Episode 808 | A $500k “Step 1” Business, When to Consider SOC2, and More Listener Questions

Rob Walling :
The big question I would ask myself if I were in your shoes would probably be, do I want to be running this business in five years and do I think it’s a viable business in five years? Probably same question for 10. And then I would ask myself, do I have the motivation and the desire to keep pushing my founder level energy into this business? You are listening to startups. For the Rest Of Us as always, I’m your host, Rob Walling. Welcome back to another episode where we dive in to what it’s really like to build, launch, grow, sometimes exit, sometimes shut down, sometimes fail in spectacular fashion and sometimes completely change your life through software entrepreneurship. These days it’s SaaS. Maybe in 10 years it’ll be something different, but right now it’s about staying in control, bootstrapping, and mostly bootstrapping incredible businesses that change your life and the life of those around you. 

This is episode 808 of this show, and I’ve been doing it for more than 15 years. Today I comb through listener questions and in fact, we are getting a little low on questions. If you could head to startups For the Rest Of Us dot com and click ask a question in the top nav, I would much appreciate it. Audio and video go to the top of the stack as well as intermediate to advanced level questions Before I dive into my first question, discretion Capital is the premier m and a advisor for SaaS founders doing between two and 20 million of a RR. You’ve heard the founder of Discretion here on this podcast, our very own a r vol set. He knows more about the sell side of that range of SaaS than anyone I know, and he has been a proponent and an advocate for SaaS founders in the MicroComp community for well over a decade. He’s attended MicroComp since the mid 20 teens, and many of you have probably met him. You’ve seen him speak on stage, you’ve heard him on this podcast, and several of you out there have even worked with him to achieve a life-changing exit. Whether you’re thinking about selling now or in a year or two, it’s never a bad time to reach out to a r and the amazing team he’s put together over@discretioncapital.com. And with that, let’s dive into our first question.  

Speaker 2:
Hi, Rob. Steven here, longtime listener, second time caller. I have a question and before I can ask the question, I feel like I need to give you some background on my business. I have a step one business. It’s an iOS B2C app. It’s not however step one type revenue, at least typical step one type revenue. We’re doing a little bit north of 500 KAR. I have multiple employees. It’s in a very large market. We have a little slice of the market. I have multiple competitors doing nine figures of a RR. I’ve grown the app through a SO and sales funnel performance, so I focus a lot on activation rates, free trial conversion rates, churn, all those numbers are looking great. I’ve hit a point though where I’ve plateaued and I’ve plateaued for a while. It’s a really calm and fun business. So I have some mindset in just some ideas that I wanted to ask you just your perspectives on, not to give me an answer, but as far as just how would you go about thinking about this? 

I’ve listened to your episodes on plateaued businesses, but what I wasn’t sure about was what do you do in a case with a step one B2C business? Is it worth continuing to invest in that versus looking at some of the other options? So I do see a number of options as I’m looking at moving forward. One is I can continue as I’ve been going. Basically, the business probably won’t grow with that, but it will keep it from declining. There’s a lot of competition in the space, a lot of fun, super calm, really enjoy doing that great lifestyle. I see a lot of change coming with ai. Should I quote skate tour? The puck will be, it’s risky, but trying to get ahead of it. The third thing I’ve been thinking about is focusing on a EO. That’s answer engine optimization. I feel like there’s tons of opportunity in this space that’s actually a marketing channel that’s brand new. There’s a lot of lack type of tactics and tricks people are using. The other one is trying to go after a whole new app in the AI space. What are your thoughts just about ideas as far as how I should be thinking about this and questions I should be asking myself? Thank you.  

Rob Walling :
I love this question. Thanks for sending it in Steven and for being a second time question asker. I think what’s interesting is I don’t know that it matters that you have a B2C versus a B2B business. I actually think of myself back in 20 11, 20 12 where I had hit tail, which was B2B as an SEO keyword tool, and it was doing, let’s say it peaked at about 30,000 a month, and it was just me and I had a few contractors, so it was like 90% net profit. It was incredibly profitable. It changed our life and it was relatively high churn and it had plateaued in the mid twenties to 30,000. And you are kind of in a similar boat, although it sounds like you have a team and you’re a little further along in terms of the a RR, but you do have a team that’s working on it. 

