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Rob Walling:
Welcome back to another episode of Startups For, the Rest, Of Us. I’m your host, Rob Walling. In this episode, I’m going to talk about the eight levels of platform risk as well as the three factors that contribute to platform risk. And I’m not just going to talk about the traditional, I have a Shopify app, or heaven forbid, your WordPress web host this week, but I’m going to look at platform risk from a sense of any type of reliance on an external platform. So if you use SendGrid to send email, how does that factor in? If you use AWS for your hosting or you use an open source package like WordPress, and honestly, this is a framework I came up with a few months ago and I jotted it down in a Trello board. I keep for a podcast episode topics, and I was just going to pull it out at some point, probably put it in a book, I’m sure talk about it on the podcast. 

And then the WordPress WP Engine kerfuffle flared up by now, that’s a couple weeks old, but it did remind me that I had this and had never really done a full refinement on it. And so this podcast episode is a way for me to kind of bring that out and talk through my thoughts of platform risk as I see it, especially it’s probably any startup, but realistically, there’s a little bit of a B2B SaaS bent to it, right? Because that’s the 191 investments I’ve made. And so I’ve seen different forms of platform risk blindside companies in different ways, and that is the basis for today’s episode. Before I dive into that, tickets for MicroConf New Orleans are on sale. You can go to MicroConf dot com slash us if you’d like to grab your ticket. The event is being held next March of 2025. Speakers are yet to be announced, and of course, I will be there in New Orleans. And if you want to get together with about 250 of your favorite bootstrapped founder friends, head to MicroConf dot com slash us. The tickets right now are the least expensive they will ever be, and they will go up in price, I don’t know, in a few weeks or a month or whatever. In addition, we are going to sell out. We sold out our Europe event, I believe we sold out at Atlanta last April. So if you want to get a ticket, there is no reason to wait. microcomp.com/us. 

Let’s dive into platform risk. So I’m going to start with these three factors that contribute or define platform risk. And each of these you might think of on a scale, whether it’s one to 10 or one to a hundred, there can be a small amount of risk for a specific factor or a large amount. So the first one I think of is a replacement. So if you are on a platform, whether that is using SendGrid to send email, whether it is hosting on AWS, whether you built a no-code app in Airtable or Bubble, whether you are a Heroku app or Shopify app, is a replacement available for this platform? And how hard is it to switch? And is the pricing approximately the same? So there are more questions than that, but those are kind of the high level, so it’s replacement. So we might think of, well, what is an easy replacement where it’s available? 

It’s not that hard to switch and it’s a commodity, so the pricing is the same. Well, that is something like I would say SendGrid postmark, mandrel mail gun. The switching cost is real. It is a thing, but it’s connecting to a new PI. And it depends on how deeply you’re integrated, obviously, but that switching cost is not catastrophic. And pricing in that space of sending email or even SMS, I think of Twilio and the cajillion, SMS APIs out there are a lot of replacements available, so that’s going to be a much easier spot. But what if you are built on Shopify’s API and you’re in the Shopify app store? Is a replacement available? How hard is it to switch? And is it priced the same? Well, the pricing doesn’t necessarily make sense in that context, but is a replacement available? How hard is it to switch? 

It’s kind of like, no, there really isn’t a replacement. And switching is basically impossible, right? Because if you were just a Shopify app and you’re like, well, they kicked me out of the app store, or they took my API access away, it’s like, well, we can go build a BigCommerce, a Magento, a WooCommerce version, but it’s not the same. It’s not a replacement, and that’s not really switching costs, that’s just building spinning up a whole new product. So the hard to switch is just astronomical. So when we think about replacement from one to 10 or one to a hundred, that takes you from easy to hard, at least in my mind. So the first factor was replacement, second one is customer concentration. And the question here is, are the majority of your customers on this platform, meaning that if you were kicked out or the API access were shut off, or somehow the platform suddenly said, you’re on Twitter’s API, and they say, we need you to pay us $12,000 a month. 

Now to maintain it are 80%, 90%, even 70, 60% of your customers on this platform in a way that essentially will decimate a huge amount of your revenue. Now, what’s interesting is this is separate from the third factor, which is I’m saying lead flow or customer flow. That’s on an ongoing basis receiving new customers, say from an app store listing or a marketplace listing. And that’s different, it’s related, but it’s different than customer concentration because in theory, I could go build a Twitter client, I could be getting zero lead flow from Twitter, but a hundred percent of my customers could be concentrated on Twitter or on Facebook’s API. Again, if I’m an app that postponed, for example, that helps you post to Reddit, Instagram, Facebook, Twitter, and all those Grant, he’s a TinySeed founder, started Postpone and it was just for Reddit. And so when we funded him, we said, your customer concentration is basically a hundred percent Reddit. 

We think you should diversify into other platforms. And he was already on board with that. So now he has a little more diversity across the different platforms. Now, great example with Postpone. Does postpone receive any lead flow from being in a Reddit app marketplace? No. So you can have concentration and you can have the risk of that concentration without the lead flow, and you can have the lead flow. I guess in theory, you could have, let’s say I was on four platforms. I was like Shopify, BigCommerce, WooCommerce, and Magento, and I had 90% of my customers on Shopify and only 10% across the other three. But let’s say the other three were sending me a lot of leads, I just branched into ’em, and usually this is not the case. Usually actually branching into other platforms is a lot harder than you think. We’ve seen Tiny, I’ve seen TinySeed companies and non TinySeed companies try to do it and it can work, but in the majority of cases I’ve seen it hasn’t worked. 

So the example there though was to say you could have lead flow in those three smaller non Shopify apps, but not very much customer concentration kind of still early. So these three of is there a replacement, customer concentration and lead flow are the three factors that I think of when I try to rank order these levels of platform risk. So now that I’ve defined these three factors, the contributing factors of platform risk, I want to walk through the eight levels of platform risk, and I will talk through the contributing factors and how they relate to each of them. Interesting data point. As of a week or two ago, I had seven levels of platform risk, and the WordPress WP Engine kerfuffle basically begged the question of, well, let’s say you are built on WordPress, what’s the platform risk of that? And there’s different things. WP Engine uses WordPress and they’re a web host, but what if you had a B2B SaaS company that was built on WordPress as the core, so it was kind of a no-code thing hacked together with plugins. 

That’s almost a related, but a different question. And so I added that as another layer. The answer of course is always, well, it depends on a lot on the specifics of how you rank these. All of these are valid levels. It’s just comparing being built on WordPress versus being hosted on AWS. I have ordered those in a certain way, and I think in different situations they could be swapped a little bit, but to me, this list is directionally correct and it takes those three factors and applies it to a bunch of different scenarios that I’ll give examples of. So moving from least amount of platform risk, what I consider the least amount up to the most amount of platform risk, basically where you have the most exposure and the most risk of your business being killed. And so I’m going to go one through eight again, where one is the lowest, eight is the highest, the most dangerous level one is almost no platform risk. 

It is where you own your own server in a cage with redundant power, you run your own SMTP servers to send emails. The platform risk here is any development language you use, right? Plus your internet service. I mean, basically you are not reliant on a host, you’re not reliant on anything to send email. You’re not built in no code. I guess your oh, and your risk there is where are you getting leads from and do you have customer concentration and where are you’re getting leads from? And in this case, I’m assuming there’s just almost none, right? You have this great variety of leads coming from all over the place, and there’s no customer concentration in terms of them being reliant on an external API. So this ones, it’s so unrealistic, I just kind of want to skip by it. None of us are going to do that, right? 

