Show Notes
In this episode of Startups For The Rest Of Us , Rob and Mike answer a number of listener questions on topics including SaaS pricing, subdomains, and building affordable MVP’s.
Items mentioned in this episode:
Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs to be awesome at building, launching, and growing software products, whether you’ve built your first product or you’re just thinking about it. I’m Rob.
Mike: And I’m Mike.
Rob: And we’re here to share out experiences to help you avoid the same mistakes we’ve made. Where this week, sir?
Mike: You remember a few weeks ago when I said I had gone unto meetup.com, and had started a Dungeons & Dragons group, and gotten a couple of people together, and started playing a campaign?
Rob: Indeed.
Mike: Because I’m signed up for and have a paid account now, they started emailing me about various groups, like, “Hey, you might be interested in this,” and I was told that I should join the Massachusetts cannabis marketing and sales group.
Rob: You totally should. That’s a growth market, man.
Mike: Yeah.
Rob: Is it legal in Massachusetts?
Mike: It is. Although I don’t think anybody’s licensed to actually sell it yet, that happened two years ago, they said, “Yes, this is now legal in Massachusetts for recreational use.” but they still had to go through all these regulatory hurdles, and people had to get certified, and all these other stuff. They’re like, “Yes, you can use it recreationally, but nobody can sell it to you.” that was the situation for a couple of years, I think that they’re supposedly sometime this summer, starting to do that but I don’t know. Maybe the deadline has already passed. I don’t know.
Rob: Because I was back in California, I think it was when I was at SaaStr, so it was probably, February or March of this year, and it’s legal there. It’s been medically legal for years, so they already have the dispensaries, and they legalized it. I think it was maybe, less than a year later, they were allowed to sell it for recreational use.
I was walking around at night with some friends from the conference, co-workers, there was a lot of pot smoke that you could smell, and it was like, “Oh, yeah.” Of course, I was looking around like, “Oh man, they can’t be doing that, right?” it’s just this sense you get when you smell that. But it’s like, “No, no. It’s just legal, and you can do it on the corner.” It’s such a trip, such a trip. It’s going to be weird to get used to. The way it’s going, it’s going to be legal in all 50 States, eventually. It’ll be an interesting thing to adjust to.
Mike: Yeah. Definitely can be interesting. I just found it funny that they’re like, “Oh, you should join this group.”
Rob: Totally. They know who you are, Mike, deep down.
Mike: I guess, maybe. I don’t know. How about you?
Rob: I’ve been doing some smart home stuff which is something I’ve been interested in for years. But since we had a rental for the past couple of years, obviously, I wasn’t going to put a bunch of stuff in a rental. I now have several Alexas—oops, I just activated.
Mike: We should leave this in. This is good radio.
Rob: Yeah, I have several Echos in the house. I need to, not say A-L-E-X-A. I’m enjoying them. I’m enjoying that you can use them as intercoms because our house has a lot of stairs. There’s three or four stories—depending on how you count.
Mike: I found out about that the other day that you could use it as an intercom. I didn’t know that you could do that. You can just drop into some other room in the house. Although I was told there’s a—not a security loophole or something like that—but something associated with it where you have to disable it by default. Otherwise, if somebody in your contact list, they know you have one, they can drop into your living room and just talk to you through the intercom, I think over the internet, and I didn’t know that.
Rob: Oh, interesting.
Mike: Yeah. It doesn’t sound good.
Rob: Yeah. I enjoyed doing it most from the Echo app on my phone. You can just click a couple of times, and then boom, you’re just speaking out of one of the Amazon Echos. Our kids’ playroom is way downstairs, and it’s easier than running down and telling them dinner is ready. It’s pretty nice.
I’ve definitely bought into the Echo ecosystem, and I like their direction that’s going. I got a Nest for the first time. I tried installing Nest at our old house, but it wasn’t compatible. I have a Nest here, and I can now control that of course with the app, and it’s smart thermostat, and that’s fun. You can even tell the Echo to adjust the temperature, I believe. I haven’t activated that yet.
We moved into this house, it’s in the Midwest, it was built right around 2000, and they wired the whole thing for in-home speakers. There’s speakers in almost every room. There’s this big central places where he had a receiver, a tuner, CD player, and all this stuff. I’m thinking, in the 90s, that’s what I would have done. When in college, I would love big speakers from dorm room to dorm room, as I moved around or apartment to apartment, and you had your receiver, you had your amp and all that stuff.
Now I went online, and I was like, “There’s got to be an easier way here. I want to be able to stream everything.” I researched it, and of course, Sonos is the leader in that space. While I don’t love how proprietary Sonos is, even down to the fact that I can’t just stream from Spotify through my Sonos but I believe that you have to use the Sonos app, and you […] it into your Spotify account like, “I don’t want to use the Sonos app.”
Mike: Oh, geez.
Rob: I know. I know. I need to double-check that because they may have opened it up, but last time I looked, you weren’t able to kind of just airplay it–the equivalent of that through the Sonos thing. But anyway, they have this thing called, Sonos Connect: Amp. The Amp part means it has an amp in it that you can connect to speakers. I just got one, just as an experiment. I put in on the first floor, and sure enough, it takes the place of all of this equipment he had, the speaker wires go in the back, and there’s volume knobs on every wall in the house.
I was going to bail on it altogether and just not do it. But Sherri’s like, “No, no, no. If we have people over, there’d be multiple…” because you can do multiple floors, and there’s all this stuff. All that to say, I reluctantly implemented Sonos in this smart home thing, but man, it’s cool. You can tell your Echo to start this on Spotify on the Sonos, and it will do it, and you go to the wall and turn it up. It’s magical, man. It’s pretty interesting. It feels like we’re living in the future.
Mike: That’s pretty cool. I bought a new amplifier maybe two or three years ago because my old one was 12, 15 years old. Actually, it was more than that. It’s probably close to 20. It still works great. It’s just that it didn’t have any of the connections. It didn’t have an HDMI connection. It still had all the component outputs or inputs and everything else. I couldn’t hook it up to any new equipment that I had, like a Blu-ray player and stuff like that. I was like, “Alright, fine.” I brought it down, and I bought a new amp.
I was looking at all the different options, and it seemed to me like a lot of that type of equipment, is very much like car technology where they’ll build something into it like Spotify or something like that, and it’s obsolete almost the second you buy it. They’re terribly useful. It sucks that it feels like that type of technology is still on that trend, where everything is proprietary, and it’s so hard to connect stuff, and it’s expensive too, but at the same time, it doesn’t really wear out. I still got speakers that were almost 20 years old, and they’re still in great working condition. I don’t really have any need to buy new ones, except for the fact that if something breaks. That’s it.
Rob: Yeah, that makes sense. I agree. I was concerned when I bought this Sonos. I had to research it because I was, “Do they even support speaker outputs anymore? There’s exterior speakers in the patios, is it going to drive those? Is it going to connect to all the stuff?” Sure enough on the back, it looked like it had the right ports and it wound up doing it. They’re called banana clips.
I agree. Trying to interface this newfangled technology with stuff that has existed for 30, 40 years, maybe even longer. I remember twisting speaker wires together. I had four speakers in my dorm room. Certainly, it was quadraphonic, it was a stereo, but I would twist them together, ran them into the amp, and do all the stuff, and that technology is now having to interface with, like you said, this Spotify stuff.
I did evaluate not doing Sonos. There are, obviously, other brands that have streaming music devices that have amps built-in, but they just all seem, like you said, bolted on, and antiquated. I don’t know. It’s interesting to see how this is going to shake out. I’m interested to see how it’s going to shake out over the next few years.
Obviously, I’m investing in ecosystems now. I’ve been on the Alexa ecosystem now. I’m in obviously now, on the Sonos a little bit. I think I’m probably going to have to get at least one more […] perhaps too because there’s different zones and stuff. But I’m trying to pick market leaders because I don’t want to buy the Betamax, and suddenly have to bail on it because they just killed the line or whatever.
Mike: Well, that just means you’ll have to find the one that is selling porn with it, that will be the winner.
Rob: I do think, I might need to stand corrected because I opened Spotify while we were talking, and it does look like I can just connect to the Sonos downstairs, and just stream it through there instead of using their app. I’ll test that later to prove it out. I know for a while they didn’t do that. But if it does it now, they must have added it in the past whatever, six months or something.
Mike: It seems to me, for that type of technology, anything that comes to streaming, you just want something where you can connect to it with Bluetooth or something like that, or with even just a cable, and then from there, it just acts as a dummy piece of equipment that just does its thing, and that’s its sole purpose is, and then you plug other stuff into it. It seems most people would really just want to do that.
My wife used to work at an electronic house, and they had all these high-end stereo systems going up to $100,000-$150,000. Don’t get wrong, they were beautiful, but the reality is you’re going to spend that much money on a stereo system for some downstairs place. Their target market was people who had nothing better to do with their money. Sure, that makes sense, but I think for the average user, it doesn’t matter that much.
Rob: Yeah, that’s the thing. Like you sad, I wouldn’t want to use a cable because the Sonos is in a cabinet set away but Bluetooth or I believe it’s just via wifi because it connects to wifi obviously, and it had its own identity. Once I […] it connects over that. I’m not Bluetooth-connected to Sonos at all. The phone just know where it is.
Mike: Yeah.
Rob: With that, should we do a whole episode?
Mike: We could talk about all the different problems of those too. There was some kid’s device that was out there that connected into the WiFi, but it also would record pretty much anything, and it would send it back to the servers to the company that made it, it wasn’t encrypted, and it was using it to do voice recognition. They were basically collecting voice data from kids. It was like, “Oh boy. That’s not good,” and it’s all not encrypted either. That’s a big problem.
Rob: Yeah. That’s the thing too. The IoT is the term for this—Internet of Things. Everything is going to be on the internet at some point, is what they’re saying. The IoT devices are much like the Nest and the Sonos and even smart toasters, smart microwaves, smart fridges, and all the stuff that’s supposed to be coming.
That stuff is said to be a hacker’s dream. Most of it, it’s super insecure. Some of it, if it doesn’t get patched, then it’s easy to hack. Even a lot of it that is patched is easy to hack into. They’re saying that’s the coming wave of hacks. That’s going to be the zombie nets of the future. Because that’s how folks do DDoSes—they go out, and they take control of a bunch of old PCs that are unpatched, and then they do attacks, distributed denial-of-service, from all those things. They’re saying that the Internet of Things is going to be tenfold or a hundredfold the number of devices. It’s going to have that much power.
Mike: Yeah. I shudder for people who have to deal with those types of problems.
Rob: Seriously, yup. Cool. Let’s dive in. We have some listener questions. We have some comments on some prior episodes. Our first comment is on episode 403 which was titled, Should You Love What You’re Working On? and it’s from Martin. He just came to startupsfortherestofus.com and entered a comment at the bottom of episode 403’s blog post.
He said, “Hi, Rob and Mike. Thanks for another great episode. When you guys talked about love versus opportunity, I was reminded of the idea that it can take hard work to cultivate a passion. If I remember correctly, Cal Newport talks about this idea in one of his books. I don’t know about you guys, but I’ve noticed that there are a lot of things where you need to put in the work first before you start to enjoy them. I’m currently working as a software consultant, and I remembered that the reason I picked up programming in the first place was because as a kid, I was into video games. Now many years later, I really enjoyed developing software, often more than playing games. I think that’s true of many things. For example, when you’re just starting with any kind of sport, and you suck at it, it’s often not that great, but once you put some effort into it and you start to improve, you suddenly get why people enjoyed doing it.”
I think Martin has a good point. Thanks for posting, Martin. This is how I felt about playing music–playing the guitar. When I first started it, it was really hard, and then definitely the better I got, the more I wanted to play my guitar. What do you think about this?
Mike: I remember reading about this. I think that Josh Kaufman wrote a book about learning different things. I’m pretty sure he had a graph in there that showed that. There’s a skill level versus enjoyment. When you first start doing something new, you suck at it which is to be expected, but you don’t enjoy it at all. Then once you get a little skilled at it, then you really start to enjoy it because you feel you know what you’re doing, so you’re on the cusp of always learning this new stuff, but you’re also enjoying the journey. Once you get much more advanced, then it’s about putting the time and effort to practice, and get the muscle memory or the mental connections made so you don’t have to really think about it when you’re doing it. Pretty sure it was Josh’s book that—I can’t remember the name of the book off the top of my head—but I think that that was in there.
Rob: It’s called The First 20 Hours: How to Learn Anything Fast.
Mike: Yes, that was it. Yup. It’s a fascinating read, too. If you are interested in learning new things and the process of learning new things, I’d definitely recommend picking up that book and checking it out. He goes through several different things that he learned, like the ukulele, sailboarding, and a couple of other things. It’s just fascinating how he learned about how to learn stuff.
I always had a problem with that when I was in college. When I got to college, I just authorized, “Go ahead,” relied on my natural ability to just remember things, pay attention in class, and then do well on tests. When I get to college, you have to do the homework. That was always a problem for me in college, but it worked itself out eventually, but it took years for that to happen.
Rob: Yup. For sure, I felt the same thing. The First 20 Hours by Josh Kaufman. It’s also on audible which is I believe how I read that book. Thanks for the comment, Martin. Our first question of the day is from Michael Needle. He’s from alltheguides.com. He says, “Mike and Rob, first, thanks for all you do. I previously called in about building a marketplace, alltheguides.com, to connect adventure travelers and guides. I’m close to finishing the platform, and I took your advice on building one segment first. I went with guides to have providers ready when clients come,” which is the way I believe we should have recommended that you do. It’s a two-sided marketplace, and we said when you start with two-side marketplace you have to get that one side done first.
Now back to his email. “Now ahead of the platform launch, I want to make sure I can bring the clients to the site, the customers, the consumers. I thought I’d follow your advice by starting an informative blog in order to get emails.” Adventure Travel Ideas, I think is the idea of the blog. Here’s the question. “I already have a landing page up from my platform. I assume it would be better to have the lead gen on a different domain as opposed to a subdomain. I just assume that subdomains will be less likely to draw initial visitors. Am I wrong on this? Or if I’m right, and I should go with a different domain, what is the best way to nudge my list towards the platform once it’s launched? Thanks again, guys. You provide invaluable advice and inspiration.” What do you think, Mike?
Mike: I think there’s a natural inclination to believe that you should put your landing page and stuff like that on some sort of a subdomain and that’s how you’re driving traffic to them. But the reality is, I think is that if you’re doing tour guides in a marketplace like this, I don’t think people necessarily really care about the subdomain. I think what really comes into it with the subdomain is that you’re trying to establish new website according to Google, and do all the SEO, and the site ranking, and get that up based on how Google looks at it.
You could instead focus that energy on a subdirectory in your main domain and use that to essentially focus your efforts and increase the authority of that domain versus trying to do it with one subdomain and then another— that’s probably the approach that I would go with. I guess there’s a few different examples I would point to like Craigslist, Angie’s List, and Reddit. Reddit’s got all those different subReddits and stuff in it, but they’re all under, most of them in different subdirectories.
Rob: The reddits? Yup. It’s reddit.com/r/whatever, /startups or whatever.
Mike: Right and that’s not necessarily a two-sided market, but Craiglist is. Based on the location, they will have subdirectories, which are a geographic location, but I wouldn’t worry too much about the subdirectories, at the moment. I guess I’m curious to know whether or not you’re trying to use those subdomains as like the location, like city name, or something like that. Maybe it would make more sense in that case, but at the same time, you could also just use it like it as a different subdirectory as well, and you’ll benefit, for the site authority, through that.
