Last Updated Sep 29, 2010 11:50 AM EDT
According to Alexa.com (AMZN), Xmarks had a traffic rank of 1,484. Hardly something to sneeze at. It was top of the Firefox bookmarks category. There was just one little problem: It was making bupkes. How it got into that position should inform and scare a lot of entrepreneurs, because some critical advice people have fed them is wrong.
Xmarks was a company with pedigree, and if that was enough it'd have been a smashing success. Founder Mitch Kapor founded Lotus, wrote its one-time market leading spreadsheet product, started other companies as well, and was the first chair of the Mozilla Foundation. Kapor put in the seed money, with additional funding by two different VC firms. And yet, there was a major weakness that you can see in the blog announcement of the closing from co-founder Todd Agulnick. Here's a relevant excerpt, although I'd advise any entrepreneur to read the entire piece:
For four years we have offered the synchronization service for no charge, predicated on the hypothesis that a business model would emerge to support the free service. With that investment thesis thwarted, there is no way to pay expenses, primarily salary and hosting costs. Without the resources to keep the service going, we must shut it down. Our plan is to keep the service running for another 90+ days, after which the plug will be pulled.The group had a cool idea for a combination product and service. It actually came out of Kapor's own frustration with Firefox when, as head of Mozilla, he had to use Safari because there was no way to synchronize bookmarks across five computers he used. But they ran into the same problem that I've often seen trap writers, including myself. In journalism, you'd say that someone had an idea, but not a story. It's the difference between "I'd like to write something about Microsoft," and, "I want to write about Microsoft's weakness in mobile platforms as a result of its success on the desktop."
Just as there is a difference between an idea and a story, there is a difference between a product or service and a business. Creating something that people like is one thing, and vital if you want a healthy company. But a business requires the detailed context of financial and operational models that makes the entire endeavor viable. Mind you, that could include something like open source freeware with developers donating spare time. No matter what the structure, though, you must be able to do the following:
- distribute product or services to customers
- attract customers in the first place
- support customers when something goes wrong
- manage the process of business
- generate enough revenue to cover costs, salaries, and profit for owners
Unfortunately for them, and too many other entrepreneurs, particularly in high tech, viable business models are often far more difficult to develop than the software they are to support. This isn't a trivial detail, and even one-time success doesn't mean that you understand why things went well in the past and what you need to do now. For every Steve Jobs or Bill Gates that has successfully built multiple companies, there are hundreds, if not thousands, of "world class executives" who had a triumph once and then traded on what was essentially a freak accident the rest of their careers.
Clearly some companies thrived by focusing first on product and then worrying about how to make money. Google is a clear example. Actually, Google acquired a start-up that had figured out how to make money off search ads. Tellingly, CEO Eric Schmidt and co-founders Larry Page and Sergey Brin have been far less successful in making other attempts at revenue work.
Getting backers doesn't mean that the idea can't miss. Venture capital money works by betting on multiple businesses, assuming that only a portion will have even moderate success and a smaller group will be true hits. VCs will pile on to something like Twitter because the buzz about the company and the popularity suggest the chance of a hit. But that's educated gambling and an investing model predicated on significant risk, not an impartial endorsement of an approach to business.
I think there's still a significant chance that Twitter will never make back the boatloads of money investors put into it, and that the VCs involved will eventually write the company off, if someone doesn't get convinced that it is a "must" to acquire. And it may be that it would make sense for a Google or Microsoft (MSFT) to buy the company one day for the relationship with customers.
That's still far different from having a viable business. It would just mean that the founders and investors didn't have to learn the hard way that they didn't have a business. Think of it this way. I might have a key plot of land that a developer would badly want for a project, and I might be able to sell it. But just because I made money doesn't mean that simply owning the land would have been a business.
- Silicon Valley News Flash: Angel Investors Like To Make Cash
- Yahoo's Problem Is Really a High Tech Problem
- Twitter Does What It Must, and That Pisses Off the Privacy World
- 7 Ways Companies Like Foursquare Can Hold Off Giants Like Facebook