So when should we go full steam ahead with our idea even after hearing all the negativity—and when should we pause and evaluate the idea?  The answer depends on who the naysayers are.

1. Student Proving a Professor Wrong

Fred Smith was a student at Yale University in the 1960s. For his Economics class, he wrote a paper describing an idea he had about using the hub-and-spoke model to make the delivery of mail and goods more efficient.

His professor—Challis A. Hall Jr—read the paper and barely gave it a C.

But Fred didn’t let that discourage him. He went on to create Federal Express (now FedEx) and revolutionized the postal industry.

Why didn’t Challis A. Hall Jr see the potential in Fred’s idea? Because he was a college professor who didn’t run a business—FedEx’s core market. Hall didn’t see the benefits of getting important mail delivered a day early.

2. LolCatz? Are You Kidding Me?

A few years back, if you told me that you were going to start a blog with funny pictures of cats with captions in broken English, I would have called you crazy. But yet, today LolCatz is one of the most popular blogs in the world. Today, the LolCatz and other funny blogs in the entire ICanHasCheezeBurger.com network receive more than 218 million page views a month!

So why didn’t I see the value in it?

You see—I’m not its target audience. I’ve never held a 9-to-5 office job where people pass on silly stuff just to get rid of their boredom. I couldn’t predict how well it would do. You’ve got to ask that question to people who will find it useful—those who will form your core audience.

Action Summary:

• Don’t heed advice from folks who don’t form your target audience. Who you wouldn’t expect to take out their wallets and do business with you.
• Don’t listen to naysayers – especially if they are a part of your family or friend circle. They don’t have the right perspective.
• Call up 5-7 of your target audience and test your idea with them – and them only.

A Few Questions To Ask Your Target Audience

• What do you do now to solve [the problem you solve]?
• What is the exact process you follow to achieve [the end result]?
• What was hard about it?
• What was easy about it?
• What is the one attribute of it you wouldn’t change?
• Would [your idea] help you do it in a better way?
• What type of a person do you think would benefit most from [your idea]?
• Would you tell your friends about [your idea]?
• Where do people like you hang out – online as well as offline? (Helps you find where you can start promoting your idea…)

The idea of ‘filler’ content is nothing new in publishing. Magazines, newspapers, even TV has filler, it’s the stuff that bulks up and fills out your editorial calendar. But online, filler content has the potential for a whole lot more than just plugging gaps, and it all rests on search traffic.

For most online publishers, search traffic makes up a reasonably large bread and butter base of visitors. On our Envato blogs, for example, search traffic generally makes up about 20-30% of visits. That’s a pretty substantial amount of traffic for us, but for some publishing sites those are some really low numbers.

You see there is a way to grow search traffic that has nothing to do with tinkering with the keywords on your articles, or even building link-backs. Instead it’s about publishing masses and masses of content, and that’s where filler content is taken to a whole new level.

Authority Domains, Page Titles and Quantity

Ever notice that when you Google pretty much any topic in the world, Wikipedia will appear somewhere in the top ten search results? That happens because Wikipedia.org is an authority domain. Search ranking algorithms take a slight shortcut in ranking pages and give very heavy weighting to domain names with a lot of link backs, even if the individual page itself is not that important. As it happens Wikipedia is a pretty good source of information on most topics, so this method of ranking works quite well in this example.

Now let’s say you Google “Where is Timbuktu in Africa?” and there is a page out there with those exact words in the title, Google again will give this a pretty high ranking for your query – after all it appears to be a perfect match.

Marry these two ideas together and you will see that if you could get an authority domain with tons of content with a variety of organic titles, you’d be open to receiving a lot, and I mean a lot of traffic. Of course there is also a good chance that you are creating what some pundits are calling information pollution.

Feeding the World’s Demand for Answers

In a recent Wired article ‘The Answer Factory: Demand Media and the Fast, Disposable, and Profitable as Hell Media Model‘, author Daniel Roth writes about how companies are using the mixture of Authority Domains and Quantity of Content to make some very big businesses.