Rob: That’s the thing, and now Google has come out and said, “Oh, subdomain, subdirectory, there’s no difference.” I still think there’s some difference. I still believe, deep down, that subdirectory is better for SEO. I do like your point there. I think if you are going to start a blog, I would try to do it in subdomain, if possible. It’s not always possible to do that. You might need to do reverse-proxy and do some things if you’re running WordPress because you don’t tend to want to run WordPress on a production app server. When I say don’t tend to want to, I mean don’t do it. There’s just too many security holes.
If you want to host it somewhere, I’d go with somebody like the VPNGINE or Pagely or whatever. I think I may have misspoken earlier and said subdomain, but what I mean was subdirectory, if you can do a subdirectory, that’s what I would do.
I don’t think this matters actually, that much. When using a different domain for the lead gen, I would probably lean towards subdirectory, and if you need to use a subdomain, I don’t know—its just apples and oranges, this is small stuff. If you’re going to drive ads to it, it doesn’t matter, nobody cares, they’ll just click on the ad, and they’d go see it. If you’re going to try for SEO then like Mike and I were saying, I would lean towards subdirectory, if possible, I think it’s pretty clean, but in all cases, I don’t know that it matters that much.
Mike: Yeah. The one really nice thing about having everything underneath the same domains—and you’re not dealing with subdomains—is redirecting people back and forth, and then also dealing with the fact that, like any tracking analytics where you’re trying to track like, “Did somebody hit this subdomain and then this other subdomain?” and then you got cookies back and forth between them. With marketing tools, it becomes an absolute nightmare.
You’re much better off just having it all on one domain and then you don’t have to worry about that because the cookies are going to be able to work all on that domain between different directories, versus, like a Google Analytics tracking code. Something as simple as that is going to be an absolute nightmare to work across multiple domains.
Rob: Yeah, and it’s possible, you just got to know how to do it. It’s not out-of-the-box trivial. Sharing cookies is a pain, and then you’ll get the, “Hey, this person came from one of your domains to the other, and they show up as a new visitor.” It’s not ideal. Anyway, I hope that helps.
Our next question is from long-time listeners and friends of ours. Folks that we’ve known that have come to MicroConfs–Dan Taylor and Simon Payne. Dan Taylor runs appsevents.com, which is an events company that runs more than 300 annuals events. Simon Payne was the co-founder of Lead Pages. They both live in Prague, actually, in Czech Republic. Simon was working on an app with Dan Taylor, and Simon has also launched a WordPress button called Convert Player. That’s pretty cool.
Anyway, they wrote in. They said, “Hi, Rob and Mike. Two long-time listeners here, Dan and Simon. We’ve developed and released a SaaS app called EventsFrame. It’s eventsframe.com. It’s ticketing and attendee management system, with fixed low monthly pricing for unlimited events and unlimited attendees. We’ve moved all of my company, AppsEvents more than 300 annual events to this, and done a full public launch last month. We already have paid sign-ups from our listings on sites like Capterra, some content marketing, and some basic Facebook ads, which have converted this in paying customers, which is a good sign. We’re doing an AppSumo launch in a couple of weeks to get a bunch of users on this system, which is taking a lot of our focus, but we’re planning for how we grow this long-term, as Simon and I are focusing all our time on this project.”
“Our question is on pricing. As you know, systems like Eventbrite take a percentage of ticket price, and most systems follow a similar model. With AppsEvents, I was spending thousands of dollars a year on Eventbrite fees. We want to go for a fixed price for unlimited events and attendees. Our initial idea is $97 a month. Now the issue with this is that people running one several small events might prefer a percentage of ticket price, as there is no upfront cost. And on the other end, large event producers would pay a lot more than $97 a month,” or I think he’s saying they should pay a lot more than that cost they’re getting more value. “We guess some pricing tiers could be good. But any ideas to help with our process would be greatly appreciated. All the best, Dan and Simon.” What do you think?
Mike: This is something that I actually looked into pretty heavily and struggled with several years ago. Back when I was running AuditShark, one of the ideas that I had come up with was, ironically, Bluetick, because I was doing a lot of outreach to people and I just needed to follow-up with them and keep on them. But also, as a side note, I was also helping out on the sponsorships side for MicroConf. For that particular problem, I found that I had to do the same thing.
I said, “Oh if I had this product or tool in place that would allow me to do that outreach as an event organizer that would help me out a lot.” I looked around. A bunch of different things didn’t really work very well for what my use case was. I said, “Well, could I build this? Is this something that I could basically move away from AuditShark?” because at the time, it wasn’t really on the best path, and I recognized that at the time.
Anyway, I looked into specifics of whether or not I could target event organizers with that. What I realized was that there’s a wide range of types of event organizers. Some of them, that’s all they do, they organize events like the AppsEvents company. They will organize hundreds of events every single year, and then there’s ones like MicroConf where we do it a couple of times a year, and that’s it.
For ones like that, a monthly pricing model really doesn’t work well because of the fact that you’re only running a couple of events. If you’re doing it on a regular basis, sure, it makes a lot more sense. But as you pointed out, it makes a lot more sense to just do with a percentage of the ticket price for those types of customers.
The other thing I would look at is, Eventbrite, yes, they do charge a percentage of the ticket, but they also give the event organizers the ability to pass that cost onto the attendees. That’s actually what we do with MicroConf. It’s only a couple of percent, but at the same time, it raises the ticket price by that amount. The question you have to ask is, “Well, as the event organizer, is that something that’s going to turn away people? Are they going to, not buy a ticket because they have to pay that extra fee?” That’s again, for the event coordinator to decide. But your problem is, how are you charging?
For us, Eventbrite is I’ll say, “free” and that we’re passing those cost on, and then on the other side, we’re paying the cost of the payment processing, which we would have to pay, regardless. Whether Eventbrite handles it or we do it through PayPal or Stripe or whoever, that fee has to be paid. But our payment to Eventbrite is basically, covered by the attendees buying those tickets, which make it free for us, which makes it a lot more attractive than a $97 a month plan or even a $50 a month plan. Coupled with the fact that, we also don’t run more than a couple of events a year. Why should we be paying for that over the course of the entire year if we’re only running events in a certain time window, I’ll say?
That’s exactly the problem that I ran into when I was trying to identify, “Well, how can I build this email follow-up product aimed at event organizers?” Event organizers, if they run a lot of events, awesome. They’re a good target. But if they don’t, then having them pay a monthly fee is not going to work.
Rob: Yeah. Basically, what Dan and Simon are talking about doing is doing pricing innovation in the events space. While I think it certainly saved Dan money from a customer perspective—he was paying Eventbrite thousands a year—I’m not sure it makes sense to do this from a business perspective.
There’s a reason that most of these events software companies charge the way they do. The reason, as you’ve laid it out, if your event is free, you don’t pay EventBrite anything. If you only sell 20 tickets, and they’re $5 each, then I believe you pay Eventbrite 2.5% of that. If they do the processing, they charge you 3% fee, payment processing fee or we use PayPal, and obviously, it’s whatever it is, 2.9% or 3% there.
Or, if you sell $100,000 worth of tickets in a year, then yeah, you do pay $2500, so I get the […] Eventbrite. It makes sense from a customer perspective of being like, “Man, I’m paying EventBrite so much money,” but now that you’re on the other side of it, and you’re running a business, my thought is like, “Yes, that’s how you want it. You want it so that the people who are getting a little bit of value out of this system aren’t paying that much for it and it scales up perfectly linearly with how they do it.”
If you sell $100,000 for the tickets, you’re probably making a chunk of money. We can argue about whether $2500 is too much money, but you definitely are getting quite a bit of value out of the system if you’re selling $100,000 worth.
Trying to do pricing innovation is a challenge. Is it business model canvas? That something that if you read that book, do you remember the book?
Mike: Yeah, I remember it. There was a whole worksheet that went with it.
Rob: Yup and that talks a lot about trying to do pricing innovation. I don’t know if it has practical enough tips to help you sort this out. But I will say that I tried to innovate on pricing in the early days of Drip, and instead of doing per subscriber just like MailChimp and everybody else is doing, I tried to do new subscribers per month, and it was a bad idea. Not only did they confuse people, but as we started to scale up, we were not growing nearly as fast as we should have.
That’s the thing that you’re going to run into is you’re going to have people who come and are selling half a million dollars’ worth of tickets on your system and they’re going to be paying $97 or even if you do tiers, it’s not going to be that much. They’re not going to be paying you 2.5% of $500,000.
I think since people are used to this, and it is a lucrative model. If anything, you could try to be the low-cost provider which I don’t think is a terrible idea in this space. I don’t know enough about the whole space. I know that EventBrite, yes, it does feel expensive to a lot of people, and it’s clunky, so you have those two things. They have a ton of features, but they’re a little more expensive than everybody wants them to be, and they’re arguably quite a bit harder to use, although they have a lot of features.
This is like going after a QuickBooks or InfusionSoft or Marketo—kind of going after that. If you make your software infinitely usable and slightly less expensive, but you still keep the same model, maybe only try 2.5%, I don’t know. I know you have other bootstrap competitors around you, look at what they’re doing. That’s probably where I would start is doing just a big survey of all the pricing structures of all the events SaaS apps, and mapping that out on a big sheet of paper or mind map or something, and trying to think that through.
I think in the end, you are going to want to be a percentage of revenue is my guess, because otherwise, you’re going to constantly have this problem. Try to think if there’s any way around it with tiers, try to think creatively. It’s like you could have a free tier or you can’t charge for events, and then you could have your $50 a month tier where you go to a certain amount of ticket sales. In essence, you’re taking a percentage, but you’re not, you’re just having tiers of it. That would maybe be the only other thing that I would consider. But man, just taking 1.5%, 2.5%, it’s so clean. It makes your pricing look so clean. It’s simple, and everybody understands that.
Mike: I think the problem that you just alluded to is that, depending on the size of the event that you’re dealing with, if it’s 5 or 10 people, you might have one price tier, and then if it’s 50, you could have another. Whether or not you deal with those, like what’s the price point of those? If it’s $25,000, but they only allow five people in it, is it a free account? Depending on the value that you’re providing to them, that’s really what you’re pricing should be based on.
I think you almost get into this territory of, you have an unlimited number of pricing tiers because how high could those ticket prices go or what is it that you actually basing it on? Is it the number of attendees or is it ticket price? Or is it a combination of the two? Once you get into that territory, it gets overly complicated, and people don’t want to deal with it because they’re like, “This pricing model is too confusing for me. I feel like I’m going to get screwed, so I’m going with the competitor because I understand it.”
Rob: Thanks for the question, Dan and Simon. I hope that was helpful and I definitely wish you guys the best of luck with EventsFrame.
Our next question is from Alex, and he says, “Hi again. Thanks for all the great content. I feel like I’m in a bit of a dilemma. I have an idea that I would like to turn into a business. It’s for a job site. I have the requirements, more or less hammered out to the point I can have a developer build it. I’ve recently been in the process of getting quotes from various companies, and freelancers to build it but I’m hesitant to make this jump. Aside from the inherent risk of it just failing, I’m concerned I will spend all my money on the MVP then quickly run out of money to fund any iterations on the site. I don’t know anyone willing to help me build this for free, and I also don’t know the first thing about raising money or how to prepare for that. I guess my question is, how would you approach building an MVP in the most affordable way?”
One thing I’ll throw out before you dive in Mike is, you’ll not be able to raise money, maybe from family and friends, but you’re not going to be able to raise money without a working app these days. It’s just kind of table stakes. Although he asked us, “How would you approach building an MVP is the most affordable way?” I don’t know that’s a question we should answer. I think the question we should answer is, how do you validate this more before building an MVP. Would you agree?
Mike: Yeah, I would agree. That’s the next step is like, what is the MVP? What question are you trying to answer? The question I think you’re trying to answer is, “How do I know if I should dump this money into this type of product?” I think the answer to that is the same thing that I did with Bluetick. Go to balsamiq.com, and buy a copy of Balsamiq for $80, and mock everything up. Then go try, and sell that to people, and see if people are actually interested in buying what it is that you have.
That will do a couple of different things for you. One is, it will help you find the types of people that you need to talk to, and the second thing it will do is, it’ll give you enough information to say like, “Is this something that people would actually pay for?” and that’s the answer to your question is, if you can get enough people and find the market for it and tap into a channel of people to talk to, to get them excited about it, and find out if they’re going to pay for it, then sure, go for it.
But if you can’t get past that part, if you can’t find the people to talk to, it’s never going to work. You’re just not going to be able to turn it into a working product, regardless whether you have code written or not. That’s not the problem. The problem is trying to find those customers and make sure they are willing to pay for it. There’s obvious concerns here about, Alex’s voice about, “I’m concerned about making the jump because of the risk of it failing,” and that’s how you make sure that it’s not going to fail.
Rob: Yup, I would agree with that. I think the question you need to ask yourself is, “How can you validate this before dumping a bunch of money into it and doing as much of that as possible?” Sometimes, an MVP is not even software. We’ve talked about this in the past. An MVP might be you with an Excel spreadsheet or a Google spreadsheet. It might be you manually writing things, taking in a list of keyword someone gives you, manually running an algorithm on them in Excel, and then giving back the keywords they’re most likely to rank for. That is basically what I would have done if I had built an MVP for HitTail, as an example, or any keyword tool.
There are ways to do it without needing to hire anyone to write a line of code. My second book, which is a collection of essays, is called Start Marketing The Day You Start Coding, but now, I think it’s Start Marketing Or At Least Validating Well Before You Start Coding. With Drip, I had 11 people who said that they would pay $99 a month for what we were going to build before we broke ground on code. I wanted 10, happened to get 11, then Derrick started writing code.
I know for Bluetick you got pre-orders. There is a lot of hustle that can happen up front. It’s hard work. This is the stuff that, “Well, is anyone going to trust me? Who am I? Is anyone going to trust me if I don’t have the software after the software ?” No, that’s an excuse. Yes, it would be better if you had all the software, and could just start marketing it. But that’s not the case.
I think your concern is valid, that going out and building an MVP, it’s very, very unlikely that’s going to have product fit, so you’re going to have to iterate. If you don’t have the money or the time or the skills to iterate on that, then you need to figure out how to get to the point where you feel more confident.
Here’s the thing. If you try to recruit a developer to build it for free—we’ve talked about this in the past—nope, no developer is going to want to do that. If you go to a developer and you say, “Hey, I built all these mockups, I have 25 phone calls, and I got 10 pre-orders, they paid for a quarter, three months of service, and they’ve all committed to—assuming it works and does what I say—it’s going to be $50 or $100 a month after that, boom, we’re going to be at $1000 MRR,” yes, that’s a lot of hustle, and it’s a lot of work, but that’s how you recruit a co-founder or at least a developer who is willing to build it maybe for an equity share or something like that.
I like the way you’re thinking about it. I’m glad you’re hesitant to just dive into the MVP, but I don’t think you should look at building an MVP as software in the most affordable way. I think you should look at, not automating them, doing stuff manually, and think of, “How can I possibly validate this?” The first step is going to be customer conversations, then it’s going to be trying to get pre-orders, then it’s going to be doing it manually until the software’s built, then it’s building a crappy software MVP, and then it’s doing a better job. I bet there’s a lot of steps between where you are today and basically, paying someone to build a complete SaaS app.