And the big question I asked myself around hit tail was, is this a five or 10 year business? Meaning do I think this business will survive that long and do I want to be running it in five or 10 years? And the answer was no on both counts. And so I had to go through exactly this decision of do I keep pushing on it to try to push it past this natural plateau? Do I have more ideas? Do I have motivation? Do I go and sell it or do I try to autopilot it and I’m going to come back to autopilot? Put an asterisk by that term because autopilot doesn’t actually exist. If put something on autopilot in any space that we deal in, it will decline over six to 18 months tops. Even if you have all this automated SEO, blah blah blah, you’ll just slide and the business will just slowly melt like a iceberg or a nice cube in this case. 

And so by autopilot, what I really mean is try to keep it flat and if it starts shrinking, try to minimize how quickly revenue is dropping and then diversify into another idea. And I think those are really your three main options, right? I mean, there’s other options you could sell part of it, things that we kind of get, I dunno getting a little crazy with, but the big question I would ask myself if I were in your shoes would probably be, do I want to be running this business in five years and do I think it’s a viable business in five years? Probably same question for 10. And then I would ask myself, do I have the motivation and the desire to keep pushing my founder level energy into this business? Because you as a founder have an incredible opportunity cost of every minute, every hour, every day you spend working on something that isn’t working. 

It’s not just that you’ve spent that day, it’s that day hasn’t been spent on something new that could be growing at 2, 5, 10 times the rate that could be worth two, five or 10 times the valuation and therefore 2, 5, 10 times your net worth. That’s the issue with being a founder. And a lot of this depends on age. If you’re 25 versus 55, how many more at bats do you have? Is the clock ticking is something to think about. But a big thing I asked myself around hit tail was not just do I want to run it in five or 10 years, but it was like, am I kind of bored of this or do I still have that founder energy, the founder activation energy to really get a flat business moving again because it requires a tremendous amount of energy to do that. So those are the questions I’d ask. 

And if the answer is yes and I’m excited about this a EO that you mentioned, then why not take a crack at that and give yourself three months, six months and see if you can get some results out of it. It is typically easier to not have to build a grand new product from scratch and find product-market fit and then get growth engines in place. You already have a good chunk of product-market fit it sounds like, and you would just need to get the ball rolling again. And that’s going to be simpler than building a new product. Question of course is do you have the motivation and the desire and ideas on how to do that? And it sounds like a EO is the idea that you have. So why not take three to six months and get that engine in place? And it’s probably going to start by you having to do a bunch of research and you doing some of it and then having some of your team take that over and then hand it off to them such that you’re not doing the day-to-day right? 

So that’s one option. Second option is just to sell it, take the cash and move on to your next thing. And of course the third option is to, like I said, with hit tail, autopilot it with an asterisk to mothball it and have your team run it and try to stay flat and not decline and then go off and build your next thing. Third option is what I did with Drip, and that is it was late 2012 where I had the idea for Drip. I hired a contract developer, we broke ground on it, and that was to diversify because I saw building in the email space as just a longer term play than an SEO keyword tool that was really kind of smacked around by Google every six to 12 months. And basically the business was almost put out of business multiple times just because of the way it worked. 

So after Drip was successful during that time, hit Tail did in fact decline relatively significantly. It lost MRR almost every month, even though I was still pushing on some things and doing marketing on the side, doing things on the side doesn’t work that well. And this is one of 10 products I had that I autopiloted by this time. I knew that that isn’t a real thing, that it will certainly, if it’s growing, it’ll plateau and if it plateaus, it’ll start to shrink. Hit Tail did that, but I never regretted it, made a great bunch of profit on Hit Tail, I acquired it, I rehabbed it. And as I said, the money, I mean, I think I’ve said on this podcast before, all of the revenue plus the exit price was $1 million and I paid $30,000 for it and everything else was my time and the expenses were minimal. 

I don’t know if I had a hundred thousand in expenses, I don’t think the entire time I ran it, it was probably more close to like $50,000 of expenses. So it was one of those life-changing moments. It wasn’t never have to work again money, but in fact it did by the time I sold it. And I looked back and I thought that was a great experience. I learned a ton from it and it allowed me to stair-step my way up into Drip, which was obviously an even larger success. So realistically, those are your three options, and just because it worked out for me to diversify and start Drip doesn’t mean that was the right answer, right? It just happened to be that was what I was motivated to do. The right answer is probably what you’re really championing at the bit to do as the founder because wherever your energy is, that is the most likely path to success. 

