Greetings,
I joined another startup…  Not quite as small as Scoble’s new venture, and not part of the bubblicious blogging/vlogging/podcasting, etc. world, but still relatively small.  However, I have about 8 months of mortgage payments in savings, and several small side-services that make me enough to cover utilities and food if we’re really careful.  I no longer would really think of joining a startup without that partial net, but then I have responsibilities that I’m not willing to fail on.
The only thing I’m really afraid of if my company tanks is losing health care…  When you don’t have that safety net, one serious health issue can mean the difference between surfing the web and getting sucked under the waves.

I’ll pass along a piece of advice for anyone looking to start a company, from someone (me) who’s been through several startups.  (McAfee Associates and PayPal being two very notable, very successful, and very different, ones, in different decades.)  The advice is useless ever since 1994 because the ‘free money’ vibe of the VCs has infused the business world and made it hard to follow, but it’s free advice anyway, and worth whatcha pay for it.  😉

If you’re going to start a company, be profitable FIRST, before you ever talk to VCs.  If you don’t NEED their money, but you’re on one of the beautiful adoption curves, they’ll fight each other to be the one who gets the right to give you money.  Sure, you don’t need it, but if spent right, it can (1) pay for the dog’n’pony ‘going public’ show, and (2) move you one or two rungs up the doubling curve.

The funny thing to me is that people take the money out of the get-go, to move them up 1-2 rungs when the power curve is low, boosting them from 1000 users to 4000 users.  What they should (in my oh-so-not-humble opinion) do is grow slower for a little while, then take the money when jumping the power curve would mean the difference between 250,000 users and 1 million users AND you’re not dependent on the VCs for your existence.

This means growing slower at the start, only growing as fast as you can afford to, keeping yourself as close to cash-neutral as you can, and always being one cost-cutting exercise from being profitable.  It’s not the preferred method for a class of folk who were raised and bred on tales of overnight millionaires, and ‘get big fast’ (which only works for a very SMALL subset of companies) but it’s the way to build a sustainable, exit-strategy-free business.  (Exit-strategy-free meaning you don’t NEED one, not that you don’t HAVE one.)

I saw it done at McAfee Associates, and we completely dominated the conversation with the VCs.  It wasn’t a request for money, it was a bidding war on the part of some top-notch firms, and that was in 1992, before the first bubble even started to be blown.  We were chugging in about $10Mil/year as I recall, and spending less than a quarter of that.  I don’t believe that company was EVER unprofitable, from the quarter it was founded.

McAfee Associates took the company from “the three Fs” (family, friends, and fools) to profitable without really going through the intervening step of angels or venture capitals.  (Now, for what it’s worth, some of those 3Fs were…understandably upset that they didn’t see any return when the company made it big, but that’s just part of the darker side of the history of McAfee Associates, and not directly relevant to the point I’m making.)

Now McAfee Associate’s distribution model was nearly free (distributed by BBS), advertising was ‘make a good product and get people to talk about it and show its use off’, the product was…well, you could joke that it was viral. 😉  People used it, found it was useful and necessary, and handed it to other people who probably needed it.  The product was free and fully functional, but every run it put up a message, basically that ‘if you’re using this in a company, educational institution, or government organization, you must purchase a license’.  End users paid the registration fee sometimes, which was a nice base source of income, but companies leapt to license.  Mostly because their employees were using the software, needed the software, and were handing it around inside the company.  Someone would point out the license issue, and the company would call us to pony up.  We never had to call anyone to sell the software, it sold itself, and our users sold it for us.  Most people wouldn’t imagine it, but companies really are decently minded when it comes to dealing with other companies.  Or at least so afraid of lawsuits that they’re willing to be decent citizens.  Sometimes a big company would use their size to pressure us to give them a discount, which we were happy to do, because it was nearly free money anyway.  Our overhead was fixed, we didn’t advertise, we told them to download themselves a copy each quarter, or if they paid enough we’d send them a floppy once a quarter.
What’s changed in the world since then?  Well, a lot, but I’ll put forward that mainly the scale has changed.  Free distribution through BBSes reached a large percentage of the computer using population back then.  Distribution through the Internet reaches a HUGE percentage of the computer-using population now.  If you make a good product, people can talk much more widely about it with blogs.  Companies are still looking to be good citizens, primarily, and there are a LOT more of them out there.  Oh, and you probably don’t have to mail them a floppy each quarter, no matter how much they pay.
So the one of the biggest things I’d suggest to ‘start profitable’ is to target your product at corporations, but make it attractive to end-users as well, so they’ll bring it into the company.  As Willie Sutton didn’t say but is said to have said, when asked about why he robbed banks, “That’s where the money is.”

—  Morgan Schweers, CyberFOX!


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