Mike: I think part of it just stems from the classic misunderstanding of what an MVP is because MVP has the word Product in it, and that’s not really what it means. I talked about this in my book, Single Founder Handbook, and I quote Wikipedia from […]. It says, “An MVP is not a minimal product. It is a strategy and process directed toward making and selling a product to customers.” What you have to understand there is that it explicitly calls out an MVP as a process, not as a product. Building a product is not your MVP; answering a question is what your MVP is. The first thing that you have to start with is, “What is my question?” and here it’s, “How do I know that I need to pay people to develop software?” It’s all the stuff before that that Rob just talked about, like talk to customers, find out what they really want, and whether they’re going to pay for it, that’s all the stuff that you need to do..
Thanks for the question, Alex. I hope that was really helpful. I think that about wraps us up for the day. If you have a question for us, you can email it to questions@startupsfortherestofus.com, or you can send us a voicemail by calling 1-888-801-9690. Our theme music is an excerpt from We’re Outta Control by MoOt used under Creative Commons. Subscribe to us in iTunes by searching for startups, and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening and we’ll see you next time.
Episode 406 | Should Bootstrappers Raise Money?
Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike answer the question of should bootstrappers raise money? The guys distinguish the difference between venture capital and angel investing and how raising an angel round may be a good fit for some types of entrepreneurs.
Items mentioned in this episode:
Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you build your first product or you’re just thinking about it. I’m Mike.
Rob: And I’m Rob.
Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s going on this week, Rob?
Rob: We have new iTunes reviews.
Mike: Oh, cool. What do we got?
Rob: This one from Find Fitness Pros. It says, “This is my go-to podcast every Tuesday morning. Rob and Mike continue to give their insights, not just info on exactly what to do,” and from Nathan Bell, he says, “Great information. I listened to one episode and I’m hooked. It was full of great information I can easily implement. Some of the info was a little bit advanced for me currently, but I’m confident that by selectively listening to more, I will pick up more.”
Those are a couple of new iTunes reviews that we have. I used to keep a worldwide tally of it using CommentCast and when I moved to my new computer, I don’t have the .exe or what is it called, it’s a .app I guess in Mac. I don’t have the executable anymore and you can’t download it anywhere. So I moved over to mypodcastreviews.com but it only gives me reviews, not ratings. We’re up to almost 600 worldwide ratings, I believe. People don’t necessarily need to write sentences or whatever, but I don’t have that tally anymore. Certainly, we’re above 600 at this point.
Now, what I have is I have 347 worldwide reviews and that’s a lesser number. I want to get back to the world’s rating. I think the guy at My Podcast Reviews says that they are going to add ratings but neither here nor there, the more reviews or ratings we get, the more likely people find the show, the more motivation it gives us. If you feel like we’ve given you some value as a listener to the show, it would be awesome if you can open iTunes or Stitcher and just give us a five-star review. Really appreciate it.
Mike: The solution to not having that app that gives you the numbers is just make up a number. So we’re at 3000 reviews I think.
Rob: That’s right. 3422 reviews. That’s great. How about you, man? What’s going on this week?
Mike: Well, this morning, I published a public API for Bluetick. Of course, I say it’s a public API but there’s actually only one person who actually knows about it.
Rob: It’s in beta?
Mike: Yeah, basically.
Rob: Early access, good.
Mike: I had a prospect who wanted to sign on and they’re like, “Yeah, I really need to have a public API that is available for me and Zapier wasn’t going to work for them. Basically as I said, I spun it out because I heard from a bunch of customers that I currently have, and I started talking to them about, “What is it that you need?” and trying to figure out what’s the minimum that I could build that this particular prospect or customer would need to get started. They only needed four things. Build those, put them into it, and then there’s all the infrastructure changes that needed to go into it.
It took a week-and-a-half just to do the infrastructure changes but now the best stuff if all taken cared of. I got that published out there and waiting for them to start using it, and then figure out what needs to change. I already made it very clear upfront, like, “Hey, here are some things that I know we’re going to change, and then over here, based on what you tell me, other things could change, so treat this as an absolute beta. Eventually at some point it will become stable, I guess, and then I’ll start pushing it live to everybody.
Rob: That’s nice. It’s nice to do. You’re basically doing customer development on what is its own little product. You can say it’s a feature but really some entire products are just APIs. You want to get it right from the start, and by start, I mean by the time you publish and people start hooking into it, you can’t change it at that point. I think it’s really good to take this approach of roll it out slowly, roll out one endpoint at a time and really think through how you want to structure it.
I was just on your site trying to guess the URL. I was going to just type in a bunch of stuff so you’re going to see a bunch of 404s in your error logs. Not a hacker, it was me, but I didn’t find it alas.
Mike: No, that sucks. I would tell you if you asked for the right price. Other than that, I also got my first fraudulent charge from Bluetick. It took a lot longer than I expected it to but somebody signed up, then they logged in, and absolutely they didn’t pay any attention to the onboarding emails. Come time when their trial is up, they got charged, and then I forget how long it was later. I was maybe probably three or four days later, I got a notification from Stripe saying, “Hey this charge looks fraudulent,” and I looked at it. I think it’s a debit card too and I was like, “Oh great.” Three hours later though like, “Oh you’ve had a chargeback.” I was like, “Wait, I didn’t even get a chance to decide that to do with this potentially fraudulent charge,” and they already converted it into a chargeback, which cost me an extra $15. Well that sucks, but, oh well.
Rob: Was it a person not using or was it a stolen credit card? Is that what you think? Or do you think that they just went in with the intention that it was their own credit card and they just intended at the whole time?
Mike: I’m not sure. It looks legit. The email address, I couldn’t quite tell whether it was real. I think it was a Gmail email address. I couldn’t really trace it back to a company or anything like that but the name on it seem to match what the email address was. I don’t know. I’m not entirely sure but I think it was from a real estate company or something like that. All right, well, whatever.
Rob: Yeah, that sucks. It’s going to happen. It’s definitely a milestone you don’t want to hit but you’re going to hit it eventually.
Mike: Yup. Certainly not a milestone to celebrate but I definitely hit it.
Rob: Yeah, exactly. Cool. What are we talking about today?
Mike: Today, I thought we would have a discussion about whether or not bootstrapper should be raising money. I guess by definition if you’re raising money, are you no longer a bootstrapper at that point? I think there’s maybe a time during which you are bootstrapping a company and self-funding it. I almost called it self-funding, like should people who are self-funding raise money, but again that would go against it.
The idea came because I saw Justin Jackson had tweeted out a link to an article he wrote over on Indie Hackers called The Bootstrapper’s Paradox. In that article, he shows a graph or what they’re doing for transistor.fm, which is the new startup that he’s working on. Basically it shows a graph of over the course of 60 months was 10% exponential growth and 5% turn. The MRR will get to $21,000. But 60 months is five years of time.
I thought it would be interesting to just have a conversation about this because when I was reading through the tweet that he had put out, there were a bunch of people who chimed in on it, mostly people who were listening to the show would have heard of like Des Traynor, Jason Collin, and Natalie Nagel. They’re giving their thoughts on this stuff and I just thought it would be interesting to talk about it.
Rob: Yeah, that’s for sure. 10% growth every month sounds like an impressive number but when the number starts very small, like $1000 a month, that means you’re growing $100 MRR a month. You just can’t do that early days or if you do, it’s going to take five years. You either need to figure out a way to grow faster or you need to be really patient.
This is a struggle. It’s funny that, Justin called it The Bootstrapper’s Paradox. I don’t know that it’s that as much as this is the reason people raise funding. We know people who are just bootstrapper through and through, you should never raise funding and 37signals used to say that and even mentions it that DHH and Jason Fried took funding from Jeff Bezos two years after launching Basecamp. It wasn’t even funding that went into the company. They took money off the table. If I recall, I think that number is public. I think it’s $10 million that he invested, was my memory and maybe I don’t think I’m making that up. It’s either rumored at that or it was announced.
They had essentially at that point had FU money and it’s really easy to make different decisions or just say, “Hey, we’re going to grow as slow or as fast as we need,” when you have that kind of money in your personal bank account and you’re just running this business day-to-day.
Justin’s article is a bootstrapper’s realization of “Oh Sh*t.” This is why people do raise money. It’s coming to that realization at this point and I think it’s a good thing to call out for sure. I’ve been thinking about this so much so I’m looking forward to today’s episode because in my Microconf talk this year, I talked about things that I learned bootstrapping and then self-funding and then in a venture back company after Leadpages acquired us.
In the last five to seven minutes I did just a little snippet about fundstrapping, which is this term that Colin from customer.io coined, where you’re kind of in-between. You bootstrapped a little bit and you raised a small round. I say it’s between 200,000 and 500,000 and you raise it with the intention of getting to profitability. Without, you’re never going to raise institutional money, or raise it from friends or families or angels, so you don’t give up control, you don’t give up a board seat, you really have the benefits of funding without the institutional chaos of it, the headache.
It wasn’t a throwaway piece but I almost didn’t include it in the talk. That piece has gotten me more emails, more comments, more thoughts, more people came up to me, ask me what that’s like, asked if I would invest or find new people who were doing fundstrapping. It’s just fascinating response to this, this thing that’s been percolating. It’s a long rant on it to start but I just think this is becoming more and more of a viable option and potentially even a necessity as the SaaS market gets more and more crowded.
Mike: Yeah. That’s the part that I think has changed over time, where five or 10 years ago, you could come out with a SaaS and you’d launch it to the public and you would start to grow by virtually the fact that there was nobody else out there or there were very few competitors out there doing what you were doing. Now if you launch anything, you probably got a couple of competitors just right out of the gate. If you don’t, then you probably don’t have a product that’s going to go anywhere. But if you have any competition, it’s probably substantially more competition today than you would’ve had five years ago or 10 years ago. Just by virtue of having launched five or 10 years ago, you were going to be more successful quicker than you would if you did the exact same thing now. It’s going to take longer, which means that you’re going to burn through more runway and it’s just going to be harder.
Rob: Right. Now, five or 10 years ago, there was less competition but the expenses would have been higher, 10 years ago especially because you literally needed a rack server. There was no Amazon EC2. In addition, there was still like when Basecamp first launched on their homepage, they were like, “You don’t have to install any software. No downloads needed.” They were still educating on just the concept of being in the cloud and there were hurdles there.
Mike: That was almost 15 years ago.
Rob: Yeah, that’s true. No, you’re right. That was 2005 or 2006? You’re right, 12 or 13. You’re right. But even with that, say 10 years ago, even with that, it’s still I believe was easier back then. But that doesn’t mean you shouldn’t start something today. It just means you got to house some more, you got to pick a better niche, you got to have more skills, or you need a little more money in the bank.
Whether that means you raise it yourself out of consulting efforts, which is what I did, or if there’s definitely more money being thrown around as funding these days that is, I’m not going to say no strings attached because it’s certainly they take equity, but 10 years ago if you took half-a-million bucks, boy that was typically institutional money, it was a pain in the butt to raise, you are giving up a lot of control, you are giving up a board seat, that is no longer the case. There really is this viable option, this in-between.
Mike: I think if you look at the businesses that, in the past have tried to figure out how to raise capital, one of the things that most people, 15-20 years ago, it was common to say, “Okay, let me go to a bank and get a loan from the bank.” But that is a non-starter for most new businesses. You got SBA loans and things like that where you can use the money to take over an existing business where they’re able to evaluate.
But if you have a business that you’re trying to get off the ground, a bank loan is basically a non-starter, especially when it comes to SaaS because they don’t understand how to calculate how much that business is worth. There isn’t any inventory and with software, it’s going to lag in terms of the revenue over something like a physical goods business, or a coffee shop, or a fitness studio where they know how many people are coming in and they can put a value on the equipment whether it’s the coffee machines or the spin cycles on a fitness studio. Banks are okay with that. They understand that.
But when you got a software business, the expectations today are much higher than they were five or 10 years ago. You have to do a lot more in order to make your product a lot more polished, which means it’s going to take time to do that which burns through your runway. It burns through that money a lot faster today. I guess you wouldn’t burn through it faster. It’s just you burn through more of it than you would have 10 years ago to get to the same point.
Rob: Even if you can get a loan, you have to send a personal guarantee. Now, all your personal assets are on the line. And if you decide to shut the company down, you owe them money. If you borrow $100,000 it’s a big deal. To me, that is more of a risk than I think an entrepreneur should take, unless you’re at the point where you already have, “All right, I’m at $10,000 MRR,” in which case you may or may not need the money, but if you’re at $10,000 MRR, you should raise equity funding anyway.
But if you know the business is going to succeed, that’s fine. When I hear that people charge $50,000 or $100,000 on credit cards to start a SaaS business, I’m like, “Oy vey.” That is going to be catastrophic. That is a really, really stressful way to live and it’s something I would not do, especially when we’re in a space where raising equity capital is relatively inexpensive. Raising a small angel round and selling 10% or even 20% of your company to reduce a lot of stress and to get there faster, I think it’s a pretty reasonable idea these days. It’s not impossible to do, I’ll say.
Mike: I want to talk about that specifically right there. What you just said was raising capital is relatively inexpensive. The reason I like the way that you put that is that when I think of the way I thought about raising funding years ago was that, “Oh, I’m going to have to give up a lot of control, I’m going to have to give up a lot of equity, and I don’t necessarily want to do either of those things.”
But if you’re thinking about putting together a business and you have anybody who’s helping you—a partner or a co-founder, something like that—your immediately giving up 50% of the company anyway, and then there’s a whole lot of difference between doing that and giving up 50% when there’s really nothing there, and yes, it could grow up to be something huge, but you’re giving up 50%.
So there’s like a mental block there of you saying, “Okay, well I’ll raise $250,000 in exchange for 10% of this,” and you don’t want to do that but you’re willing to give up 50% to somebody else when there’s really nothing there that’s being invested except for their time. Do you know what I mean?
Rob: Yeah. It’s cognitive dissonance I believe is the term where two things that don’t agree or paradox, I guess. It’s something in your head you’re rationalizing one way but then you turn around and give away 50% to a co-founder. That’s what you’re saying, It’s like you can give a small amount to get a big chunk of money, or even if it’s a small chunk of money.
Here’s the thing. Let’s say you live in the middle of Minnesota, or the middle of Nebraska, or something and you have an idea and you raised even $100,000 or $150,000 and you paid for your salary for a year or a year-and-a-half. That gives you a year or a year-and-a-half to get to some point of revenue that makes sense. Even if you gave away 15% of your company, you’re valuing it at $1 million right off the bat, or if you give away 20% or $750,000, it still makes your life a lot easier.
I think that’s the realization I’m coming to, is that at Microconf, or through this podcast, or whatever at different conferences, we meet smart people who are trying to launch businesses and something that stands in their way often is that, “I have a wife and kids. I have a house. I can’t do this nights and weekends. But I don’t want to raise funding because it’s really complicated. I don’t know how.”
What’s funny is you outlined this episode and you brought the topic up. But this is something I’ve been thinking a lot about, and there’s a gap here in the space. We do have folks like indie.vc which, if you haven’t heard my interview with Bryce from indie.vc, it’s episode 310 of this podcast, and it’s a more realistic approach to funding. It’s kind of a fundstrapping model. I’d recommend you go listen to that.
In addition, I feel we’re coming to an inflection point where there’s this gap and there’s a level of interest in something, and no one is filling it. No spoilers on what I’m up to next, but I’m starting to feel I might be the person to tackle this, to take it on. I’ve been spreading the word about it. I have been talking about it for years and I’ve been investing in startup like this.
We talk about Churn Buster, LeadFuze, CartHook. These are all small angel investments. I’ve done about 12 angel investments and I think three or four of them were essentially fundstrapped. it’s where they took money from a handful of folks and they never planned to raise a series A. I put my money where my mouth is, but now I’m thinking I only have so much money, how is it that I can take this to the next level in a realistic way. It’s something that’s definitely in the back of my mind and it’s something that I’ve been thinking a lot. Hopefully, we’ll dive into more in the future.