The second level of platform risk, I think of it as you being reliant on a platform that is a relative commodity and it’s easy to switch away from. Again, relatively easy. I know we could make an argument, I’m going to say SendGrid and Twilio, an SMS provider, email provider, those are commoditized and they are relatively easy to switch. There’s no lead flow, there’s no customer concentration. It truly is just a replacement decision. And one might say, well, SendGrid integration will take you months to migrate away from. Usually that’s not the case. Usually it’s a couple of weeks. I believe we did this with Drip because we went from, we had three or four different email providers that we were using that were APIs that sent emails, and it would take us a matter of weeks to switch, and we were sending hundreds of millions of emails a month. 

So again, this is why it’s probably the most realistic one that a lot of us are exposed to, and this is where it always bothers me. I’ll be on X Twitter and someone will say, oh, man, you build on Airtable or Bubble and there’s platform risk. And some smart outlet comes in and says, oh, yeah, well, you host on AWS and that’s a platform, and you send emails through SendGrid, and so that’s also a platform, and you have risk too. And it’s like, but they’re not the same. And that’s the point of this list is to have them in order of increasing risk or exposure. And I think being reliant on a commodity, whether it’s hosting or whether it is an API of some sort, I think at the same level as imagine if you have a VPS or you have a Docker container and you’re on commodity hosting somewhere, and you can basically just pull that and spin it up in, I don’t know, half a day, a day, two days, whatever. 

It’s that relatively low switch in cost and it is commoditized. I think that fits in this category as well. So the third level of platform risk, which is just a little riskier than the one I just is when you’re using these large cloud providers, Amazon Web Services, Google Cloud, Azure, this is where you still don’t have customer concentration or lead flow, that’s irrelevant. Obviously those are more dangerous. And so those are in the higher levels of platform risk, but moving away from A-W-S-G-C-P, Azure, whoever else, it’s not just spinning up a Docker thing and moving the VPS or whatever. I think the switching costs is significantly more than moving away from an API, like a SendGrid or an SMS because this is the infrastructure where your entire app is, and you start to get reliant on a lot of services. And so this one also has a varying degree. 

It’s a slider of like, well, if I’m only using an EC2 instance and everything’s there, then maybe low-ish switching costs. But by the time I have auto scaling and I have six different types of servers, I have the front end and the API and I have a database and I have Redis servers and I have sidekick workers, and I am using Amazon’s not proprietary, but they’re more like the Redshift thing, and I’m using a bunch of stuff in Amazon. Switching away from that at that point becomes very, very painful and migrating to another platform. You just, again, that’s why it’s the third level I think a platform is. Now, if it’s such a pain to switch, why do I think the risk is relatively low? Because at least to date, A-W-S-G-C-P and Azure are not, they’re not in the business of being aggressive. They have no motivation to, their business model is selling you stuff for a certain amount of money, and so they want you to be happy. 

They keep rolling out new stuff, they keep dropping prices. It’s the opposite of, I’ll get to it in a second, but the no-code providers where they keep raising prices and where any of those could go out of business any day, and they’re not profitable. For most part, I think most of the no-code providers have raised a bunch of money and are still not profitable. And that’s where Judgment McCall like A-W-S-G-C-P and Azure, I don’t think are going to be aggressive and make people want to migrate off, unlike other startups that are still in that early, say, monetization or growth phase. So that was the third level, which was medium to higher switching costs. There are replacements available, again, A-W-S-G-C-P, Azure and others, but there’s no lead flow or customer concentration. 

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The fourth level of platform risk is the one that I added for the WordPress kerfuffle. And here’s an interesting thing. I have an open source software like WordPress, and so that’s kind of vague as the fourth level. Here’s the thing, there’s no customer concentration, there’s no lead flow. The question is, is there a replacement? Is it easy to switch and is it priced the same? Well, open source software doesn’t have to be free as in price, free as in beer, but most of it is, I think the majority of it is. So price is probably less relevant. The question is how hard is it to switch and is a replacement available? And the further question that begs is, well, how deeply are you integrated? If we look at WP Engine, that is obviously reliant on WordPress. Couldn’t WP Engine just fork the WordPress code? I believe it’s GPL, right? 

They fork it now, I guess then there’s a whole plugin ecosystem. I don’t know what happened with there. So that’s an, I don’t know. It feels like there’s risk there, but they have options. If you were a SaaS company and you had built your entire SaaS or your, I guess no low-code SaaS or your entire productized service, say around WordPress, and suddenly WordPress changed their licensing or they, I don’t know, broke all the plugins that you use and they just broke your business, what would be the replacement for that? Well, you’d have to go and build it somewhere else, right? You’d have to go build it in no code, have code written, do it manually. I don’t think a replacement in this case, it’s the job to be done. I know Ghost is similar to WordPress, but the job to be done of what you’ve built in WordPress, I don’t know that it translates so well to just another CMS. 

And so this one’s interesting in that longer term, I have this at four right now, meaning it’s higher risk than say your A-W-S-G-C-P or cloud provider. This would’ve been probably down around two or three before the WP Engine, WordPress kerfuffle, and this is how weird these things are, is that given that WordPress has shown that they are going to be aggressive, not making themselves out to be a friendly platform right now. And so I think that is why for sure I kicked them up in terms of the actual risk, the big question is if you had a business built on WordPress, how hard would it really be to switch? And if oh, in a week or two we could build it in bubble, then this really should probably be down more around SendGrid. The number two right SendGrid SMS providers are where it’s a commodity and it’s easy to switch. 

That’s more of how I would feel about it. But if your business is a 2 billion business that completely relies on the plugin ecosystem and you’re at the mercy of WordPress than I do think that there is a significant level of platform risk. So level five is high switching cost, but there are replacements and there’s no lead flow or customer concentration. The best examples I can think of here are no code. It’s building on Airtable Bubble. I was putting Stripe in there. I don’t know that Stripe fits or doesn’t. I guess switching from stripe’s kind of a pain. And I guess it depends on are you in their subscription ecosystem as to whether it’s like a medium or a high switch in cost. But in any case, this is where in order to switch, you kind of have to rebuild everything from scratch, right? There is no export your code from any no-code platform I’ve heard of. 

And if you could, how do you import it into a different platform where it’s all just proprietary tech, right? And this again, is where the argument that some no coders make or just some people make is like everything has platform risk. And it’s like, yeah, but they’re not all the same. It gets worse if you’re a Shopify app, there’s a super aggressive platform that’s worse than all the ones that mentioned so far, and we’ll get to that one in a minute. And so the idea here is that if you’ve built a million dollar business and it’s a bubble app, how long would it take you to completely rebuild that in another platform if bubble 10 x their pricing if bubble went out of business, if Bubble had two weeks of outages and one might say, well, couldn’t AWS 10 X their pricing? Yeah, highly, highly unlikely. 

