The Underlying Impact of the “Apps” Phenomenon on VC-Backed Software Startups

5/6/10

New smartphone applications (“apps”) are being developed at a rate of nearly 1,000 new titles a day. While Apple’s brilliance in cultivating the developer community receives much of the credit for this incredible phenomenon, it has also ridden the back of the global economic meltdown coinciding with the rise of the iPhone.

“Huh, come again,” you say? That’s right, the storm that wiped out so many budding software companies was so immensely beneficial to the growth in iPhone sales that even Steve Jobs probably never imagined its true transformative power and the permanent changes it would cast upon the software industry landscape.

Who among us doesn’t know someone who joined a software company in the past five years only to see their stock options plunge under water as a result of a cram-down financing, layoff, or outright bankruptcy? Or to put it a little more bluntly, who among us knows anyone left standing whose equity value wasn’t substantially wiped out? When something like 99 percent of developers who were being extrinsically motivated by stock options have seen their paper wealth get crushed, many have begun to question whether they’d been sold on a phantasmagorical dream like so many Klondike prospectors 150 years ago. Some of the walking wounded began searching for—and many have already found—a compelling alternative to the conventional startup company. Tens of thousands have launched their own app development and publishing businesses.

On the one hand, the consequences of this blight upon common stock value has caused many developers to seek higher ground in the form of competitive salaries and benefits, and to be less charmed by the allure of stock option certificates that may yet again turn out to be useful only as wallpaper. Even in the best economic times, the odds against stock options turning into real worth were already long. After a meltdown like the last one some are willing to bet on Dante’s lounge offering frozen drinks before they’ll bet on stock options again. The older dogs also remember that an economic downturn hits the entrepreneurial economy with tectonic force about every six to 10 years, taking out entire ecosystems of startups with them.

This may be good news for the Microsofts and Oracles of the world who can afford to offer higher salaries and attract software talent that previously would have opted for the upstart venture where they could play a more significant role, potentially create greater wealth for themselves, and not just be a “cog in the machine” of a giant enterprise. Indeed, finding developers to join a startup that has an insignificant war chest, no 401K, and a health care plan that relies on employees obtaining their own coverage is just about as hard as I can remember it ever being in the over two decades that I’ve been working in, leading, and investing in technology startups.

But there is another, perhaps more significant factor at work. If you know something about the psyche of software developers, then you should know that it is rarely about the money for them. Developers are “creatives” who thrive on knowing that the product they are building with their blood, sweat, and tears is going to be appreciated, if not loved by its users. The best way to kill a developer’s … Next Page »

Ron Wiener is a six-time serial entrepreneur and an angel investor, best known for founding Earth Class Mail. He is currently “Chief Mechanic” at Seattle incubator Venture Mechanics. Follow @

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  • http://bcviewer.com Paul Irvine

    quite right Ron, the landscape has changed again. App store has highlighted it, but its by no means the only avenue. I’m seeing 5 to 10 downloads a day for web software, with almost zero marketing. It doesnt sound like a lot, but it adds up. and now more than ever, a single developer with a decent idea, can bring a product to market with virtually no investment at all. Its a new world where VC’s are not even players. My very best to you,

    pi

  • Memphremagog

    Yes – small software teams can now create small businesses better, faster and cheaper than ever before. Some can create a nice wealth engine for themselves. But, if they want to be part of something greater and do something that creates a major enterprise, they will still need cash, executive talent, and maybe even the guidance professional some venture capitalists provide.

    It is always great sport to trash the VCs (and sometimes they really deserve it!). But it simplistic and wrong to say they don’t have a role to play in the right circumstances, or that software developers don’t need them anymore.

    As always, the issue is to match your funding source to your business and your aspirations.

  • http://www.covario.com Arnel Leyva

    Incisive and strategic analysis — you seem to have identified and explained the zeitgeist (so happy I got a chance to use that word in public) of the current Internet market. As a career product manager for small- to mid-size startups and growth companies, I like to consider myself on the side of the ‘creatives’, though it’s my job to tell them how NOT to develop products for other engineers and instead do so for the other 90% of the population. So just as in previous technology markets, the most successful apps will be developed by a two-person team comprised of a creative engineer and creative marketer who use just enough process to get a compelling product to market quickly and inexpensively — every Wozniak needs a Jobs.

  • http://www.personalmedicine.com Natalie Hodge MD FAAP

    What great perspective, Interested to learn more about your model and incubator. We have been bootstrapping and self funding for years and now that we have come into customers, complete product and revenues, the Venture route looks riskier and riskier. It’s a matter of the right money at the right time from the right people and overall decreasing the risk of the company as we move forward. The notion of a small team that continues indefinitely in lean mode, which plans to KEEP the company for the long term is very attractive to us as founders. Last months Fast Company notes many lean ” virtual businesses” which generally are in the ecommerce space, which operate out of virtual offices, with independant contractors, utilizing basecamp, web ex, and sharepoint. We are products of Steve Blank and Eric Ries customer development and lean teachings, and plan to run the company lean indefinitely as we add process and implement our customers.

    Natalie Hodge MD FAAP
    http://www.personalmedicine.com
    ” Your Doctor Comes to You”
    About Us http://bit.ly/ceWSh6

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