Speaking of that, if you listen to this and your thinking, “Oh, this is an interesting topic,” go to robwalling.com. Enter your email because it’s going to be something that I’m going to be thinking more about in the future as well as on this podcast for sure.
Mike: One of the comments that jumped out of me on the Twitter post that Justin had put out there was from Des Traynor and he said, “I think a second piece people don’t really internalize is that 60 months of the best years of your career is a substantial upfront investment too. Like a seed round but instead of money, it’s your life.”
That’s a fascinating way of looking at this because even back n the day, I would always say, “Oh, well. You know you’re basically trading money for time,” and I don’t think that I really equated time with years of my life. It sounds intuitively obvious. That’s exact same thing. But when you’re in the middle of working on stuff, you don’t think, “Oh, I’m trading five years of my life away of hard toil to get this thing to where it could be a lot sooner if I were just to take some money and trade some of that equity for it.”
Rob: Right. It could feasibly be a lot sooner. It may or may not. Money doesn’t solve all the problems but it certainly makes things, I’ll say less stressful and you having done it with true bootstrapping with basically nothing and doing nights and weekends, to then self-funding with revenue from HitTail going into Drip, and then venture funded. I’ve done all three of these. I will tell you that having that venture money, I didn’t have to raise it and I did attend the board meetings but I didn’t necessarily have to report to the board. My life was less stressful at that point than either of the prior two scenarios.
I think it’s a good point, man. I don’t want to come off. You can tell, I’m coming off kind of pro-raising a small round, and I don’t want to come off too one-sided. We’ve never been anti-funding ever. From the start, Microconf, I think in the original sales letter. It was, we’re not anti-funding. We’re anti everyone thinks the only way to start a software company or a startup is with funding. That maybe from the introduction of my book, actually—Start Small, Stay Small.
Even back then in 2010, I was saying, “Look, raising funding is not evil in and of itself. It’s the things that you have to give up by raising funding. Just know what you’re getting into.” Yes, we have seen founders that get kicked out of their own company. There was, I figure what that app it was. Was it Tinder? Something sold for $460 million. No. It’s FanDuel. It’s sold for $460 million and the founder who started it, and I believe was CEO when it started, he got no money because of liquidation preferences and he’s suing them.
That’s a huge exit. He got I believe it was zero dollars from the exit. There was an article or something that was like, he’s suing them now. If the contract say this is what the liquidation preference is, that’s one thing but he’s suing them because he thinks they screwed with the valuation intentionally and there was fraud or something. He’s not going to win if he just says, “No, that wasn’t the deal,” because he signed the papers. These VCs are not stupid but he’s trying to do that.
Yes, that does happen. But I believe there is a way to do this and I’m seeing it with these smaller SaaS apps. A way to do it without that much stress, without giving up that much equity. Brennan Dunn, RightMessage. That’s another one. I also wrote a check. And Rand Fishkin’s SparkToro. He’s doing the same thing. He’s not calling it fundstrapping, but he said, “Hey, we’re going to raise around, and we’re going to get to profitability, and we don’t want to do institutional money. If you listen to Lost and Founder which is his book, he talks about the perils of all that and you couldn’t read that and say, I can see really they didn’t like – once they raise funding, he really didn’t like it.
You can look and say, “Well, Rand’s anti-funding now.” But no, he’s more anti-institutional money, and there’s a difference. Venture capital is institutional money. These angel rounds tend not to be.
Mike: But I think even back, we’ve talked about it on the podcast before. As you said, we always had the position that, it’s not that we’re anti-funding, we’re anti-this-is-the-only-way-to-do-it. That’s always been my thought behind it. I’ll say the majority of my career and thought process has been like, “Yeah, I really just don’t want to take funding in this more because I don’t want to necessarily give up control.” Back then there weren’t really the options for that. Now, things have changed a lot. It’s not, say, front and center on my radar, but it’s something I’m definitely looking at niche and exploring a little bit more.
I definitely think that—like with Bluetick for example—there’s ways to go further faster, but I just don’t necessarily have the money to be able to do it, which sucks but at the same time, it’s always a trade-off. I think that’s what you always have to consider is, what is the trade-off and what am I going to have to give up in order for me to get X amount of influx and then what are you going to do with that?
You have to have a plan. You can’t just say, “I want to raise money.” You got to have a plan for not just raising money but also what are you going to do with that money when you get it? How are you going to deploy it? How are you going to build the company and how are you going to grow things? You can’t just drop $100,000 in your bank account or $500,000 and say, “Okay great. I’ve raised money. Now what?” They’re not going to give you the money if you don’t have a plan.
Rob: And if you don’t know what you’re doing, money’s not going to fix that. You’re just going to make bigger mistakes. This comes back to the stair-step approach. No chance I would have raised money in 2005-2009 with ,DotNetInvoice, and Wedding Toolbox and just beach towels and stuff. Even if I could have made the case that DotNetInvoice would grow to something, I would have made huge mistakes because I made small ones back then. But I learned and I gained experience and I gained confidence.
By the time I get to HitTail, I remember thinking, “Yeah,” because remember, I bought HitTail for $30,000 and then I grew it up to basically that much MRR per month but end and I value at it. Maybe I should raise a little bit of money in it. It would make this a little easier. But to me, it was the headache of it. I was like, “I do not want to slog around and spend months asking people and the paperwork.” It just felt like a pain in the butt to me. I don’t know if I could have. Did I have the name recognition? Could I have raised enough?
Arguably, yes. By the time I got to Drip, it was definitely like it. If I haven’t had that HitTail money, let’s just say I’d had none of it. I basically used a bunch or revenue from HitTail to fund Drip. If I hadn’t had that? I absolutely would have seriously considered doing what we’re talking about raising a small round. I knew Drip was ambitious, I knew it was going to get big at least by the time we are six or eight months in, and it had a need for that.
That’s what we’re saying here is the words always, never, and should, they’re not helpful words. Don’t say, “I should always raise funding.” “I should never raise funding.” “I should raise funding other people think I should or shouldn’t.” These are not helpful words. Just evaluate things and look at them, and like you said, look at the trade-offs. Pluses and the minuses, and the realities of them, not the FUD. Not the fear, uncertainty, and doubt.
I can tell you the story, “Oh, look. The founder of Fandle. He got screwed by his investors. Therefore, I’m never going to raise investing or I’m never going to raise funds.” That’s dumb. Actually look at the black-and-white of it. I think that’s what we’re talking about today. We;re not saying you should or should not, but it’s look at the reality of it.
Now, you and I talked about this in-depth in episode 211, When To Consider Outside Investment For Your Startup. We went in-depth on what are funds and family round, an angel round, or often called a seed round was. We talked about series A, B, C. Once you get to the serieses, that’s when you get to institutional money, which is when things get way more complicated. Once you raise a series A, it’s the point of no return. It’s implied you’re going to raise a B, a C, and go on to either have this huge exit or an IPO, and it’s growth at all cost for the most part.
But if you’re able to stop before that series A and stick to people who are on board with you, angel investors and such are on board with, “Hey, let’s build a $5 million, $10 million, $15 million company with it, it’ SaaS. Let’s do a 30%, 40%, 50% net margin on this thing.” That’s great. That’s the kind of company I want to build and that’s the kind of company I want to invest in.
But venture capitalists don’t want to invest in that. If that’s not your goal, to go to $100 million and do what it takes to do that, then you don’t want to go down that road. You want to have those expectations clear both in your head upfront, as well as anybody who’s writing you a check.
Mike: Right. The problem with that is that episode 211 when we talked about that, that was four years ago. That’s a long time in internet time.
Rob: I might need to go back and listen to that episode to hear what we said. How much you want to bet? Oh, I’m going to go search it and see if the word fundstrapping if I mentioned it in there.
Mike: I don’t think so. Oh, it is.
Rob: Is it?
Mike: Yup. About 20 minutes in, you said, “I heard the term fundstrapping and I really like it. It was from Colin at customer.io.”
Rob: There it is. In 20 minute then boom. This is 2014, November of 2014 even back then.
Mike: But you were in the middle of Drip at the time, were you?
Rob: Yeah.
Mike: Was that right?
Rob: Yup. In the middle of Drip and I was probably already thinking about because at this point, we were growing fast and I was dumping all the money I had into it, both from that revenue and from HitTail, and I was thinking, “Boy, if I had half a million bucks right now, given our growth rate could have raised it. If I had half a million bucks right now, we could grow faster. I can hire more and have more servers and not shut down EC2 instances on the weekend.”
We used to do that to save money that’s insane, that lengths. I remember valuating Wistia versus SproutVideo, and Wistia, for what we need, it was $150 a month and Sprout was $30. It’s a nice tool but now way it was Wistia. I went with SproutVideo because I needed that $120 bucks to pay something else. We had to migrate later and it was a bunch of time and all that stuff. I never would have made that choice if we’d had a little more money in the bank. It’s the luxury of having some investment capital.
Mike: Yeah and unfortunately, you have to make a lot of trade-offs like that. You spend a lot of mental cycles and overhead making those trade-offs and just making the decisions because you don’t have the money, which is a crappy situation to be in. All that said, part of the problem is, you don’t necessarily want to raise money if the idea itself or the business model just simply doesn’t have merit. Maybe that’s partly what those investors are there for is to make sure that they act as something of a filter.
That’s always the problem that I’ve seen with angel investors is that they’re the ones who are in control, not you. Maybe angel investors isn’t the right word, but outside investment where they basically end up getting control of enough of it that you don’t get to make the decisions anymore. They’re the ones who make the decisions whether or not your business is going to succeed based on whether or not you get the money. If you can’t set aside the time, like nights and weekends, to be able to do it, it’s just not going to work out. You need that money in order to make the business work, then it’s going to be a problem for you down the road.
Rob: And that’s the thing is the losing control of your business tends to be if you raised multiple rounds because each round you sell, let’s say, 15%-20% is typical. May 15%-25% and if you do one round, you still have control. You and your co-founder or you if you’re a solo founder still own that 80%. But if you do another round, another right you get two, three rounds in, it’s typically by series C or D where the founders are the minority shareholder and investors now own most of it. If you don’t been on the path, it’s unlikely, or if you just make bad decisions.
I saw someone on Shark Tank where they had no money upfront and they sold 80% of their company to an investor, to an angel investor. Shark Tank was like, “We can’t fund you because you’re working for nothing.” All the work is for the investor. If you make a bad choice, that’s another way to do it too. You do need to educate yourself about it and I think that’s something that some people don’t want to do because it is boring stuff.
I really like the books that Brad Feld does and this one is maybe like venture funding or like a guide to venture funding. I got four chapters in and I just couldn’t stand it because it was all terms. He didn’t write it. It was more of a series that he’s involved in. The terms were just so boring that I stopped. I understand if you don’t want to learn at all. You need to learn enough about it to do it.
I want to flip back to something that Natalie Nagele responded to Justin Jackson and then it was actually just what I was thinking when I saw his graph. It was five years to $21,000 MRR. In all honesty dude, I would shut that business down before I wait it that long. I forget how long it took Drip but it was maybe a year. I don’t think it was even a year from when we launched and it was probably 12-18 months from when we broke around on code, that we had $21,000 MRR.
Drip was admittedly a bit of a Cinderella story. It was fast at growth than most but if you’re growing $100 a month in the beginning and you continue that 10% growth like that, you can’t do that. You need to get it up—
Mike: But I don’t think that’s a fair comparison, though, because if you look at the way Drip was funded into, you said 21 months or so to get to that point? He’s talking about a completed self-funded company versus something where you put money in from HitTail. Those are two entirely different things. I don’t know all about the details of Transistor but my guess is that there’s a huge disparity in terms of the amount of code and the quality of code that needs to go into something like Drip because of the sheer complexity of it versus something like Transistor.
Rob: Yeah, that’s true. I was for the long entrepreneurial journey too, I would say. I had successes that I’ve parlaid into it. You’re right. It’s not a fair comparison. I shouldn’t say with the Drip but…
Mike: I was just arguing about the point of, if it was five years to get to the $20,000 in MRR, should you shut that down? I think it’s a very different answer based on what it is that you’re putting into it. If you’re dumping $200,000 into it, yeah, you probably should shut it down if it’s still going to take you five years to get to that. But if you put nothing into it, or $10,000 into it but it takes five years to get there, it’s like, “Uh, well, I don’t know.” It’s a judgment call.
Rob: It’s interesting and that’s the thing. When I think back in 2005, I started with DotNetInvoice, making a couple of grand a month. It took me until late 2008 to get to where I was making about $100,000 a year, between $100,000-$120,000 a year and that’s when I stopped consulting.
So it took me three and a half years. But again, I did it with no funding and I cobbled it all together myself. That’s the situation we’re talking. I wasn’t doing SaaS. I did it with these multiple products. I think if I was less risk-averse, I’ve could’ve done it faster. I think that’s probably what we’re talking about here. It’s getting a little bit more ambitious and trying to speed things up. How do you do that?
Mike: Part of being more ambitious these days, I think, is because you’re forced to, because of the level of competition that’s out there. You have to do something that’s quite a bit above and beyond what you would have done three or five years ago because the competition is there and people are going to be asking for features that they see in other products that you’re trying to compete against. If you don’t have those features, they’re going to say, “Well, I could pay the same amount of money to you versus this other product and they’ve already got those features so why would I go with you?”
You’re just not able to compete unless you have those features there that you can demonstrate. It’s not even just about the marking. It’s about having the things they need. If you don’t have them, they can’t go with you. It’s not even that they like you. They just won’t do it.
Rob: Yeah and that’s true. Again, funding even the way we’re talking about it, it’s not going to fix all ills. If you pick those markets that’s too small or you don’t build a good product, you’re not going to get to action. Or if it’s a market that people aren’t interested, or you don’t know how to market, you don’t have the experience, you don’t suddenly become an expert startup founder just because you raise funding but if you have the chops and funding is a big piece.
Time is a big piece because you’re only working nights and weekends. You can only put 10 hours a weekend or rather 15 hours. It’s a big difference if you can suddenly go to 40 or 50 hours with two co-founders. It doesn’t fix everything. In addition, does it come with complexity? Yes. You have to report to your investors once a month with an email. You can feel the stress of that.
That was actually something that I asked Justin McGill, Jordan Gal, and Matt Goldman, those are the co-founders of those three businesses that I mentioned earlier, CartHook, LeadFuze, and Churn Buster, and I said, “Hey, do you feel raising this money made things more stressful or less stressful?” They each have their own take on it. If I recall, Justin McGill was like, “It’s more stressful because I feel like if we don’t grow, we’re going to let you guys down.” A lot of the investors he has a lot of respect for. That’s one way it cut through. It can make it more stressful.
I don’t want to put words in people’s mouths but I think Jordan had said, “It’s more stressful but better because it motivates him to succeed.” you got to think about how your personality is and if you feel like it’s going to add more stress, if suddenly five or 10 people that you really respect, that are friends, colleagues, and fellow Microconf attendees write a check to you, how does that make you feel?
Mike: Yeah. I think the answer’s going to be different for every person, especially depending on what your product is like, what the expectations are, how you’ve position it, and how the investor views it. Some investors just say, “Yeah, I may lose all this and that’s totally okay,” and other ones may say, “I have these expectations and you’re not meeting them,” if you miss a deadline or something like that.
