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A Looming Apocalypse?

It's become so easy to start a tech company, argues one entrepreneur, that founders are missing early warning signs that their ship is sinking.

Pundits sound warning claxons constantly. After all, conflict and fear are powerful sales weapons. However, when you hear warnings from dewy-eyed entrepreneurs who are constitutionally more weighted toward optimism, it's usually time to listen.

In this case, the warning comes from Ilya Lichtenstein, the young co-founder of competitive marketing analysis firm MixRank, a 2011 Y Combinator alum. He argues that many American companies spend money as though they have traction in their markets, whether they do or not. The result, Lichtenstein says, is that U.S. tech companies are on the way to financial burnout--and that could be good news for European entrepreneurs.

But put that conclusion to the side for a moment. Lichenstein raises an interesting point on the way to his thesis: Do current conditions make it easy for entrepreneurs to miss important warning signs?

Why Launching Is So Much Easier

Look at some of Lichtenstein's correct observations:

  • The cost of building software continues to drop (and, I'd add, is probably at all time lows).
  • App stores associated with major platform vendors make it ever easier to rapidly acquire customers.
  • Unprofitable companies continue to go public and "more companies without a business model are getting acquired," often to gain access to the talent they employ.
  • Cloud technology has sent infrastructure costs tumbling, which in turn has lowered the costs of scaling.
  • Investors are pouring money into start-ups out of fear that they'll miss the next big cashout.

It has become easy--far easier even than right before the dot com crash--to launch a new venture. However, it may be too easy. Any time funding becomes virtually an assumption, the fear of failure disappears.

Good Fear vs. Bad Fear

But there is bad fear and good fear. The good type makes entrepreneurs realize that there are prices to pay for any venture. Concern about wasting money drives them to make detailed business plans, test assumptions, and carefully watch results over time for signs that they need to modify their businesses.

For many, good fear is waning because they look at an industry that seems to say it's cheap to get started, that you want to gain customers and worry about monetization somewhere down the line. However, that is the seductive road to carelessness because the numbers don't show how far off from profitability you may be.

Instead of accepting the "don't worry, be happy" mindset, create your own source of healthy fear. Start experimenting sooner, not later, with monetization. Not only will you start to quickly see whether you have a chance of creating a real revenue stream, but you also accustom your users to the idea that you eventually want to make money, rather than introducing it at a later stage only to realize that they won't put up with it.

Yes, renting infrastructure is cheap, but price out what owning and maintaining it would cost. Renting inexpensive capability is fine so long as vendors are willing to offer it at that price. Should they change their mind, you'll be up a creek. Think of cloud computing as a lucky break, but never forget to benchmark your apparent success against your ability to keep things going on your own if necessary.

Also look for other metrics, including measures of customer satisfaction and operational efficiency. The more you act as though you have a "real" business with consequences, the smarter you'll be about how you run it.

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Last updated: Sep 6, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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