Founder John Tayman, second from left, with designer David Albertson, left, and developer Nick Hodulik
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Graham said that the recession notwithstanding, he's seeing as many people starting companies now as he did a year ago. That's because over the past five years, as broadband connections to the Net became as commonplace as electricity, the model for launching a Web company changed.
In the old days, start-ups tended to get funded before they launched. Think of the dotcom archetype, Amazon. Only after getting a $300,000 check from his parents did Jeff Bezos set to work building his site. That was typical: entrepreneurs first put their energy into writing business plans — a map that spelled out what they hoped to build. After the money was in hand, they got to work.
There were two drawbacks to that model, both related to the risk of investment. The first was that founders frequently ended up owning a tiny percentage of their company as their ownership got diluted each time they brought in a new round of investment. The second was that there's often no correlation between the assumptions in a theoretical business plan and reality. Many great business plans turned into lousy start-ups — one reason for the last dotcom crash.
But with LILOs, business plans are an afterthought because you can try your idea first at minimal expense, without persuading others to buy in. Or, as Joi Ito, another well-known tech investor, told me recently, "the cost of mapping it is almost higher than the cost of trying it."
Riding the Downturn
That's certainly true for Joe Gebbia and Brian Chesky. Classmates at the Rhode Island School of Design (RISD), they moved to San Francisco a few years ago with the vague intention of starting a business. Their eureka moment occurred in October 2007 when a huge design conference decimated the supply of hotel rooms in the city. They decided to try their idea without mapping it out. (See which businesses are bucking the recession.)
"We thought, Why not host people in our own apartment?" Gebbia said. "It was a way to make a few extra bucks to offset our already expensive rent." The guys had an extra bed, a sofa and an air mattress and decided to offer, via the conference's website, ad hoc bed-and-breakfast accommodations. Thus was born AirBnB.com They made $1,000 that week and were shocked to find that their customers weren't teenage slackers but were instead older folks, including a 45-year-old father of three. Said Gebbia: "It completely blew away our assumptions."
Since they had no money, they quickly enlisted as their partner a former roommate, Nathan Blecharczyk, who had some technical skills. He built the website — which was initially aimed at cities with big conference calendars — and made it easy for hosts to offer low-rent lodging to visitors. AirBnB.com handled the financial transaction between guests and hosts and took 10% from the guests and 3% from the hosts.
Traffic grew. Along the way, the guys listened to their customers, tweaked the site and got free press by arriving at high-profile events, like the 2008 Democratic Convention, that were suddenly short of hotel space. Tapping their RISD backgrounds, they designed fanciful Obama O's and Cap'n McCain's cereal boxes and sold $30,000 worth as collector's items, which kept them going. With their guerrilla lodging site and their cereal boxes, they got on CNN, on many local newscasts and in the New York Times and the Wall Street Journal. And their site grew — enough to garner $20,000 from Y Combinator, the venture firm. (See pictures of the best Obama Inaugural merchandise.)
Today AirBnB.com has nearly 12,000 registered users, with more than 3,000 properties nationwide, Gebbia said. "As the economy gets worse, our business gets better." Again, this is a get-rich-slowly scheme: the business generates enough money to house and feed its three founders, who live together in an apartment that doubles as their workplace.
Will it be the next Facebook? The next Blogger, Digg or Twitter? Who knows? It almost goes without saying that many more start-ups fail than succeed. Reid Hoffman, founder and CEO of the job-networking site LinkedIn and an angel investor in many start-ups (including Facebook), says, "The biggest problem facing any website is distribution." In a world where it's so easy to start a company, how will anyone find yours?
But here again, a bad economy is the LILOpreneur's friend. Ito likes to say, "The cost of failure is cheap. It's so low, you can swing the bat way more times." In a bad economy, no one really notices or cares about more failure. That creates a better environment for risk-taking, which is the only way innovation occurs.
At the same time, launching in a bad economy imposes a kind of discipline, forcing entrepreneurs to keep costs low and be smart about marketing and distribution.
The common wisdom would suggest that Tayman couldn't have picked a worse time to start a company that depends on automotive advertising. But he knew that going in. "I wanted to launch into the dip so that by the time advertising improves, MotorMouths will be sitting pretty," he told me a few days ago. He said he was optimistic, based on recent figures that show auto ads are on the upswing. "If our current growth trends hold and the ad trends hold, MotorMouths could be a $250,000-revenue company within 18 months."
Then again, the economy could get worse and worse. If that happens? Tayman's already working on his next idea.