I just don’t see it. That’s not been the pattern. But what about AWS going out of business? Highly, highly unlikely. And that’s why I put ’em down at the two level and is AWS going to have a two week outage? Again, highly, highly unlikely. A small no-code startup is more likely to have any of those black swan ish events happen. And that’s why I have them at number five. Coming in at number six, I have all your leads coming from a single marketing channel such as Google. So basically it’s 100% lead flow risk. Now, I’m not including app stores in this like app marketplaces I will get to those are seven and eight, but in this case, I’m thinking of being solely reliant on a single flow of leads. And I think is that a platform risk? I do think there is risk there. There is no replacement usually, right? 

There’s no direct replacement. If you rank in Google and you get amazing organic search trying to replace that with something else, switching costs is irrelevant. You can’t do it, right? Customer concentration is irrelevant because they’re not reliant on Google once they come through SEO, but your lead flow and your plateauing feasibly, it could kill the business. And here’s what’s interesting is you’ll notice in these eight levels, the lower end ones are all kind of technology and it’s the business factors, it’s the growth and new customers and customer concentration that I’ve put at the six, seven, and eight spot. Those are the ones that are so hard to replace. And I’ve seen several businesses killed. You talk about Google changing their algorithm every what, 3, 6, 9 months and entire affiliate businesses that were doing millions of dollars basically go to zero overnight. So the reason I have this as number six is that if bubble 10 x their pricing or had a big outage, you could rebuild that. 

And if you’re hosted on AWS or using SendGrid or using WordPress, you can rebuild it. The risks are there, but they’re lower than if you lose Google where there is no replacement and you lose all your organic rankings, it can be existential to the business. The seventh level of platform risk, I’ve put a friendly app ecosystem. So an example of this is Heroku, like Heroku apps in general, thrive. Heroku has not, at least to date, and this could change, but they have not screwed their developers unlike number eight level of platform risk or aggressive platforms. But Heroku is one example. I’m sure there are many, many others. In fact, we have a list of I think 80 SaaS marketplaces and it’s microcomp.com/latest/ SaaS dash marketplaces. We link it up in the show notes, but there’s Salesforce app exchange, Zoho Marketplace, HubSpot app, marketplace, Pipedrive, less Knowing, CRM, Microsoft App Source, slack app directory, on and on and on. 

There are 80 of ’em. I won’t read them here. And look, here’s the thing, can I name all of the ones that are friendly and all the ones that are aggressive? No, I don’t know enough about them. I would guess that big companies like Salesforce and now Slack because it’s owned by Salesforce are kind of a pain in the ass. And if they’re not yet that they will become that. And I would guess that smaller companies and those that have not yet been acquired by a bigger player, a public company or private equity are going to be likely more friendly. But those are just guidelines. If you think about this, it’s theoretical in a way of like, well, a friendly platform is friendly until it’s not, and that’s really what platform risk is. When we think about the aggressive platforms that I’ll name in level eight, they all were friendly at one point. 

And so that really is the scary part of being built on in that marketplace and why being in a marketplace holds the seventh and eighth spot in terms of platform risk. And the eighth and final level of platform risk is of course an aggressive platform. This is where there is no replacement. You basically have a hundred percent customer concentration. You have a hundred percent of your lead flow from this platform, and the platform is not developer friendly. So this is Shopify, Twitter, Facebook, I’m sure there are more that I could pontificate about. I’m naming these because they have completely decimated companies that we’ve heard about or that I’ve invested in. You hear Jordan Gaal talk about Shopify coming after Cart Hook, and that’s not the first nor the last time that Shopify will do that. We heard Twitter jerk around anyone using their API once Elon Musk bought it, and I think they did this. 

Didn’t they do this about eight or 10 years ago with Twitter clients? I actually don’t remember, but they did something big back then. Facebook, do you remember? I think it was Zynga, right? It was doing tens of millions of dollars on the Facebook app marketplace, and Facebook just pulled the rug out from under room because they don’t give a shit about their developers. I mean, they’ve been pretty obvious about that. They care about Facebook and no one else. And so there are other aggressive platforms. Again, I do not have an exhaustive list. I just don’t have experience with all of the 80 platforms that we’ve listed at that MicroConf link I said earlier. And so this is where there’s just an existential risk if that you have a Shopify app that’s doing millions of dollars a year and they come and knocking, you’re getting all your leads from them, your customers are concentrated on their platform, and there just literally is no replacement. 

There’s nowhere to switch. Again, we can say, oh, we could go to BigCommerce, WooCommerce, and these other things, but it’s not the same. That’s starting a brand new business. And that risk that we’ve seen play out many times, and that’s why these app marketplaces are number eight in my list of eight levels of platform risk. Hope you enjoyed this episode. I think the list is directionally correct, and I could see either there being another one added if someone were to email in question that started For the Rest Of Us dot com, or you hit me up on X Twitter at Rob Walling, I think there might be another one that I’ve maybe not thinking about, or I could see them gently reordering. There is a little bit of an, it depends, right? I said it’s like if you’re built completely under WordPress and completely in it, it depends on is your switching costs low, medium, or high to rebuild it somewhere else? 

That could move that one up or down by one, but it’s not going to move it to three slots. It’s not going to suddenly become as bad as having a Shopify app where they are just known to be really aggressive with it. So that’s what I mean when I say I think the factors are in line, and I think the list is pretty tight. And again, directional correctness such that next time someone on X Twitter says everyone has platform risk, you can chime in with, well, there’s different levels of it, and here are eight of them. This podcast episode, they’ll obviously be listed out in the show notes, and I’m certainly going to be referring back to this in the future, probably included in a book or course at some point. I do think it’s helpful for us all to have a paradigm in a framework around it. So thanks so much for listening this week and every week. It’s great to have you here. This is Rob Walling signing off from episode 735.

Rob Walling:
Welcome back to another episode of Startups For, the Rest, Of Us. I’m your host, Rob Walling, and in this episode I talk through lessons that I’ve learned investing in more than 170 companies, specifically through my startup accelerator TinySeed. And if you’re a B2B SaaS founder who’s looking for the right amount of money, mentorship, community advice for me and our amazing mentors, you can head to TinySeed dot com slash apply. Applications are open right now for about the next two weeks, and I’d love to see you apply. Now between TinySeed and mine and Sherry’s personal investments, we are over 190 companies, but I wanted to limit the percentages, the numbers, the takeaways to only those where TinySeed has written a check in the past. I guess the first check was written about five years ago, and so that gives us a pretty tight timeframe and a more cohesive decision-making approach because we’ve been much more deliberate about the types of businesses that we fund. 

So today’s episode is stemmed from a question I got in a private slack group by man where someone said, you’re basically five years, we’re six years from the announcement of TinySeed almost, but we are just over five years from the first check being written. And he asked, are there any patterns or takeaways that you’re noticing across these 170 plus companies? And that’s what I’m going to share today. Now, I want to make a note. I have almost two dozen of these takeaways and that’s too long for a podcast episode. It would run well over an hour. So what I did is I split off six of them and I put them in a YouTube video on the microcom channel, and it has a name similar to this. It probably just came out a couple days ago, and it’s six things that I’ve learned investing in more than 170 companies over five years, something like that. So if you head to microcomp.com/youtube, it should be one of the last couple videos published, or you can look in the show notes of this podcast and click through directly to that video. If you want to get the other takeaways that I didn’t include in this podcast. 

