If you keep up to date with all the Web 2.0 startups out there you will probably know that they also raise millions of dollars in VC money to start new services, expand or sometimes just keep going.

Let’s talk about building up an idea and how you get to that point.

The example I’m going to use is of a college going person who has just thought of a new web service. I will use one of the Web 2.0 names I wrote about before, Feedily.com { it is available if you want to buy it, I’m going to give a full description of a business service…go now! }

The Concept -

Feedily is a RSS search engine and aggregator in one. You can simply search for feeds and click “feedily it” which would add it to your RSS reader. But that’s not all you can also promote your own feeds in a feed marketplace to gain more subscribers and even promote your feed for people looking to buy ads. The amount of subscribers a feed has decides the ad price.

Other features include -

• A free desktop based RSS reader with same functionality as the web based reader
• Sharing feeds and tagging them so that others can easily find it
• The ability to harness related feeds into one mashup
• Segregating feeds into modes - which means that if I want to only read a particular feed on the weekends, as I have more time then to read news of that nature, for instance my new movie review feed to only appear on the weekend. Restaurant review RSS feeds to only show on Friday afternoon to plan the evening, and so on. I love this idea!
• More features in the works

So there you have it a whole new web and desktop RSS service with the ability to monetize itself with a RSS advertiser marketplace.

With coverage soon picked up on techcrunch, mashable, venture capitalist, digg, reddit, stumblers and all the other socailizers you better have some rock solid servers to back you up on launch day. You will get the bulk of your subscribers on the initial days so make sure you are prepared. As others see that your service rocks they will blog about it to.

But…you just built this thing in your dorm room, you bought a domain name for $3.95, asked your mom for the $200 for the dedicated hosting which will last approx. 2 - 3 months. Your email account is now flooded with requests for interviews, among them are also resumes and VC emails.

Can you handle all of this by yourself.

Probably not, so you get your roommate in on the gig by promising to make him Head of Sales when you get more funds in. Right now both of you are kicking it in your dorm rooms, you miss your classes and mom is concerned that you need more variety in your diet than pizza and coke.

You have signed up your first 10,000 users in around 2 weeks and approx. 1/3rd of them regularly use the site. You slap on a few Google Ads and make around $50 a day from that. Good, so now you can pay your roommate and keep the rest for the server costs, pizza and laundry.

The first month goes by

You have reached 15,000 users and income is up around 20% from PPC ads. The marketplace is buzzing with some top notch feeds selling Ad space, you get to keep 10% of all revenue but there aren’t many takers.

So now you set up your Adwords campaign and hire the guy down the hall to manage as he said he has done it in the past. In the meantime you are scanning the emails and lo! behold you see one from “Interested Party” they want to meet you to discuss investment! Luckily the guy is in town, so you borrow a jacket and tie and go to your meet.

You have it all planned out

You expect the business to grow organically at the rate of 10 - 15% a month. The marketplace is making some good headway and you are getting requests and ideas from users to make it better and have already begin working on ver 1.2 of the site. But you need office space, another developer, a customer sales rep and a customer care rep.

So here are the costs that you expect to show a VC -

• Software Rockstar Developer - $60,000 /yr
• Customer Sales Rep - $40,000 /yr
• Customer Care Rep - $35,000 /yr
• Office Space - $1500 p/m
• Office Furniture - $5,000 /yr
• Computer Hardware/Equipment etc.. - $40,000+ /yr
• Hardware Upgrades/Maintenance - $2500 p/m
• Miscellaneous - $1000 p/m
• Advertising - $5000 p/m

You expect to hire another 2 programmers and at least 1 more sales and customer rep each within 3 months So for a 2 year plan you expect to need around $ 990,000, lets just round it off to $1 Million to play safe.

Here is how much money you expect to make -

• PPC Ads - $3000 p/m with monthly increase of 20% - 40% in relation to expected increase of traffic roughly $40,000 - $50,000 a year.
• Marketplace RSS Ads - Let’s say every RSS ad costs $20 a month for the less popular blogs and $500+ a month for the popular blogs. With roughly 200,000 users at the end of the year you have almost 170,000 making some sort of money. For example, you have 150,000 small publishers each making $20 p/m and the rest 20,000 making $500 p/m, you get 10% of all earnings. So roughly you are looking at beginning the second year with $1.3 Million in earnings - per month!
• Sponsorships bring you in around $1000 a month and you plan on charging $3000 a month from the next year on.

I would say it’s a very optimistic way of looking at things. Of course at the end of the second year the company is already making double of what it began the year with and the user base and increase in revenues has stabilized at a steady rate of 10 - 15% p/m.

What do you think, is it over the edge or do I need a reality check? Would any VC buy this?

If anybody registers that domain name I want a slice of the pie!

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Technorati Tags: web 2.0, startup, RSS, feeds, business, ideas

About the author

Hyder has been blogging for the past two years on this blog. He started Weborithm, his web company, in 2007 and along with designing blogs and websites also releases various web related products.