Join us for a Rob Solo Adventure version of Startups for The Rest of Us as Rob Walling talks about the power of optionality. He explores the importance of having different paths and avoiding backing yourself into a corner and being constrained when making important life decisions.
The topics we cover
- 1:27 The story of Gary Gygax and Tactical Studies Rules (TSR)
- 6:56 The Entrepreneurmobile
- 13:00 How to keep your options open
- 17:33 DotNetInvoice and fake reduction of options
Links from the show
- Tactical Studies Rules
- Gary Gygax
- The Entrepreneurmobile
- Episode 510 | The Story of Startups.com
- Episode 496 | The Press Covers Exceptions, Don’t Compare Yourself to Slack or Zoom
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Welcome to this week’s episode of Startups For The Rest Of Us. I’m your host, Rob Walling. Each week on this show, we talk about ambitious startups, but startups that don’t necessarily need to raise buckets of venture capital. These are companies that build real products and sell them to real customers for real money. Sometimes that’s bootstrapped, sometimes it’s raising a small amount of funding, but it’s really founder controlled, founder focused, and profit-focused companies that provide enormous amounts of leverage due to the amazing software tools that we have to build these SaaS companies today.
If all is going well, as this episode goes live, just a few hours later, I will be doing a five-hour Livestream, microconfremote.com. If you want to get a ticket to that and check out all the amazingness that Producer Xander has put together. I’m going to be interviewing some guests live in a studio in Minneapolis as well as some remote Keynotes, remote conversations, and all kinds of wacky goodness. I hope you’re joining me on that today.
Today I’m flying solo, and I’ve had several interviews and conversations over the past few weeks. I like to mix it up and not just have this be an interview show. Today I want to talk to you about The Power of Options. The power of options is the ability to have a lot of different paths that you can take and then not back yourself into a corner in a way that you’re constrained, and you can’t make choices the way you want to make them because you have essentially painted yourself into a corner or made decisions that eliminate some of your options.
I want to start off with a quick story about a company called Tactical Studies Rules or TSR. TSR was a company formed by Gary Gygax to essentially house and publish Dungeons & Dragons. It’s a game that he co-invented, co-wrote in the ‘70s. He started this company, TSR, to publish the game, basically, because no one else would publish it back in 1974. We all know Dungeons & Dragons became extremely popular, much more popular than any of the other board games of its time. It became really the first role-playing game, the first fantasy RPG.
As TSR became more and more popular, and if we roll into the ‘80s and into the ‘90s—the first edition and the second edition were released—TSR started getting itself into a bit of financial trouble. The challenge with having a publishing company like that where you’re manufacturing things is you have this enormous upfront cost to develop and then to print a product. You print 10,000 or 50,000 books, you’re going to release them on a certain day, and they have to be in physical warehouses. There’s just an enormous amount of capital that has to be outlaid to make that happen.
If it works, then you make some profit, and then you can reinvest that back. But if any of those don’t work, you lose buckets of money. Even if they do work, you have this massive delay between when you invest the money and when you get the capital back. It’s not like software. That’s one of the luxuries that we have in the SaaS space is we don’t have to deal with managing inventory and having inventory sitting in a warehouse. And often, usually, with SaaS, we don’t have to deal with payment terms net 30, net 60, and net 90 where we’re providing a service or product and then not getting paid for it for a while. With TSR or any type of publishing like that, they have to have these massive cash reserves in order to be able to produce the product.
One thing TSR started doing and it was really one of the contributing factors to their demise because TSR sold to a company called Wizards of the Coast in the late ‘90s. TSR went bankrupt is what happened, and they were sold for parts. I believe they had $30 million in debt, and they sold $30 million or $35 million. It wasn’t public, but it was reported to be that much.
In essence, Wizards of the Coast just paid off their debt and I don’t think the shareholders got much (if any) out of that sale. Which is incredible because TSR was the intellectual property holder for an enormously valuable cache of games, characters, copyrights, trademarks, and just stuff that was really valuable, but the fact that they had gotten so far into debt really spelled their demise.
One of the contributing factors to this is they really reduced their options dramatically. The way they did this is to raise capital—I feel they could’ve raised some outside, some venture, some angel, or whatever. I guess they passed that point. But instead of doing that, what they would do is they’d say, okay, we’re going to figure out everything we’re going to launch over the next year. We’re going to go to the market to all the distributors and the retailers, and we’re going to ask them to pre-purchase, to pre-commit to all the purchasing they’re going to do over the next 12 months. Then we’re going to take all those purchase commitments, and we are going to sell those to—in essence, it was like Wall Street. I don’t think it was investment banks, but maybe it was, but they would package them up, and they’d sell them at a discount.