Sites ploughing out enormous fields of content have been around for a while, from grand-daddy names like About.com to more modern Stackoverflow.com type sites. Sometimes they are driven by a fairly traditional publishing model, sometimes entirely by user generated content. But they all share the same general ethos: pump out a lot of pages with a lot of subjects on a big domain.

DemandMedia, the focus of Roth’s article, takes these ideas and applies them to publishing at a whole new level. It does this in two ways. The first is in the sheer scale of the operation. At their current size Demand publishes over 100,000 articles and video clips every month. By next year the company plans to step this up by a massive ten times to around 1 million pieces of content per month. To give this some context, Wikipedia has around 3 million English articles at present, in total.

The second part of Demand’s operation is to make the process of choosing what content they produce a whole lot more scientific and systematic. Using an algorithm that processes search trends and ad rates, then combines them with what rankings are attainable based on competition for terms, the company is producing not just a lot of content, but a lot of content that people are actually looking for and that advertisers will pay to place ads on.

Even with over $300m in funding and a reported annual revenue of over $200m, that amount of quantity is going to be difficult to produce with particularly high quality or compensation levels. Unsurprisingly video clips are shot on budgets of $20 and articles get $15. Copy editors come in at $2.50 and fact checkers at just $1 per article.

It’s hard to imagine that these kind of rates attract a lot in terms of quality. But of course, that’s not the name of the game for DemandMedia.

MediaGlow, Aol and a Friendlier Version of Quantity

While I’m impressed by Demand’s ideas and success, they aren’t the most inspiring vision of where web publishing might go. A slightly friendlier alternative is offered by the aging internet giant Aol.

While their dialup business has been slowly rattling through its death coughs, the company has had the good sense to make a plan for the future. Beginning with their insightful acquisition of Weblogs Inc in 2005, along with its very successful stable of names like Engadget and TUAW, Aol has been slowly building their roster of niche publishing sites into an empire, all sitting under the MediaGlow sub-brand.

Where Demand is building mass niche content on the cheap, Aol is taking an economic but only moderately so route. Hiring from the increasingly large pool of talented but redundant print media workers, Aol has been building a very large roster of writers and editors.

The results speak for themselves, nearly 70 million monthly visitors over 80 niche publishing brands and the elevation of this model to underpin the entire Aol strategy as it spins off from parent company Time Warner.

Where DemandMedia is the poster child for quantity, Aol and MediaGlow lean slightly more towards quality, but certainly don’t exemplify it. On the one hand, Saul Hansell—formerly of the NY Times and now AOL’s programming director—was quoted as saying “Aol is just as much as journalistic organization as the New York Times,” (source) but on the other Aol is reportedly trying to buy DemandMedia competitor AssociatedContent. In his post The End of Handcrafted Content, TechCrunch’s Michael Arrington laments both approaches and implores publishers to search out new ways of profiting from a quality focus in online publishing.

Quality vs. Quantity – Psdtuts+ vs Tutorial Aggregators

Though I have no experience of publishing at the size of either Aol or Demand, I find the quality vs quantity issue interesting because when we launched our flagship tutorial site Psdtuts+ two and a half years ago, this was exactly the dilemma it faced.

Though Psdtuts+ is far and away the largest Photoshop tutorial blog today with around 2 million visitors a month, it certainly isn’t alone. In fact there are tons and tons of tutorial sites around, so many so that there is a class of meta-content sites called Tutorial Aggregators that exist to funnel all these tutorials to the reader.

The best known aggregator is a site called Good-Tutorials.com and at the time when we launched Psdtuts+ it was already pretty large. I remember wondering if it was such a good idea to be in the rather expensive business of producing long, quality tutorials, when it was possible to get huge amounts of traffic with a mostly automated aggregation system where other people had to do the heavy lifting.