And again, coming back to, I don’t know that it matters that it’s B2C versus B2B, maybe if it’s high churn, it’s B2C, I would guess, and one time payments or maybe low subscription fees. It sounds like it’s a little bit like hit tail. So if anything, it’s even similar to the situation I found myself in and the big thing as I was coming off of hit Tail was I wanted something that was higher priced than hit tail. Hit tail was like $10 a month. 20 and $40 a month were the three lowest plans. And so it was low priced, high churn, tons of platform risk, and I wanted bit higher priced. I wanted lower churn, I wanted much less platform risk. On and on. You could see that I had seen the weaknesses in the business even though it treated me very well. And in fact, I have no regrets about doing it, but when I stepped up, I was like, I want the next one to be 10 or 20 times larger. 

That was just what I was looking to learn. It was what I was looking to do in my own career, and that’s what I did. So those are the things I’d be thinking about in your shoes. Do you keep pushing and do the A EO? It’s like, do you have the motivation? Do you have the ideas? Do you sell it? Or autopilot and diversify. So thanks so much for that question, Steven. Hope it was helpful. My next question comes to us from Pratt and he says, longtime listener, third time questioner. I have a small tech firm, K tmbs.com. Oh yeah, see these written questions? They go way back. This goes back to September of 2023. So while the question itself may not be relevant to Pratt, I do think the thought process is interesting. So back to the email, I have a small tech firm and have been providing software consulting services to clients around the world. 

Lately I’ve been collaborating with startups and providing them with very budget friendly MVP development in a partnership model. I’ve been asking such partners to only cover the salary of my developer, which is very minimal. So prova has a consulting firm or an agency and has developers working for ’em. I feel like this is a risky move as I am losing my income. However, I really want to encourage startups and make them feel like application development until an MVP could be done at a very low cost. I will however, want to be part of the company once the application scales. Any suggestions you could give me or anything I need to be considering before I take in more partners? Yeah, really interesting. Yeah, you are losing income and opportunity costs and all the things I talk about. I think the biggest thing I would be concerned about is you say, I want to be part of the company. 

Once the application scales, what does that mean exactly? And where is that in writing? Because if you’re effectively working for free, and I know they’re paying for your developer, but you are doing whatever it is, project management and hiring and training and keeping folks on staff so to speak, and that’s for free, there needs to be a tremendous amount of upside because nine out of 10 of those companies when you’re building an MVP will fail. Maybe it’s 19 out of 20. And so the one that works, you are going to want a significant amount of upside in that company. And this is partially the venture capital model or any type of investing in startups is that most will fail. And so this is a risky model for you because it seems like there’s a lot of time that you’re investing in this, and I personally probably I wouldn’t feel comfortable doing this myself. 

If anything, what are you going to want? 10%, 15%, 20% of each 20 sounds like a lot, but 10 15% of each company that goes through. And so again, if you have to build 20 of these MVPs, I dunno how long they take you, and these days with ai, it’s probably a little faster, but 20 to get one or 10 to get one. I mean that is a tremendous amount of darts to throw at the wall. Yeah, I wouldn’t do this unless I had something in writing. I wouldn’t do it unless I had some idea of the math of this because so many MVPs, even one in 20, is that being too ambitious? It really depends on who’s coming to you for this, to be honest, is it second time entrepreneurs? Is it just random people who have a B2C two-sided marketplace idea? I mean, this is where I’d apply kind of you have to maybe de-risk this and turn clients away in this case using the 5:00 PM framework, right? 

This puts a lot of burden on you to validate and think, is there a chance that this idea is successful? So all that said, I don’t know when I was back doing this, when I was building MVPs, but it was before we called them MVPs, but 2000 to 2006, maybe 2007, I was a developer and then I ran a micro agency, which was just me plus a few contractors. I used that as an opportunity to charge market rates, which were a hundred to $150 an hour. And then I took the market rate and I banked that money and that allowed me to then go buy Doted invoice and to take some time off or work a few days less per month to then go build my own stuff. So I looked at it differently rather than trying to attach to other people launching and hope they succeed and hope that I can be a part of that success. I took a different tack to it. So I dunno what you’re doing. Again, I don’t want to overstate it, but it does definitely sound risky. And if I were doing this, I would want something in writing that I have equity or upside in each of these businesses. So thanks for that question per bot. I hope it was helpful. 

Almost every founder I know has a long list of features to build and bugs to squash, but they just don’t have the time or the team to tackle it. If that sounds familiar, check out today’s sponsor Gearhart. They’re an AI powered product development studio that builds B2B SaaS products and AI agents at twice the speed of traditional teams founded by serial entrepreneurs, they understand startup constraints and can plug right into your workflow. They’ve launched over 70 products including Smart Suite, which raised $38 million and is used by companies like Capital One, whether you need a fractional CTO or want to add senior developers without breaking the bank, head to gearhart.io. For listeners of this show, they’re offering the first 20 hours of development completely free. Head to gearhart.io and make sure to tell them I set you. 

