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.