Equally pertinent was the question of whether there was even a market for good quality tutorials where masses of hobbyist material was already abundantly available.

Within a few months of launching however it was very clear that there is a market for quality and it can be profitable. Given that there is only so much information a person can take in, I believe they will generally prefer smaller amounts of higher quality content than buckets of average quality.

A couple of years on and Psdtuts+ has outgrown the aggregators—though they still send substantial traffic—and thanks to advertising and subscriptions it’s even profitable. It’s also one of a growing number of great tutorial sites posting hand crafted, long, detailed and laborious tutorials.

I don’t know if the Psdtuts+ lesson holds true in every type of publishing. But it certainly makes me optimistic that there is room on the web for both quality and quantity operations. It is a pretty big web after all.

Of course a quality AND quantity site… now that would be a thing of beauty!

In his post Are you a Seesmic or Balsamiq Entrepreneur, blogger Jeremy Chone gives a good roundup of the pros and cons of both these approaches, using two well known startups as examples of each. Of course a brilliant example of the Scale-First approach is Google, who for a long time had a big question mark hanging over them regarding their business model. If you flip back to December 2000, you’ll find BusinessWeek published an article that literally had the words “But how will Google ever make money?”

Personally I fall most definitely in the Monetize-First camp. I like a business to be self-sustaining as soon as possible, and that means you need to have a clear plan from the out-set about how to actually make money. In startup literature this is called a business model and this post is all about finding one!

There’s More Than One Way to Skin a Cat

Most ideas have multiple ways you can monetize them. These are not however, created equal. To give an offline example, let’s say you wanted to open a cake shop. Now the obvious way to make money is to sell cakes, and arguably that’s the best business model for a cake shop. But that doesn’t mean that’s the only business model. You could for example decide to give free cake samples and then sell recipes. Or you might do cake baking demonstrations in the shop and operate some sort of ticket based show. Or you might sell advertising space on the windows of the cake shop.

I don’t know much about cake shops, but I would guess that the only really viable plan out of all those is the plain-jane business of baking and selling cakes. In fact, the idea of selling advertising space on the cake shop windows sounds laughable, that is until you realise that there are many, many online startups attempting pretty much this same idea. Is it any wonder that they run into problems?

The Problems with, and Lure of Advertising

Anyone who has ever put up Google Adsense knows that it is as easy to do as it is hard. That is to say that anyone can get Adsense code up in minutes, but it can be extremely difficult to make decent revenue out of it. It is possible, and certainly there are lots of “Make Thousands with Adsense” guys out there, but I know of many more failures than I know of successes.

At Envato we have some fairly large traffic and content sites but even with huge numbers we’ve only had limited success in getting ad revenue flowing. Using Adsense on Feeds for example nets us only a few hundred dollars a month, despite having a combined RSS count of well over 100,000.

Selling banner advertising has been somewhat more successful for us, but not as much as you’d think for an outfit with some 20 million pageviews a month. Perhaps we’re going about it all wrong, perhaps the ad industry has fallen off a cliff lately, or perhaps it’s just not that easy to make money selling advertising. Either way my cautionary tale on advertising is more to make other entrepreneurs think twice about making ad-money their planned business model.

While advertising is certainly a viable business model and there are some very large companies doing well with it, I don’t believe that advertising is the easy success formula that it sometimes is made out to be. Certainly I don’t think it should not be the first port of call for a budding startup.

Where is the Value Being Generated?

So let’s say you have some startup idea. Maybe an idea for a neat web app, or a plan for some amazing blog network, or perhaps it’s a kickass web service that isn’t currently available. How do you figure out how to make money?

Every business model can be boiled down to selling something to someone. Whether it’s selling advertising to people who want to market to your audience, selling a product, selling a subscription to a service, selling a third party product in an affiliate deal, or selling your whole startup to another company.

And the fundamentally unchangeable characteristic of selling is that you can only sell something of value.

