A couple of weeks ago I poked fun at Flipboard for seeking to raise $50m on the strength of a free product and zero revenue. At around 8.30am yesterday morning I did a 180 degree turn and now believe it could be an absolutely unbeatable product.

What happened at 8.30am yesterday? I read Erick Schonfeld’s interview with CEO Mike Cue in TechCrunch and saw the light, despite the lack of detail.

My scepticism of Flipboard’s future was based on the observations that (a) their app is free, (b) it’s in active use on only a minority of tablet devices and will remain so (after all, no app can be the app for everyone), and (c) building a social recommendation app is difficult but not difficult enough to ward off competitors — see Zite and Pulse.

So with maybe 45 million iPads to be sold in 2011, plus other tablets, taking out market share from Flipboard’s competitors, that’s (generous finger in the air) perhaps 5-10 million Flipboard apps in use by the end of 2012. Take out the ad revenue they’ll be sharing with media companies, I figured they’d make a few million a year from advertising.

And then I read this in the interview:

Q: Why do you need $50 million?

McCue: We want to build a large business here that has the ability to get into the billions of dollars in revenue.

Billions of dollars! And suddenly being faced with that magnitude of ambition I stopped thinking about piffling little apps — that’ll never do it — and had to raise my sights. They would have to take a significant cut of the global advertising market [pdf]. How could they do that…?

Flipboard can become the world’s content recommendation engine. The Flipboard app is merely the first stop, and plausibly just a showcase. Socially-recommended content is incredibly compelling — whether it’s recommended by your friends or a group of specialists (often called “editors”) or a mix of both. And the final product doesn’t have to be in the manner of the Flipboard app — just as not all newspapers look like USA Today. Such products will be a major part of the media product mix of the future.

So what if we break out of the idea of recommendations just by your friends? And what if we break out of Flipboard-the-app? What about… just New York Times content recommended by your friends? FT.com content as read by Asia fund managers? All the hot news about Google? Guardian environment news plus a smattering of links recommended by its readers? WSJ-4-U?

In his Monday Note Frédéric Filloux says

Flipboard is THE product any big media company or, better, any group of media companies should have invented.

Media companies can’t ignore social influence — because consumers are following that already — and they have to make it a big part of their offering. But they won’t build Flipboard, as Frédéric urges, because it’s a distraction from their more pressing issues, especially if they intend to do it well. On the other hand if someone steps forward and says, “Hey, you want to build your own social publication? We’ve got everything you need…” then that’s very tempting offer.

Flipboard has the content mapped to the social graphs; they could filter in or out certain classes of user, include just their media client’s content, and maybe add a mix of other content just to spice it up. The media company gets to produce its own compelling socially-recommended publication, with its own choice of content (just twiddle Flipboard’s admin dials to taste) and to its own design, with a fraction of the hassle. They could make any number of specialist standalone publications or sidebars on what they do already. And by building a large social graph of recommendation the early leader — Flipboard — has a good chance of keeping that dominant position, continually attracting more media clients. All the while Flipboard shares in the ad revenue the media company itself sells into its product.

At the Guardian you can already see some exploration of ideas in this area. Zeitgeist is a constantly changing collection of “hot” stories, as determined by unusually high readership of the moment. The Social Guardian was created on a hack day and steers you towards similar content that others are reading right at that second. And you can filter Charles Arthur’s Twitter stream for everything that begins “Linkage”. But of all these, only the first is anything like a packaged product, and the Guardian has the special privilege of being able to explore those kinds of things. Most media organisations are not that lucky, however much their content might deserve it. And even the Guardian hasn’t spun out any of these things into an actual standalone product. Despite this it’s clear that what the readers read is an essential part of the media package of the future.

Now I have no idea if Flipboard really is going to go in this direction. One possible use of pulling in $50m is to get the world talking and see if anyone comes up with a better idea than what you started with (in which case: You’re welcome, Mike, I’ll just take 1%). But really I’d be disappointed if Flipboard was only ever Flipboard-the-app. I’d much rather see “The New York Times powered by Flipboard” or “Paramount Comedy powered by Flipboard” or even a consortium of media companies pooling their content for “Science News Today… powered by Flipboard”.

It seems it would be helpful to elaborate on my earlier points about acting like a startup in an established company, and one point in particular. I said “you can’t just take the idea of  a startup and drop it into an established business”, but it looks like that was interpreted too broadly.