I am going to list these in no particular order. They just came to me in this order as I was trying to think of what are the patterns that we’ve seen. First one is the survivability of B2B SaaS and maybe specifically within our portfolio because obviously we are pretty picky, pretty cosy about the companies we let in, but broader than that B2B SaaS in general, once you get a little bit of traction, it doesn’t fail very often. So more than 170 investments, approximately 2% of those have been written off, have shut down, not sold, and basically moved on to their next act. So very, very small, what I’d call a failure rate, much, much smaller than you would see in a traditional more risky venture fund. Now, I want to couch this. It’s still early. We funded, I don’t know, approximately 45 companies in the past 12 months. 

And so obviously the failure rate of those would be much lower because they haven’t had time to fail. So I don’t want to act like for eternity for the next 10 20 years, there’s going to be a 2% failure rate, but we did start writing checks five years ago, and even among those companies, a failure rate is still extremely low. The other number that I found interesting, and I just confirmed these in our as of this morning, is that 4% of TinySeed companies have exited, meaning sold for enough cash that TinySeed at least got our money back. And in some cases, as you’ve heard with Iran GRE’s exit on this podcast, we received many, many times our money back, but 4% have exited, 2% have been written off. So there’s still a lot of companies in play, and as I said before, it’s still early. 

I mean, we are in the first inning in terms of B2B SaaS taking five years when a traditional startup might take two years because the long slow SaaS ramp of death just takes a long time for things to unfold. Now, my second takeaway is just how valuable SaaS is. You’ve heard me say this on this show where I talk about if you’re over say 2 million in annual recurring revenue and you’re still growing at 40, 50% a year, whatever it is, you can sell at a four to seven x multiple. And so this is all loose numbers. Please don’t I get quoted on Twitter saying this stuff, but I’m just trying to give you a general idea, but let’s say a five x multiple. So if I add 1000 MRR to my company this month, that is 12 KARR multiply that times a five x multiple if I were to sell it, and I’m adding $60,000 in theory to my net worth every single month that I had one K of MRR. 

So now think about adding 5K of MRR, which many, many tiny C companies are doing 5K times 12 is 60 times five is $300,000 to the value of that company. So I’ve been talking about how valuable SaaS is for many, many years. There’s a reason that I began focusing on SaaS, what 12 was it? 12, 13 years ago? And part of it’s the recurring revenue, part of it’s the cheat codes, the net negative churn, but a big part of it is it’s just really, really valuable and that value can be seen in the profits you take out or it can be seen in the exits. So in our coined this term that I really like, it’s called the TinySeed millionaire rate. And what it is is of all the companies that are no longer in operation, so this includes those that have sold and those that have been written off that have shut down of all of those. 

So I told you before, it’s 4% exits, 2% written off. So 6% of those companies, 43% of the founders are now millionaires. Let that sink in for a minute. I’m not saying 43% of the exited companies made the founders millionaires. I’m saying 43% of all companies that are no longer autonomously operating, meaning they’ve either sold or they’ve shut down, 43% of those founders are now millionaires. Now, that doesn’t mean TinySeed one in all of those exits because imagine if we invest at for round numbers, let’s say TinySeed invest at a million dollar valuation or 1.2, whatever it is, and someone sells their company for $2 million and they’re a single founder, they are now a millionaire and TinySeed received whatever it is, not quite two x back on our money. That’s not a home run for us as an investment fund investing in bootstrapped SaaS, we do have to return a lot more than two X to our investors or a bit more than two x. 

And given that some companies will fail, we obviously need higher returns, but that doesn’t discount the fact that the TinySeed millionaire rate is 43%. If you’ve known me for any length of time, you know me as someone who is truly out to help raise the tide, help raise all boats, obviously with TinySeed, with MicroConf, it’s a for-profit entity. Everything I do makes money, but I’m genuinely here to help people and it brings me no end to joy to know that that many individuals join TinySeed received are mentorship, our advice, our investment, and are now millionaires and they can move on to their next act. I’m sure someone in the audit is saying, oh, a million bucks isn’t what it used to. And it’s like, I get it. They can’t live for the rest of their life on that. But I would say that if this is your first startup or if you don’t already have a million dollars in your bank account, that a million dollars is absolutely life changing money. 

It’s not never have to work again, money, but it does change your life. It changes the way that you can think about the financial safety of yourself and your family. And every time I think about this number, I smile ear to ear, I’m just so happy the TinySeed is having this impact. People ask me, why do you still do what you do? You could write off into the sunset or you could just write books or you could just record podcasts. This is why, this is exactly why I still record 52 episodes of this a year, 26 YouTube videos, why I’m kind of on track to ship a book every 18 to 24 months because I love doing things that have an impact on people. And to me, while the end goal of everything is not wealth, it’s not all about money. This is changing people’s lives and I’m here for it. 

The third learning is something I mentioned on this podcast. It was a prediction for this year, and it’s that vertical and orthogonal SaaS appear to have fewer headwinds than horizontal SaaS. You know what horizontal is? It’s like competing against MailChimp where it’s every SMB, every business in the entire country can use it. Versus vertical is where you build MailChimp for realtors, for example, and orthogonal is if you were to build a piece of software that focuses on a specific role or title at a company. So applicant tracking systems, for example, target HR directors, so that’s orthogonal, vertical and have their own because they’re niche, right? The idea is that when we think of niche, we think of vertical only. And so I’ve started using this term orthogonal to describe this other way to niche in to slice it. And what we’re seeing is in general, horizontal companies are competing with big venture funded incumbents, really successful folks where there’s a lot of money in the space and it’s hard to differentiate, and you don’t really know who your ideal customer profile is. 

You kind of have an idea, but you don’t know exactly where to find them. There’s no in-person event you can afford to go to. There’s no ad targeting say on Facebook or Instagram where you’re targeting by demographics and psychographics that will work for horizontal. I shouldn’t say there isn’t any, but it’s very, very hard to do. Versus if you know exactly who your customer is, whether it’s this type of business or this role at a company, it is easier to do cold outreach and ads and just all the marketing approaches become easier. And you don’t have to be the best marketer in the world, you just have to be the best marketer in your niche. And that’s the difference that we see. And so I’m not going to go through exact numbers here. Obviously we don’t give out our performance numbers in public, but in general, the trend is that we do see vertical and orthogonal SaaS companies not only growing faster, they tend to have lower churn. 

Honestly, if they’re doing well in these spaces, there are net negative churn and it’s still early, but it does seem like the exit multiples are higher because there is more appetite from acquirers, from strategics and private equity to go after these niche plays, presumably because they also know their numbers, they know how hard it is to market, and they know what negative churn can do for a business. And so with all that in mind, the metrics are better, blah, blah, blah. So it’s still early. And here’s the thing. I know someone on the internet is going to come and post, but that’s not true across all 10,000 SaaS companies. Look, my one counter example is going to try to disprove up. I’m not trying to state a physical law like gravity in this podcast. What I’m doing is I’m looking at trends across things that we are seeing. These are not statements of fact. I’m not saying that every horizontal product TinySeed has is not growing, is nothing like that. It is trends, it’s numbers, it’s bell curves. So yes, you can do your post and say, I’m a horizontal, and look, I have net negative turn. Great. I ran a relatively horizontal play called Drip, and that had net negative turn too. So that was a great business. So I’m not saying don’t start horizontal either. I’m just telling you vertical and orthogonal. There’s some real advantages to doing that. 

