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Yesterday I was at the premier conference for technology entrepreneurs and start-ups in South Africa, Net Prophet. I had a chance to mingle with some of the fantastic talent we have here in Africa and there is one thing that I kept hearing in conversations and it went something like this:
“We had to keep costs low, so we built our own platform”
Or, sometimes, a variation:
“We had to keep costs low, so we chose an Open Source platform”
On the face of it, that makes perfect sense. For a technology start-up you start with an idea for a product or service, and the first decision you need to make is what platform to use. Apparently, it’s a no brainer. An easy decision that you can’t get wrong. Or can you?
Let’s take a step back and see what you actually need for a start-up. Yes, you need that great idea or service that someone wants to buy from you, but what you then need is capital. Money. Greenbacks. Moolah. There are various ways of raising it – running a start-up in parallel with your day job, selling your house and car as capital and living out a cardboard box, getting an angel investor, joining an accelerator program… but whatever option you choose, your start-up needs to be as lean and mean as it can. This is something we all know to be self evident; low overheads mean better margins and higher profit or – if required – the same margins and lower end cost to customer, increasing competitiveness.
This is then when we come to our first decision. We need a platform, we need to keep costs low. If we custom build or go Open Source, our cost is zero. Lean. Mean. Profitable. Successful.
But wait a moment… what many start-ups fail to realise is that the art of keeping costs low has two distinct and very important parts; capital costs and running costs. What is the distinction? Capital costs are the costs incurred by a business to get to an operational state, and running costs are the costs to operate the business. For our start-up, we need to consider both. Remember, time is money. Every minute you spend before you are operational is a capital cost. That includes time developing or extending your platform. Somehow, you need to pay for your time to do that. Just because the platform is free doesn’t mean it doesn’t cost you anything. Then, once you are live, you need to consider how much time you spend maintaining that platform. Something that was free might actually incur far higher operational cost than you expect, both in time and hard cash.
On top of all this, we have a golden rule for start-ups… get to market as quickly as possible. Why? Because then you can start making revenue, and that makes a successful business. This is lots to think about, so let’s summarise our options.
Ultimately, which option you choose depends very much on where you want to go with your start-up. If you have a great idea you want to develop yourself and time is no consideration, build it yourself. If you are really, really squeezed for initial capital but you can’t take the risk to build it yourself, go Open Source. And if you can raise the capital to do with a paid-for platform up front, you will get to market and profitability far quicker with lower operational costs. In real-world experience, if a start-up is successful then if they chose build-it-yourself or Open Source then they will tend to re-platform within a couple of years to paid-for, and at a significant migration cost. Those start-ups that started with paid-for can just continue making money with their scalable platforms and don’t need to hit that speed bump on their journey. If you can raise the capital, it’s a long term win to start that way.
Here’s a question to finish up. Do you think that an angel investor or venture capitalist will be impressed if you tell them about how you’re going to take ages to get to market because you’re keeping capital costs low? Or do you think they care about fast time to market, quality of platform and operational costs? They have money to place where they think it will be effective, and for them the capital cost is the small part of the picture. If you pick a paid-for platform and partner with them, you already have a team on your side, you have credibility, and you have a product you can be proud of. That makes capital raising for your business a much easier affair. It shows you’re serious, and you’ll find investors are likely to reward your long-term vision.
So your first decision, your platform, does require serious thought. Make a wise decision, and a good one.