A couple of things happened last week around this. One is that Michael Brunton-Spall and I had a long and winding conversation about innovation, in which he claimed to disagree with me about being able to take useful lessons from startups. The other was a Twitter exchange in which Dan Catt was mystified — as was Martin Belam — by Nieman Journalism Lab’s excitement over the Washington Post’s dashboard of usage stats. In that exchange Dan said that actively responding to usage stats “startup 101” while Michael (again) said “The concept of applying startup 101 to news [i.e. our established business] is considered a mistake by some” linking to my earlier post, and then kindly added “That might be slightly misrepresenting that post a little.”

So let me clarify: I have huge respect for startups, and there are lots of things the rest of us can learn from them. But I do have many, many reservations about the hype that surrounds them — almost all of which comes from people not in startups.

Here are the things I think are true about almost all startups:

1. They are driven by one or two individuals who have had a vision, and are risking their own money to see that vision become a reality;
2. There is a small number of people in the company;
3. They do not have a proven business model.

And, in order, here are some implications of those things:

1. The company is run by handful of people who act like their livelihood depends on the company’s success. Because it does.
2. The company is so small that the bosses’ behaviour determines the way everything in the company happens, and they can have direct influence in everything. Similarly, each employee of a startup has a significance which is far greater than if they worked in 1,000- or 10,000-strong company.
3. They need to constantly shift their offering until they have what looks like a proven business model. After that point they’re more-or-less no longer a startup — they’re a company with an established business model they have to execute.

There’s a huge amount to admire in a bunch of people who are in that situation, particularly if they seem to be making a success of it, but I hope it’s clear that you can’t drop all that stuff into an established company. Here is where things are (generally) different in an established company, again point-by-point, in order:

1. The company is run people who have salaries, and who most likely inherited their situation from a previous incumbent.
2. The company is large enough that any one person’s actions have very limited effect. Real change can mostly be brought about only through the co-ordinated action of many people.
3. The company has an established business model with real revenue and the organisational structure is designed around that.

It’s for these reasons an established company can’t just “be like a startup”. You might as well ask for Manchester United to be like a rock band. Sure there are lots they can learn from each other, but fundamentally they’re different.

Also, “like a startup” means different things to different people. I think the original points 1-3 above are the only (near) certainties, but here is a selection of things that other people think means being like a startup. I’ve taken a handful from Jason Goldberg’s excellent “13 Things You Must Do Every Week As A Startup CEO”, which Dan posted in the exchange I discussed earlier:

• Be innovative. Probably not like most startups. Lots of the ones that get lots of press coverage are innovative, of course, because it makes for a great story. But I suspect most startups are just a variation on a theme — as are most successful products.
• Focus on the key metrics, and take action accordingly. Yes, absolutely — but isn’t that obvious? It was Nieman Lab’s excitement over this which caused Dan’s mystification earlier. Surely that’s “startup 101” he said.  I’d go further: that’s not “like a startup”, that’s like any company that wants to take its digital products seriously.
• Separate from any kind of mothership. Well of course they do, because they don’t have a mothership to be otherwise. Doing the same thing in an established company is difficult, though, and not necessarily a route to success. The Telegraph’s Project Euston was intended to focus on innovative ideas and located separately. But it was brought back to the mothership after less than 12 months.
• Blog about your work and your team. Agreed that this is very valuable. But again, not just for startups. Working with social media is important to pretty much any company these days.
• Live and breathe your product, so you know how it feels and can guide it accordingly. Excellent advice. Although a bit difficult if you’re, say, Cisco or Time Warner — what exactly is your product then? Big companies have several products, and probably too many for one person to use meaningfully. A reasonable-sized company will have product teams, and it’s they who should live and breathe their respective products, while the CEO has to trust them (and, of course, use a good number of them).
• Release, release and release again. I really like this philosophy, although not all startups do it — for example, those that are in “stealth mode”.

So startups are great, energised, and fizzing with ideas (because their survival depends on it). There are loads of lessons any of us can take from an organisation like that. But to be “like a startup” is a meaningless for an established organisation, because the fundamentals are different and because it’s debatable that anything more than the fundamentals is actually “like a startup”. Context is all — we should copy the behaviour of others with our eyes open.

One of the things from QCon that struck me most was the insight into how Facebook works. The focus was very much its technical infrastructure, but I see organisational insights there, too. First the technical, briefly, then the non-technical…

The most remarkable thing about Facebook’s architecture is that it’s not how you’d design it if you had the choice. All its servers reside across two datacentres. One is for reads, one is for writes. Their software is PHP which is then translated to C++ and compiled and deployed in a single 1GB binary. Features are developed by teams of no more than 15.

