From startup to star - what's the most difficult phase?

[Clinton]

To take an online business from conception through to IPO or other eventual exit ....

I'm looking to sound you out on which of the below phases adds most value to the final business.

1. Initial Phases:
- Idea Formation
- Market Research
- Choosing and buying a domain/s, paying for hosting
- Creating a template, commissioning programming/scripts, getting a functional site
- Doing the basic tech jobs on the site ... from logo to SEO
- Creating the basic content pages, product such as ebook or a core membership (if a community site)

2. Mid Phases
- Adding Content / commissioning articles or other material
- Developing Traffic
- Building Links
- Tweaking SEO
- Basic advertising and marketing
- Involving social media to promote the site
- Getting to critical mass on membership

3. The Money Stage
- Monetising the site
- Testing different monetising strategies
- Examining the best uses of advertising money, monitoring ROI of ad campaigns and improving
- Introducing membership subscription
- Consolidating existing traffic and building new sources for traffic

Obviously all three stages need to happen before a project can be sold as a successful business. But I get many sellers approaching me every week who've done a good job on the initial phase and believe that the most difficult work has been done and much of the value has been already created. They believe the idea is the most important. If a lot of time and money has been spent on the execution that's a considerable extra value. That they've put some passion and expertise behind the idea and initial development must count for something too.

Buyers, OTOH, often argue that any idiot can conceive a plan and buy a domain + template; that the difficult job is converting that into a business, that it may not even be a viable business. They continue that the reason the founder is bailing is because he was too dumb to realise before he started that a successful business takes more than a good idea and a template.

For a business that's achieved success, what's your opinion on extent to which each of those phases contributed to the final worth of the business? 10% - 20% - 70% or 33 - 34- 33 or something else? And why?

I hope to use this thread as a reference to point people to when I reply to their emails.

[hooperman]

I'm no good at estimations of value, but here are some rambling thoughts.

I don’t know which phase adds the most value. The results of the second phase where traffic is grown can verify that the initial market research was good and that there is demand. The monetisation stage verifies that the initial idea and execution were good and that there is money to be made from that demand. For that reason, the latter two stages are important for a buyer to confirm that the business is a goer.

I could give some numbers to each phase to give relative importance, but I wouldn’t be able to justify them. I bet each website is different too. For the milliondollarhomepage site, the idea was innovative so maybe the idea stage was more important for that site than the idea stage for some of my sites.

I find that developing traffic can be very difficult. Link building, networking, all that stuff creeps me out so I’d place a lot of importance on this stage of a profitable site’s development.

Sometimes monetisation is dead easy. Often it’s just a case of slapping ads on the site. But though the act of slapping ads on the site might be a doddle, the verification that the site can actually make money (and the confirmation of how much) is very important.

Back to the ideas. How many profitable sites were based on original ideas? I'll wager that proportionally there aren't that many. There'll be the first movers and then there'll be the millions of copycats or similars, that are profitable too. If you replicate an existing business, the idea formation/market research/etc have already been done.

I'm going round in circles. Help, get me out of here!

Be interesting to hear what someone who knows what they're talking about thinks.

[Clinton]

I bet each website is different too. For the milliondollarhomepage site, the idea was innovative

However innovative the idea, the buyer type could argue that it would have died if the owner didn't bang the drum, get noticed, get big news sites to pick up the story, handle all the pressure and the massive email box he must have had and cope with all the behind the scenes admin and other work.

I'm sure there are numerous innovative ideas that fell by the wayside because the owners couldn't execute phases two and three.

[benitez17]

Clinton, I believe that ideas (good and bad) are a dime a dozen, and that the two keys to a successful site are execution and monetization. Also, a owner who can sell his idea to outside investors can basically leapfrog this entire process to get to your end point (cashing in), so I wouldn't discount that ability.

There are plenty of examples of a business that was first to market being left in the dust by a competitor that either has a new twist on the existing model, or just does a better job of providing a service or product to customers. Also, there are literally thousands of sites with the "potential" to make their owner rich if only he had the right contacts, or knew what to do with all of the site's traffic, or started a mailing list, or whatever excuse the current owner comes up with this time.