Obviously, Wall Street’s not going to pay 100% of the revenue or of the projected net profit. But maybe they’ll pay 90% or 80%. This is often called factoring where you sell accounts receivable at a discount to get the money now. To be honest, margins in publishing are not that great anyway because of all the physical products that you’re shipping, refunds, returns, and whatever happens there. But in addition, they’re also then factoring stuff, and they were locking themselves into a production schedule a year in advance. They couldn’t respond to competitors very well. They were really not flexible, or they had no dexterity in essence.
One year it went really far south. They got a bunch of returns, they couldn’t respond by reducing the number of products they were going to release, they laid off a bunch of people, and they couldn’t produce the products they had already committed to and presold. They had just reduced their options. They had reduced their options to the point where everything had to go right or else they were up […].
The reason I’m telling you this story is you may not care about this at all, but it’s such a parable of how reducing your options further and further and further can back you into a corner and cause you to have to make bad decisions. Whether those decisions are to have to sell your company for parts, to go bankrupt, to not be able to send your kid to college, or whatever that may be. You want to keep your options open.
In fact, one of the powers of running a startup, one of the powers of running small companies is we have enormous amounts of options. Think about competing against the 900-lbs gorilla, that slow-moving whoever it is—Salesforce or QuickBooks where you know it’s a big company, and they’re planning 6, 9, 12, or 24 months out. Whereas a startup, you can literally plan to do something today, and then tomorrow you get a feature question and you implement it by lunch.
That is one of the superpowers of us. That is one of the Jiu-Jitsu moves of using your competitor’s strengths against them. As a startup, we need to maintain as much optionality as we can. We need to realize the power of having options and keeping our options open.
I want to give you a couple of examples of this that I’ve experienced in my life both with myself, friends, colleagues, relatives, and such. And then I’ll talk a little bit about keeping your options open toward the end of just some guidelines and how I think about it in my life.
Also, there’s a danger of I want to keep all my options open all the time and I’m never going to commit to anything that might reduce optionality. That’s not good either. It can be too extreme and you can be too much of a Jack or Jill of all trades because you don’t want to narrow your focus. You don’t want to get great at any one thing because it removes options. I don’t think that’s a good way to go either.
The first example I want to bring up is this idea of the entrepreneur mobile, which is a concept that I learned about from Dan and Ian on the Tropical MBA. The entrepreneur mobile is the car that you drive as you’re starting your companies. It’s before you’ve made it (so to speak). It’s before you get rich in essence before you make buckets of money. Basically, you buy a cheap car. You buy a used car and you take the money that you didn’t spend on the $500 a month car payment that all your friends have. They did when they got out of college. You take all that money and you build a damn business. This is exactly what I did.
At one point, I’ll say it was around 2010, 2013 range. I had quite a bit of money in the bank. In my first job, I made a minimum wage. My dad was a construction worker. My first job out of college with an engineering degree, I made $17 an hour. I’m guessing it was around $100,000 maybe in the bank that I had just saved. I had sold products, I had worked consulting and just saved this money. It was a lot of money, it was a huge amount of money. The most I’d ever had at that point.
Instead of going out and leasing or buying a brand-new car, a friend of mine at that time already had a credit card debt. Literally had a negative net worth, had his rent payment and this credit card payment, then went and bought a BMW, and had a $500 a month car payment. I couldn’t see doing that. I didn’t want that to drag on my ability to grow businesses.
Sherry and I went to a guy who was referred by a good friend of ours, and I bought a salvage title, which means it had been in a wreck and it had been totaled. It was a salvage title, Buick Rendezvous. I paid right around $9000. I paid cash for it. Never had a car payment. That car lasted me about a decade. I almost never put any money into it.
When I think back about all the money that I saved not buying that BMW, paying the car payment, all the cash I could invest in growing my net worth, and invest in HitTail. There was a reason I had $30,000 to invest in HitTail. It’s because I didn’t go out.
Frankly, I would’ve loved to own a nice car. I actually do appreciate luxury things. But it’s that sacrifice of when you do that, you reduce your options. Because when you have that $500 or $1000 a month drag, it’s a depreciating asset, you reduce your options to go spend $1000 a month on Facebook ads to grow HitTail or to start your next app. As I took all the revenue from HitTail to start Drip. I had options because I kept my options open by not saddling myself to debt.
That’s a big thing. Debt reduces optionality. Debt is the consumption of your future earnings, but you’re consuming them now before you make them. Frankly, having any type of high monthly expense—yes, I’ve owned several homes, and I do still own a home today, but even that I would argue, is that a necessity? Having a large house payment, I’ve seen people be house poor is the term you hear where they buy a house, and then they don’t have any money to do anything else. It can hamper your options. It can hamper your ability to grow a company.