More relevantly, these technical restrictions have implications for the organisation. It means that any changes to the core product (and Facebook is pretty much entirely that single product) have to happen within those architectural bounds: single steps, feature-oriented, and following along the line the product has evolved to date. Anything more significant is a mammoth, time-consuming change.

So while Facebook is awesome by dozens of measures, there’s also a surprising similarity to many of the behemoths we see in the non-digital world. It does one thing, and it does it astonishingly well. Today it’s not facing disruption and can continue to forge ahead. But it is a juggernaut, and like any juggernaut — when the time comes — it will take a long time to turn around.

Things are getting out of control. Like many people I know I’ve long had a low-level fascination with tech startups, but as valuations are beginning to escalate my low-level fascination is starting to look more like an addiction. At least I recognise my problem — investors may be spiralling towards madness, but they don’t have to take me with them. By way of therapy I’m going to open up and talk: here, enumerated, is what’s driving me crazy about startup fever, with the hope of a saner future. Let’s go…

1. Economics doesn’t change just because you’re cool

The essential ingredient of business is to make money. You’ve got to pay your staff, your landlord, your suppliers and others. But it seems a lot of people forget that. As I write this Flipboard is said to be seeking $200m in additional financing even though they have no revenue. Not “a little revenue”. Not “less revenue than their costs”. No revenue.

Steve Blank reckons that successful startups will “focus on getting massive user bases first, and let the revenue follow later”. That’s it, apparently: just let the revenue follow. It’s like the pied piper of Silicon Valley. You just walk down the street with a jiggle in your step, play your socially-networked pipe, and glance cheerily over your shoulder as you see all those dollar bills dancing behind you and jumping into your open bank account.

I’m sorry, but basic economics still holds. There’s no change in the definition of “profitability” or “solvency”. There’s no special theory of economic relatively for cool startups, whereby you get a dispensation based on the inverse square of your social graph or whatever. The only economics is the same economics that holds for all of us. Same for you, same for me, same for the plumber down the road… everyone.

2. “What’s your exit strategy?” means “How are you going to cash out while giving your problem to someone else?”

Lots of people want to know what a startup’s exit strategy is. For me, an exit strategy means the founding partners are looking to get out without creating a viable business. They may get out having created the promise of a viable business, but they do so without actually having created it yet. They exit, with cash, and it’s up to someone else to go the last mile.

In reality “What’s your exit strategy?” should be a trick question. The response should be “I’m not intending to exit — I’ve only just started. I’m intending stick around to make sure my business makes money”. But I guess that’s a crazy idea.

3a. Jargon only serves to distance people from reality. In particular “pivot”…

There’s nothing wrong with changing your plan based on data. In fact, there’s everything right about it. But don’t pretend to be special by using a secret language. Yes, I’m talking about the word “pivot”.

“We looked at our log files and realised we needed to execute a pivot.” Would your Grandma Mimi understand that? No she wouldn’t. She’d wonder if your job actually involved any work of value, or maybe she’d think you were hiding something. But say “We looked at what our customers were doing and realised we needed to change,” then she’d understand you. And she’d even be able to put her arm around and give you comfort in your difficult hour, because your Grandma Mimi has more leadership skills than you’d like to believe, if only you’d give her the chance to demonstrate them.

See also the TechCrunch post “From Now On We Will Only Be Using The Word ‘Pivot’ In Mockery” and the New Yorker cartoon “I’m not leaving you, I’m pivoting to another man”.

3b. …and “$1mm”

As in the phrase “Angellist was immensely helpful in Wanderfly‘s recent $1mm round”. On a purely numeric scale $1mm means the same as $1m. But only numerically. If someone wants to express merely the number they could just as easily, and more transparently, write $1m. But if someone writes $1mm they’re communicating very much on a human and social scale. And what they’re communicating is this: “Here is a dollar amount so incredible, and so far beyond your pedestrian comprehension, it exists in a dimension you didn’t even know existed”.

3c. …and “pre-revenue”

What’s with that? Is it like “pre-owned”, and “pre-eaten”? Wouldn’t it be clearer to say “We have no idea how we’re going to turn this into a proper business”? Or is there some reason they don’t want to say that?