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He really exceeded my expectations. Chaz said he definitely used lemon.io again when he’s looking for a senior level engineer to learn more and get a 15% discount on your first four weeks of working with a developer head to lemon.io/startups. That’s lemon.io/startups. Takeaway number four is we’ve done some, it’s really back of the napkin surveys, show of hands where I’ve said, okay, the original thesis of TinySeed was some people will want to grow quickly, be ambitious and sell for some number. They have in mind 10, 15, 20 million or more as we’ve seen, versus run a company for years, decades and take out profits. What we didn’t know is what the breakdown would be. Is it 50 50 to more people want to take up profits? With my show of hands surveys that I’ve done in several TinySeed Zooms, it appears that it’s about 15%, maybe 20 that want to grow a company for the longterm and take out profits. 

So it is the, call it the super majority that do want to have that big exit. And I think there are reasons for this, right? We are choosing for more ambitious founders. Like if you want to be a lifestyle bootstrapper and truly run a 10, 20, $30,000 a month company and pull it all out, that’s great, but the numbers don’t work for TinySeed to invest in you. And so I do think a much bigger chunk of those folks, whether you call, I call ’em lifestyle, you could call ’em indie hackers, although I think that is actually a different definition, but you get the idea those folks really do want a lifestyle business, and that’s great. I’ve had some of those, but the idea of joining TinySeed and taking funding and then wanting to do that is obviously a super minority of folks. I do think there’s some selection bias in that for sure. 

And I also think that when people hear me do this analysis where I went through the whole one K goes to 12 KARR times five is 60 grand, and someone puts a check in front of you that you’re like, I don’t really want to sell. And they’re like, cool, here’s your relatively early stage business and here’s $3 million. Suddenly things really shift. Things really shift. I remember the first time I saw a seven figure number written down in an email for a potential acquirer to acquire one of my companies, and I was like, this is it. If I say yes to this, I am set for a very, very long time, and this will be absolutely life changing. I remember almost being in a weird, it’s not euphoric state, but it’s hair stands up on the back of your neck and kind of lose time and even kind of can hear ringing in your ear. 

It was that. I was like, whoa. I was so shocked how in theory I had been thinking, oh yeah, if we sell this company someday, of course it’ll sell for a lot. But the moment that I saw that number, it changed everything. I was like, that’s real. That could really be cash in my bank account. And I think that as folks think about that, especially if you are either a first time founder or a founder who’s never had a big exit who has $50,000 in their bank account and a couple hundred grand a retirement account, and you realize that, yeah, maybe I could see this for the long term. Maybe I could grow this company for 10 years, but if I sell now, I’m set for life and I can work on whatever I want forever. The calculus really changes. So whatever way you choose, if you’re listening to this, maybe you’re thinking about, I want to be able to retire for three to six months, as most entrepreneurs do before they get back in the game, or you want to run it for the longterm, that’s okay. 

I’m just calling out some patterns that I’m seeing with our companies. The fifth takeaway is I looked at only our seven and eight figure a RR companies. So if companies doing millions or north of 10 million in annual recurring revenue, and I found that the founder count for these types of companies are very close to being in line with all the founders across the ecosystem from the state of independent SaaS reports. So in this example, 53% of seven and eight figure TinySeed companies are single founders, 33% are two founders, 14% have three or more founders. And just to compare again, the successful TinySeed companies, 53% are single founders and in the broader state of independence, SaaS, MicroConf, startups, the rest of us ecosystem, 51% are solar founders. So 53 versus 51 with two founders, it’s 33 versus 34, and with three or more founders, it’s 14 versus about 15 and a half. 

So the route, why do I bring this up then? Well, I don’t think founder count, at least in this analysis, has that much of a difference on success. I know that growth numbers in the state of independent SaaS show that for some reason there’s an anomaly with three founder companies. I’m still curious to figure out why that is, but I find it fun to often compare to the broader ecosystem with this much smaller and tighter dataset that we have. My sixth learning, really it’s just a thing to share, is that we have had to turn down many deals where we have made offers or we’re about to make offers, but their cap tables were ruined. So an example of this is founder left and took their equity and whether they own a third or half the company, they didn’t have vesting in place. And now the company is kind of unfundable. 

If you come to us and we’re typically the first money into a company and the founders own less than 70%, that’s not a good sign. And sometimes we are the second money in. So there are exceptions to that, but certainly you want the founders to own 80%, 70 to 80% and up. And so we’ve seen companies where again, there’s one or two founders left and they own like 50% of the equity and they can’t raise funding in the future. They’re basically working to put money in someone else’s pocket. It’s just a really bad scene. The other thing we’ve seen is that there are some really sharky investors out there that give extremely low valuations, or they have these exploding terms where if you raise before paying them back, then suddenly they own three times the equity that their original document said. And these investment terms can make the company uninvestible unfortunate, but we’ve especially seen it in Europe where an angel will invest at, I dunno, I’m trying to think of an example. 

There was $50,000 check for 25% of the company, so they invested a $200,000 valuation and that it’s just rough. So now you have this investor who’s not doing anything, not providing a value add, and it’s on the cusp for us of like, Ooh, would we be willing to do that? But realistically, I’m just giving you examples of ways that it’s easy to torture cap table. Be careful. We are less picky, I would say, than bigger venture funds if they see that, they just walk away. So with your ownership percentages, which is what I’m referring to with cap table, you just want to be careful with that. I’ve been shocked at the number that we have seen, and it’s common enough that we ask for the cap table after the first round. If we do a verbal interview and then you go to the second round, we just say, give us a spreadsheet with your cap table. 

And probably half the cases, I have a question about it, who is this person? What did they contribute? If someone owns 10%, 12% of your company, I’m always like, how did this happen? It also shows a judgment thing. If someone’s like, oh, they helped us a few years back and they did some design work and gave us some advice, and so they got 12% of your company. Like that to me shows a questionable judgment is maybe a strong, maybe a lack of knowledge of the space of how things work, but it’s at least something that we have to dig into to be sure that you don’t make that mistake in the future. A next thing that we’ve seen is subsequent fundraising. So when you join TinySeed, you do not commit to raising additional funds. You just keep the option to do so if, if it makes sense for you. 

And within the first few years, it was about a third of our companies went on to raise additional funding after the 2022 crash where funding valuations hit 10 year lows and money is just not as easily accessible. I think it’s probably closer to about a quarter, like 25% of TinySeed companies, and this is not, you have to discount the prior year that we’ve invested. Like the most recent year, probably zero to a handful of those companies have even thought about fundraising because they still have the TinySeed money, they’re in the batch year. But we look at anybody who’s a year or 18 months prior to now, what percentage and ballpark. I would say it’s around that one In four mark, we had a company apply with six co-founders. That was an interesting one. They had a lot of products were very scattered and we weren’t able to fund them. 

Can you imagine? I mean, none of them owned more than 16% of the company and making decisions would be very, very challenging. So that was a red flag of frankly, decision making. When we got into that, then we saw a company apply with zero founders. There was actually one founder of course working on it, but they owned 25% of this early stage company. So I am kind of like, are they really a founder when they are basically working for someone else? To me, that feels like a nice equity grant to an employee. He called himself a founder, but in essence, this is one of those cap tables that we could not fund because a founder working for 25% equity, it just doesn’t make sense. Alright, to wrap things up, the most common topics that I advise on the people pull me into one-on-one conversations during my office hours are the following four things. 

