Hosted applications for small businesses

Posted 12 November 2006

As I’ve been exploring what kind of business I want to build, I’ve found my thinking settling on hosted applications for small business. Here’s my reasoning.

I believe hosted applications are the future of computing. As I’ve noted in some other posts, connectivity isn’t quite as universal as one would hope, but this will only get better in time. And in many situations, such as in virtually any business office, connectivity is rarely a problem. The availability of great open source technology means the software infrastructure is nearly free. Frameworks such as Ruby on Rails make it dramatically easier to build web applications, while AJAX toolkits and tools such as Adobe’s Flex greatly lower the barriers for building great interfaces.

From a business model perspective, hosted applications have the advantage of being subscription businesses. If you can provide a service that your customers come to depend upon, you have an annuity. With shrink-wrapped software, on the other hand, it is getting harder and harder to get customers to keep buying upgrades year after year.

Another huge advantage of hosted applications over shrink-wrapped software is the ability to evolve rapidly. Instead of big releases that come once every year or more, releases can happen monthly or even weekly. And by watching the analytics, you can have an intimate, constantly updated view of what your customers are actually doing. The agility of small companies provides a big advantage over large organizations in providing this kind of product.

Having settled on the hosted application space, the next question for me was which customers to serve. I’ve spent the last seven years building products for digital photography consumers and hobbyists. As much as I love this domain, I’ve concluded that digital photography makes a better hobby for me than a business opportunity. The digital photo web space is tremendously overcrowded already, and customer acquisition is a huge challenge.

Neither do I want to join the masses of consumer-focused Web 2.0 sites. Building a great consumer site is a high risk proposition—sort of like deciding to be a rock star. No matter how great the site you build may be, and how hard you work, the chances of making it big are small. YouTube was a huge success, but how many other video sharing sites are going to see a big payday?

This line of thinking has led me to focus on small businesses. VCs generally don’t fund startups in this space, so there’s a much saner competitive landscape. Most small businesses today get very little value from their web presence, if they have one at all. There’s all this great web technology available, but it is out of the reach of the vast majority of small businesses.

I see a lot of opportunity in building focused web applications for small business niches, closing the gap between what Internet technology makes possible, and what ordinary business owners are able to use. I’ve been helping out some local businesses and looking at what’s available to serve them, and the existing solutions are generally far more complex than they need to be, deliver too little value, and have a lot of missing pieces. This seems to have all the ingredients for building a great startup.