Small is beautiful for Web 2.0 start-ups

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Jason Fried, president of start-up 37signals, is a bona fide software entrepreneur. But he wants nothing to do with the traditional model of starting a software company.

Rather than try to crack into the business market with a complicated, pricey product, Fried and his colleagues chose to stake out a fairly narrow sliver of the software world: hosted personal organizers and project management applications.

To Fried, the old way of doing things--where a start-up's success hinges on a few well-heeled customers willing to shell out big dollars--is history.

"I think the idea of enterprise software is dead. Enterprise software is kind of a dirty word--big bulky things that never work, were never delivered on time, and are too expensive," Fried said.

The enterprise software market is a multi-billion dollar industry that's still growing--albeit more slowly than in years past. But changing industry dynamics are making it a less attractive market to try to break into, say some investors and entrepreneurs.

"Investors are less excited about the tough sledding of that (enterprise software) business model," said Mark Hildenbrand, general partner for enterprise applications and infrastructure software at Onset Ventures. "There's no question that it's a challenged area."

Instead, the past two years has seen a proliferation of smaller companies building Web-based applications, sometimes referred to as Web 2.0, as well as open-source companies. Many of these firms can get off the ground with relatively small up-front investments, not the tens of millions of dollars that venture capitalists pumped into new software ventures in years past.

The business plan at 37signals, for example, is to build simple hosted applications and charge a monthly subscription fee to small businesses and individuals.

In the two years since launching its first service, the self-funded company has signed on hundreds of thousands of customers and it has no debt, said Fried. It has also founded a successful open-source Web development project, Ruby on Rails.

"You can build a great business on a niche product because with the Internet, you can reach a million or a half-million people," said Fried.

Sharp focus, wide angle
A number of technology changes are making very focused product offerings more viable, according to entrepreneurs and investors. Most significant is the growing popularity of hosted applications, or software delivered as a service.

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