If you’re a developer working on a new project or launching a new startup, you’re doing one of two things. You’re either creating a product or starting a business.

This notion comes from a great post by my friend Berislav on his site devoted to the business side of web startups, SoftWave (link in Croatian). What he says there is this: A business is a long-term activity with the goal of creating income by selling certain goods or services. A product is one of those goods. You have to choose; you’re either launching a single product, or you’re starting a business. If you’re starting a business, you must have a solid business plan. If you have a product, then your business plan can easily be “selling out to a bigger fish”.

If you put this into correlation with web startups, one can easily identify a trend. Many web startups are delivering a product, but they are trying hard to make it look like a business. Same goes for VC companies: they are investing (sometimes) huge amounts of money trying to create a business out of something that isn’t a business - it’s a single product.

A recent example that comes to mind is ZenZui. ZenZui has created an interface that makes browsing through applications on your mobile phone easy. It’s quite a simple product; actually you might even call it a feature. It may be great, but can you launch an entire business on it? ZenZui, and Microsoft (its main backer) think yes: they’re thinking of it as a platform, and trying to sell advertising space on it.

I, on the other hand, am not so sure. ZenZui’s product seems like a great thing to sell to other companies. But, as one commenter somewhere said on ZenZui: why would anyone use an interface full of ads? Do we really need more clutter in our lives? By trying to create a business out of it, they’re ruining the user experience. I’m not saying that it necessarily won’t succeed; but I do think they’re pushing it.

The result of this trend is the following course of events. One or two developers launch a web startup, based on a single product. It’s solid, but rough on the edges. Then, they get millions in VC funding. The team grows to ten or more people. The product gets polished and starts working great. People start using it by the thousands.

And then, something odd happens. From that point, the product stays essentially the same, but the team behind it is spending more money. The money is spent by creating a business out of that product, but it’s not working out because it’s very hard to get people to pay for a single product on the Internet.

Here’s a question. How many times did you see a web startup that was just as good when it began as it is millions of VC dollars later? I would go so far to say that this happens in most cases. The main reason for this is the fact that the startup is working on a single product, which was quite good in the beginning and can now only be polished to perfection without any new revolutionary features to add.

In the “real world”, this works because you have to manufacture the product. So, even if you have a company that’s based on a single product, like a self-cleaning toilet seat, you still have to manufacture it, sell it, advertise it. You need people for that, and you get money by selling it. On the Internet, you can’t sell your product because people are used to free lunch (and there’s also that zero cost switching thing and ten competitors always waiting to take your place). You don’t have to manufacture it. You can advertise it, but it feels a bit dumb to heavily advertise something you’re not making any money on.

So, what do you do? You must decide, early on, if you’re creating a product or launching a business.

If you’re creating a product, you shouldn’t be chasing VC dollars, or trying to create bogus business models that will decrease the value of your product. You should be thinking of either integrating your product in some other service of yours, or sell it to someone who will find it useful and move on. Or you can slap some ads on it and let it linger after it’s done, putting minimal effort into it.

If you’re launching a business, then you go for VC dollars, and expand your team, but you must know exactly how you’re going to sell whatever it is you’re making. And you should have an idea how it’s all going to work out 6 months from now, 1 year from now, and 2 years from now. You must have a plan. It’s important to understand here that you can probably create a business plan from any product. If your original product isn’t all that great to create a business from, then you create another product that makes it so. But you should always know that you’re in the business of creating something that people will be willing to pay for.

The best example to illustrate this is Google. If you think that Google is so huge now because two guys behind it had created a great search algorithm, you’re wrong. I would even go so far to say that it has nothing to do with it. Sure, the search algorithm (the product) was great, and they could have sold it for millions of dollars. Or they could have slapped some ads and let it linger. But they chose to go into business, and so they created AdSense - the thing that makes people want to give them money (they also made hundreds of great business decisions on the way, but it’s beside the point).

The moral of the story is that many web startups shouldn’t be fooling themselves that they’re starting a business when they’re only developing a product. And, more importantly, angels and VC firms should know this too, and invest with this in mind. Selling your product to a bigger fish is a valid business strategy. If you’re not good at business, you might do well to embrace it.

If you’ve got an idea for a web service or a product, the first question you should ask yourself is: who am I going to compete against? Strangely enough, it seems that not many people do this. That’s why some corners of the web are overcrowded with hundreds of similar services, usually proportional to the success of the few that stand at the top.

Now, I’m all for innovation and going against all odds - if everyone would just play safe, the world (and the web) would be a boring place. But, if you choose an unpopulated space, even a mediocre idea can yield good results, while to succeed in some areas you need a killer idea, solid funding, a great team of developers and a lot of luck on top of that. Let’s look at some areas of the web where the competition is really, really hard.