Number one, raising prices or fixing, changing, correcting pricing. It’s not always about raising sometimes the value metrics off. Sometimes they just don’t feel right about the pricing, so we talk through it. The second is, I’m at a plateau or I’m about to hit a plateau. How do I break through it? And those are the conversations that have fueled this mythical doc that I’ve put together, which is just a bulleted list of all the plateau reasons that I know of with B2B SaaS that someday I’ll figure out a way to package it up in a way that’s actually helpful. But plateaus are a common thing. Someone wrote into this podcast I believe, and said, I heard the most bootstrap SaaS companies plateau at 20 or 30 K. Why is that? And the answer is, that’s not true. It’s not that most do. I see SaaS companies plateauing early because they don’t have product-market fit. 

I see them plateauing at 20 or 30 K because they only have one marketing approach and the top of funnel is her churn is too high, and I see them plateauing it a million a RR because their churn is too high or they’ve tapped out the market or there’s all these reasons and then they can plateau at 3 million because competitors, blah, blah, blah. So lots of different reasons for plateauing and it is a very common topic of conversation. The third one unfortunately, is co-founder disputes where one co-founder is living, wants to leave, thinks the other should leave, is asking for advice about a buyout or should they just walk away? Should they give some equity back? It gets really complicated. It is like a divorce because folks have worked together, have been friends, have built and started something that is valuable, sometimes not valuable enough. 

If it was worth $20 million, then maybe you sell it and split the money. But if it’s worth half a million or a million and you’ve spent years working on it, do you really want to liquidate that to the what’s going to be the lowest bidder because you’re not going to get a great price for it and distribute a few hundred thousand dollars to each person that they get taxed on. It is tough. So I don’t mediate co-founder disputes per se. I’m not a mediator. We do have folks that we recommend our founders talk to if they need that, but I definitely am someone that people talk to about advice. Hey, here’s going on. How should I think about it? What are my options? That’s usually the big one is what are my or our options in this case? And of course, now I have a whole laundry list of options when these things come up. 

And the fourth one that folks get my advice on is raising funding or selling a company. And usually it’s not like, how do I raise funding? How should I think about this? Should I raise funding or sell the company? There are questions then about what are next steps and how should I think about it? What are typical valuations? All of that. But as you can see, I get brought in at big strategic points. Now, I also get brought in, I got brought in for some great just nitpicky questions the other day of per seat licensing advice on how to optimize a marketing channel, what marketing, let’s brainstorm marketing channels to go after next. But if I’m grouping them, it really is those four that I mentioned. As a reminder, I have six more learnings that I did not mention in this episode that I mentioned over on the YouTube channel. 

You can click the link in the show notes or go to MicroConf dot com slash YouTube and look for a video of approximately the same title as this episode. And another reminder, if you are a SaaS founder and you want the right amount of funding advice, mentorship community TinySeed dot com slash apply. Applications are open now, and if you are an accredited investor and you’re interested in investing in companies like this, the tiny C millionaire rate is 43% on companies no longer in operation. So obviously we’re having some success. Head over to tiny c.com/invest can fill out a form. There it goes, straight to my good friend, Einar Vollset, whom you’ve heard on this podcast before. Thanks so much for joining me for this week’s episode. It’s great to have you this week and every week. This is Rob Walling signing off from episode 729.

Rob Walling:
It’s Startup To The Rest Of Us. I’m Rob Walling, and this week I talk to Eran Galperin, the founder of Gymdesk, about how he bootstrapped and frankly mostly bootstrapped Gymdesk to a more than $32.5 million exit. It really is an incredible story of Eran launching this product on the side and working for years, nights, and weekends until it clicked. And this is a good example of if he had launched it and expected it to just work in a month or three months and was launching 10 things, Gymdesk would not be where it is today. It was the sheer focus and the relentless execution and showing up night after night, weekend after weekend until he could quit his day job that got Gymdesk to such an incredible life-changing generational wealth-generating opportunity. 

I sometimes have TinySeed founders on this show, not because they are TinySeed founders, but because they have really interesting stories and most TinySeed founders are also part of the Startup To The Rest Of Us and the MicroConf community and Eran is no exception. I do ask Eran why he applied to TinySeed in this episode and you’ll hear his answer if you feel like TinySeed could be a fit for you as a bootstrapped SaaS founder, head to TinySeed.com/apply. We are opening applications for our fall batch within the next week, and that will run for about two weeks. If you hear this after September of 2024, you can always go to TinySeed.com/apply to get on our email list and learn about our next open enrollment. In addition, if you are an accredited investor and you’re interested in investing in companies like Gymdesk, ambitious B2B, bootstrapped SaaS founders, head to TinySeed.com/invest. And with that, let’s dive into my conversation with Eran. 

Hey, Eran Galperin, welcome to the show.  

Eran Galperin:
Hey Rob, how’s it going?  

Rob Walling:
It’s good, man. It’s been a long time coming. I’m glad to have you on here. So folks have probably noticed from the title of this episode that you had a $32.5 million strategic growth investment from Five Elms Capital. And I want to start the show by asking you what did it feel like that moment where you’ve refreshed your bank balance and you saw more zeros than you probably ever imagined that you would have?  

Eran Galperin:
It’s surprisingly a large feeling of relief. It was the end of a very grueling, even though not long, maybe in competitive terms, but for me, long process of three months where basically every day I doubted that this would actually end up well. And many times as sort of a psychological trick, I would kind of let myself feel, “So what if it falls apart? It’s all good.” When the money hit the bank account. Actually it happened very fast. We closed the deal on a Friday, 30 minutes before the wire cut off time and the funds were in the bank account the same day. I did not expect that before the weekend and I’m just like, “I guess it’s over. I guess it’s done. I can have a real night’s sleep today and maybe the entire weekend.” And I literally slept 14 hours a day for the entire weekend. That mainly just a massive feeling of relief. All this weight just washed down.  

Rob Walling:
That’s incredible. And had you been planning in your head of, “Once I have this money, I’m going to do XYZ with it.” Or did it just come in and you thought to yourself, “Well, this is it, I’m set for life at this point”?  

Eran Galperin:
It’s kind of a mix of both. So I didn’t really have an idea for things to buy, but I already had in my head financial plan of how I’m going to deploy this. I’m a proponent of the FIRE methodology, if you heard of it. Financial independence retire early and it’s basically revolves around investing in fund indexes that return a very stable amount every year and with this amount of money, I’m basically set for life if I follow this approach. So I knew I was going to do that. I ended up upgrading my car to basically the same model but newer and higher trim because I really liked that car. And now we’re in the process of, we bought a piece of land here in Tokyo where I live and we’re building a house on it. So that’s super exciting. Not something that I actually planned, but a month after the sale was completed, it’s like, “You know what? We should start looking into it.” And we’re now in the process. Those are the major things.  

Rob Walling:
What kind of car do you have?  

Eran Galperin:
So now I have an Audi RS3 for people who are into that kind of stuff.  

Rob Walling:
Nice.  

Eran Galperin:
It’s a nice car. It’s still compact, which fits with the very narrow streets of Tokyo, but it’s just a slight upgrade from the previous car, which was an S3. Basically exactly the same car on the inside, but a small upgrade that I felt like was well-deserved.  