Since you asked for a rating of each component, I would go with the following:

1. 20% (all of this is trivial, but a bad idea is destined to fail no matter what else you do)
2. 35% (most of this because of the difficultly of getting traffic/members to a new site)
3. 45% (if you put monetizing the site into its own category, I would probably make that at least 40%)

[Kay]

Ideas are ten a penny. It's very easy to have an idea, a great new concept, and bung a site up content and all in a few hours.

What's much harder is bringing the idea to fruition so it can reach its potential. That takes a lot of effort, whether it's adding fresh content or getting the site noticed. One way or t'other you must build traffic - only then can a site succeed.

Monetisation? If you create a good site, the money will come even if you don't chase it too hard. There again, one of the first things any potential buyer wants to know is how much money it makes.

Therefore, just based on gut feeling, I'd say:

1. 15% - initial idea, concept and site build

2. 60% - making it happen

3. 25% - monetising your successful site

[flipfilter]

From my own experience:

1. 34% - initial idea, concept and site build

2. 30% - Mid Phases

3. 36% - monetising your successful site


2. Mid Phases IMO are perhaps the least significant part of a sites overall worth, simply because this is the easiest component to outsource and scale completely independent of the idea itself, and probably the owner. Very few people would find themselves unable to build links, create content do some basic marketing mostly thanks all the resource on topic freely available. Strangely, despite this part being the easiest, this is probably the lengthiest and most time consuming, so I guess outsourcing is key.

1. Initial Phases - I agree with Kay that ideas are ten a penny, but a good idea poorly executed (stage two) will always outshine a poor idea with excellent execution (which is almost opposite to bricks and mortar business) - sites like the MPH or twitter are incredibly simple, but effective ideas and require little to no marketing spend and effort simply because people can tell their story easily and the ideas spread like a virus. A good idea will shorten the amount of time, money and effort needed in number 2.

3. The Money Stage - A business exists to make a profit, and by definition, all the work put in at this stage will shape how much of a business you actually have. Traffic, signups and Facebook likes are all irrelevant if you are unable to monetise and want a business rather than a hobby; Successful monetisation IS the only proof of concept.

37 Signals blogged a few years ago about the odd fact that a company with zero revenue (for example Facebook pre revenue) will often be valued at more than a company with substantial revenue (like 37 Signals 3 years ago) simply because investors are valuing on Anticipated monetisation potential. I guess this adds another dimension, when you hit the big leagues that means perception (created by buzz, traffic, signups (i.e. stage two)) is more important than the other two stages combined?!

Justin

[3Six]

A slightly different angle:

Phase 1: Worth almost nothing till you've demonstrated a successful implementation of phase 2.

Phase 1 acquires more and more value - even as a percentage, up to a limit - depending on what you've done in phases 2 and 3.

If someone has completed phase 1 and they selling, it's because they've realised that it's a lot easier to have a bright idea than to make a business out of it. Laugh at them and move on.

For a business that's achieved success

Phase 1: 10-30%
Phase 2: 20-70%
Phase 3: 50-100%

[ICN]

Perhaps I'm doing things the wrong way round, as I've always found step #2 to be the hardest possible. I'm good at #1&3, so I look for sites where the majority of the mid phase is already done. I don't mind re-designing, re-coding or monetising the site - but building links and content is where the worth is for me. I guess it just depends on what our own talents are.

So, #2 would be the answer to your initial question about added value.

2. Mid Phases IMO are perhaps the least significant part of a sites overall worth, simply because this is the easiest component to outsource and scale completely independent of the idea itself, and probably the owner. Very few people would find themselves unable to build links, create content do some basic marketing mostly thanks all the resource on topic freely available. Strangely, despite this part being the easiest, this is probably the lengthiest and most time consuming, so I guess outsourcing is key.

Have you been able to sucessfully outsource this stage on repeated ventures? I've found this very hard to do (if this Q is off topic, perhaps I should start another thread).

[rmills]

How about including initial testing/monetization in phase 1? I'd hate to get to phase 3 and discover that I've put in all that time and effort into something that's not going to bring in money or isn't well received by the demographic or market you assumed was there. That's a classic trap that many technology companies fall into developing a solution then looking for a market or problem to apply it to. If you're going to fail, fail early and cheaply. Measure, test and adjust along the way.

[Clinton]

rmills, that would come under what I called market research. It is most definitely a phase one activity. But, yes, it's a good question to ask the seller of a property that hasn't passed phase one - ask him for copies of his market research docs. If he admits to not having done any market research that immediately puts his property in a higher risk category.