commission, doubles your expenditures. Building and managing an affiliate network will consume most of the time you have for your regular web app.

This is a 2:1 growth model, comparing hours spent to money made.

Subscription web apps

Eureka! You’ve found a perfect idea and you even know how to charge monthly for it, good for you. Let’s say you spend 120 to 200 man hours getting the app ready for launch. Let’s also say you offer a plan of $5/month after a free 30 day trial. You launch and you get 10,000 uniques from your aggressive twittering and word of mouth, and convert the standard 1% to paid customers.

You’ve now set yourself up to collect $500 a month off your initial 120 to 200 hours. On top of that, with tools like twitter, facebook, podcasting, and other word of mouth; you could easily grow your business ten fold in first few months.

Server scalability and word of mouth are the two key growth points for a subscription model. Services like EC2 or Linode make it quick and easy to purchase hardware you need on the fly. Scaling really is easy with open source tools like nginx, haproxy, and mysql. As a friend of mine once told me “Server guys are like car mechanics, a dime a dozen”.

This is a 1:N growth model, comparing hours spent to money made.

Subscriptions and client web apps

Building two apps at once can be a very tricky thing, indeed. While this option may seem appealing, I will warn you it isn’t for the faint of heart. I’ve attempted this approach with a partner, and it didn’t work out in the end. I’ve also been an employee of a company that tried this model and had moderate success with it - the growth curve can be insane for the number of workers you bring in to get things going right. If things don’t feel pressured when trying this model, you’re doing it wrong ;).

Time once again is an enemy of this model, but with this approach you may have a larger talent pool to tackle time sink issues. You will likely also end up with a talented worker to help with scaling issues.

This approach can offer more stability if you can pull it off, but it is very easy to get off track and focus in one area or another with a smaller team. I often refer to this phenomenon as “streaks”, and we ran into it quite often when I attempted it with a partner. For example, let’s say you have a client deadline on Friday and you start off on client work with a bang on Monday. Tuesday you decide to focus on your company web app, making changes and trying to add new features. Next thing you know it is Thursday afternoon and your company web app is updated but you have a ton of client work still left for Friday morning!

This is a 1:M growth model, comparing hours spent to money made.

Summary

I wrote this to help people who might be starting a new business like I am, and to encourage them to take the time to really make the right choice. In the end, it doesn’t matter what you choice, you have to execute if you want to succeed. Here is a quick run down of businesses that make these models work:

• 37signals - Subscription web apps
• Four Bean Soup - Subscription web apps
• Less Everything - Subscription and client web apps
• Intridea - Subscription and client web apps
• Digg - Ad web apps
• Facebook - Ad web apps
• Hashrocket - Client web apps