There's a reason for this phenomenon. It might be misguided in this particular case, but there is a reason that it exists. It's the same reason that everyone here loves businesses based on technology. It's the same reason that VCs are willing to invest millions of dollars in nascent companies which will, in all likelihood, fail in the near future. It's the same reason I spend my evenings working on my own startup.
The reason is scalability.
My dad was always shocked that investors valued the last startup I worked for in the tens of millions of dollars while we were losing money. He's worked in construction his whole life for firms that do on the order of $100MM in revenue per year. Like all construction firms, however, their margins are razor thin. Their revenue doesn't grow much faster than their costs (employees and materials, primarily).
A construction company that loses money is not going to be worth $50MM any time soon. A tech company with similar financials might be. A tech company might take a while to get their technology right. But when they do, they can leverage it. Their revenues can grow far faster than their costs. Software as a product scales better than just about anything I can think of. Software businesses often go from slightly in the red to huge annual profits in very little time.
Everyone in tech is trying to find the Next Big Thing. This includes us (entrepreneurs), the media, and investors. In the case of the media, they're just trying to be the first ones to break the next big story, as usual. Just like investors, if they want to succeed, they have to be willing to take risks. They have to bet on companies that look like they have potential. Sometimes they're wrong. But in those rare cases where it pays off, it usually pays off big.
Other industries lack this quality. In other industries 1 success is not going to make up for 10 failures. In technology you make money by picking winners before everyone else. It's somewhat of a crap shoot. But the bar is low because the potential reward is high.
Don't forget that there are other industries having such remarkable properties as well: another example is pharmaceuticals and generally biotechnology. Or the motion picture and music recording industries.
Industries where the resources of the participating companies produce IP, not products (or products where the marginal cost of production is insignificant compared to the cost to design).
Biotech has startup costs that are orders of magnitude more than software - especially web stuff. People with PhD's + lab + equipment == lots of dollars. Multiply that by years for them to make anything close to being testable on people and it's a big chunk of money.
A big website or widely distributed software package is still extremely expensive to create and maintain. Less than a pharmaceutical company to start, perhaps, but pharmaceuticals don't have to be maintained once invented, and they're relatively protected from competition for the lifetime of a patent. Software companies must invest continuously in development, or their window of profitable operation will be narrow.
My point is that the massively profitable, "free" website run by three people in a garage is probably a myth. The massively profitable online retailer run by three people in a garage is definitely a myth. To reach the scale where non-trivial profits are possible from the internet, you've got non-trivial expenses.
You're dreaming if you think Craigslist is three guys in a garage. They have ~30 employees, and I can guarantee that they have large server, colo and bandwidth costs. They also make their money off of direct payments (as opposed to advertising), and their annual revenue is around $100 million, by the estimates I've seen. So they're profitable, but not hugely so. (By way of comparison, Netflix makes a bit over $20 million net per quarter, on over $300 million gross per quarter.)
I'll grant you that they're exceptionally small for a website of their size -- but being "exceptional" means only that they're the exception to the rule. The rule is what's important.
Actually, they are quite exceptional. Craigslist gets more traffic than either Amazon or Ebay and those companies respectively have 16,000 and 20,000 employees.
You've missed the point: Craigslist is so far and away the exception to the rule, it's practically non-reproducible. And for what it's worth, they're also not nearly as profitable as either Amazon or EBay, regardless of their traffic.
There's simply nothing about Craigslist that you can count on reproducing. If you're creating an internet company today, and you're aiming for hundreds of millions in revenue, it's 99% probable that you will need to spend more money than they do.
Well, of course you can reproduce their design. But reproducing their design won't reproduce their success. If it were that simple, every website would look like Craigslist.
Again: you're missing the point. Craigslist is the exception to the rule. It's a product of its time. For any value of X, if you tried to say "this is the way Craigslist did X, therefore I should too," you'd very likely be wrong. And in any case, Craiglist is pretty far from the romantic notion of three guys in a garage. It's an expensive site to run, even if it's more cheaply run than other big sites.
But as the industry matures, it's becoming apparent that that model doesn't hold up quite as well. 1 success is rapidly copied by every other major website and YC type startups, there's major marketing spend to stay on the front of techcrunch, techmeme, digg, etc. Software requires more maintenance, hardware becomes a bigger cost, employees extract more from their employers or leave just when they're most productive, etc. So where it might have been 1 success will make up for 10 failures, it's rapidly becoming the case that 1 success will make only make up for 5 (or 1) failures.
Plenty of empirical evidence out there in the decline in shrinked wrap software, the disappearance of successful IPOs, and the inability of the vast majority of websites to charge for any service whatsoever.
Feel free to tell me "yes, we heard it ¡Ya basta!", but Hal Varian's (chief economist of Google) book is a fantastic look at a lot of the economics in high tech and is well worth buying (my summary doesn't do it justice, I'm afraid - meaning it's not just fluff:-)
>It's the same reason that VCs are willing to invest millions of dollars in nascent companies which will, in all likelihood, fail in the near future.
...
> The reason is scalability.
The reason is scalability.
My dad was always shocked that investors valued the last startup I worked for in the tens of millions of dollars while we were losing money. He's worked in construction his whole life for firms that do on the order of $100MM in revenue per year. Like all construction firms, however, their margins are razor thin. Their revenue doesn't grow much faster than their costs (employees and materials, primarily).
A construction company that loses money is not going to be worth $50MM any time soon. A tech company with similar financials might be. A tech company might take a while to get their technology right. But when they do, they can leverage it. Their revenues can grow far faster than their costs. Software as a product scales better than just about anything I can think of. Software businesses often go from slightly in the red to huge annual profits in very little time.
Everyone in tech is trying to find the Next Big Thing. This includes us (entrepreneurs), the media, and investors. In the case of the media, they're just trying to be the first ones to break the next big story, as usual. Just like investors, if they want to succeed, they have to be willing to take risks. They have to bet on companies that look like they have potential. Sometimes they're wrong. But in those rare cases where it pays off, it usually pays off big.
Other industries lack this quality. In other industries 1 success is not going to make up for 10 failures. In technology you make money by picking winners before everyone else. It's somewhat of a crap shoot. But the bar is low because the potential reward is high.