Scott Burkett's Pothole on the Infobahn » web2

Web 2.0 for The Uninitiated (or Ignorant)

Scott Burkett — Mon, 19 Mar 2007 12:27:55 +0000

The term “Web 2.0″ is (and has been for a while) one of the most over-used and misunderstood phrases in business. I always get a chuckle when someone says they are “all about web 2.0″, when in actuality, they have no clue what it even means. They often use it to represent the “generic comeback” of the tech startup. To some people, any company started after the bubble is a “web 2.0″ company. Funny.

For those who really still don’t get the movement, you owe it to yourself to watch this video. It is a bit long, but be patient – the payoff is worth it. This is done in the style of Lessig and Dick Hardt. Click the video clip below to play it.

Thanks to Michael Wesch, Assistant Professor of Cultural Anthropology at Kansas State University for putting this gem together.

Cheers.

Web 2.0 Sanity Check

Scott Burkett — Sun, 14 Jan 2007 16:23:13 +0000

Jack Humphrey had a great post this morning summing up why he thinks the Web 2.0 free-for-all is over, yet the Web 2.0 movement is just beginning. A great read, especially if you are an entrepreneur feverishly building an online community, social network, video-sharing site, etc. that you think you are going to sell for millions in the next 30 days. This is a logical and timely extension to my post on the real value of a social network.

The real winners are going to be those who can innovate and build businesses around them – not just be the first guy to clear a path into the woods.

Cheers.

Technology Cost Comparison: Web 1.0 vs 2.0

Scott Burkett — Mon, 01 Jan 2007 01:56:44 +0000

Inspired again by this post from Fred Wilson at Union Square Ventures, I began thinking of the differences in the capital required to launch something these days. Much ado has been made over Web 2.0, and how much cheaper it is to build technology solutions these todays.

I came across an old proposal that I received from a vendor years ago (in the 1.0 days), and got a good laugh out of it.

We all know that things are cheaper to build these days, but I thought it might be interesting to put together a post illustrating the actual dollar differences in hardware, software, services, and labor costs. And yes, this is my last official post for 2006 – so happy new year in advance (4 hours from now!).

Preface

Note: I am using the phrases “Web 1.0″ and “Web 2.0″ to simply represent the passing of time.

The numbers that I am using to represent the Web 1.0 days are taken from a series of documents from a startup I was working with at the time. I am going to show those vendor dollars (and time components, where possible), and compare them to what my estimate would be if I were building that same system today. The focus, of course, will be on dollars, time, and trends.

The exact specifications of the proposed system are not important. For the purposes of this post, consider the proposed system to be a “typical” B2B/ASP procurement system. The only important criteria here at this point is that there should be a suitable “stage” environment, which would run parallel to the production environment.

These numbers only reflect hardware, software, and outsourced labor costs – they do not reflect internal IT spend (laptops, mobile fees, etc.), and do not reflect salaries of FTEs or other business-related expenses. I think it is safe to say that there were more than a few companies back then spending money on frivilous non-essential items.

Enterprise Software Costs
The original system was built on a stack comprised of ATG’s Dynamo web application server (with the personalization license add-on), and Netscape’s Enterprise Web Server. The backend was facilitated by an high-end Oracle database.

On the application side of things, we were building upon Oracle Exchange, which was Oracle’s attempt at fighting Commerce One and Ariba. It was *supposed* to provide a big pile of transactional and catalog management capabilities – it turned out to be a vaporous pile of ****, but that’s probably a post best left for another day.

Interwoven was the content management system (CMS) of choice, and Verity was selected to provide “search” capabilities.

We implemented a very high-end CRM solution built around Silknet’s product and Aspect’s ACD (call center) solution.

Component	Qty	Unit Price	Total
Oracle Database	1	120K	120K
ATG Dynamo	4	10K	40K
ATG Personalization License	4	20K	80K
ATG Development Seats	5	10K	50K
ATG Staging Licenses	4	5K	20K
Netscape Enterprise Server	2	1K	2K
Silknet	1	170K	170K
Silknet Maintenance (1st year)	1	34K	34K
Aspect ACD	1	250K	250K
Aspect Maintenance (1st year)	1	41K	41K
Oracle Exchange	1	825K	825K
Interwoven Bundle	1	90K	90K
Verity Bundle	1	120K	120K
			$1,842,000

Nearly $2M in infrastructure software spend, and we haven’t written any code or hired any employees. As you will see in a moment, for a tiny fraction of this same amount, you could very likely build not only the entire application, but build the entire company around it.