I’ll even take it a step further. One of my relatives owns a good chunk of a construction firm—an electrical contractor. He and I have conversations all the time about keeping options open. The standard model of having, if you’re an electrical contractor in a city, you have an office, you have staff there, and then you have a shop which is a warehouse-ish thing where you store some tools. That’s where the electricians come in to grab stuff. They have stuff shipped there and then you can put out to the job site this and that.
I ask him, “Do you really need an office? Could you go fully remote?” He’s like, “Yeah. I’ve been thinking about it. Nobody does that, but why do we need an office?” We started talking through. He’s like, “They need a little place to ship stuff and a place to store some tools, some assets, or trucks.”
We started looking into a storage facility or buying a warehouse out in a warehouse district where you don’t need an actual office. Because do any of us really need that physical space anymore? Or could you run a fully remote—I almost think of it as a bootstrapped-ish startup or a MicroConf startup, where like I say in the intro of this podcast, it’s an ambitious company. He’s just running an older school company. It’s a construction firm.
The thought there is if you don’t have that office, you just have more options. Could you even start doing work in another state pretty quickly because you don’t always need to open an office? Or could you do it in a different part of your state? You don’t have that rent payment, where does that go now? It could go to the bottom line, you could pull it out, or you could use it to be more efficient or to bid for more jobs. There’s just so much you can do when you have these options and you maintain them.
To be honest, this leads me right in. This is the reason we started TinySeed. I was writing angel checks to startup founders who didn’t want to take venture funding because it put them on a path and it reduced the options they had. They could no longer pull out dividends, they couldn’t have an LLC. There were just certain things that they weren’t able to do, and I was writing angel checks to these companies that can be wildly successful for us. And for us, wildly successful is maybe $5 million or maybe it’s $20 million in ARR, but that can change the founder’s life, and it can provide an amazing return for an investor.
TinySeed was really the way to make that more sustainable because I was frankly running out of allocation. I was so overweight startups at the time. I didn’t want to put more money into them. TinySeed allows us to invest in bootstrap SaaS in a way that really doesn’t reduce their options, in a way that a lot of other funding sources do.
Let me switch up and talk about keeping your options open. A few ways to do that, and I’ve already covered a couple of examples that I’ve said above. But if you think about one is, of course, just keeping your personal spending low. These days, my personal spending is not low. I will admit.
I saw a video of Noah Kagan the other day talking about what he spends in a month. He spends $20,000 a month on his Airbnb in Malibu. His spending is not as low as it used to be. But you know what, he makes a lot of money. He makes $1 million a year. He says it in the video, but it’s a lot. I am at the place now where my spending doesn’t need to be low. I’m willing and able to indulge in some luxuries that I really haven’t my entire entrepreneurial career, and I didn’t until I sold Drip in 2016.
That’s the thing. If you’re not there yet, you’ve got to be willing to do the things that no one else will so you can live like no one else can. Keep your spending low. It’s a big one that people make mistakes about often.
The other one that I think about is if I’m going to build an app on the side, I’m going to keep my day job. I was either working a full-time job, or I was consulting the entire time that I was building my startups. Now, if you have the luxury, if you’ve done really well, if you’ve saved up a year’s worth of salary, good for you. Then you don’t need to do that. If you just want to focus, you don’t need to do that.
We can think of counterexamples of people. If you recall, Colin from Customer.io was on the podcast while back, and he said he and his co-founder just quit their jobs with no customers. I wouldn’t have done that. That would’ve been too scary for me to do. Think about what the worst case was if they failed, they were two developers. This was 2012 or something. They could’ve gotten a job anywhere. The worst-case actually wasn’t that bad, they still had options.
The time when you don’t have options is when you’re like TSR who I mentioned at the top where you have backed yourselves into such a corner that you really don’t have a backup plan. What is the backup plan? It’s to go bankrupt. That’s not much of a backup plan.
Another thing that I’ll throw out to keep options open is until you have enough personal wealth to where you can tie some of it up, invest in a liquid investment. Invest in things that you can buy and sell quickly. Obviously, keeping the cash cushion between three and six months of living expenses is the rule. These days I actually keep a little more than that just given where the economy is, and the fact that I don’t think I want to sell stocks or cryptocurrencies to pay my expenses if there’s a long recession or a long dip in these assets.
