How to Finance a Web App in 2010
It was 2004 and Kevin Rose, the then host of the obscure Screensavers, had an idea that was going to change the way we did media. Such a revolutionary idea would surely require hundred of thousands of dollars to create with a large team?
Rather, Kevin spent just $99 on server space and paid a developer $12 an hour to mockup his idea into a web app. And it costed further $1200 to secure the now infamous domain, Digg.com.
This story is typical of many a successful startup. If you were inspired by my previous post on Why You Should Build a Web App, and thought you might give it go, read on to discover just how accessible it really is.
Costs Are Now Low, Ridiculously Low
That was 2004 when Digg.com was launched for around $2000. And the cost of entry has only become lower thanks to App platforms (Google App Engine) and other Cloud Computing (EC2). If you have an idea, you now have no excuse to bring it to market.
Where To Find Money
With costs so low, you really don't actively need to seek venture capital while building version 1.0 of an app. Talking to a number of founders it seems most started by racking up a debt on their credit cards and borrowing from friends and family if needed.
If you've got a job, don't quit before building the app, try and work while version 1.0 is in the works.
Make Money From Day One
Task.fm made its first sale on the first day it launched. I wanted to make sure I had some form of turnover coming in from day one. Thanks to a loyal customer base (due to the nature of the product), very few people cancel their Task.fm subscriptions. This means I have predictable a steady monthly income which is only growing. If you can use a similar pricing model in your app, I highly recommend it.
Gone are the days when you can simply build a web app and then use "advertising" as your business model.
The most common model amongst bootsrapped apps is Freemium. This involves giving away part of the app for free and than offering more features or a premium version for a fee. Ever wondered how many free users convert to paid? The average is around 1-5% across a large variety of apps.
Plenty of people will tell you to build traffic, your brand and culture first and then worry about money later on down the track. This is the most ridiculous advice I have ever heard. If you're serious about building an app, you need to have a business model from day one. Even if its not 100% implemented (which it should be), you should at least have a plan. Open your eyes people!
Some of the Costs Involved
So you have some idea of the costs involved I've included a brief run down of what I think an app requires to get built. Of course, you probably have your own suggestions so let me know in the comments.
A web app can be launched on a server costing as little as $20 a month. You probably spend more than that on coffee in a given month. The idea is to start small and scale. A VPS or Virtual Private Server will make scaling simple. Processing power, memory and hard disk space can be added with a click rather than a complete hardware reinstall if you were using a dedicated box.
Expect to pay around $50+ a month for a decent setup and expect this to increase month on month as you grow.
This is an easy cost to estimate as once you have invested in a domain, the costs to keep it registered are minimal. Task.fm costs less than $100 a year. If you want to acquire a premium domain, expect to pay upwards of $500. Don't fork out more than $2000 for a domain, its really not worth it.
The cost of labour really depends on how much work you can do by yourself. Hiring people will be your biggest expense, even if you work with freelancers. Figure out exactly how much development work you can do and then decide how much you can afford to spend. Create a budget and try and stick to it.
Developers work for around $20+ an hour.
The Other Costs
Its amazing just how many other costs are involved in running a startup. Here are some of the bills I pay each month:
- Mailing List
- Email Server
- Helpdesk Software
- Subversion Server
- Offsite Backup Provider
- Voip - my number, office number, voicemail, etc.
- API's - used to power sms and voice reminders, transcription, gateways etc.
- Statistics - realtime analytics
- CDN - Content Delivery Network to server images, scripts etc (really fast).
Of course these don't include legal fees, incorporation costs etc. This will most likely happen later on down the track for you, so I decided not to include these costs right now.
As you can see, there are lots of little costs involved that all add up.
So do you have a great idea and $2000? If so, you potentially have all that's required to get your app off the ground.
Photo by - velo_city