If you don’t have anything of value, then you don’t have anything to sell. If you don’t have a big or useful audience, you don’t have anything to offer an advertiser. If your web app sucks then there’s no value in it for customers. If your service has major flaws then people won’t want to buy it. So then the question you should be asking yourself is:

Where is the Value Being Generated?

Wherever the value is in your startup, that’s where you can make money. Sometimes it isn’t even in your core product, but rather in the audience it attracts. If that’s the case then you sell advertising. So for Google, the value in their search service is partly for the users searching, but even more so in the fact that at any given moment they have access to millions of different audience subgroups that they can sell advertising for in an ever-changing market.

Sometimes the value is being generated not for your main user group, but in a smaller subgroup. On Envato’s Tuts+ tutorial sites we have a huge body of free-tutorial consuming readers, but there is a smaller subgroup of people who get so much value out of the tutorials they want to pay to get even more tutorials. So we have applied a freemium model to the sites and it’s worked out very successfully.

Every startup is different and that’s why there is never an easy one-size-fits-all solution to choosing a business model. In our cake shop example the real value is in the cakes themselves. Other things like people in the shop, recipes for the cakes and the cake making process have value too, but on a far smaller scale. So the logical thing to do is find a way to charge for the cakes.

Increasing Value Increases Either Sales or Price

Once you see that finding a business model is all about finding the value in your startup proposition you will naturally see that the more value you can add, the more you will sell OR the more you can charge OR even both!

For example for a web service operating on a freemium model you might see that the real value of your service is to the people who are willing to pay the subscription. Therefore adding value by making the web app better somehow, means that (a) they’ll be happier, (b) you can lure more of this type of customer and (c) you may even be able to justify an even higher subscription rate.

An Even Easier Method: Follow the Money

In some ways this is all common sense, but in others figuring out all this “value” stuff can seem a bit hard. But never fear for there is an even simpler way to figure out a business model. I call it Follow the Money!

You see there is one thing you can universally depend on. If you can figure out a way to help other people make money, you will always be able to charge them for it. This make sense because the net result is positive for your customers. They pay you, but they make more money themselves, which presumably covers whatever your service or product costs and then some.

Examples of what I’m talking about are services and products that save people money or time, that help them do more with what they have or that get them access to new ways of making money.

At Envato we operate a set of digital goods marketplaces where people can sell their creations, things like blog themes, graphics, music loops and so on. Because we help them make money in a way they may previously have not been able to, they are willing to give up a significant percentage of the revenue they make. At 37Signals, products like Basecamp and Highrise make small businesses more efficient, effectively meaning they can make more money, so naturally they are happy to pay for the service.

Follow the money in your startup plan and chances are you’ll find creating a business model is relatively straightforward. Not all startups are in areas relating to money, but if you are, or if you can find a business application to your startup, or if you’re making the choice between serving regular consumers or business customers, then this is a really important thing to keep in mind.

Experimenting and Iterating

Creating a profitable business is not easy, and thank goodness it’s not – because otherwise everyone would do it! However it is doable. And remember there is room and time to experiment and adapt. You may have to try a few different ways to make money before you hit on the one that works.

A while back I was reading about a neat service you may have used called YouSendIt which lets people send large files over email. The CTO and co-founder Ranjith Kumaran wrote up an article about how they got the freemium business model working for them and while it had some fascinating insights on that particular business model, what I was struck by was that this wasn’t their initial plan! Rather it was something they had adapted into, found suited them and then run with.

Remember that iteration is a powerful way to build a business and the iterative process can be applied to almost every aspect of startup life, including selecting and optimizing a business model!

Non-Technology Driven Startups

The first question to ask is, is your startup idea technology driven? Are you inventing new technical solutions to a problem? In the cases of all the founders I just mentioned the answer was yes. Facebook was a new way to manage social interaction, Google was a new way to search, Amazon was a new way to purchase, both Twitter and Blogger were new ways to communicate, and Digg was a new way to determine the relevance of news. They were all completely new technologies or applications of technologies.

