Startups – Page 2 – 6 am pacific

Web 2.0 – Dotcom Redux?

TechCrunch recently posted a link to GoToWeb20.net, a self-proclaimed complete directory of Web 2.0. (I would recommend you try the link only if you have broadband) It is quite a nifty AJAX web-site with a logo-listing of a whole bunch of Web 2.0 startups, which are organized by date and tags.

If you haven’t had enough of the whole AJAX-social networking-folksonomy-long tail thing, this website should cure that for you. There are 283 startups featured on the website. That doesn’t tell you much. But when you find out that there are 26 companies working on some form of bookmarking, you know there is kool-aid being drunk in large quantities somewhere.

Startup – Tips and Tools

As we make our way through the woods on Gridstone Research, the startup that I work at, I often come across tools and methods on solving problems that are probably the same problems that many other startups or larger businesses face. Sometimes we struggle for a bit and then find something that works well. If I think it might be useful to others, I plan to post them here.

Here’s a solution that I came upon recently to a problem that many people in Marketing face. At Gridstone, given the stage at which we are I run the Marketing function myself. Getting the web-site right is something I end up spending a lot of time on. The marketing consulting firm that works very closely with us. As we iterate through design ideas for a variety of things like the home page shown here, it is not efficient or effective to write feedback notes in emails. When you are dealing with graphical images, you need tools that work well in that medium.

Go South, Young Man

A few months back in a post on ‘Paperbacks in India’ I had talked about how information products have some interesting challenges when it comes to pricing in the developing world. I believe that in what is called Software as a Service (or SaaS) – basically web-based hosted software like your internet banking software or even Yahoo Mail – there are significant opportunities for Indian technologists.

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.

Company structure – Cross border issues

When we set up our company we went through some very detailed thinking on how to structure the company. Our business model involved research operations in India but our markets were going to be largely in the US and other developed markets outside India. We ended up incorporating in the US with a wholly owned Indian sub, which is kind of the vanilla solution, but in the process went through a decision process that may be interesting to other entrepreneurs.

Some people we talked to had set up a corporate structure that was designed for tax efficiency. They had a holding company in Mauritius or some other zero tax country, with subs in every country that they operated in. This gave them a very flexible corporate structure with great tax efficiency. Any of the subs could be sold or go public independently without an incidence of capital gains. And so on.

Another thought was to incorporate the parent company in India and have a wholly owned sub in the US. That had corporate income tax advantages as well as tax advantages in the event of a liquidity event. Also, doing an IPO in India would have a lower bar and probably get a better valuation as well.
In the end we decided to incorporate a Delaware company and have a wholly owned sub in India. While this is almost certainly less tax efficient it has other advantages that don’t show up on a spreadsheet exercise. If you are looking to get quality venture money into the company (and we are), you can’t go wrong with a US company. US VCs are comfortable with a US legal jurisdiction and not all of them are completely open to an Indian jurisdiction. Indian VCs on the other hand regularly fund US incorporated companies.

Also, the management of the company is largely in the US (4 out of 5 founders are here). Being an Indian company makes it operationally a tad more difficult. For instance, under Indian company law, board meetings must be attended in person, not on the phone.

In the end, the argument that tipped the scales for us was ‘simplicity’. The US-parent-Indian-sub structure was simple and a natural fit. Anything else would have made things complex to manage and complex to explain to an outside investor. Sure, we would probably have liked to have been more tax efficient. But then you have to make a whole lot of profit before you start worrying about the income tax on it!

While this solution works for us, everyone has a different business model and their own preferences. Be sure to talk to a lawyer and an accountant who know cross-border issues. And don’t forget to check within your network of entrepreneurs.