1. Search. Everyone big enough to buy it or develop it has already got some sort of search technology in their arsenal. But even if giants like Google, Yahoo!, and Microsoft and the millions they invested in their search technologies aren’t competition enough for you, check out the other hundreds of search engines, including meta-search engines, vertical search, semantic search, visual search and just plain old weird search. If you’re still bent on developing your search engine, there are a couple of things going for you. Although Google is already delivering better search results than anyone though possible 10 years ago, everyone still seems to be bent on the idea that there’s much to improve here. So, if your search even hints at being “smart” or “semantic”, you might get bought out by a giant. And that’s quite a good deal.

2. Communities - MySpace is already running out of people to recruit. At their current growth pace, soon there won’t be any users left that are not on MySpace, so if you’re planning on launching a community, you can’t really count on people being unfamiliar with the concept. Of course, MySpace is not your only competitor; there’s also Facebook, which waits for more money to be printed so that there would be enough to buy them out, as well as Bebo, Orkut, and dozens of others. In fact, online communities are so “in” right now that even if you launch a non-English, music-based community aimed only at middle-aged college-dropouts from a certain county of a certain state in a certain country, you still might not be focused enough. Another problem here is that the great features and shiny technologies rarely work: the biggest online communities are also the ugliest and not really technologically advanced. The upside of all this is that you can always go over to Ning and create your own social network within 5 minutes absolutely free.

3. Social bookmarking - first of all, the .us domains are all taken, so don’t even think about that. There are people out there right this very minute developing algorithms which check which exotic countries’ top level domains can be used to end English words. And if you want it to be a derivative of the word “delicious”, forget about it. I’m not kidding, check this out: del.icio.us, digglicious.com, mobilicio.us, thumblicio.us, staralicious.com, populicio.us, similicio.us.

Some of these aren’t social bookmarking services; but del.icio.us faces more competition from the likes of magnolia, and, to some extent, StumbleUpon, Digg, Reddit and Netscape. But the point is clear: when the competition is so fierce that you can’t even name your damn service, I think it’s time to move on to something else.

4. Web Office tools & suites. Zimbra, Zoho, DimDim, Sundera, Plaxo, Preezo. I swear, some of these have to be swear words in exotic languages. Hell, for all I know, they might all be swear words in exotic languages. Still, it’s just a small sample of Office-related apps out there, and the crowd is lead by none other than Google itself with its Google Docs and Spreadsheets, which is - unfortunately for you, young developer - already pretty damn good. And, yes, this also goes for calendars: there’s a lot of them, and many are great, like Google Calendar, Remember the Milk, and 30 Boxes, to name a few. So, if you’re going to launch an online office suite, it better be leaving Microsoft Office in the dust, or else it’s toast.

5. Photo sharing The first rule of photo sharing is: you should never name your product in a grammatically correct way. This makes for a myriad of interesting possibilities which will never be fully exploited, so if you’re starting a photo sharing service you’re in the clear here. If in doubt, just take a word and drop a vowel or two, and you’re all set.

However, this won’t help you when you actually try to develop such a service, as it’s pretty much all been done by Flickr and its many followers, most notably Google’s Picasa Web Albums. Even if you try developing a more specific service, like online photo editing, you will still get greeted by several solid products that are already doing it.

6. Video sharing. The problem with video sharing is in content. Sure, you can create a killer service, but how are you going to get people to fill it with content? If you had a million people uploading videos daily, you’d still need a couple of years to catch up with YouTube. And the competition is fierce here, too. Besides heavyweights like Metacafe, Dailymotion, Google Video, there are dozens of smaller sites out there trying to create a userbase. On top of all that, if you do manage to draw attention to your service, expect to be sued. A lot. By companies with lots of money.

7. Personalized portal. Here, it isn’t so much about there being a lot of competition out there. The problem is that the competition is damn good, and the fact that it’s hard for any of them to introduce a killer feature that would separate it from the rest proves that it’s hard to innovate in this space. Sure, you can try your luck, but you need to be better than Google Homepage, Netvibes, Pageflakes, Yourminis, Yahoo!, My.Netscape, Goowy, and several others. And they’re all very, very good.

Well, that’s it. I hope that this list will discourage many a young and aspiring developer from ever developing anything, and save me from reviewing hundreds upon hundreds of similar services! *just kidding, kids. Keep ‘em coming, I love it.

Liked this post? Click here to subscribe to FranticIndustries’ RSS feed in your favorite RSS reader.