If I were building this same system today (as a startup), it would very likely be built upon the LAMP stack (Linux, Apache, MySQL, PHP). Why? Low cost, high human resource availability, and sufficient scalability. For CRM purposes, I would do a 5 minute download and install of the free version of SugarCRM.

For the CMS, take your pick – there are several dozen very high quality open sourced/GPL’d CMS products out there that are comparable in functionality (PostNUKE, Plone, Joomla/Mambo, Etomite, Apache’s Lenya, etc). Building a CMS framework from scratch is certainly an option as well – very easy to do with current toolkits. Adding search capabilities is just as easy (Apache’s Nutch project, htdig, Sphinx, even Google).

Total cost? $0. Gotta love freely available, open sourced, GPL’d software.

Hardware Costs
In the original system, the servers were all obtained from Sun, and were broken down as follows:

Component	Qty	Unit Price	Total
Sun Microsystem E250 (1 CPU unit) – front-end web server	2	10K	20K
Sun Microsystem E250 (2 CPU unit) – Dynamo hosts	2	20K	40K
Sun Microsystem E450 (2 CPU unit) – database server	1	30K	30K
50 Gbyte RAID device (back-end storage)	1	40K	40K
			$130,000

We were eventually going to add some additional hardware, but this was our initial environment (about $130K worth). Obviously hardware is more powerful now, so to support the same number of users, logic tells us that we would need fewer of today’s servers. Of course, web services are more widely adopted now by B2B users, so our number of users would probably go up – in the end, it is probably works out about the same.

The bottom line is that you can obtain a nice 2U or 4U rackmounted server, dual or even quad CPUs, loaded with several gigabytes of RAM, 15K RPM SCSI RAID arrays, for less than 10K each (I’ve recently procured them around the 7-8K point.) If I were building a system comprised of six (6) physical servers, you’d be looking at less than $50K, which would be a savings of $80K.

That of course assumes I am interested in launching with relatively high-end hardware. If you really wanted to pinch pennies, you could slide down the scale a bit – remember, hardware is more powerful these days, so perhaps a dual CPU (or even dual core) unit would suffice in lieu of a quad-CPU rig. You get the idea.

Hosting Costs
Hosting was one of those things that really became a racket in the 1990s. Now, it is back to being a commodity, where it should be. Hosting providers have to differentiate themselves by tacking on true value-added services (imagine that).

Oracle was charging us $300K/year for hosting their Oracle Exchange. $50K per month! That didn’t count the $100K we spent on routers, switches, and other network equipment (so we could do our own hosting for our core online service – again, imagine that).

In the first year, that represents a $400K spend on hosting.

In today’s market, we could have hosted all of our servers, on a reasonably fast pipe (against a fiber ring) with a reasonable throughput capacity of say, 10Mbps, for less than $5K per month (much less, depending upon the vendor, if we were co-locating the servers, leasing a full rack vs. 1/2 rack, etc.)

Labor Costs
If the savings in software, hardware, and hosting hasn’t made a strong enough case, wait until you see the labor savings.

I am reminded of one of the great “de-motivational” posters available at despair.com, which says “Consulting: If you are not part of the solution, there’s good money to be made in prolonging the problem.” I both made, and spent, a small fortune in consulting during the 1990s.

We had a veritable army of people working on this project. We were paying one consulting team (from a typical vendor) a total of about $3.4M over a nine month stretch to build our core product. An additional $840K was budgeted for another four (4) month phase after that.

We had another team working against a $1.4M purchase order to build out our customer care portal. And finally, a third, smaller team consulting with us on “corporate strategy” against a $480K purchase order.

I won’t count the latter (corporate strategy consulting), as no startup in their right mind would pay for that service today. Nevertheless, the total labor bill came to around $5.6M.