There’s a lot of dynamics and complexity there. Some people will thrive in it and some people won’t. I think at the end of the day, I also feel having money has the potential to make the downsides of your product or business model worse. It will just exacerbate some of those issues. If you don’t have a market that you can actually go to, if you think you do but you don’t, and you get a bunch of money in, I think it’s just going to make it worse because yes, you can try a bunch of things and you’ll be able to throw money on it, but then you’re burning more money than you would have otherwise.
Rob: That’s the thing. I know we’re going long on time but really important. I would not raise any type of funding before I have product market fit. That’s a personal thing because (a) your valuation is way last before then, and (b) no one is going to give you money if you don’t have a product, period. You have to have a product these days. You can’t raise money on an idea unless you’re Rand Fishkin, or Jason Cohen, or a founder who’s been there and done that.
You have to have a product, you have to probably be live or at least have beta users, your should have paying customers. That’s a bare minimum to even think about trying to raise funding. You have to get there. You have to write the code, you have to beg, steal and, borrow to get someone to write the code. But the valuation is going to be way less and you’re probably going to burn though a lot of that money just trying to get to product market fit. From the time you launch until you’re part of market fit, I’m going to say it’s 6-12 months if you know what you’re doing.
You see founders like Shawn Ellis, you saw Jason Cohen, you saw me do a Drip. You see people who are pretty good at it and know what they’re doing, and it still takes them six months, and ours still takes 9-12 months to do it. At that point, once you do it and you do kick it in a little bit of that growth mode where it’s like, “Okay people, are really starting to uptick it.” That’s when you pour gasoline on the fire.
But before that, I have seen at least one startup in the last year raise a small round before product market fit, and just burned through it really fast because they staffed up, do a lot of marketing and do a lot of sales, and it just that their churn was so high. That’s typically where you can tell his people aren’t converting to pay it or they aren’t sticking around. There are dangers there. Like a samurai sword, like a said in the past, it’s a weapon that you need to know what you’re doing with to wield well and I think you need to be smart about when you raise.
Mike: Yeah and it sounds like there’s obviously different takes on it. If you want to go down like the VC or angel route, series A funding down the road, I think it’s possible to probably raise money if you have any sort of history or relationship with them, like if you don’t have a product yet. But you’re still also going to get eaten alive in terms of the equity shares and everything.
I think that point that you raised about you have to have a product and you have to have paying customers before you start to go raise money, that’s how you maintain your equity, a fair amount of the equity, enough of the control to be able to what you want, need to with the business, and also be reasonable sure and confident that you’re not going to just waste the investor’s money and burn those relationships. You can use that money for good, and you know what that money will do for you versus you’re still trying to get to product market fit. You don’t know who’s going to but it or who uses it, or why.
Rob: Yeah and the once exception as I’m thinking about it is if you raise a big chunk, let’s say you raise $250,000 or $500,000 and you feel like you need to spend it, and so you staff up but your not part of market fit, you’re going to treat their money. But the exception I can think of, is like I said earlier. What if you just bought yourself 12 months of time and you didn’t staff up but you just worked on it, or 18 months. You didn’t raise this huge amount of money or raise a small amount to just focus on it and work, I could see doing that before product market fit. That would get you to the point where then you can raise that next round.
I’m not trying to be wish-wash but I’m realizing I never said never raise before product market fit but I did say I wouldn’t personally. But I have the resources to get me to product market fit and I could work on a full-time to do that. It’s an exception. If was I doing it nights and weekends, then I would take money before I see I have to think about where the advice is coming from or where the thoughts are coming from. I’m just thinking it through as if I were literally doing this nights and weekends, I would consider taking money as soon as I could. If I was going down this road because going full-time is a game-changer. Being able to focus full-time, being able to leave everything behind is a big deal. It really is and a night and day difference.
Mike: I know there’ll be a range of opinions on it, but I wonder what most investors would think about, somebody saying, “Hey, we got this product. I’ve been working on it and I’d like to get some funding and money in the bank, basically to extend the runway because I got a little bit of something going here, I got partial product in place, I got some customers, but it’s not a lot. I need runway in order to make it work but I don’t know specifically how much runway I necessarily need or how I’m going to get to having $10,000-$20,000 MRR, but I need time to get there. There’s something here but I don’t know what.” I think it’s hard to evaluate for anybody what that looks like.
Rob: Yeah. I don’t know of any investors today that would work with that. I think that’s a good thing to bring up. It’s like, is that a gap in the market then? Could that be a successful funding model of looking at people who essentially have the potential and have, like you said, pre-product market fit but have something to show for it and looking at backing them for a period of time.
Anyway, I love this topic and I think that we’ll probably talking about it again, just soon you’ll be hearing more on it from me, but I feel we might need to wrap this one up today.
Mike: Yeah. Great talk. I like it.
Rob: Me as well. So if you have a question for us about this or any other topic, call our voicemail number 888-801-9690 or email us at questions@startupsfortherestofus.com. Our theme music is an excerpt from We’re Outta Control by MoOt used under Creative Commons. Subscribe to us in iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each and every episode. Thanks for listening and we’ll see you next time.
Episode 405 | Minimum Viable Security, Moving on from AuditShark, and More Listener Questions
Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike answer a number of listener questions on topics including Mike’s thoughts on moving on from AuditShark, minimum viable security, and more.
Items mentioned in this episode:
- Indie Hackers Podcast with Mike Taber
- Release Notes Podcast with Mike Taber
- Segment
- Zapier
- Nomad List
- Comics ‘N’ Coffee
- Medium.com Post
- Medium.com Post #2
- Safestack.io Post (Security)
- SaaS Security Checklist
Welcome to Startups For The Rest Of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you’ve built your first product or you’re just thinking about it. I’m Rob.
Mike: And I’m officially the answer to the ultimate question of life, the universe, and everything.
Rob: 42.
Mike: Yes.
Rob: Did you just turn 42?
Mike: Yup.
Rob: Congratulations man. Happy birthday!
Mike: Yeah, I finally made it. It’s like my kids. I keep telling them, “Oh if only you make it to 10, or 11, or 12.”
Rob: You finally made it to the end. I can’t believe I didn’t even think about that when I was 42. Ooh, people get to guess now how old I am. It’s fun.
Mike: I know. Oh you’re screwing up the intro.
Rob: And we’re here to share our experiences to help you avoid the same mistakes that we’ve made. Where are we this week sir aside from happy birthday wishes to you?
Mike: Well, I was in The Indie Hackers podcast, I think about a week and a half ago. That was with Courtland Allen. I was also on the Release Notes podcast with Charles Perry. There are actually two episodes to that. They split it up into part one and part two. I think that part two will be live by the time this episode goes out. Both were a lot of fun. I’ve got a lot of feedback from both The Indie Hackers podcast through The Indie Hackers forum and then over Twitter. It was nice to see the stuff I was talking about was resonating with people in terms of my journey, and path, and things with Bluetick and how that was validated, and how AuditShark went off the rails and everything else.
Rob: That’s cool. I heard the Release Notes episode. It actually came up in a Google alert. I have a Google alert on maybe Founder Cafe or maybe Startups For The Rest Of Us or something, and so it came up because it was in the show notes, and I so I picked up the episode. I actually enjoy hearing you on other podcasts because they ask you questions that we never cover on this show, and so I learn something, “Oh I didn’t know he did that.” You talked about your past and then even just hearing your retelling of the story of AuditShark, and Bluetick and stuff was kind of fun. I enjoyed it. We’re going to link up both of those episodes in this week’s show notes, episode 405.
Mike: Aside from that, I’ve started working on public API for Bluetick. I knew that I wanted to do it, at some point but the entire application itself is a single page application, so everything’s driven with an API. But in the process of building the app and creating that API, I found all these things that are just, I’ll say, are not probably done in the best of ways. It’s nice to have version 2–is the API that will be public versus 1, which is for internal use only.
Rob: Yeah, I was going to say that. But obviously, be sure to have a /V1 or /V2 when you publish it because you’re going to need to update it at some point and you don’t want to break retroactively. The other thing is, have rate limiting in from the start because, by the time you get to the point where you need it. It’s not good to have somebody take your API down.
I would also, this is all just from experience, if possible, put the API on a separate server or separate banks of servers because if someone takes your API down, you don’t want your main app to go down. What else? I bet there’s like four of these totally off the top of my head. I had not pre-planned these, but yeah, there’s really good ways to do APIs at this point.
I remember, again, dating my years back 10 or 12 years ago, all the APIs were different, REST was not a thing, it was all post-APIs. It was really jenky, and I guess, they were what, it was like web service, it was like XML. Remember, it was all XML?
Mike: Yeah, Microsoft came up with this thing as WSDL.
Rob: It was WSDL, SOAP, all that crap. It was terrible. You’ll still see some old APIs use that, but REST APIs now are so clean. A lot of them are stateless. There’s these best practices that people use. I would really try to implement because they definitely makes a cleaner experience for everyone.
Mike: I use Swagger to document the API, kind of hooked it, so if I make any changes to the API, I’ve got to document that basically says how it works. That’s an easy enough thing to incorporate into the public API but the other nice thing that I found is that there are utilities out there that you can use to query your Swagger documentation, and then it will build libraries for you in various languages so, Python, C#, and various other things. It’ll just create a library for you, and then you can make it available to people so that if they want to hook it directly into their application, they’ve got the code to do it, and they don’t have to write all of the wrapper stuff that goes with it which is awesome.
Rob: Assuming that it works well, that is awesome. Really, really cool. I know that with Drip early on, obviously, we released a Ruby wrapper because Drip was written in Ruby, and then someone built an open source. Python was one, I believe, and then someone built a .NET one. I think they kind of just open sourced it, and we linked out to it which was cool especially in the early days. It did kind of stink as we got further on because they weren’t actively maintaining it because they have built it for themselves and implemented it.
We added more to the API later on, a bunch of more methods, they didn’t implement them, so people would email us and be like, “Hey you need to add this.” It’s like, “We don’t even know anything on the code base.” and we didn’t have any .NET developers on staff. There’s different things. Everybody wants a wrapper in every language, and you just can’t do it, and it’s just not feasible. But if you are able to roll up the top two or three most common ones and then be able to maintain them, that would be a big deal.
Mike: I don’t know how many people are going to hooking into it, but I have talked to other people who run apps like SaaS apps, and they are interested in hooking into Bluetick. Question is, “How do I make it available for them? How do I make it available as a public API for customers? Do I have separate endpoints for each of them?” I’m not entirely sure on it yet but I suspect it’d probably be easier to maintain if I just have one public API, and that was it, regardless of whether you’re integrating directly or not.
Rob: I would tend to do that although—we had the public API and anyone could consume it. If we wanted like, when Leadpages wanted to integrate with us or if it was an official integration that we were both going to promote, and it was going to be on our integrations page, we typically fork off a separate endpoint so that we could handle that differently. Because sometimes, with that one, we wanted to give it a higher rate limit or we wanted to route the traffic slightly differently based on what it was, and if it was coming to the public API we didn’t know–that is one thing to think about. In the end, we had 35-40 integrations. We did not have a full, 40 different endpoints but I do think we had a handful for especially the most popular ones.
Mike: I could see having a third party integration API, like a dedicated endpoint for that, and then for certain ones, you say, “Okay, we’re going to fork this code and give it additional functionality or put it on a different server.” Because it justifies having higher rate limits just because of the data going back and you trust them to send you things in a normal fashion versus if you just have that public endpoint, who knows what they could be doing or sending. Most of those are going to be for regular customers versus somebody who is sending stuff over on behalf of a lot of customers.
Rob: Yeah, totally. Here is something to think about as well. For some reason, segment.com—at least last I heard when I still at Drip—they don’t honor rate limits, they just never implemented it. They said that they were working on it but they would DDoS us about every two months or three months. They would take the API pretty much down, and we would be frantically emailing them because we would return a 403 I believe which is, “You’re over your rate limit. Please stop sending.” and there’s a bunch of stuff in the response code. You say, “You have to wait 57 minutes before you can send another whatever.”
Zapier is an example, has a rate limit, and when we would go out and webhook into Zapier, we would read that response, and then we’d throw it into a queue for 57 minutes later. It would say, “You can have up to 1000 per hour.” You can just read the response, and it will allow us to rate limit stuff out. Segment never bothered to build that, and so someone would come in with half a million uniques a day, and they would be pumping everything into the segment, and they just click the check the box of like, “Yes, stuff everything into Drip.” All of a sudden it will be just, boom. Beware of that.
Again, we talked with Segment quite a bit about it, and they were like, “We’re working on this. It’s a problem for other folks too.” But at one point, we, for a couple of hours, we had to block all of Segment’s IPs. It was crazy. We’re at the firewall, and then they would get it turned off. Just beware. It’s not going to happen day one, but it will happen eventually.
Mike: I don’t know. It may happen day one.
Rob: Yeah, that’s the thing, right? You never know.
Mike: I’ve seen, just because of the volume of data that Bluetick handles on the backend because it’s a mailbox. When I split things off onto two servers. Part of the reason I ended up having to do two servers was because when I got a new sign-up, if they had a large mailbox, the first thing it does is it indexes everything. Right there, just adding a new customer will basically DDoS the entire application, it depends on how large they were, so I added a bunch of code to back things off a little bit and do internal rate limiting on how much calculations and stuff it does, and how quickly it does stuff.
I even added code that would monitor the process that was currently running, and then throttle it up and down in terms of the CPU usage which was kind of crazy because it works across the entire process, you can’t do that on a […] basis in Windows. I don’t know. I considered moving it off into its own separate process, but that one involved a different service. I was just like, “I’ll put it on a different server, and I then I won’t have to worry about it.” that was the solution I ended up with.
Rob: Yeah, that makes sense. Something else to consider, in the early days, reset the rate limit pretty low knowing you can always increase it but decreasing it later is not going to go well. We set it low and when people come in and say, “I need to import 100,000, and your rate limit is going to take me two days to do it.” So we’d said, “Okay, we’re going to build a bulk endpoint for you.” so then we build a public endpoint that was, instead of add subscriber, it was bulk add subscriber, and you could I think it was 1000 per payload, 1000 subscribers. It was still the same amount of submissions, it was still rate limited at that, but you could then send 1000 instead of just one. We built several bulk endpoints both in, and I believe out as the troubleshooting.
This is one of those things where customers say, “No. I need a higher rate limit.” It’s like, “What do you actually need?” “What I actually need to do is import 100,000 people.” “Oh well, there’s a better solution than increasing the rate limit across the board for all 30,000 people or whatever who use this app because that could be catastrophic for the thing.” so we did do that. It’s just something to think about. It’s product decisions. But there’s often more elegant ways to do things than just what the customer is asking for.
Mike: Yeah. I like to have early conversations with pretty much every customer that comes on to Bluetick just because I want to know what it is that you’re actually trying to do. Like yesterday, I had a call with somebody who had signed up, and I was trying to figure out what it was they were trying to do. They’re in the fashion industry, and they have all these samples and stuff of people, like manufacturers and vendors, that they have to follow up with, and they ask for samples, and if they don’t get them or they don’t hear back, they have to follow-up with them.
It was very interesting hearing the conversation about exactly the specifics of the problem that they were trying to solve. Ultimately, we concluded that the volume isn’t high enough right now to justify using Bluetick, but once it starts scaling up, which they expect that to happen, then Bluetick is going to be really helpful for them.
Rob: On my end, as you know, I recently moved. We were in California for two weeks, and then we flew in and landed at midnight on a Wednesday, and we closed on the house on Friday. When we were in California, I really wasn’t thinking much about the house closing. All of the stuff was in-flight, and there wasn’t much work to do on it. When we got back, I’m like, “I need to start changing our address.” Thursday and Friday, as we’re about to get the keys, I start changing the address, I start moving utilities, I start doing all that. I forget that for internet access, a: how critical it is—it is perhaps more important than a lot of other things.