Rob Walling:
Yeah, no doubt. And for folks listening, when I say you received a 32.5 million strategic growth investment for your company, Gymdesk, and we’ll get into what Gymdesk is and what it does in a minute, what does that term mean? Because a lot of folks might be thinking, “Oh, a growth investment, that means you raised money that went into the company.”  

Eran Galperin:
So our investor is a private equity firm and they did a majority acquisition of the company. They bought a majority stake of the company. I am left with a minority stake in it, and some of the funds are going to be used to grow the company. The majority of it is for them to acquire the controlling stake of the company. This is what the amount that is on the public statement is for.  

Rob Walling:
And so that means it goes to you and other shareholders and full disclosure, you’re a TinySeed company and so TinySeed obviously received some money as well, but that’s not why you’re on the show. You’re on this program because your story is pretty remarkable in terms of how you executed, how fast you grew and how you went about the sale process. 

So I want to roll us back a few years. Before I do that, I want to let folks know Gymdesk. Gymdesk.com, your H1 is gym management software that frees up your time and helps you grow simplified billing, enrollment, member management and marketing features that help you grow your gym or martial arts school. 

So take me back before you started Gymdesk and I know the inside baseball, Martial Arts on Rails was actually what Gymdesk was called, which is such a cool name for developers. I’m like, “Well of course I know exactly why he named it that.” But such not a cool name for non-developers, right? Because clunky, it’s long. People are like, “What do you mean on rails?” Did you get a lot of that? Is that why? Because you rebranded the company in ’21 or ’22 I think.  

Eran Galperin:
Most of our customers just referred to us as MA on Rails or just MAOR or some reason. I hated that acronym, but a lot of them used it and I just ran with it. So yeah, at the time I just winded down a previous company, a VC-backed company called BinPress that raised a seed round and just didn’t grow enough to raise another round and I was kind of burnt out on the VC model. It’s like I felt that company had potential, but because it didn’t fit the VC timeline, it had to shut down. 

So I wanted to go in a different direction. Me and my co-founder kind of split paths. He moved to the dark side and became a VC partner, and I started a bootstrap company back then that was called Martial Arts on Rails. I wanted to combine my hobby of many years, which was training in Brazilian jiu-jitsu, nine years at the time with my professional skills in software development. 

I did a lot of market research initially, I kind of tried avoiding going into the vertical we ended up going in, which is business management software because there’s some very entrenched players in this space. Now I know that that’s actually an advantage. They do a lot of the customer education for us. There’s obviously a lot of potential revenue to be had because they’re so big, but back then it looked very intimidating. 

Eventually I did decide to go that route just because everybody I talked to in this space said the current incumbents were just so awful. So I don’t want to name any names, but anybody in this space knows exactly who they are and I felt with my experience in user experience and software development, I could bring something better to the market. We launched in 2016 and me being a technical founder in every stop previously I was the CTO, some kind of engineering leader. I quickly realized that I had zero idea on how to acquire customers. And so began this kind of slow trial from zero to a livable wage over the course of three and a half years during which I got a full-time job as initially a software engineer and eventually a CTO of a e-commerce company in L.A. And only in 2019 I started working full-time on the business.  

Rob Walling:
Got it. So you were three years in, three years and nights and weekends on Martial Arts on Rails, which became Gymdesk. So that’s interesting. So it’s not the overnight success that people might paint it out to be, right?  

Eran Galperin:
It actually, it didn’t feel quick to me the last couple of years went in a blur when we were growing pretty fast every year, but the first five were a slog for sure.  

Rob Walling:
This is something I talk a lot about online or on this podcast is folks who don’t stick with an idea long enough and they launch one thing and then one thing and then one thing, “Nothing’s taking off so I’m just going to…” You were three and a half years in before you even had a full-time income, and then there was kind of a, I’d call it like a bootstrap or hockey stick moment where we saw this because you applied to TinySeed, I believe in 2021. You were cranking up, I think you were. Do you remember you were 30, 40K MRR by then?  

Eran Galperin:
Yeah, I was around 35K and by the time the program started already 40 and I remember having chats with some of the founders and the meetup we had in Arizona and they’re like, “You’re at 40K, why did you join TinySeed?” 

And I had a different calculation than them in my mind because I had the same kind of dilemma when I was thinking about applying. It’s like, “We’re doing pretty well. What can I get from TinySeed that I can’t get by myself?” And the framework that I use is if TinySeed helps increase the value of the company by more than the equity that they take, which was 10%, then it’s worth it. And it ended up being way worth it. So I think in that regard, it doesn’t matter that we were at 35 because we came in for maybe different reasons than some of the other companies in the batch.  

Rob Walling:
There are different reasons why some folks come in because they’re super early stage and they really do want guidance help finding product market fit. You didn’t need that. You already had it pretty strong. Some folks come in like I could really use the 120 to 250K investment. You didn’t really. Now I know it was a little bit helpful, but that’s not why you were doing it. Why did you decide, and really I think the question is what did you ultimately get out of TinySeed that makes you say it was worth it?  

Eran Galperin:
A lot of it, well, it started with me following your content on Startups For The Rest Of Us. I’ve talked to many investors and I can tell when somebody actually knows what they’re talking about. They’re not just repeating stuff they read on somebody else’s blog, listened to on a podcast, which is the case with a lot of the investors that I see. And I was coming in to get that kind of advice one-on-one. 

This is my first company that I’m building bootstrap first company that I got to a certain scale that I haven’t been able to at previous companies and I’m going into a lot of uncharted territory. I remember that we had pricing realignment engagement together. Me and you sat together and talked it over. That was a very scary process for me. We had a lot of long-term customers and I’m about to really ramp up the pricing on them and it helps so much that I can do it with somebody that already ran this playbook, also seen it fail at other companies, even your own after acquisition, I guess. That really helped me do this confidently and it went super well and actually kickstarted the next upward strand in our revenue growth and there were multiple such instances. This is the main reason that I joined TinySeed.  

Rob Walling:
I think that makes a lot of sense. Community and mentorship are the two things most people name most often and it sounds like the mentorship and advice was a big piece for you. 

You entered an extremely competitive space. There’s one 900 pound gorilla who as you said, no one likes, but there are dozens. I mean I’ll say every TinySeed batch we get one or two applicants at least that make it into calls that do something similar to this. Why did you succeed?  

Eran Galperin:
I think I can tell pretty accurately why we succeeded and it’s because we went against what everybody else in the market is doing. So we have the 900 pound gorilla like you mentioned, and a lot of the similar competitors kind of copied their playbook. They have a product and I think this is coming in a lot of B2B verticals that is very outdated and difficult to use. I guess the thinking is that business software doesn’t need to be accessible or easy to use and they just have a very strong sales motion and a lot of our other competitors are pretty much the same. I mean their products started at different points in time, so you can kind of tell, “Oh, this one is from ’08, this one is from 2011.” But they never bothered updating it afterwards. 

When I started Gymdesk without any sales knowledge, the only thing I can do was just talk to customers and make the product better. I myself went through a transformation with this company where I used to be that technical person that engineering lead that it would come to with customer complaints and it’s like, “Yeah, they’re using it wrong. They’re not very smart.” I would say mean things like that. And with this product I kind of realized it’s actually the opposite. The dumber, the feedback looks like the more opportunity there is to make the product better, and I really took that to heart and through this endless feedback loop made a product that just makes everything so much easier than our competitors. We might have a similar feature set, but the way those features and flows are implemented is completely different. And this is where I feel we really made our first kind of differentiation in the market. 