But it would be a mistake to think that that is the only kind of web startup there is! Thanks to years of internet progress there are existing technologies that virtually anyone can piggy back off. In most instances they still require some development, but it’s the kind that you can generally easily hire. Here are a few common examples:

• Publishing / BloggingThere are a wealth of off-the-shelf tools available for publishers and bloggers, and it’s possible to build a veritable media empire out of them (think Gawker Media), or to simply carve out a really solid, small business (think Problogger). Blogging tools, video hosting services, image hosting services and the like, all make this a very accessible place to start up.
• E-CommerceBecause this was the first big front of online business, there are again a plethora of services you can build with. Services like Volusion and Shopify or DIY products like X-Cart, are numerous and often quite mature. These days you can even outsource fulfillment to Amazon’s Fulfillment services. It might be hard to be the next Zappos, but there are plenty of niche spots. I know of a couple of completely non-tech guys who started a successful bag e-tailer back in Australia called Rushfaster that I use every year for gifts. The web is full of these sorts of openings for a savvy startup.
• Community and Social SitesI don’t know how easily you can make money in this line of business (the fact that Facebook isn’t profitable is probably a good warning sign) but creating online communities certainly is possible. Between the long traditions of forum and chat software and the rapidly growing areas of social networking services, you can build a significant community online without much in the way of hardcore development. Sure, creating a custom community application can still be challenging, but services like Ning and Kickapps can also easily serve as a platform.

Just so there is no misunderstanding though, don’t think that building a business in any of these areas is easy! I am only saying there is certainly no requirement that you be a developer or have strong knowledge of development.

The Web Itself is Still Very Much Technology Driven

So the web has evolved a lot, and there are lots of services you can build businesses on. But pull off the hood and underneath it all is still the raw development machinery of technology stacks and computing infrastructure. What is possible online is determined by the technology available and to what extent you can manipulate and use it. If you use a piggy-back services like those mentioned above, you are simply being shielded from the technical requirements of the web by another company. In other words you are outsourcing the technical aspects of your startup.

Fundamentally the web is technology driven and to build any type of new service you need a pretty good grasp of what is going on to know whether it’s even feasible. It’s one thing for example to describe a great business – “We’ll build a search engine that understands context, and doesn’t just look for a specific word!” – but it’s altogether different to know whether it’s doable in any reasonable way.

In a technology driven industry, not being able to determine feasibility is a pretty significant problem. How do you know if an idea is fundamentally flawed or inhibited by a technical drawback?

For Non-Trival Tasks It’s Hard to Hire Good Developers

The obvious way past this hurdle would be to hire the skills you are missing. If you can find a developer or development team then you’ll have the capabilities to tell you what is feasible, what is not, and then to actually build the thing.

Hiring people has a whole load of accompanying difficulties in any situation – trust, reliability, personalities and so on. Hiring developers has a bunch of new factors to throw into the mix. You see it’s pretty difficult for a non-developer to tell if a developer is any good. There are an awful lot of mediocre developers around and determining which are which involves a lot more than looking for qualifications on a CV – in my experience these can mean not a whole lot.

If you are a non-developer and need to hire one, I can’t recommend enough reading this article: How to Recognize a Good Programmer.

Assuming you are building a reasonably complicated site or service, you need someone good. A mediocre developer is likely to lead to flaws and bugs, poor performance, missed deadlines, unreliable estimates and code that is hard to build on. It’s a little bit like hiring someone to build your house who does a shoddy job of laying foundations, measuring doorways, tells you a 1 year job will take two months, and generally creates problems that run-on after they’ve finished the job.

All in all a mediocre developer is likely to simply be inefficient, which is another way of saying long-term expensive and that is something no startup can afford.

My Own Experience Hiring for a Technology Driven Startup

The founders of my own company, Envato, have no real development experience at all. Out of the four of us, we had two web designers, one graphic designer and a physicist! The main application we operate – FlashDen – is a very complicated beast that today has a development team of six working fulltime on it.