Mike: […]?
Rob: Yeah, I was going to say electricity, but it’s really not because you need both. It is as important to me as having electricity. It was crazy to not have it. What I forget is that cable, internet, and DSL—they can turn it on same day or they overnight you the equipment, and you get it the next day. That’s what I was thinking. But of course, we have fiber here. We’re at the luxury of having fiber gigabit fiber.
There’s two companies that offer it in the neighborhood, really cool. I call up, and they’re like, “Yeah, we can get to you in 11 days.” Then the other one said, “We have to trench…” not trench but put pipe under the ground, so it’s going to take 30 days. I was like, “No, this is catastrophic,” because we’ve been spoiled by having this fiber at the other house, so I set up the appointment. The 30-day fiber is a local company called US Internet, and super fast, and it’s $70 per gig, up and down. They are at the street, but it’ll take them about a month to get in.
But I signed up for cable. I’m going to basically have it for a month. I had them overnight the equipment, so within 36-48 hours of moving in we had real internet but it is cable which is crazy. It used to be blazing fast, but now it feels–I think if Sherri and I if we’re both on video calls, and the kids are streaming, you start to have issues. It’s funny how quickly you get spoiled by having gigabit which you never, I will say, we never maxed it out.
Mike: Yup.
Rob: The moral of the story is a couple of things; if you’re moving, and you’d only need DSL or cable, you can probably just give them a few days’ notice assuming it’s already wired in but if you’re going to do something like fiber, this is a reminder to myself be like, “Yeah, you wanna give somebody a few weeks because it may not actually be wired to all the houses.”
Do we want to answer some listener questions today?
Mike: Let’s get to it.
Rob: Alright. Our first question comes from Nick Malcolm, and he recorded an audio question, and so he went straight to the top of the pile—as they always do—so voicemail to us or emailing us with an MP3 or M4A gets you to the top of the stacks. Let’s listen to that audio here.
“Hello, Mike and Rob. I’m a long time listener from New Zealand. I’ve been involved in startups in the past, in technical roles but now I’m working as a consultant helping companies to better at security. I work alongside development teams doing things like threat modeling and teaching about common risks like […] and also at an organizational level with processes and policy and risk management. I’d be really interested to hear your thoughts on what minimum viable security should look like for startups and how this might change as the company grows. Thank you for everything you both give to the startup community, that’s much appreciated. Thanks.”
Mike: I think the trouble with security or trying to address the problem of minimum viable security in a startup is it competes with the aims of the business especially when you’re first starting out. There’re pre-profitability and then post-profitability. If you’re talking about pre-profitability, you need to do at least the varied minimum basics such as making sure that the code that you’re writing is, if it’s proprietary code, you’re not going to be releasing it, just make sure that it’s in a secret repository someplace, it’s not like a public repo. But obviously, if it’s open source, that kind of stuff doesn’t matter.
In terms of the server and infrastructure, for a startup, it so depends on what the startup is doing, how their infrastructure is configured, and the, I’ll say, knowledge of security that the people who are building it have. If you’re the type of person who is like, “Oh let me handle all these edge cases and make sure that I’m doing the right things,” then that’s fine. But if you’re not, then you just have to be aware that those things are probably going to need to be dealt with at some point down the road. Maybe not today but you have to do a good job of being diligent about marking where your code could potentially be exploited or places where things could go sideways. Whether it’s cross-site scripting attacks or things going into the query string and the API being used for things that it really shouldn’t be. Beyond that, you can go so far into the weeds that it’s just not even funny.
Security companies make their living basically, sort of being ambulance chasers to start with. If somebody has a security breach, they suddenly come up with all these articles about, “Hey, you have to be careful of these two, and this just happened to this person.” because it’s scare tactics. That’s really what they’re trying to sell on. But in terms of the basics, if you’re using password, make sure they’re one-way encrypted, make sure that anything that is sensitive is being encrypted inside of the database.
Those are the types of things that you want to at least pay minimum attention to. If you’re running Windows, obviously, you’d probably want to be running antivirus software of some kind on each of the machines in the environment. But as I’ve said, you can go so far into the weeds like putting data loss prevention things on your phones or laptops or all these other stuff. You don’t need to go that far, in most cases, I don’t think. Unless you are a security company selling security software, in which case, being hacked would obviously, be the worst thing in the world for you.
Beyond that, just do what you need to do in order to protect the customer’s data. Making sure information does not bleed from one customer over to another. That’s a pretty basic thing, but sometimes it can go wrong if you’re not careful about how you’re doing database queries or packeting data between customers.
Rob: I agree with you. This is the kind of stuff that you have to worry about just enough, and not any more than that because it will slow your business down, it’ll slow building features down, but you have to pay attention to it as you go. These days, when I think of minimum viable security for startups, I think of starting with a language that has that built-in or a framework that does. I know that Rails has a bunch of stuff that validates the incoming request streams, and it’ll pull out cross-site scripting sequence injection, and all of the stuff. That‘s a good place to start.
If you use Azure or if you use EC2 or Google cloud, there’s a lot of security best practices built into there. Nick, who sent the question, included what looks like three blog posts that we will link up in the show notes as well as a SaaS CTO security checklist. Again, this is stuff that you do it just enough to where you feel comfortable. It’s like GDPR. Do you implement a full-blown thing and pay $10,000 to hire a lawyer or do you pay someone $500 and the be mostly compliant?
The TLDR that Nick sent over is like, “Use version control, have logging and monitoring, and continuous integration.” so that you’re constantly running unit tests. I think you should have some unit tests that are testing security, and making sure that things are not going to be easily hacked or whatever. Hopefully, those thoughts are helpful. I realized that it’s kind of an “it depends”, and it’s definitely always a “there’s a continuum” when you’re doing these things but it’s also similar to a question of, “How much should I worry about the legal stuff surrounding getting my LLC set-up and getting every trademarked.” and getting all that. It’s like, “Well, I should worry about it just enough.” It depends on your risk tolerance in all honesty. Thanks for the question, Nick. That was a good one.
Next, we have a comment about moving on from AuditShark. He says, “Hey, guys. I’ve been listening for a while now. Over two years ago, I started an app part-time. Finally, after all these time and all the money I’ve sunk into it, I’ve decided to let it go. There were a number of reasons it failed. Most important being that I’ve never launched my own product before and didn’t fully understand what it took. Listening to Mike’s decision to move from AuditShark…” we have an episode called Moving On from AuditShark. It’s probably 150, 200 episodes ago. He said, “It’s given me the confidence to know this is the right decision. I felt his pain in the episode because it’s the same pain I’m going through now. I’ve decided to do this stair-step approach and practice learning simpler products like an e-book or audio course. Hopefully, this will both give me the confidence and an audience when I’m ready to launch another product. It still hurts and I still think what if all the time but I know I’m making the right decision. Love the show and congrats on 400.”
Thanks for writing in, Greg. It’s always good to hear from folks who experienced things. We talked about trying to help people avoid the same mistakes we’ve made. Sometimes you’re going to make the same mistakes we’ve made but maybe knowing that we made them, there’s some solidarity in knowing, “Oh, other people make them too,” and kind of we’ve all been there so. I think this thing will go away over time. Mike, from your perspective, you went through it, and now you’re in the middle of AuditShark building something that’s obviously starting to get some traction. What are your thoughts on this?
Mike: I’m not in the middle of audit shark anymore. What are you saying?
Rob: Freudian slip, that’s funny. What do you think?
Mike: Well, I definitely get how you can think what if all the time. I really don’t. AuditShark would not have been a good fit for me long-term. I didn’t realize that when I started out. I didn’t realize it ‘til I was probably very close to the end but it didn’t fit me as founder, and it wasn’t the type of business that I probably would have wanted to own long-term. I looked at it from more of a financial perspective of, “Oh I really want to be able to sell this and make a lot of money from it.” I enjoyed the problem space itself, but I did not enjoy trying to sell that type of a product versus Bluetick where I actually do it because I feel it’s legitimately helping people that need that help, and with AuditShark it was more about meeting the checkbox requirement for people, and nobody actually cared about it. It was just like, “Oh, our company says we have to do this so we’ll do it.”
Rob: Yup, that makes sense. I think early on you probably thought what if a bit, and then you moved past it. That’s the healing process of letting something like this go.
Mike: Yup, definitely.
Rob: Cool. Our next question/comment is a comment on episode 403, so go to startupsfortherestofus.com if you ever want to leave a comment, read all your comments. Doug said, “First of all where do you find the time to play D&D?” which I think is funny. From my perspective, I am trying to think, I got back into it, what is it, my kid is 12, and I think I taught him when he was maybe eight, and so it’s been about four years so yeah, Drip was going on. Frankly, we don’t play D&D very much. I mean, we do more now that I’m not working on Drop anymore, but when I was growing Drip, we would maybe play every few months. It really was not an on-going campaign thing, but it’s definitely gotten easier for me to carve out the time.
I think if we have a recurring campaign that was with other people, you just kind of find the time. If it’s every week or twice a month on a Thursday at seven, and you know that you’re going to let people down if you don’t show up, that would be something. The other thing for me is we keep our sessions short. They’re typically 60-90 minutes. They’re not these four-hour campaigns, and we enjoy it that way. How about you, Mike? How do you find the time?
Mike: I have two different ones. […] morning is with a friend of mine and our kids, kind of collectively, that we’ve run very sporadically. We might need once in a month or once every two or three months. That’s been going on for probably close to two years at this point. The other one that I just started up, I think we’ve had three sessions so far, but it’s every Tuesday night. We meet up at 7:30 PM. Two nights ago we’ve had a rather lengthy one. It went until 12:30 AM. It was almost 1:00 in the morning by the time I got home. It was 7:30 PM to 12:30 AM, that was kind of the ballpark thing.
We’re shooting for 2-3 hours, three hours is kind of the minimum that we want, and then after that, it’s kind of wherever is a decent stopping point. That session just happened to be longer. But I agree with you that having a set time of the day each week or every couple of weeks that you’re shooting for, that’s the best way to go just because you’re making a commitment to other people to be there and show up. I think that’s really helpful.
Rob: Here’s the thing, when I was doing startups on nights and weekends and had a day job, I didn’t play any of this. There were years where I didn’t go to happy hours with friends when they would go. I didn’t play any type of tabletop games because I work all day, and then I work all night. My kids were either not born yet, or they were really young, so they would go to sleep at seven, and then I would just work ‘till 1:00 in the morning, and I was tired, but that was the slog.
You and I both moved into the position. Once I’m working on it full-time during the day, and I’m putting the seven-nine hours a day of startup work, then in the evenings I actually like to not continue to do that, and so it depends on the phase you’re in. If you are still working nights and weekends, I would say don’t get involved, like don’t have a hobby. It’s crazy advice, but I really put all my hobbies on hold while I was getting that initial traction. It was definitely a couple of years, it was even more than that, actually. It was probably over the span of about five or six years, but it wasn’t constantly I would tackle a project, work on it for six months, and I wasn’t doing anything nights and weekends, and yeah, it sucked, but I had that goal. I wanted to get that financial freedom. I wanted to get out of my day job. It would crash and burn, and then I’d be all dejected and disappointed. I would go back to having a hobby for a while until I got motivated enough to do the next effort.
Mike: I find that setting aside the time is a nice distraction as well because it’s very easy to get stuck into the pattern of working on the same thing all day every day and let it bleed into other parts of your life which ultimately is probably not good for you. I think that they’re just making sure that there’s a set commitment that I have that is external to work in any way, shape or form. I find that that’s helpful.
Rob: I agree. I fully agree. I think of this podcast a little bit like that. Every week, no matter how bad things were, how hard they were, how stressed I was, you and I would have this one hour blocked off to sit and talk about this stuff, and that’s something that we’ve done for a long time. Even though it’s talking about work, in essence, it did help the days. I think you have to have some variety to them.
Doug has another question, he says, “Rob, you say wanting financial freedom was motivating. Is that another way of saying I hated my day job? How far can not liking the cubicle and office get you on a startup journey? Comfortable paycheck is the enemy of great startup ideas. I am proof of that.”
It’s an interesting question. In all honesty, I hear this from people time to time, and they’re like, “Well, my day job’s good enough. I’m kind of motivated to do. It sounds like it’s fun to do a startup.” In my opinion, if you’re not all in on it, you’re just not going to put in the time to do it. If it really is a major pain point, like for me, yes, I hated my day job. I hated all of the day jobs I did. Hate is a strong word, but I was never happy for very long. Maybe it was 12-18 months, and then it was like, “No, I have to move onto the next thing.”
The further I got along, not only would I burn out on a job within, let’s say, 12-24 months. But I also realized I wanted to make money more as a salaried or even as a contractor. I wanted mobility. I wanted to be able to travel, and not have to worry about being in one place or living in the same city or being concerned that I was going to get laid off, so I wanted the confidence that I was in control of my own destiny. Frankly, I did want more control of my time.
I hated having to be in an office at 8:30 AM or needing to be available at these hours, so I just wanted that. Especially as I got older, when I’ve gotten to my early 30s, I realized, “This was not going to work for me.” It was a real, true pain point in my life and I was willing to put it all on the table. I was willing to sacrifice nights and weekends for years to do this. If that’s not you and you don’t have the burning desire, that’s okay. I’ve some good friends who I envy because they’ve been happy.
Mien, a really good friend of mine in Sacramento, started the day job the same week back in 2000. He still works at that company. It’s 18 years later. He’s a developer, and he works at a consulting firm. I’ve had 20 jobs since then. I bounced to different jobs, different products if you count it all, maybe even more than that. We’re just cut from a different cloth. I would be so hopelessly unhappy and depressed if I had his life but I don’t judge him and say, “Oh you could do better if you’ve done startups.” because I don’t think he really had the desire. I don’t know if his personality is cut out for it. He really didn’t want the stress. He’s just more conventional than I am.
We each have different priorities, and we have different personalities. I think you really have to look in the mirror and ask yourself, “Am I willing to do what it takes?” because this startups stuff is not easy. I hope that’s something we’ve communicated in the past 405 episodes both through just talking about stuff theoretically and also the agony of episodes like moving on from AuditShark and the agony of some of the stuff that I’ve talked about here. That was a good rant for me. What do you think, Mike? You have other thoughts?
Mike: The summary of what you just said is like, it’s a personal decision for each person. I can relate to your friend out of Seattle. I was up in Rochester within the past couple of years, and one of the reasons I had left Wagman’s was there was a guy who’d recently got promoted to a position that I had wanted, not that I was going to get promoted to it, it’s just that it was one that I aspired to. He got promoted to it after being at the company for 18 years. I was like, “I’m not waiting 18 years to get promoted to that level.”
I ran into him a couple of years ago, and he’s still there working at the same company that he’s been at for 30 years. That would not have worked for me. I don’t have the personality to have been working in that business for that long and not transition around. I’m sure that he works on different things, but it would not be a good fit for me.
Rob: Thanks for the questions, Doug. I enjoyed them so much. I didn’t answer them on the blog. I wanted to talk about them on the show. Our final listener question for the day is from Ricardo Feliciano, and he says, “Hey Mike and Rob. I love the podcast. I find it very valuable. My question is, what is the best way to charge for an online and real-life community? The two best examples I’ve seen are Founder Cafe from the two of you and Nomad List, nomadlist.com. I ask because I’m starting a community for Marvel and DC fans called Comics and Coffee, that’s comicsncoffer.com. I don’t know if I should pay wallet or try to monetize it through merchandise. Perhaps through a premium program such as what Reddit does with Reddit Gold or Discord with Nitro. Thanks for your time. PS for comics and coffee background: We started up with a podcast, and we’re adding a form, and in-person meetups for movie nights soon.” What do you think?
