Friday, December 5, 2008

What does it really cost....

One of the most frequent enquiries we get from web and software entrepreneurs is "how much would it take to build something just like X". Leaving aside the implication that you could penetrate a market someone else has already occupied with a "me-too" product, in most cases the would-be entrepreneur can answer this question themselves! It's actually really easy in today's world. Let's say you wanted to build a product just like the popular restaurant reservation system (Or just like it with some difference or tweak you think will make it better). Here's how you find out what kind of investment you'd need to make to build it:

  • Fire up Google.
  • Now put the following phrase into the search box: Opentable venture funding. You can also try Opentable angel funding.
  • The first article that comes up is a press release from Open Table indicating that they received in 2000 a $10M venture capital infusion, after a $2M initial angel and VC round.
  • The $2M was probably pretty close to the cost to build out their initial demo/proof of concept and implement it in a small controllable beta (probably by region), and some portion of the $10M was used to make that scalable, fully featured, and to build the sales, marketing and business arm of the company to make it huge. There was probably an additional initial investment in Friends, Families and Acquaintances dollars (typically under $1M).

You can use this same methodology to find out the initial venture funding of most of the companies out there that have received venture dollars in the past. Sometimes you have to dig a little deeper, or you might have to go through a few articles to find either the actual or estimated dollar amount (except for public companies they're not required to report it). Alternatively you could look at other similarly scaled apps and check their funding.

The mix of how they spent their venture might be a little trickier, but most start-ups are spending the bulk of their initial cash on initially building software, and the bulk of their second round on infrastructure, scalability, marketing and sales. A me-too product would probably have to spend even more money on marketing and sales to be successful, since they'd have to fight off competition the first company into the space didn't have.

So what does that mean for the would-be entrepreneur? It means you'd better have something so interesting, new and revolutionary that no one else has thought of it if you expect to get funded and bring the product to fruition. Google took over the search market from Yahoo by presenting a simple semantic search interface instead of yahoo's structured/categorized search. It changed the world, but most of the success stories today are for new ideas no one ever thought of before.

Assuming you do have that revolutionary idea, be prepared to invest some serious dollars into making the thing a world-wide success. Treat the development effort and the business model development as the serious task that it is. Do some due diligence, market research, business planning, and specifications work before you jump into the development process feet first. Be sure you're prepared to stay the course and hear NO a lot before you dive into the Venture and Angel Capital fray - there are a very few applications that get funded, and the better prepared you are the more likely you'll be to be one of them.