Is it “software” or a “web based business?”

Serious question. Are you building software or a web-based business? The differences are clear, but many entrepreneurs view themselves as the next Digg or the next YouTube or the next Facebook that they fail to realize what they are actually building.

The big difference, broadly speaking, is that when you build software, it can scale (more users, more page views, more subscribers) proportionally to the work required to keep it running. For example, a web service with proper architecture can go from 1,000 users to 10,000 users pretty easily. Maybe a few more servers, a bit more bandwidth, presto.

A web-based business, however, scales in reverse. For example, an online news site that caters to Texas sports fans could be started by a couple folks with a few extra minutes a day to submit stories and moderate some forums. But then some Oklahoma fans want in, and the original folks have to add someone to handle the extra work. So on and so forth until they’re running around looking for VC funding to pay the 75 people that are posting stories all day on 100 different things. And it will never end. The more viewers their site gets, the more people it’s going to require on the back-end to keep it up and running.

So, what’s the point? There are a few, but two that I’d like to mention specifically:

  • If you are building a web-based business that scales linearly like the second example, get a rock solid monetization plan in place early on. I can say with absolute certainty that Google Ads aren’t going to keep an office of 15 eating steak for long. And if you get some VC money, great. But you’re only putting off the inevitable. Businesses that scale linearly end up with one of three possible endings: they run out of money, they have to decide not to grow anymore, or they work round the clock and never seem to get anywhere. Who wants to do that?

I moderate and write for n extremely popular Fantasy Football site.  We have a staff of about 30 and someone has to be involved 24/7 to keep it afloat.  But the core product is a subscription service for high-quality football information.  A way to make money was laid out early so that when it came time to add staff or add servers or create high-traffic features, the site’s owners were able to do so in a way that scaled the system proportionally to the money invested.

  • Although you’d never admit it, part of you is building your business with the hope that some big company is going to acquire you for an absurd amount of money. I think you’d have better luck sailing a rubber-dingy across the Atlantic, but whatever. With that being the case, you need to know this: NO ONE IS GOING TO PAY FOR AN APPLICATION THAT SCALES LINEARLY. Period. No ifs, ands, or buts. If the only way you can grow is to expand headcount, you won’t sell. If your system lacks the technology to have a proportional return on investment for whoever is sniffing around for acquisition, then they won’t be sniffing around for long.

    Not every application is ready for a million users right out of the gate. Frankly, very few are. Furthermore, it’s a waste of time to worry about supporting the millionth user when you don’t even have the first user. But you absolutely have to know that your technology – the code, the framework – can scale effectively if needed. Otherwise, your business may grow but you’ll never feel like you’re getting ahead.

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