With a decent offshoring team (even in India, where the prices have been rising steadily), you could build this entire application for between $500K – $1M (as a reasonable estimate based on my experiences in both worlds.) If you wanted to use one of the cheaper, emerging countries (Vietnam comes to mind), you could probably build it for less than $500K.

For that matter, a dosmestic team in your own office could build it for at least half of the original price. Even cheaper if you “inshored” to a cheaper development shop in a smaller market. Finding a handful of college kids with a penchant for creating things is also an option.

What about scability?
There are some who would scream that PHP isn’t as scalable as J2EE. To those people, I simply say fire up your web browser and go to “yahoo.com.” Is it fast? That’s PHP. People who claim PHP isn’t scalable simply don’t know how to scale a PHP application.

MySQL was certainly not scalable a few years ago, but they have made tremendous strides in bringing their product up to enterprise levels (with the added functionality around replication, transactions, clustering, etc.) These days, I have no problem deploying MySQL 5 in a production environment.

Friendster has scaled to north of 40M users using PHP and MySQL. That represents about 39.9M more users than most startups have right before they crash and burn. :)

Why the big difference?
For starters, I should point out that a great many vendors really pumped up their prices in the 1.0 days. Thankfully, the days of billing out a fresh-faced college graduate as a technical resource for $300/hour are long gone. This clearly played into those inflated costs. Everyone was going along for the ride. The “get big now” pressure from investors also added a “kerosene on the fire” factor as well.

The passing of time has also helped. Time has a great knack for putting downward pressure on costs, especially when the environment becomes hypercompetitive.

Open source/GPL tools have continued to develop. They are at a point now where they are viable at the enterprise level. Additionally, they have matured to the point where they can signficantly reduce the amount of effort required to create something from scratch. There are exponentially more freely available libraries, tools, and canned solutions than was available just a few years ago. Back in those days, you had to either create things from scratch (and hope you could reuse them later for other things), or open your checkbook and pay for the best vendor-peddled solution you could find. No more.

Additionally, the bursting of the bubble forced the “rackets” to shift to being pure commodities, and driven more by corporate consumers. Hosting is the big example of this. The benefit here has been better service and lower costs from hosting providers.

Hardware has evolved to the point where an entire rack of horsepower five years ago can fit into a single 4U space. Pricing has also fallen to the point where even the lowliest startup can afford a serious array of horsepower. Illustrative of this point is that for the price of our original hardware ($130K), you could actually launch many Web 2.0 type plays, at least in an initial beta state!

The continued evolution of Linux has also played a tremendous part in all of this, and it shouldn’t be overlooked. Over the years, I have used OS solutions from Microsoft, IBM (AIX), HP (HPUX), Sun (Solaris, SunOS), etc. None have played such an important role in helping startups watch their bottom line, and put serious firepower online more than Linux. From price (free) to scability to POSIX compliance – you just can’t beat it. If you are a startup, and you are building your solution around costlier platforms, you are simply wasting your money, or worse, the money of your investors – period – end of the story.

The offshoring revolution has certainly played a key role in the lowering of labor costs – no doubt about it. And given that hourly rates from India have gone up dramatically over the years, we are moving into a second wave of offshoring. We are seeing CMMI Level 5 shops popping up in places like Vietnam. The decentralization of the labor market through places like odesk.com and elance.com have also played a hand in things.

Summary
Not much to summarize really – it is obviously cheaper to get things done these days, and there are lots of valid reasons as to why that is.

To circle back to Fred Wilson’s original post – the reduced technology-related spend is not a panacea for successful startups. As Fred points out, eventually, the capital requirements to build a sucessful company come full circle. However, you can definitely take advantage of certain trends to substantially lower the slope of the spending curve – which obviously assists you in controlling your burn.

I don’t think anything amazingly profound or prophetic has come out of this post, but it was fun to put together. Hopefully, you enjoyed it and found it of interest.

Cheers.

Do VCs Still Matter?

Scott Burkett — Thu, 21 Dec 2006 16:02:31 +0000

According to Fred Wilson at Union Square Ventures, they do. If you are a web entrepreneur, you owe it to yourself to read this post.

