A recent article asks whether apps are just a feature, or if they are a business. Should individual creators or very small teams try to make a decent living from an app (a “lifestyle business”) or should they raise venture capital and expand (a “startup”). The article cites Buffer, an app for scheduling tweets (sigh), as an example of a business transitioning from the former to the latter model.
MetaFilter founder Matt Haughey offers an interesting response, one that runs counter to the usual Silicon Valley disdain of anyone who doesn’t match their worldview:
“I’m OK with this lifestyle business. It’s a put-down for a lot of people, especially in Silicon Valley. I think it’s the best thing in the world. You don’t have to kill yourself. I’ve been at startups where we worked 16 hours a day and didn’t get anything out of it. It’s stupid. Geeks who know how to program and make things should be able to make a small thing that runs forever and make $100,000 a year and live off that. I mean, what is wrong with that? It’s an awesome goal.
…It’s like nobody sings unless they want to be Britney Spears. That’s stupid—we should all sing in bars three nights a week if we like it and get paid as professional musicians. Who says you have to be a superstar? I hate the whole ‘rock-star programmer’ thing where you have to make the next Facebook.”
This sounds lovely, doesn’t it? I’m all for opposing the VC folly, and The problem is, singing in bars three nights a week is a hobby, not a business. That’s not an insult to amateur singer/songwriters, but it does show where the analogy breaks down: a business, even a “lifestyle business” has to be sustainable for its owners. It can’t be a thing done just for pleasure—not if it’s meant to be a real business providing a primary income.
We used to have a name for those kinds of organizations: “small businesses.” Small businesses serve modest numbers of customers with specific products and services, enough to support their owners and in some cases a small group of employees. There’s an old joke: “What’s the difference between a startup and a small business? A small business makes money.”
The name “lifestyle business” has always been a derogatory one, used by proponents of investment to recast small business as indulgence. After all, plenty of small business owners work just as hard as the startup employees Haughney mentions. Yet, the implication is clear: “lifestyle businesses” are easy, quaint living, while startups are hard, real work.
The conflict is not one between working more and working less. It’s a choice of principles rather than effort. The problem is, one set of principles is making the other inviable.
Startup culture values high-leverage, high-risk, fast-burning value above all else. What you make is really incidental; all that matters is that it develop a perception of worth in the marketplace, which can be used to leverage further investment and eventually acquisition or a public stock offering.
By contrast, small business culture values stability—and to his credit, Haughney does point this out in his comments. There are lots of types of stability: the stability to work outside of corporate fealty, to spend time or even work with family, to pursue a passion without compromise, or to service a particular talent, to name just a few.
But there’s a problem with the whole discussion, at least when it comes to software, the subject of the article in question. Nowadays, the startup sector has made it nearly impossible to run a small business in technology anyway. There are lots of reasons for this, but the most obvious one is cost. Since startups care less about revenue than they do about value, they can give product away in order to build a user-base, which can then be used to provide evidence of value. Even if those “customers” aren’t paying revenue, they could always be “monetized” in one way or another. And of course some startups do makeÂ real money rather than speculative money, but they seem always to do so by giving everything away at first. And they can afford to do that because they’ve raised investment in the first place.
In a situation like this, the “small business” developers have no choice: they have to play the startup’s game. That doesn’t mean they have to take investment, mind you. Rather, it means that they have to work within the market conditions the startups have created. Most of the time, that means giving away products for free or nearly for free—in any case, at a price that can’t sustain the business. Since only a small percentage of users actually pay, one now needs a much larger customer base to achieve the same yield that might have previously been possible with a smaller one. For example, I was recently told that all the revenue in Facebook games comes from 1.7% of the players. Ad-supported apps and websites work the same way: only those with very large user-bases can make advertising sustainable at the level of a business. Without the capital and access to market to very large groups, the only way to succeed is through sheer dumb luck. In that sense, it’s just like becoming Britney Spears.
Here’s another aphorism about small businesses: “You can sell a thousand of anything.” It used to mean that it’s possible to run a sustainable business at small volume, since there’s a small market for everything. Nowadays, transaction costs and price points being what they are, selling a thousand units of software might net you $700. The more accurate slogan for our time might be, “You can’t give away 1,000,000 of anything.”