My next question is from Message masses writes, hope you’re doing well. I’m a MicroComp member building a product to simplify and lower the cost of getting and staying compliant with standards like SOC two and ISO 27 0 0 1. We built it after getting ISO compliant and realized we overspent on it. My team and I were reflecting on how little founders actually talk about compliance until they’re deep in the process. We’d love to better understand how this plays out in real startups and not just our own lived experiences. What was your experience with SOC two or other compliance while bootstrapping Drip? Have you noticed any patterns or shifts in how founders deal with this now? Anything you wish you’d known earlier? See founders consistently get wrong. When do you think they should start thinking about it? When do you think they should start getting certificates? Yeah, a lot of questions here, but I think I can boil ’em all down. 

The answer is we didn’t think about it at all with Drip because we didn’t have to. My broad advice across this because with TinySeed across my entire portfolio, TinySeed plus private investments, I’m about to be at like 2 34, 2 35 companies and probably if I were to guess, it’s maybe 10%, 15% of those have a SOC, two or an iso. So 20, 30 ish companies, 40 sounds like a lot, but you get the idea. And inevitably my answer is always, don’t do this until you need it. This is an insurance, this is filing for an LLC. This is like anything that isn’t moving the business forward until you absolutely need it to move the business forward. And I think that founders that actually think about this too early are the folks who are kind of playing business, they get the business cards and they get the domain and they pay a lot of money for the design. 

And it’s like, how about sell something, build something that people are paying you for and many folks get off the ground and are doing fine without SOC two, as long as your customer type is not enterprise. I mean if it’s enterprise, obviously that is a different ball game and some founders from day one know that they’re going to need SOC two and ISO compliance and other folks just wait, put it off as long as possible. Honestly, and I know that’s not particularly what you want to hear as someone who is building software to help folks do that, but this is one thing where if you’re not getting requests for it and you’re not losing deals over not having it, I wouldn’t put the time into it. I do think this is a very interesting space. I know Van is here and there’s several competitors to them. 

So I think it’ll be an interesting space that you enter in terms of trying to improve on what’s already there because obviously just building the same thing that’s out there isn’t going to get you much because people are going to use the brand names and I guess you could come out and try to be cheaper in the early days, but longer term, what will be your unique selling proposition or your unique value that you can add to this space and position yourself and carve out a corner of this market in order to take on the Vanta and the other big players in this space. So thanks for that question. Hope it was helpful. My next question is from Brandon and he says, Hey Rob, I’m a couple of months into starting a business. I’ve really gravitated towards you and your content. My wife and I welcomed our second child about a month ago while in parallel trying to adapt a four day return to office mandate. 

That puts me on the road two plus hours a day rather than spending the time with the family. It’s a huge factor in why I decided to finally start shipping. My question is how did you balance a full-time job and building a SaaS business on the side while also combating an unpredictable sleep schedule? I was making great progress before a baby was born, but have not been able to find much time since. I know this phase is temporary, but I feel like I’m falling behind. Yeah, there’s no silver bullet here. And realistically, the way that I did it is when we had young kids, I didn’t try to build and launch stuff. I went into autopilot mode and I either tooled around on little step one businesses that didn’t require a cajillion hours to ship or when our second child was born, that’s when I did the four hour work week thing where it was right before I bought tail actually. 

And I kind of, again, autopiloted all of my stuff. I spent about 10, 12 hours a week working on it, but I’d already quit my day job. So I didn’t have the day job by the time I had the second one. But with the first child, yeah, I backed off all my side projects, had a little bit of product income from two to $4,000 maybe a month of product income from a couple of things that I had going. And I did not try to move forward when I had young kids and I mean babies that were waking me up as well as I’d never had a two hour commute. I worked from home intentionally and I guess one of my jobs had about a 20 minute commute each way. So I mean, my big thing is how do you recapture hours of your day? Well, you try to find a work from home job or one where you’re not on the road two hours a day. 

This comes from someone who used to live in the Bay Area and I used to commute 70 minutes each way. It was 13 miles, I think it was down six 80 and it was brutal, 70 minutes each way. It was just all basically nonstop the whole way. And it infuriated me and severely reduced my quality of life, which is why I don’t live in the Bay Area anymore. And I guess these days if I lived there, I’d work from home. But you get the idea. So yeah, you have to make a choice of either slowing down for let’s say six months and doing what you can during that time and launching something smaller. You don’t want to do a standalone SaaS app. I say you don’t. I don’t want to make an edict. I wouldn’t want to do a standalone SaaS app in your shoes because it’s just too much. 