This chart showing the capital requirements of “web 1.0″ startups compared to “web 2.0″ startups is brilliant (click to enlarge). Notice the nice curve on the web 2.0 line, which reflects the relative ease of getting into the game these days. But note how eventually, you end up with a “real” business, and the cash requirements become very similar. Good stuff, Fred.

Cheers.

Oh, How I’ve Missed That Feeling!

Scott Burkett — Tue, 24 Oct 2006 15:04:16 +0000

When building a new company, there is an unmistakable feeling you get when you reach the launch date. When those first users are in there, you feel like the weight of the world is off your shoulders. This is the closest that men can ever get to actually birthing a baby. On the other hand, there is the unmistakable punch in the gut that reminds you that the games are just beginning.

We launched HiddenMarket into public beta yesterday! At several points yesterday, I was asked how I felt (by various people). Here are some of the words that I used to describe that unmistakable range of feelings:

Tired/drained/spent, hungry (literally and figuratively), excited/thrilled, pumped/stoked, blessed/fortunate, pissed off/chaffed, curious/anxious.

You don’t really know whether to love it or hate the experience. It simply is what it is. I suppose it is a bit of both.

The way to get started is to quit talking and begin doing. — Walt Disney

The requisite goofy post-launch self-portrait of Jerry and I.

Some press release love follows:

HiddenMarket Launches First Social Business Intelligence Network

HiddenMarket Group, Inc., an Atlanta-based technology start-up, launched the open beta of HiddenMarket.com today. The free, first-of-its-kind social business intelligence network helps members tap into the vast “hidden market” of business news, information, resources, and opportunities.

HiddenMarket Founder and CEO Scott Burkett explained, “70-80% of job openings aren’t posted in the public domain and word of mouth is a key driver of informal sales leads, business intelligence and business opportunities. Even the most dedicated networkers can’t be everywhere. So in spite of someone’s best networking efforts they could be missing out on the perfect job, or the sales lead that could turn into their biggest customer.”

“Everyone knows that networking is the surest catalyst for career and business success,” said Jerry Recht, HiddenMarket Vice President of Business Development. “The key to successful networking is the groups with whom people affiliate, from professional trade associations to church groups to alumni associations. These groups provide an environment where individuals connect based on shared values, interests and objectives. Those connections lead to mutually beneficial relationships where exchanges of valuable information take place.”

The key to HiddenMarket’s success, the founders believe, is a unique model that simulates a real world networking environment. Individuals join the HiddenMarket community according to the groups with whom they are affiliated. They also have the option of joining as individuals or creating their own groups. Members decide with whom they want to share information, whether it’s just one individual, people on one or more of their friends lists, one of their groups, several groups or the whole community. Conversely, members can receive information based on criteria they define to ensure they only receive information that is relevant to their interests and objectives.

The way Burkett sees it, “Most business networks are essentially databases. HiddenMarket is a community. By leveraging the power of the Internet to facilitate relationships we think HiddenMarket.com has the potential to transform the way people do business.”.

Cheers.

Hittin’ the Streets with HiddenMarket

Scott Burkett — Sat, 23 Sep 2006 02:48:26 +0000

Today was a very cool day. This morning I spent a couple of hours with the Kettering Executive Network, a group of around 500 C-level/VP-level executives here in the Atlanta area. I got a chance to network with some old friends, meet some kind new faces, and best of all, show off HiddenMarket as a platform for B2B social networking and market intelligence. :)

The discussion was lively, and carried over into lunch. The group really got into what we we’re doing at HiddenMarket, and where we’re going with it all. We got some good questions, too. Nothing beats getting out there in front of users and doing “show and tell.” If you want honest feedback, and suggestions from the trenches, you can’t get the full picture by sitting at your desk. Ya gotta get out there and beat the pavement a bit.

My big takeaways were:

Everyone agrees that there is a “dilution of trust” in many existing social networks.
Preservation of “trust” will be a critical area moving forward.
It is time for social networks to move beyond their current state if they are going to add real value in the business community.

Fortunately for us, they also were pleased with our approach to addressing these and other issues, which was both refreshing and validating. Especially coming from this group. The level of social capital in the room was simply enormous. We are definitely thrilled to have Kettering as one of our beta groups.