Mike: I think if you’re going to have a community, there has to be some compelling reason for people to join and stick with their membership is, really what it comes down to. When you look at something like Nomad List, that’s aimed at people who are traveling around the world—and they’re probably constantly traveling—they’re more likely to become and remain a member for longer periods of time. Because even though they may be in Thailand for three months or six months or even a year or two, then they go over to Belarus or Spain or Africa or wherever, and then they’re going to need to be able to connect to other people either locally or online or potentially both, that’s one of those communities where it’s an ongoing thing, that they don’t just need the service once versus something like, trying to meet up with other people locally and those people are not moving around.
Everybody lives in the same community. For example, I live here in Massachusetts. If I wanted to get together with people and wanted to form a group or an organization or something like that, I might use meetup.com for that. The benefit of that is finding other people but if you’ve already got an established location, and a group of people that are coming, chances are good that they associate with other people outside of that who are also involved in comics. They’re going to invite their friends.
Now, the advantage of your platform or your community is that you are going to be able to attract more people to it and that’s the value proposition you have which is, “Hey, find other people and stick with a local community.” The problem is that once they have found your community and are coming to whatever meeting’s there are on a regular basis or semi-regular basis, what additional value are you offering? I’m not clear on what that would be.
With Founder Cafe, it’s a little different because everybody’s remote. Because it’s all remote like, if you join the community and then you leave, you no longer have access to it versus if it’s a local, in-person meet up and there’s a regular meeting every Tuesday at 7:00 o’clock, everybody comes at 7:00 and once you’ve found it, you kind of no longer need the platform anymore, so what value is it that you offer?
I think that’s what you need to focus in on in terms of trying to figure out how to monetize it. You might be able to pay wallet and have some sort of merchandise behind it, I’m not sure how would that go though. I don’t know is charging on ongoing basis is for would be terribly lucrative, I’ll say.
Rob: Yeah. B2B is easier than B2C. In this case, Founder Cafe or the Dynamite Circle or Nomad List, they tend to surround people who run businesses, who are making money through something, who the network they know can help them make more money, help them to have a more successful business whereas going to gamers, I mean gamers are notoriously cheap. They’ll spend money on games but trying to ask consumer to do a subscription tends to be a harder thing to do. I’m not saying that you shouldn’t do it but know that when I think about the $99 every quarter that we charge for Founder Cafe, most business owners see that and think, “Yeah, that’s not very much money compared to what I’m paying for all the other services I’m using.” But if you were to try to charge that in your case, it will be very hard.
Basically, no one would sign-up. I bet people would be like, “Are you kidding me? $33 a month to have access to this list?” You’re going to be more down in the, I’ll say, the Netflix zone where you’re probably looking at $5-$10 a month, I would think. I would probably either charge it quarterly or charge it annually. It’s such a small dollar amount. You don’t want to have these $5 charges all over the place. Maybe it’s $50 a year, $80 a year, $100 a year, somewhere in that range is what I initially think about.
I don’t think it’s a bad experiment. I mean depending on how many people you already have on the list, merch is fun, but merch is going to take time, the margins are low, and you really need a lot of people on your list in order to sell enough merch to get any type of revenue, you’re only getting, what’s the net margin on merch? Is it 10%, 20%? It’s going to be very small. I think that could be an interesting revenue stream to explore, but I would do that later. Having a premium membership, I think could be very interesting.
You could also consider doing a Patreon but again, you need quite a few people to do that, then you can have that insider’s group pretty easily, and all the mechanics are handled for it. People already know, it’s becoming pretty popular to hear this word Patreon and to know what that means. It’s not like reinvent the wheel and introduce everybody to, “Yeah, this premium membership,” blah blah blah. It’s just like, “Go to your Patreon account. You already potentially support some other podcast creators, support it, and if you support it at the $5 a month level,” and then Patreon handles all that for you—all the billing and all that—then you get this extra perk of getting this log in, or getting this episode earlier, getting these episodes that are only published on the Patreon feeds.”
Those are my initial thoughts on it. I love the idea of Chris. I’d love to do something like this, but it is going to be hard to pull the viable business out of it. You’re going to need a lot of people listening to you. B2C is the volume play. You need a lot more people selling something for $5 a month versus $50 or $100 a month.
Mike: The other thing that occurs to me is something like this seems similar to there’s a website called Roll20 which is mainly aimed at roleplaying games but obviously, there’s a lot of Dungeons and Dragons players on there, but playing various editions, and Pathfinder, and various other roleplaying games and they have a mechanism where they’re charging, I think it’s either $5 or $10 a month and it’s an annual fee.
I agree with Rob but I think going the annual route is probably the best way to go to get some of that initial revenue and then down the road, you could look at that and say, “Okay, now that I’ve got 500, 1000, or 10,000 who have paid that much money.” Again, with 1000 people paying $50 for a year, that’s $50,000, it’s not enough to support one person for the most part full-time.
One thing you could do is start offering like an escrow service for people who want to buy or sell comic books. Yes, you can do it on eBay, but then you have to deal with PayPal, and all these other stuff, for higher-end, and Rob maybe you could speak into this because I know you’re in the comic books but would you pay for an escrow service for something like a high-value comic book? Because we’ve talked about, in episode 403, about analyzing another type of business but I think part of that is looking at the type of customer that you want. People who are buying and selling extremely valuable comic books, they want to make sure that what they’re getting is good quality, and that they’re actually going to get it and not going to get ripped off. By offering an escrow service as an add-on later, that might be an option.
Rob: Yeah, I think that could get traction. I don’t know if that exists today, to be honest. I wish there was a text box, we could type search terms into, and it could potentially tell us if that exists today.
Mike: I know. That’d be fantastic.
Rob: It’s crazy. Anyway, enough daydreaming. But yeah, I think that’s a good point. Again, then do you have to build a large enough community that the small percentage who use whatever service offshoot making enough money to be viable. But I do think that’s a cool thought experiment or an interesting way to think about it. It’s a creative way to think about, I’ll say. I think adding offshoot businesses rather than just charging directly is another way you could potentially monetize it.
Mike: Thanks for the question, Ricardo. I think that about wraps us up for the day.
If you have a question for us, you can call it into our voicemail number at 1-888-801-9690 or you can email it to us at questions@startupsfortherestofus.com.
Our theme music is an excerpt from We’re Out of Control by MoOt, used under Creative Commons. Subscribe to us on iTunes by searching for Startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening. We’ll see you next time.
Episode 404 | How to Dissect Your Business Competitors
Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike talk about how to dissect your business competitors. Gaining insight can help with validating an ideas and understanding the landscape. The guys give you 8 ways to better understand your competitors.
Items mentioned in this episode:
Rob: What?
Mike: Is that what this episode is?
Rob: Why?
Mike: I don’t know. Because it’s episode 404. Come on! Give me the nerd joke.
Rob: Oh, sorry. I totally missed the prompt.
Mike: Come on man. Alright. Theme music.
Welcome to Startups For The Rest Of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you’ve built your first product or just thinking about it. I’m Mike.
Rob: And I’m the guy that doesn’t know what 404 means.
Mike: And we’re here to share our experiences to help you avoid the same mistakes that we’ve made. How are you doing this week, Rob?
Rob: I’m doing pretty good, actually. Aside from missing that bump set that you just gave me at the top of the intro there, we have wrapped up our move. Sherry and I bought a house in Minneapolis, we decided to stick around for a few years. We’ve been renting for two years. Have I gone on my rant about how buying a home is like not a good financial decision? Have I done that?
Mike: You have not done that but I have seen various people say that.
Rob: Yeah. I won’t do that here. I’ll spare everyone, maybe in an after show at some point I’ll dig into that. But I realized that sometimes you make decisions that are not the best financial but you make it more for your life, your lifestyle, or your family, or really, we wanted more control of exactly where we lived. We wanted to live right around this lake in Minneapolis called Lake Calhoun. There are just very, very few rentals here, we have lived in one for two years. It was kind of a crappy house, it was fine but the landlord didn’t do much upkeep on it, I’ll put it that way.
Really, we just wanted more control. Also, didn’t want to ever be like, “Hey, we sold the house. You guys have to move in 30 days.” you know that type of thing because we know that would have happened at the worst possible time. It wouldn’t happen when I’m totally off and not working. It would happen right in the middle of me starting a new startup or something.
Anyway, it’s all I have to say, we bought a house, we’re just one block away from where we lived before. Got the keys on a Friday, packed or showed up on Sunday, moved or showed up on Monday.
Of all the moves we’ve done, it was by far the most seamless and least stressful. It really helped neither Sherri and I really worked very much last week, and so we’re almost unpacked. We’re also motivated by our packers. They gave us two prices; one was to pack into cardboard boxes where you have all the waste and you have to get rid of it or to pack in these plastic reusable tubs that they take back and you basically just rent it for the move. The fact that you only have them for a few weeks, it was just motivational like, get those things returned and get the whole house unpacked quickly.
Mike: That’s cool. I’ve always had to move myself. I haven’t moved in more than 10 years at this point. It’s been close to 13. I don’t look forward to ever moving again. It’s one of those things where—I know at some point we’ll probably have to—but I just don’t feel like it at the moment.
Rob: It’s not fun. It’s a short-term pain for what could be a long-term gain. In our case, now that we’re in this house that’s larger, closer to the lake, we like it more, it’s newer, just all of these things. It was totally worth it but yeah, coming up to it I was just filled with anxiety, “Oh, god. This is going to be such a terrible experience,” because so many of them have been in the past. We used to move ourselves. When Sherri got the job in Fresno, they paid to move us across the country, and then obviously, Leadpages, they offered for anybody on the Drip team to move here.
Now that we’ve done it a few times and paid someone to do it, it would be hard to go back especially we have three kids. There’s a lot of moving parts in it, I can imagine. Even packing our stuff at this point will take a couple of weeks. It’s not ideal. We could obviously do it if we need to, we’ve done it before, but it really does help to reduce the stress of the move knowing that in one day they’re going to come and it was three guys showed up and in seven hours they’ve packed our whole house. It’s crazy how fast they are.
Mike: Well, because they don’t care because none of the stuff is theirs. It’s easier for them to just throw out stuff in a box because they’re not like, “Oh, I’m going to reminisce about this for a few minutes or talk to so and so, have a conversation about it.” because you’re going to procrastinate to some extent because you don’t want to move because it sucks.
Rob: Totally.
Mike: They’re just going to go in, get the stuff done, get it taken cared of. They also don’t necessarily need to worry as much about like, “Oh, this item here, I want that in the new living room,” versus right now it’s in the dining room, they just throw it in a box.
Rob: Right, they just throw it in the box. To tell you the truth, the other things that made it really less stressful than it used to be—aside from the Minneapolis move—we were in Fresno for seven years, I believe. Something that’s different now is we got in this house and it’s like, “Oh, the doorbell doesn’t work. Well, I’m going to need to go get a doorbell. I need this halogen lamp that burned out in here and I’m certain it’s some specialty halogen lamp so I don’t have that. This towel rack is broken.” there’s just a bunch of stuff.
In general, the house is in great shape but there’s little things, those little things tend to bother me. I don’t have to drive all over town doing that. I jump on Amazon, I order it. I probably spent $300 in the last week on little knick-knacks and parts and things that used to be a 3-hour drive all around town to find all these things. Now, it shows up in 48 hours. It really kind of reduces the time commitment of this move because I’m able to add on an ongoing basis. Then, of course, I would have driven around, I would’ve found the halogen, come home, put it in, and the next day notice something else, so then I would’ve driven around again. It reduces the need to waste time which I think is good.
The other thing—and then I’ll stop talking about the move—is changing addresses is way easier than it used to be. Eight, ten years ago, I used to call everybody. I would have this huge list of our credit card companies and all the stuff, and I would call the 800 numbers, you wait on hold, you change the address. Now, I just went through LastPass and I looked through all of our accounts. We also have a list, there’s a few alumni associations or whatever that I don’t have accounts for but it was so much faster. It probably took me 90 minutes. I was able to do it without talking to anybody on the phone, I was listening to some music, and just hammering through different tabs in Chrome to be able to change them all. I don’t know, I think life’s a little better than it used to be.
Mike: Cool.
Rob: How about you? What’s going on?
Mike: Not a lot. Just kind of keeping track of the MicroConf Europe tickets, they’re going on sale. We’ve released those to FounderCafe members and then we went out to a second round for the previous attendees for MicroConf. I think by the time this episode goes live, the next round of tickets is just going to be available. This episode go live on Tuesday and then the following is when it will go out to the early bird list. If you’re interested in meeting up with us in Croatia and 120-150 other entrepreneurs, go over to microconfeurope.com, sign-up for the mailing list. As long as you do that on Tuesday before the email goes out on Wednesday, you should be able to get into that. We’ll send out the links and you’ll be good to go.
Rob: Sounds good. It’s going to be a good time. What are we talking about today?
Mike: Today, we’re going to be talking about how to dissect your business competitors. I’ve done this—I’ll say somewhat ad hoc—over the years where I’ve been talking to somebody and the conversation would come up about who their competitors are and how big they are and how well they’re doing.
There’s some several rules of thumb that I learned from the VP of Marketing at Pedestal Software back 12-15 years ago. He basically laid out, he’s like, “Oh, well, this is how I go about doing it.” so we just got to talking and he talked about revenue, how you look at the number of employees, and all these different things. I’ve kind of had these things in my head for a while. What I did was I’ve put them down into a list and walked thru how you can go through and analyze how big a competitor is, and how much, I’ll say, strength or resources they have to bring to bear on a particular problem in their space or to turn around and crush you.
If you’re looking at a market and you’re trying to figure out, should I even go in here or not? Is there a valid business here just knowing that there is another business in that space is a good data point but knowing the specifics and being able to drill into those, it’s good to know how it is that they make their money, and how you can do it as well. Because what you don’t want to do is you don’t want to go into a market and decide to do things in a completely different way without any justification. If something is already working well, especially if it’s an entrenched competitor, they’ve been there for a while, and the industry is already used to operating in that way, then you can come in and do kind of the same thing but you have to know what the lay of the land is, how things are currently working in order to be able to make it successful for yourself.
Rob: Why is it important to do this? What are the benefits that you get from learning all these information that we’re going to talk about a competitor?
Mike: This is a way to basically go partly through the validation process. If you already have a product for example, and you want to know like, “Are there other people in an adjacent market that I could serve?” Looking at one of your competitors who already serves that market would be a good way for you to decide whether or not you should go into that. If so, how you would position yourself in the market to them. Obviously, there is low-end, there’s mid-tier, and then there’s higher-end like enterprise level sales, there’s B2B, B2C—all these different things that you can talk about or look at in terms of the business—just knowing where all of the different pieces are is going to help you figure out where to position yourself. It’s partly about market validation but it’s also about being able to position yourself in the market and explain to people why it is that they should buy from you.
Rob: Yep, that makes a lot of sense. I also think it can help you perhaps know the […] economics or the profitability potential of the business. Because if you find out the revenue is $5 million and they have 10 employees, that’s probably a very, very profitable business and easy to run. You can think to yourself, “Oh, I can do it with only 10 employees.” or, “I should keep my headcount down if I’m going to be a similar business model.” Versus if they’re at $5 million and they have 100 or 200 employees it’s like, “It’s a very labor-intensive company. Do I even want to get into this business? Or, “Are they just hiring out ahead of growth?” and you can listen to that.
