Flipping – a model that’s easy to get

Brian Dear objects to the built-it and sell-it mentality he saw at the Web 2.0 conference:

Build-to-flip felt like it was now driving everything. I was nauseated when Business 2.0, a magazine I used to respect, had run its cover story — what, a year ago? — on the concept of build-to-flip. But it wasn’t just a cover story. It was a how-to cover story. Ever noticed who advertises in Business 2.0? Take a look sometime. And it’s not just the ads: it’s become a lifestyle magazine, complete with reviews for Porsches and Bentleys. They ought to rename it Flipper: The Magazine for the Build-to-Flip Generation.

Well, yes – there were a rather lot of businesses there whose main hope for a liquidity event seemed to be ‘sell to a larger business’. But I can’t really blame people, since this is a model that’s easy to intellectually grasp:

1. Build something cool.
2. Talk it up with the right people.
3. Wait for Google / Yahoo / Amazon / eBay / AOL / Microsoft to notice.
4. Hope like hell they’d rather buy it than build it.

See, easy – even I understand it. And quite profitable for a few, like Andy Baio’s Upcoming.org, which Brian uses as an example. A developer can look at an example like Upcoming.org and see himself doing exactly the same thing – no part of the process feels like a mystery, other than that minor bit at the end where the acquistion occurs.

Compare that to something like, say Checkpoint’s $225 million purchase of SourceFire. Much more impressive, but much more opaque. My theory (tolerate my overgeneralization here): unless he’s particularly far-seeing, has some business-building experience, or is prone to megalomania, a lone developer can’t see himself sitting down and building something like SourceFire. Companies that sell for $225 million usually have full-time salespeople and CEOs in suits and a whole raft of things culturally alien to 24-year-olds with computer science degrees. (An aside: the one highlight of the deeply-unfunny GooglePark series is the ‘sales aliens.’ A pretty accurate representation of how coders view bizdev.)

One fundamental difference between now and 1999 – the MBAs are out of the picture. Today, newly-minted B-school graduates want to manage hedge funds, not found a dot-com and take it public. The horizons of B-school graduates are therefore absent. Not trained to picture themselves as robber barons, the horizons of developers and coders are (on average) more modest, aimed at a few million rather than a few hundred million. Build-and-flip will therefore continue to predominate for as long as the entrepreneurship culture is lead by developers. (To, I might add, all the big players’ delight.)

Of course, lower average horizons doesn’t mean lower ambitions. “The place was drenched in the presence of and desire for money,” writes Brian. Agreed, felt that too.