4. There’s a very blurry line between “exciting startup” and “another new business”

There’s a cool new startup headquartered right where I live. It’s called Lava Lanes, and to quote the founders’ elevator pitch it “blends luxury surroundings, stunning special effects, state of the art lighting with modern Ten Pin Bowling”. Like FourSquare it’s also got an online social angle which crosses into the physical world, so allowing people to meet up and have serendipitous encounters.

Yet for some reason this exciting and innovative venture didn’t get covered in TechCrunch or elsewhere, while — inexplicably, and to pick just one example — ModCloth did. You know what ModCloth is? It’s a clothes shop. They sell clothes. And like all other clothes shops they’ve got a website and some other mobiley bits and bobs that go with it, but basically they’re a clothes shop.

I don’t know why, as a journalist covering startups, you’d prefer to spend time on clothing retail when you could be talking about “glow in the dark, ultra violet lighting and high definition video projection screens”, but apparently you would. Maybe Lava Lanes didn’t have such a good PR agency. Maybe it’s something to do with them creating a successful business without a $19.8m series B funding round. I just don’t know.

5. Nobody knows anything

As in Hollywood, so in Silicon Valley: nobody knows anything. Odeo was a ho-hum podcasting site until it launched Twttr as a side-project. Flickr was a multiplayer game until they focused on photos. And Instagram was originally a service for medical practitioners to share information about hemorrhoids.

Okay, so I made up that last one. But the point is, the founders of those companies went into their startups with a really clear idea of what would be successful, and they were wrong. At the point of their later successful venture they had a success rate of 50/50. So those founders now carry with them fantastic and rare experience of growing an operation, but they do not carry a gift of vision or foresight. In the end everyone’s just making their best guesses, and some people get lucky.

6. When you spend all your time in the maternity ward it’s easy to forget there are teenagers out there

Everyone loves startups in the same way everyone loves babies: they’re small and cute, with their little button logos, full of promise and hope for the future, so innocent and untainted by bumps and bruises in the nasty outside world. They get more than their fair share of love and attention, but we don’t begrudge them that because in a few years they’ll be teenaged companies ignored by most of the media.

When we spend so much time cooing over babies it’s easy to forget that most of the world around us is inhabited by older, established companies: the place you buy birthday cards or groceries, the gas company or the coffee shop. And they have real problems, too. Some might say more interesting problems: trying flex an embedded business model, stabilising the mess they necessarily created in the course of getting through those early years of uncertainty, and finding ways of motivating the staff now the initial rush has worn off. This is the daily challenge of most businesses, and no-one has the answers, but the attention still goes to the gurgling cuties.

7. Yes, I know the babies are cute but you still can’t take them home with you

Or to put it another way, you can’t just take the idea of  a startup and drop it into an established business.

Particularly in my own industry, the beleaguered news industry, I hear a lot about how our companies would do a whole lot better if we’d just act more like startups. The standard argument is most clearly expressed in a piece over on 10,000 Words: (1) Startups seem to be doing well, (2) the news industry is having problems, therefore (3) the news industry should act more like a startup. There are at least a couple of flaws here. First, how startups are “doing well” is rarely defined, and if it is defined it’s unlikely to be the same way the news industry needs to do well. Second it’s a non sequitur. You might as well say “The arms industry is doing well, the NHS is having problems, therefore all our hospital staff should carry a pistol”. (And if you think that’s exaggerated “logic” take a look at one of the recommendations to save the news industry from that 10,000 Words piece, which is to have colour photos of the contributors.)

To be sure, there are lots of things an established company can and should take from a startup. Energy, imagination, and common responsibility, to name three. But you can’t simply take that, plus any other ingredients you fancy the look of, and expect it to produce a winning formula. Especially if your definition of a winning formula includes healthy revenue generation, which — in case we’d forgotten — is notably missing from most startups.

Nor can you literally start a startup inside an established company. One of the determining forces of a startup is a founder who has risked their own money, and is therefore driven every second of their waking day to make it a success. You don’t get that kind of person joining an established company, and you don’t get that kind of drive if you give a salaried employee a budget that everyone knows the company can afford to lose.

In the end, what unique asset would an established company really bring to startup? Committee meetings? HR policies? Office parties? Any company, from startup or global corporation, has a unique culture and ecosystem. It is possible to change it, but it has to be done in a way that is uniquely appropriate to it, and not a direct transplant from one organisation to another.

That’s it

Thank you for being part of my therapy. I have no idea if you feel better, but I certainly do.