Garage-Sale

In big business the phrase ‘cost of doing business’ is often employed to justify a cost that is deeply embedded or can’t be justified on an Return on Investment basis. Sometimes it truly is necessary. Often it is just handy management jargon to keep something from being cut by the accountants.

In a startup, on the other hand, the cost of doing business has a very real meaning. It in fact means exactly how it reads – the cost of running the startup. In management speak this is often referred to as the ‘burn rate’. And I am here to tell you, that the cost of doing business for a startup is going down fast.

There are many trends that impact the cost (and ease) of doing business for a startup. The two  that I think are particularly pertinent to the cost of technology are – open source software and usage based pricing. Sometimes both these things get combined.

Let me give you an example. As an ex-head of Sales, I believe in a company acquiring good habits on Sales process early. Ergo, we use a CRM system at Gridstone. When making the choice for a CRM system we never even considered licensed software. If we had, I suspect it would have cost us several thousand dollars per user per annum, for something with the functionality that we need. We probably would have needed outside consultants to implement it adding more to the cost and time to value. Most startups nowadays don’t even consider that option.

The next option, which is very popular today is salesforce.com which is a hosted internet application. The company is very successful and is growing like a weed. Their price for the Enterprise edition – $900 per user per annum. Simple to implement. Good service. Works like a charm.

We were almost going to go with salesforce.com when we heard about this open source CRM software called SugarCRM. SugarCRM is also a company. I think the way their business model works is that they, and outside collaborators, work on the open source version of Sugar, which of course is free to use and comes with the source code for others to tinker with. But SugarCRM the company also develops add-on modules like Sugar-Outlook integration that are not open source and are priced per user per month. Sugar also offers hosting and training services around SugarCRM. If we wanted to take the full hosted solution with add-on modules, we would get an excellent CRM system that matches salesforce.com in functionality for the price per user of $480 per annum.

Now SugarCRM is open source and anyone is free to use it themselves or host it for others for a fee. There are dozens of hosting service providers who will host SugarCRM for you. Some of them even have add-on modules. And you won’t believe the prices. The service provider we finally went with charges us $5 per month. Not $5 per user per month. $5 per month period. For the usage it allows, for us it practically means unlimited users! Plus the price includes hosting for a few other applications as well. It’s a brave new world!

Now technology costs are not the only costs for a startup. All costs related to people, office space aren’t going down. But tech costs are a major component of the costs especially for early stage startups. For two guys in a garage, the quintessential valley startup, their runway is now much longer than it used to be. In the future more  tech companies like Flickr will be going straight from garage to selling the company. It is ironic that this should be happening in an environment where venture capital is so abundantly available.

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8 Responses to Garage-Sale

  1. The implications for both startups and VCs are interesting.

    Do you think anything is lost by going with SugarCRM vs Salesforce.com?

    Everyone expects to get lower service/quality with a cheaper product. However, if that substantially cheaper product offers the same quality and performance as the expensive brand, then the situation becomes potentially disruptive to the market.

    Michael Krigsman
    http://projectfailures.com

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  2. Startups.in says:

    Not only are there more opensource options these days but the “ease of usability” degree & cross platform support is nearing that of the closed source solutions. It is definitely a very good thing for new startups.

    Regards,
    NagB /at/
    Startups.in

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  3. Would appreciate if you could post more on similar lines & challenges with startups.

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  4. Chaitanya says:

    Insightful. Thanks.

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  5. Shankar says:

    It’s always interesting to see people adapting…to see Fortune 1000-style IT expenditure getting substituted with Startup style low-cost open source for just about any office productivity software. It will be great if you can share any updates on your SugarCRM’s performance in its first 2 quarters. Met the business case?

    Talking about VC funding, its still much needed even in TMT sector startups – the prime cost being human resources to scale up a working model.

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  6. Basab says:

    Shankar, re SugarCRM – so far so good. We just upgraded to Sugar 4.5. But given our small sales operations at this time, I can’t say that we have put it through its paces.

    Your comment about startups needing VC money is true in enterprise technology, but a consumer internet startup can go quite a distance just sipping capital.

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  7. bertha says:

    I found your article by googling "sugarcrm hosting $5 per user". I'm looking for exactly what you are talking about. Can you tell me the hosting provider you are using? thx

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