I was just reading the 2005 blog post by Ryan McIntyre about the plummeting cost of doing a startup, and thought I’d share the comparison of prices for hosting services in 1995 versus 2005.
  • Bandwidth: $1100/megabit/month in 1995 vs. $128/megabit/month in 2005
  • Cage Space: $175/sqft/month in 1995 vs. $25/sqft/month in 2005
  • Disk Storage: $1,300,000/TB in 1995 vs. $3,300/TB in 2005 (SCSI RAID)
  • 1-CPU Server: $25,000 in 1995 vs. $1,000 in 2005 (web server class machine)
  • 4-CPU Server: $360,000 in 1995 vs. $38,000 in 2005 (with 16GB RAM)
Most investors and entrepreneurs LOVE talking about the low costs of doing an Internet-based startup these days.

Which is why I was very glad to read Bill Burnham’s great article about the true costs of building an enterprise startup, and why plummeting software costs don’t totally change the game for enterprise startups.

Burnham has three main points (all true) as to why “enterprise startups” (think Blackboard or SalesForce.com) are different from “consumer-startups” (think Google or Twitter):
(1) enterprise customers don’t do “betas,” — that is, they won’t buy anything that’s not ready for prime time;
(2) enterprise customers need customer support and sales attention (which Google is learning as it begins to enter the enterprise space for the first time); and
(3) enterprise customers want an inherently stable infrastructure, which costs money to build and maintain.

The only PS I would add to Burnham’s post is that cloud computing has a fundamentally different value proposition for enterprise businesses than it has for consumer businesses.  Enterprise businesses use the cloud to deliver better software, not simply cheaper software.  An enterprise product (whether cloud-based or not) needs to be fantastic to be viable, because being cheap isn’t good enough.

And to make a truly fantastic product for enterprises, you need to follow an iterative development process to find the right product-market fit.  That is, you would never dream of building a software package alone in a room with four engineers and unveiling it to your enterprise customers at a grand opening.  You need to build a non-beta product that is ready for market, make sales, get customer feedback, do A/B testing, get customer feedback, expand your reference-base, incorporate customer feedback and A/B test results into new features, and repeat until the product fits the market, and you’re ready to scale.  (Of course, this is similar to the process you follow when building consumer software, too, but in this case you need to factor in the higher costs for doing it (1) to a higher non-beta standard for each iteration, (2) doing it in a stable environment, and (3) incorporating sales and support resources starting on day one. 

In other words, falling hosting costs may have reduced the overall price tag (with those cost savings coming primarily early in the process), but bandwidth and “cage space” aren’t the only things that you need to pay for when you set out to build a fantastic enterprise company.

Will Marlow is the co-creator of AlumniFidelity, which helps schools and nonprofits improve their online fundraising results.  Email him at will@alumnifidelity.com.