A quick shout out to Craig Larson, a brilliant man, a co-founder of VuBotics and a good friend. Craig was kind enough to record my presentation on his handheld digital video recorder (where I was able to snag a couple of stills for this post.)

I also want to thank Steve Walden and Armando Cuevas, two of our advisory board members, for attending and showing their support. Same for Gregg, Lee, and Josh from the Gang of 5, our entrepreneurial roundtable. Fun!

Cheers.

A Dilution of Trust

Scott Burkett — Tue, 12 Sep 2006 03:20:52 +0000

Fred Wilson at Union Square Ventures had a very interesting post yesterday (Friending). In it, Fred shares his views on the evolution of “contacts”, “connections”, “friends”, et al. A very interesting read, and timely, given what we are doing here at HiddenMarket.

The quote from Fred that keeps sticking with me is this:

Friendship has been defined on most social networks as the people who get their faces on your profile. But as these social networks start to add real applications/utility on top of the relationship maps it’s going to create issues. Friendship is not a monolithic thing. It’s a nuanced thing.

Those of you who run into me at various networking events here in Atlanta and have to suffer through my rantings and ravings on social networks can attest to this. What Fred points out is actually one of the key driving points behind what we are doing at HiddenMarket.

What we have seen from talking with literally hundreds of users of professional social networks is what we’re calling a “dilution of trust” among users. Many people only “know” a small fraction of the people in their immediate online network. If everyone had played by the rules, and only “connected” with people that they actually knew, then we would likely be having a different conversation here.

Current social networks have largely become a “numbers game.” The quality factor has been largely supplanted by one of quantity. Instead of saying “wow, look at this nice, tight collection of strong contacts that I can leverage”, it has become a “Wow, honey, look! I now have 25,000 friends, and am connected to everyone in the free world!” The dilution of trust.

And as Fred points out, when “real applications” start appearing (or trying to appear) on top of those relationships, the problems become pretty apparent. Apples and oranges. Square peg, round hole. Whoops.

The social model we’ve implemented with HiddenMarket was born out of our realization that it was time for the a new iteration in social networking (at least on the B2B or professional side, where we sit.) It is refreshing (and validating) to see someone like Fred speaking out on this issue.

Cheers.

Why Web 2.0 Plays Still Need a Business Plan

Scott Burkett — Wed, 06 Sep 2006 03:45:00 +0000

There has been quite a bit of buzz lately about Web 2.0 startups, and the importance (or not) of having a formal business plan in place. The whole Paul Graham, YCombinator, Kiko failure has brought all of this to the forefront. Is business planning important? You bet.

My thoughts, in no particular order:

1. A web 2.0 play is still a business. Peel back the fancy fonts and the minimal 2-color palettes and what do you have? The answer: servers, storage, office space, payroll, expenses, etc. Granted, it is becoming increasingly more cost-effective to bootstrap these types of plays, but at the end of the day, it is still a business. If you aren’t viewing your play as a business, then you are trying to monetize a hobby. Different animal. In that case, you don’t need a business plan, you need a day job.

2. It helps to frame your thinking for investors, new employees, etc. Fairly self-explanatory. By reading your business plan, a new employee can “get vertical” very quickly. If you are considering taking on investors, then having a business plan allows a potential investor to go “beyond the pitch”, and really ascertain your level of understanding of your industry, your competitors, your assumptions, etc.

3. It helps you iterate your business. By going through the motions of writing a business plan, you will simultaneously “iterate” your business as you write it. You will come up with additional revenue streams, identify previously unforeseen threats and opportunities, etc. There truly is something magical about putting pen to paper, or hands to keys, as it were. I promise you that your idea will take on new meaning when you’ve written a business plan for it. Just as “no plan survives first contact”, “no idea survives first planning” … I promise you it will evolve.

4. It helps YOU get down to the nuts and bolts. The act of writing a business plan affords the entrepreneur the opportunity to get very “hands-on” with the business model and the strategies behind it. If you are preparing to raise capital, this is a very important exercise, as you will get the tough questions sooner or later.