If they’ve raised funding, you know how much they raised, and you know they’re at x million in revenue and these many employees, you can back-of-the-napkin calculate their burn rate, and you can back-of-the-napkin calculate when they need to start raising another round or if they’re going to run out of funding or that kind of stuff. I think the more of these things that you learn—and we’re going to talk about revenue and target customer type and other things—it just helps you get that mental map of the landscape. You don’t just do this for one competitor, you do it for four or five of your closest competitors, and you put it all up on a whiteboard or in a doc and you start to get this understanding of the landscape and how they think about things. Let’s dive into the first one.
Mike: The first one is trying to figure out how much revenue they make. There’s a couple of back-of-the-envelope calculations you can do for this and it does depend greatly on the industry. For example, with a software type business, most of those types of businesses tend to make somewhere between $150,000 and $200,000, that’s kind of like the, I’ll say, the average range but there are certainly exceptions to that. If you look around, there are companies like Apple, and I think, Balsamiq and several others that have been public about what some of their numbers. But you can get up above $200,000 in revenue per full-time employee. You have to remember that’s revenue, not profit and that’s per full-time employee.
Usually, you can do a back-of-the-envelope calculation to figure out how much money a business is making based on the number of employees they have. If it’s a software company, they probably make somewhere between $150,000 and $200,000 per employee. You say, “Okay, well, just quick math on that, $1.5 to $2 million.” That’s not exact, obviously. There’s a range there and it could also be much lower. They could be making $100,000 per employee or they could be making $250,000 or $300,000 per employee. That also depends a lot on whether or not they’re funded. We’ll talk about some of those things but just a raw calculation, that gets you in the ballpark but, it’s by no means, exact. You have to make sure you bear that in mind. It is not exact at all.
In terms of the industry, it can vary greatly from there. I have a friend who’s in the oil industry and we got to talking about this exact same topic. I kind of gave him that ballpark estimate and he’s like, “You’re off by a factor of 10.” I was like, “Well, why is that?” He’s like, “Because in the oil industry, we sell based on margins and we have to sell a lot more. Our margins are much lower. Basically, you have to multiply by 10 in order to get the revenue.” and then their profit is basically what they support their employees on. It was 9x off.
Rob: Right. Because their profit margins are so slim that they have to make a way more revenue. That’s the thing, we should probably stick to online businesses when talking about this, bringing up the oil example is fine but we should clarify that we’re really talking about startups. Even physical e-commerce is tough because I know someone who runs a $2 million or $3 million e-commerce business but the net margin on that is 10-15%. You can imagine, they couldn’t support 30 employees on that because you just don’t make enough. I think we’re talking more about software companies.
Mike: Yep, I agree. I brought up the oil example just to point out that when you get into physical goods, like with software, your profit margins tend to be 90% or upwards of 90% but with something like selling oil, for example, you sell oil at $2 per gallon, your actual profit on that is only ¢10 or ¢20. That ¢10 or ¢20 is what comes back into your business and you can use that to support your employees. That’s why my back-of-the-envelope calculation was so far off by a magnitude of 10 when I was talking to that guy who’s an executive in the oil company.
Just keep in mind, physical production costs really eat into that, and your revenue will be substantially higher or their revenue will be substantially higher because of that but it doesn’t necessarily translate to profit and […].
Rob: Yeah. This is the formula, the 100k-200k per employee that I use in my head just when I ballpark things. As you said, there can be outliers. You can have some startups will be five people and they’re doing $5 million or $10 million, and they’re super profitable. Then others that have raised funding are the exact opposite. They’re doing 200k in ARR–Annual Recurring Revenue and they have 20 employees because they’ve staffed up. It can be skewed but this is for a—when I think of it—it’s like a bootstrapped and profitable or even funded but kind of well-run and capital efficient company, I think this is a reasonable number. If someone is growing really fast, this number can get skewed in one direction or another. As you said in the outline here, you have early-stage or pre-employees where it’s just founders, it’s pretty much guesswork. Unless, you hear them comment in a podcast, or in a blog post, or they posted it live on Baremetrics or something, it’s just pure guesswork at that point.
Mike: The second thing to look at is their target customer type. To do this, you can look at their pricing and specifically who they are targeting. By who they are targeting, there’s two different classifications. Generally, it’s either B2B or B2C, and within B2B, there’s several different levels; there’s the high-end enterprise, there’s the small-medium business market, and then there’s the professionals, so freelancers, various small agencies, or partnerships–things like that. I would throw prosumers in there as well. Those are people who are professional freelancers but maybe they do it on the side or it’s something that they are interested in but they don’t necessarily gain their full time living from it.
Then B2C, it’s something like a mass market where you’re trying to sell one of every single thing to every person on the planet. Then there’s well-off individuals or trying to sell the families or pro-hobbyists sort of prosumers. Those are the two general classifications; B2B and B2C and then within each of those you have to also be aware of what type of customer they’re selling to. That’s mostly a function of price but again, it depends on what it is they’re selling, whether it’s a software, or digital asset, or a physical product.
Rob: I think pricing is a big indicator here and then just with their marketing–look at their headlines, look at their copy, look at their colors and their design. I was thinking, what’s a mobile phone company that really caters to the youth these days? They’re going to have a different logo. Is Boost Mobile still around or am I totally dating myself?
Mike: I don’t know. I don’t think so. I think they’re part of, I don’t know, the one with the purple logo.
Rob: Yeah, exactly. This is great radio here. Sorry folks. Some brand like that that’s targeting kids in college is going to have a very different language and very different logo than salesforce.com–that’s B2B enterprise, all that stuff. You can get a feel from that if they’re positioning themselves well and then price, of course, is a big deal.
When I was first trying to figure out pricing for Drip and I was really agonizing over it. I went out to all the competitors that I knew about and I put it all in a single doc of what everyone’s pricing was. All the grids and I was just trying to analyze it. It really helped me get a feel for where we should land that as a new startup that’s launching. Of course, pricing is tough, it’s always a lot of guesswork but it gave me a really clear picture of again, the landscape.
What was interesting is that I returned back to that doc every six months or so, and so many of the prices were just dramatically different. The people had different tier levels, some had raised prices, some had lowered prices, some had raised them on the low-end, lowered them on a high-end. It was really interesting to watch that over time. I updated it a few times and did a snapshot over time but it is fascinating if you watch competitors and make it, every 60 days or every 3 or 4 months, go into this group and whether you have a VA do it or do it yourself, then just take another snapshot of their pricing and you can watch how stuff shifts over time in a space.
Mike: The next thing to look at is what their sales and acquisition channels are. There’s a few different categories. Obviously, there’s online which includes either website, their content marketing, advertising, email list, etc, and then there’s offline channels which are much, much more difficult to find and analyze the effectiveness of. The things like trade shows, physical mailings, relationships and partnerships that they’re leveraging, if they have a brick and mortar store, there’s obviously heavy infrastructure cost and logistical cost of just getting products to those.
Again, we’re probably going to lean away from the physical product side of things but you can imagine that with offline channel such as a trade show, how do you know how many customers they’re getting in contact with, or what their cost to acquire those customers. You can guess based on what it costs to attend the trade show. You could go to some of them, like a competitor, let’s say they go to trade show x and you go to trade show x and say, “Hey, can I see your sponsorship rate card?” You look through that, figure out what sponsorship level they went in on and then figure out how many people they probably sent. If you are at the trade show then it makes obviously, that easier because you can just go up to those people and ask them questions. But you can get a sense of what their marketing budget is like based on some of the different things that they do.
Obviously, trade shows are easier to calculate but if they’re doing physical mailings, it’s really hard to get any insight there because you don’t know how they’re getting their list, what they’re paying for it, or the effectiveness of it. All that stuff is going to be, very much siloed inside their company. It’s going to be much harder for you to figure out, not just how much money they’re spending on it, but whether or not it’s effective.
Rob: You know, one way to also get an idea is to use an online tool to look at your competitors’ keywords that they rank for, to look at ads they’ve run or are running. There are tools like Spyfu and ahrefs.com which you can type in a competitor website and it’ll give you a good idea of what they rank for, and what the terms are, and how much traffic potentially. It’s all estimates but it gives you some idea.
Then, just to get an idea of their top-level traffic like, “How many uniques do we think they get?” I used to go to compete.com but that shut down and so now, I’ve really been using rank2traffic.com. There is another one—I can’t think off the top of my head—but what I did is I searched for compete.com competitors or replacements and there’s actually a Quora thread where folks named a bunch of them and I tried 10 of them, and Rank2Traffic and another one was I felt like had at least the best guesses.
Again, these can be off by a factor of two or three in either direction. It is a bummer but at least it gives you some idea. Sometimes you’ll put in a competitor and it’ll just say, “Not enough traffic to list here.” It’s like, “Oh, they’re probably getting less than 5000 uniques.” That’s not a major channel for them most likely.
Mike: The next thing to look at is the type of products they’re offering. We’re going to neglect the physical product side of the equation and focus on digital products. But even within digital products, you’ve got things like software, you’ve got courses, all sorts of things that fall under that digital category. There’s going to be support costs differences for them, and engineering, and research and development costs that are radically different.
If you have a course, for example, the support cost on that is way, way less than they are for a software product. Just because with software products, you have to train and educate people versus a course that is the whole goal of it.
In addition with most software products, you’re going to have to offer some sort of ongoing support. If it’s a SaaS application, that is a monthly ongoing support that you’re offering but with training courses, if there’s a bug or a problem in it, you typically fix it and roll out the new version to everybody and that’s it. You don’t have to continually update it–at least in terms of fixing things inside that. It doesn’t mean you can’t offer a new version of it or an updated version for 2018 versus 2016 but the length of the time that you’re going to be spending doing support and offering any sort of warranties or bug fixes or anything like that is dramatically lower for a course than it is for a SaaS product.
Rob: Another thing that you can look at is the length of time they’ve been in business. Older businesses do tend to be more stable without massive revenue fluctuations, they also tend to be in the software space slower. They’re slower to release features. There’s a lot of opportunity when competing against older businesses that have gotten kind of big and bloated.
Newer businesses can obviously have a lot more revenue swings or faster revenue growth in terms of percentage wise, but they can be harder competitors for you to compete against because a lot of times, if you’re just a team of one, two, three people, your advantage is that you can move quickly and you can take refugees from those older, larger companies. I think there’s a lot of opportunity. It was the playbook of Drip–that we were the young upstart, and we were smaller but we were shipping features so much faster than a lot of our competitors. It was kind of easy pickings against companies that had been around for 10 years and had a bunch of legacy.
That’s the thing with oil companies, or paper manufacturing–kind of typical brick and mortar businesses. If you’re 50 years old or 100 years old, you have a brand name, you can be entrenched in a space but if you’re a software company that’s 10 or 15 years old, you are very likely to have a ton of legacy code, and your software is very likely to not be as good as software that was built today. It is this kind of inverse thing where, older companies will have a lot of revenue, and they have a lot of momentum and they’ll have a lot of brand, there tends to be a pretty good factor to get in there as an upstart and make some traction.
Mike: Just to kind of tackle on or clarify a little bit of what Rob is saying because I don’t want people to misunderstand him based on exactly what he said. But when he said that the new businesses tend to have a better code, it’s not like the ones and zeroes are any better, it’s really just that they have basically, honed in on exactly what it is the customer wants in terms of the minimum stuff that needs to be built versus the businesses that have been around for a long time.
It’s just so much harder for them to make a change even if it would be better for their customers because they have to take into consideration the existing customer base. If they make a large change to the frontend of their product and they suddenly alienate 30,000 customers, it’s really bad for them. That’s just going to make massive problems for them and support headaches. They’re going to choose to not make those changes even though they could and they have the resources to.
Rob: Yeah, that’s right. There’s legacy customer stuff. That’s what you’re talking about if you can’t make a change, and then there’s legacy code stuff. When I think of how much better software development practices have gotten over the past 15 years with extensive unit testing, the frontend integration testing, and the agile development methodologies–the software I was writing and working on 15 years ago was harder to maintain. Maybe that’s not across the board and maybe that’s not for everyone, but that software, we could not ship features nearly as fast because the software didn’t have unit tests and it was more crafty–it was all these things. These days I believe the practices, they’ve gotten better. I think software these days is easier to work on assuming that you have knowledgeable people who are using the right engineering practices and aren’t just hackers throwing stuff at the wall on a weekend or something.
Mike: The next thing you look at is the company leadership and how that is structured. If they’re self-funded, the founders tend to be in those company leadership positions. If it’s angel or VC funded, the founders may be there still in the executive capacity or they may have put into more of a director role and they brought in professional CTOs or CEOs, for example. It depends on how far along they are.
If it’s a established business that’s been around for 10, 15, 20 years then who knows what that looks like but it also gives you an indication of what things are going to change in the future. They just brought in a new CEO or they just got a round of funding, for example, that dramatically changes what the future vision for the company is going to look like.
Those are just, again, just data points that you can look at but it helps you to understand how quickly is this company going to change direction and are they likely to change direction? If the company’s been doing their business exactly the same way for the past five years, chances are good they’re probably going to do that for at least the next year or two but there’s no guarantee.
Rob: You can go to Crunchbase for this. You can signup for Google alerts on the company names. I think that’s a good idea anyways. One thing I’ll caution as we’re talking through this is, I have been in environments where people were way too fixated on what are competitors are doing. “Oh, they just shipped this thing. Oh, they just raised this round of funding.” I was like, “This stuff is good to know but this is not make or break. You should be focusing way more on your customers than on your competitors.” With that said, everything we’re talking about here is still good to know, to have an idea of the landscape, and to revisit it every—I would say in a startup environment—probably every month to three months if you’re in the early stage. But this is not something that everyday you should just be thinking about and trying to look and watch competitors and watch what they do because it just matters so much less. Unless you’re in a neck and neck race with your competitor, it’s just not a good thing to be overly fixated on what other people are doing.
I think another thing to look at is red flags or exceptions. These indicate potential problems or major changes that could be good or bad that a competitor is doing. If you hear about layoffs they’re doing, if there’s a quick change of leadership where the CEO was perhaps, asked to leave–anytime there’s a change of leadership you always wonder what happened; if they raised funding recently, they have new product announcements, all kinds of stuff. This is where you can again, monitor the email list, there’s people talking about any industry. If you’re in marketing automation and then there’s three or four people who are kind of the industry experts that you can be on their list or you can like I said, subscribe to Crunchbase updates or do Google alerts just to hear about what your competitors are up to.
Mike: The last thing you can look at to dissect your business competitors is to pose as a customer and try and find out how they treat their customers. There’s obviously some ethical questions that you have to answer for yourself here in terms of how far you’re going to go. Obviously, you can sign-up for a competitor’s products, you could just get on their mailing list, you could call or email their support and directly ask questions.
Posing as a customer gets a little dicey of course in terms of ethics and how far you want to go with that but each person has their own, I’ll say, line in the sand for that. Personally, I don’t think that I would go too far with that. I might look at their email list. What I don’t know is I would sign-up for a trial if I wasn’t actually interested in it though. But all of these gives you an idea of how they treat their customers and whether or not there are ways that you can position yourself to customers that are unhappy with their product or their service in order to make yourself more attractive to those customers that are leaving.
Rob: To recap, we had eight way to dissect your business competitors.the first was, look at their revenue. Second was target customer type. Third was sales and acquisition channels. Fourth was software versus courses. Fifth was length of time in business. Next was company leadership, then red flags and exceptions. Eight one was posing as a customer.
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