It takes too much time to get it going. That’s where the stairs step method is so fricking helpful is where you don’t a cajillion hours every day or every week and you can ship it in little bits and get it live and learn. And I was the first person I know who lived the stair step method and I had a bunch of little products that I either built or acquired and I was able to kind of dip in on them and make some small things here and there. But I did not have this big lumbering drip type standalone SaaS app. That’s great and can get huge, but is really, really hard to manage when you have what, a handful of hours a week. So that’s the type of thing I would be thinking about as well as is there a way I can get a work from home job and reduce or eliminate my commute altogether? So thanks for that question. Alright, my last question of the day comes to us from Conrad.  

Speaker 3:
Hi Rob. Covenant Boak here, you listener from Poland. So I have a question now with the era of all the AI coding and all those tools, I see that one thing that can help us boots, strapper, especially to stand out in the crowd is having our intellectual property, but in it, what’s your intellectual property? Like patents, grants, it’s super hard and it takes years of research sometimes like for some algorithms r and d projects. But I recently heard about building your IP as open source projects and maintaining them and at some point growing them to apply where other people start to help you maintain it. What’s your thing? Maybe you have also some nice guys you could invite to the discussion for this. Thanks.  

Rob Walling :
So Conrad, I’m not sure I accept the premise of your question. You’re saying that to stand out in the crowd, you need to have intellectual property and I don’t agree with that. To stand out in a crowd, you need really good marketing, really good sales, really good positioning and potentially a product that is actually differentiated or at least one that you position and differentiate it. Because as far as I know, no one uses MailChimp because MailChimp has six patents or they have some secret sauce intellectual property that the other ESPs don’t. It’s a capitalist system where people are paying for the best tool at the best price that does what they need to do. Unless you’re talking about really very complex ip like when Google first built the search engine or they didn’t invent the search engine but built their search engine and their algorithm out of Sergei and Larry Page’s, PhD doctoral dissertations or open ai, yeah, that’s IP because we can’t just build that. 

But the SaaS apps that we’re talking about that you’re going to bootstrap and mostly bootstrapped are not based on some secret ip. And this is why approximately zero founders in the MicroConf TinySeed startups For the Rest Of Us ecosystem have patents. There are some exceptions. That’s why I say approximately zero. So yes, I can point out two right now, but there are more than what is 125,000 folks in the ecosystem, maybe 150,000 in our audience. And so it’s approximately zero. So as a result, I don’t even know how to weigh in since I don’t agree with your basic premise. You’re saying you can open source your IP so that other people build it and start to maintain it. And my understanding from folks I know who’ve open sourced things is unless you have a very successful project, it’s still a lot of work for you. 

Even if other people write code, you then have to review that code. You have to make sure it’s not malicious. You need to make sure that it’s actually making the product better. You’re rejecting it if it doesn’t. And then you get people who are upset because you rejected their poll request because they’re trying to put something self-serving in, there’s no silver bullet here with I’m going to make it open source and then someone’s going to build out my ip. And even if it is your ip, then can’t anyone come along and it’s open source, they can then fork that and compete with you tomorrow. So if you don’t have the marketing sales positioning that I mentioned earlier, there are some exceptions. Obviously there are the big open source companies that have done very well with this like Laravel, WordPress, tailwind, CSS, and many others. There’s not only a few sidekick I think is one, but there aren’t thousands. 

There aren’t tens of thousands. There are so many more successful SaaS closed source SaaS companies. Then there are successful companies that have been built on open source. And it’s not even like, oh, it’s half as many. I would guess it’s a hundred to one ratio or something like that, give or take. And so I dunno if that’s the world you’re in and you want to go deeper in that, I would find the startups For the Rest Of Us for open source. And I would listen to all the interviews with Adam Wain and with the founder of Sidekick. I interviewed him here on the show, Mike Perham, I think his name was. And with all I would really dive deep into that, but I would be careful with painting the idea that somehow open sourcing is going to make things a lot easier for me in terms of building out intellectual property or in somehow getting your code base built faster. Because if it did, a lot more companies would do it. So thanks for that question, Conrad, that wraps us up for today. Thanks so much for joining me again, listener questions are always fun. And again, I’m running low, so if you want to head to startup For the Rest Of Us dot com, click ask a question in the top nav. I’d love to answer your question in a future episode. Thanks for listening this week and every week. This is Rob Walling signing off from episode 808.