5. It doesn’t need to be the Grapes of Wrath Part II. I think many people shy away from creating a business plan because they think “why should I put all of this effort into writing a 100 page document when I could be pushing code instead?” Great logic, but a poor assumption. A good Web 2.0 business plan can be written in less than 20 pages. For that matter, a good “non-Web 2.0″ business plan can be written in less than 20 pages. The best business plan I’ve ever laid eyes on was actually only one page long. ONE PAGE!

6. It shouldn’t take 6 months to write. To go along with #4 above, business plans shouldn’t take that long to write, and I know that many entrepreneurs are anxious to jump right in and start bootstrapping. However, most competent entrepreneurs can shell out a plan in less than two weeks. If it takes you 6 months to write a business plan for a Web 2.0 startup, you should seriously consider another career field.

7. It serves as a roadmap and a validator. As I’ve stated on this blog before – no plan ever survives first contact. Agility is a critical skill these days. However, having a business plan in place allows you to have a firm idea of where you were initially headed when you signed that term sheet. It also serves as a validator for you …. how close were we to the plan? We deviated, yes … but are we straying too far from where our vision is/was?

8. It is a valuable learning experience. For all of the reasons listed above, as well as some others. You will be a better entrepreneur because of it. The same could be said about pitching, financial modeling, etc.

9. It sends the right signals. Contrary to what some would have you believe, there are still investors who will insist on a business plan. Sure, there may be some that will open their wallets for a slick pitch, but their confidence in you as the jockey will go considerably if they know you’ve got a handle on things. And having a business plan in place certainly allows you to get a handle on things. Remember, having a “handle on things” doesn’t just take into account what you’ve done and what you’re doing currently, but also what is to come.

10. The odds are in your favor. Most businesses fail. Most of those businesses don’t have well-thought-out business plans behind them. Gee.

Can you start a business without a plan? Yes.

Can you be successful without a business plan in place? Yes.

Can you fail even with a business plan in place? Yes.

However …

Are your chances of success greatly magnified with a plan in place? Without a doubt.

Cheers.

Why There is No Web 2.0 Bubble

Scott Burkett — Sun, 27 Aug 2006 16:35:14 +0000

I have been working on this post for some time now, and for a variety of reasons, simply have yet to finish it. However, after reading today’s offering by Alex “Semper Fi” Muse over at the Texas Startup Blog, I am scrapping my efforts on this front. He has managed to summarize my thoughts in a way that has eluded me; so instead of mirroring his efforts, I will simply add a few comments.

You can read Alex’s post here, but I will offer a few thoughts to go along with what he (and Fred Wilson and Paul Kedrosky) are saying.

First, to have a “bubble”, there has to exist something to exert upward pressure, generally around pricing, cost, valuation, etc. I see nothing doing this, for all of the reasons pointed out in Alex’s post. VCs are active, but they are certainly not investing at the levels we saw before. There are certainly “pockets” of heavy investment, but nothing on the scale preceeding the stupidity-parade of the late 1990s.

Another point I’d like to make is that the bursting of ye olde digital bubble in the late 1990s affected most major markets. Atlanta, for instance, was one of the heaviest hit areas back then. The investments back then were fast, furious, and all over the map.

That simply isn’t the case now. Believe me, there is no Web 2.0 bubble here in the southeast. Most investors here couldn’t tell you the first thing about Web 2.0. They are still largely continuing to lick their wounds.

The key point, to me at least, in Alex’ post was his statement regarding the lack of copy-cat investments. This is a HUGE distinction from the 1990s. If one online dog food company secured a round of $5M, three more received $10M, with a fifth startup receiving the $50M warchest. That is not the case now; with a few exceptions – such as the rush to solve the world’s “video file sharing problem.”

What we see now are lots of bootstrapped startups, with the VCs letting a “clear” winner rise to the top, and then infusing capital into that player to bolster their postion. Instead of investing in lots of copy-cat plays, VCs are now searching for those plays that complement those other portfolio investments. In other words – taking previous investments to the next level. Big difference.

And has been pointed out by everyone already, the deal sizes are not at pre-bubble levels, which in effect reduces the impact of failures.

I’d be more worried about the housing/real estate bubble.

Cheers.