If you have a bit of net worth, obviously you can invest in public securities, equities, and such. But I would not be investing in things that are illiquid, personally, until I could literally write that check and not worry about it. Illiquid investments are things like investing in startups where you don’t know if you’re going to get your money back for 5 years, 10 years, or maybe never.
The last thing I’ll throw out on keeping options open is if you are going to take funding, think to yourself, does this reduce optionality? Am I willing to live with the reduced options that I have? Funding is a bit of a random topic. I only bring it up because I had mentioned TinySeed earlier. But day to day, I actually think pretty heavily about which of my decisions are undoable. Being able to undo a decision is an option of sorts.
If I make the decision today to paint this room that I’m in, blue, it’s a pain to undo it, but it’s not actually that bad. I can either repaint it myself, or I can hire someone to do it. If I make the option to sell my startup today and to walk away, that is a very, very hard, near impossible decision to undo. Unless you try to buy it back. That’s just unlikely.
Similarly, in the situation I’m in today, if I buy a car, I want to be pretty sure that I like it. But frankly, if I don’t like it, it is undoable. I might lose a few thousand dollars if I sell and then buy it again, but it is undoable given my current financial situation. Twenty years ago, it would’ve been very difficult to undo because a few thousand dollars would’ve been a major swing. You have to know what is undoable at what time in your life. That’s where having more money makes things more undoable.
It’s pretty interesting. More money gives you more options. And that is one of the pieces of freedom. When I say startups can bring freedom, purpose, and help you maintain healthy relationships, part of that freedom is not just oh, I can work when I want to or I can pick who I work with. But it does just give you a lot of flexibility if you are able to increase your net worth to the point where you do have that life-changing money.
Like Wil Schroter said a few episodes ago, maybe that’s just $200,000, $250,000 in your bank account. You have a lot of options once you have that kind of a cushion. Lastly, and then I’ll wrap up. I also think it’s interesting, I’ve often told the story about when I bought this app called DotNetInvoice. It was one of my first successful apps that I paid $11,000 for. At its peak, I got it to between $3000 and $5000 a month in revenue. It was a one time sale. It really changed my perception on wow, I can do this.
As a solo founder back in 2005, 2006, I can make well more than my house payment just on the internet as a micropreneur, micro ISV. But the interesting thing was, one of the reasons that I really pushed into DotNetInvoice is there was a forcing function on me. My back was to the wall because I’d written this $11,000 check, I hadn’t done very good due diligence, the app was in pretty bad shape, and I was super stressed out. It felt to me like I had reduced my options because I dumped all this money into this thing. I wasn’t super happy with what I had gotten. But it forced me to basically make it work because I couldn’t let that $11,000 go to waste.
Since similarly with HitTail, I paid $30,000 for that. That app was in better shape and I knew more about it. I had done better due diligence. But I felt like my back was to the wall, and I have to make this work because I’ve just spent this much money. What’s interesting is it was a mental forcing function for me to really double down, and in both cases I spent 60 days, working 60 hours a week. These are one of the few seasons in my life where I have worked more than that full time mark in order to get these things done.
But realistically, my back wasn’t to the wall. I hadn’t actually reduced my options that much. I had spent a little bit of cash, but in both cases, it was almost all the cash I had in the bank account. If DotNetInvoice or HitTail had completely failed, we weren’t going to lose our house. We weren’t going to go bankrupt. I had not reduced our options to the point where I had to sell our assets for parts to Wizards of the Coast. It’s really an interesting thing to think about, is there a way to mentally force yourself into feeling like you have reduced options for the potential gain of doing that? Because I’ve done it to myself a few times. Sometimes it can stress you out, maybe it’s not always the ideal situation.
But in those two instances, that did work to motivate me, to push me, to go the extra mile, and to really build these apps up to something that became an amazing ROI for me. Both of which provided a lot of revenue for me to then grow subsequent apps. DotNetInvoice was a big reason I can then buy HitTail years later. And HitTail revenue, net profit was a huge reason that I could start Drip.
All that to say, I was giving a little thought to this fake reduction of options. Where mentally it feels like it’s a forcing function. It feels like I have reduced options, and the only way to go ahead is to press forward, do hard work, and get this done. But when I actually think about it, I still had quite a few options at my disposal.
That’s it for this episode on The Power of Options. Hope you enjoyed it, and I hope to see you at MicroConf Remote today if you wind up hearing this on Tuesday morning. As a heads up, keep your eyes peeled for the first episode of season two of TinySeed Tales. It will be live on this feed in just about 48 hours. Thursday morning, September 3, TinySeed Tales Season Two, Episode One will be live. Every Thursday after that for the next several weeks until this season is wrapped. I will talk to you again next Tuesday morning.