The one thing we had going for us is that I have somewhere in my murky past a computer science minor to my undergraduate degree and an aptitude, if not interest, in computing. When a guy I knew from an old job applied for our development position, I thankfully had the good sense to recognize some of the qualities that make a good programmer and we hired him. Through this mix of chance and circumstance, we ended up with a developer who turned out to be far more talented than we probably deserved. He’s still with us today and not only instituted a strong culture of good development, but has been a foundation to build a strong team on.

Given how difficult the startup road was, even with this bit of fortune, I shudder to think where we might now be had we hired some of the other candidates I reviewed.

A Better Solution – The Developer Co-founder

In my opinion an optimum solution for building a technology driven web startup when you aren’t a developer is to find a co-founder who is. This is better than hiring for a number of reasons:

1. Hiring a good developer is not cheap. You get what you pay for and given how critical this position is, you can’t afford to be stingy. A developer co-founder means cutting back on a significant expense.
2. Your co-founder has as much to lose as you do, so they have their heart fully in the project. It’s hard to replicate this dedication in a hire.
3. Your co-founder will stick around, not potentially leaving you with a tech startup and no tech skills.
4. Your co-founder is there in the planning stages, helping develop the product, rather than being brought in to build something you’ve already planned (and potentially not bothering to tell you that it kinda sucks).
5. A developer co-founder unlocks a lot of unexplored possibilities. Just as you may not know an idea is unfeasible, you may also not know that something is feasible!

Finding a co-founder is as difficult, if not more, as hiring. You’ll need to find not only a good developer, but also someone you get on with, want stuck to your business for ever and ever, and generally trust. Shelfmade’s blog has a great article on finding a technical co-founder that is worth reading if this is the position you are in.

Understanding the Web

Regardless of whether you build a technology driven startup or not, perhaps the most vital attribute of an online startup founder is a deep understanding of the web, what sorts of things are possible, what works, what doesn’t work, what people want, and just as importantly what they don’t want.

Ultimately being a developer is not an essential criterion of founding an online startup. But it sure does seem to help!

A year ago I told a couple of programmers we were going to launch a marketplace for people to buy WordPress themes and they looked at me like I’d just said I was going to try selling the oxygen we breathe. Why would anyone pay for WordPress themes when there are so many free ones around?

And I’ll admit it does sound contradictory. The reality is however people will still pay and for a number of a reasons:

• ConvenienceNot everyone has time to look for bargains. That’s why the whole world doesn’t clip coupons before they go shopping. You either have time to clip coupons to save money. Or you have money to save time on clipping coupons. Don’t underestimate the convenience market.
• LegitimacyIt’s commonly known that you can download pretty much any movie, television show, song, game, software, and just about anything else for free online with a little bit of know-how and persistence. But hey, it doesn’t make it the right thing to do. Whether it’s for the principles or for fear of the law, there are plenty of people who would rather pay for this content.
• Reward the CreatorIt’s hard making things – whether its music, movies, themes, illustrations or a book, the creator deserves to be paid for content, and there’s a good portion of the population who will even go out of their way to reward the creator.
• Quality and SupportFree is many things, but it isn’t always a license for high quality or fast support, often these things alone are well worth paying for. That’s why many open source companies do a healthy business offering free products with paid support, and why the freemium business model has been so successful with startups.

Late last year we launched ThemeForest to buy and sell WordPress themes and sure enough the sales have been high, with the best sellers having sold thousands of dollars worth. It’s been the same story with FlashDen and GraphicRiver where there are similarly large amounts of free content available online, but where again the market has borne out the supposition that people will still pay for those products.

Of course there are still plenty of people who won’t pay for anything, and that is how it should be. Nonetheless it’s a good idea to remember that the small fraction who will pay is often more than enough to build a business on.

Is there anything people won’t pay for? Well in fact as it turns out, even oxygen can be sold … go figure.