Web start-ups almost always fail. So why are these guys launching one?

The story of America's greatest idea.
April 21 2010 7:05 AM

Risky Business

Web start-ups almost always fail. So why are these guys launching one?

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When the site launched its San Francisco service in October 2009 there there were only two part-time employees other than the co-founders. It offered more than 300 kinds of services, but the team chose to focus on 20 core services, including painting, photography, and cleaning. Starting from scratch, they signed up 1,000 service providers in a month. By December, they had several thousand, a sufficient pool of providers to run competitive auctions on each bid. Now, six months after launch, the challenge is to grow customer traffic. For competitive reasons, the company says they can't release their customer numbers to the public. But they will have to when they ask investors for money. The numbers are not likely to be huge, but the co-founders are betting they can make the case that with funding they quickly can be.

The plan is to expand to major cities like Los Angeles, New York, and Chicago. In their most ambitious moments, they aspire to replace the Yellow Pages, a more-than-100-year-old institution. As they considered the idea, Anderson, Binur, and Lee know they aren't alone in going after the $150 billion a year spent on local advertising nationwide. Their former employer, Google, is making a pretty good business out of that. Nor are they alone even in their small corner of the market. They have to compete against companies like ServiceMagic and Angie's List as well as start-ups like Thumbtack and HelpHive. But the trio was captivated by the scope of the challenge. They want to become a verb. "In the future I want people whenever they want something to simply say, 'Redbeacon it,' " says Anderson.

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Step 2: Be Lean

During the Silicon Valley boom years of the late '90s, a company like Redbeacon would have put together a fancy business plan full of projections that were largely made up and sell their idea to a venture capital firm. They'd get a big investment and then they'd figure out how to build the company. The companies were "an ever shifting abstraction," as Michael Lewis wrote in The New, New Thing. Sometimes that abstraction fell apart before the huge launch party. Sometimes it fell apart afterward, when the business plan met reality.

Now everyone in Silicon Valley is much more cautious. The venture capital money has dried up. Big investments are rarer, and investors want to see proof of concept before they invest at all. Redbeacon is a lean start-up, a company that has launched small, in a limited way, and hopes to improve itself day after day, rather than in a single grand swoop. Lean start-ups try to build themselves the way hardware companies build hardware. Technology producers have long had a highly regimented system for building gadgets so that bugs can be discovered and fixed at each stage of development. Fatal flaws get caught before the big launch with the ice sculptures and B-list celebrities.

Redbeacon has also minimized its risk by not spending as much as it could have. It's much cheaper to launch a tech start-up in 2009 than it was in 1998. Redbeacon only employs part-time engineers and Web designers as needed because lots of software code is available for free. The only full-time employee other than the co-founders sells the site to service providers and handles customer support.

It also helps to start during a downturn. Anderson worked with Jobnob, a clearinghouse of engineers and marketers laid off from failed start-ups who are willing to work for free in exchange for future equity or a future job. The first time Redbeacon was mentioned in the newspaper was in a story marveling at how the recession had brought office rents to historic lows. Companies that started in the late '90s spent $20 million to do what Redbeacon has done with $100,000.

Gift Horse or Trojan Horse?

There may be a downside to the lean start-up. It may make new entrepreneurs too cautious. In Silicon Valley, people talk about the state of risk the way residents of a ski town might talk about the prospects for snow. If the new model of risk assessment makes everyone too conservative, the whole system might not thrive. Investors will only give a little money, and start-ups won't make grand plans. Adding an extra parachute before you jump may be prudent. But jumping out of the plane when it's still on the tarmac ruins the entire enterprise.

Not being risky enough is a challenge to Silicon Valley's economic longevity, and it's also a problem for Redbeacon. The company is threading a path between too much risk and too little. This was encapsulated by an experience they had in the early fall of 2009.

In the spring of 2009 they started considering whether to enter TechCrunch50, a sort of Sundance Film Festival for start-up companies. At this point, they had quit their jobs and opened an office but were weighing when and how to launch. As a condition of entering the competition, companies have to promise to launch at TechCrunch, which takes place in the fall, four months after an initial application process. In Internet time, four months is five years.

Delaying outreach to customers and the service providers was one risk. Another was that they could spend time competing for the prize and then fail in public.

About a thousand companies submitted applications, answering essay questions, providing a business plan, and taping videos. Then 50 companies were invited to compete for a $50,000 prize in front of a panel of technology journalists, venture capitalists, and CEOs. The prize money is nice, but the buzz that goes to the winner is why companies are willing to endure the long application process. If you win, you can get a big investment without much more than a good notion. The dream of every participant is to wind up like Mint.com, a TechCrunch winner two years ago that was just purchased for $170 million by Intuit.

Redbeacon was competing with companies like Anyclip, which allows users to search for any line of film dialogue and retrieves the exact piece of footage; CitySourced, which helps local governments use crowdsourcing technology to allow citizens to report potholes or graffiti; and Threadsy, which allows users to combine all of their e-mail and social networking accounts into one service.