The other side of it is with the customer service. So anybody who works with me knows how responsive I am to emails, and it was the same with customers in the going when I was the only one talking to them. And when I started hiring for customer service, I made sure that we stayed with that mentality. Somebody sends a report that something is not working, we have to get back to them as early as possible and resolve it as quickly as possible. Not just issues, but also small feature requests where it seems like it’s a no-brainer. We would roll those out sometimes same day. You can find reviews of us on Capterra and other websites where the guy’s like, “Yeah, I messaged customer service, I talked to the CEO, and on the same day I get a new feature that solves our use case.” And you can’t beat that kind of experience. So this is how we kind of build our brand in this space.  

Rob Walling:
Got it. So you’ve referenced product that you built your product differently. It’s not just great product, but it is actually zigging when others were zagging, sales motion, they were really heavily on sales and you were more allowed self-serve I’m assuming, but.  

Eran Galperin:
I’m 100% optimized for self-serve, so it’s maybe a bit ridiculous, but in the early days, I actually refused doing demos. I just hate getting on video calls with people I don’t know. And people would email in, “I want the demo.” It’s like, “Yeah, we don’t do that. I’ll be happy to answer your questions over email, which is the medium I’m comfortable with.” But for years we just didn’t do any demos. We do do demos now. We have a full team, they help with onboarding, but because we didn’t have any demos and none of that motion at all, I really had to make the product shine in those aspects. So every time people would say, “Oh, I can’t do this in onboarding.” It’s like, “Okay, let me go back to the product and fix it like that instead of getting on a call and explaining to you how to do it.”  

Rob Walling:
And then support, as you’re saying, was exceptional. There’s one other thing you didn’t touch on that I watched firsthand. I watched you execute exceptionally well, like top 10%, top 5% of founders that I work with, and you are a technical founder who in 2016 launched Martial Arts on Rails and you didn’t know how to market. By the time I knew you in 2021, you knew enough about how to market that you were driving consistent, consistent, consistent growth. I say that word three times because it was just every month there were no plateaus. And then it just got better. I mean, the growth got faster. You eventually hired a head of growth and I mean you coming from development to marketing, a lot of people, as much as I say it on this podcast of all the successful TinySeed companies, all the TinySeed companies doing seven figures, pretty much inevitably one of the founders runs marketing from the start. 

Now you can eventually hire someone to do it, blah, blah, blah, but trying to outsource marketing when you’re 10K MRR, you and I both know that’s probably not a good idea. So my question is there’s a long way of asking how did you figure this out? How did you get good at driving tons of leads because everything else you said, building a great product, great support, self-serve people do that, and then they flounder and they plateau at 10K because they don’t know how to drive traffic. So I don’t know how to drive traffic or leads. How did you figure this out?  

Eran Galperin:
Yeah, I mean that’s definitely the part of building this company that took me the longest to figure out. I do have some background in writing, so I’ve written a lot over the years, mostly technical writing, but eventually moved into, I wrote about startups going through accelerators, stuff like that. So I had that in my back pocket. Also, some experience with technical SEO, so I thought for sure with SEO I could drive some leads to the product. Turns out that was also naive. It took me quite a while to figure out the SEO for this company, but now I have such a good handle on it that I advise other SaaS companies on this particular topic. 

I just had a call with one of the TinySeed companies where I analyzed their entire SEO structure and gave them actionable items. This is one of the things, it’s not like this with every marketing channel. Maybe it is, I haven’t figured it out yet, but specifically with organic traffic, you can approach it almost like an engineering challenge and really figure out a plan to attack it. And we built a really structured repeatable process there to expand and also retain the land that we acquire in SEO because to keep your rankings, it’s very difficult in a competitive market. 

It took me, I want to say five years to really figure that out. In 2021, when we hired the first full-time employee that was a content marketing editor, I knew this is our strongest channel and this is our best writer and I want to just keep investing in this channel. And it paid off. We still drive most of our leads through SEO. I think it’s over 60, 70% of our leads come through that channel, and they’re all extremely qualified leads. It’s a channel with a lot of buying intent. So yeah, it’s definitely something I had to work on. But just persistence with everything else, trying and failing, trying and failing and figuring it out, that’s how we did it.  

Rob Walling:
And to give folks an idea from ’21 to ’22 you doubled, from ’22 to ’23 you doubled, from ’23 to ’24 is not over, but you’re on pace to double. So it is like a really interesting growth curve. I like to call this because you started in 2016, it’s eight years to overnight success because all the people on X-Twitter want to know, how many people do you and I know that would stick with something for five years kind of grinding it out to figure it out?  

Eran Galperin:
I follow some people on Twitter that literally what they do is they build a tiny SaaS product and they give it a couple of months and then they sell it for peanuts on microacquire.com, I think it just acquire.com now. And just move on to the next. And they keep hoping that one of those will blow up, but that’s not how it works. If you’re going to only stay with it for a few months, it’s never going to happen.  

Rob Walling:
I want to dive into the acquisition because you received a lot of inbound interest. You told me offline, you said you initially ignored it. So it was what, 2021, you start receiving private equity firms that are reaching out, and this is a very common thing. People hit mid six figures, get into the seven figures, and it just happens. So how are you thinking about and dealing with all that inbound interest?  

Eran Galperin:
When it started initially, first of all, the language that they use in a lot of this inbound, it is very vague. I didn’t think it was about buying the company. I thought it was venture investment basically. They talk about growth equity, like we said at the beginning. At that time, I didn’t know exactly what that meant. It’s like, “Oh, are you interested in growth investment into your company?” I’m like, “No, I’m bootstrapped. Not interested in that.” 

Eventually one of them actually used direct language and I’m like, “Okay, interesting. I think we’re too small, but let’s talk and see where it’s at.” And we were too small at that time, but I started to get a sense of how things might go. And between 2021 and 2023, I must have taken close to 40 calls with different private investors, search funds, all sorts of different constellations. And I really got a pretty good lay of the land as to what a potential outcome might look like and at what revenue numbers it would make sense to sell. And I started having this kind of mental funnel in my head. It’s like, “Okay, if we hit those benchmarks, maybe it’s time to start thinking about running a process.”  

Rob Walling:
Got it. Why not run the company forever and take out profits?  

Eran Galperin:
That’s definitely an option. And some people do this, but I started to feel some burnout even in 2021. I ran the company with a bootstrapper’s mindset, always hiring maybe a couple of steps later than I really should have because I’m optimizing for profits. It’s really hard to disconnect the revenue going into the company from your own finances. At the end of the day, anything that’s left over in the company is your revenue personally, and I was doing a lot, just maybe doing too much was feeling burnout. And at some point it’s like, “You know what? I would be happy to take a step back and let somebody else run the company.” 

There’s also when you’re at a smaller scale and you self-select for the customers, everybody’s nice and it’s a pleasure to work with, but as you hit a certain scale, the small percentage of people that, I can’t think of a better word, just nasty people and you have to deal with them. And it gets to the point those people are above the level of even a full-time customer service person to handle, it leaves a dent in you. It always feels like they’re going to ruin your company’s reputation. We had people like trash us and all the social media channels for the pettiest stuff. I have stories that just make my blood boil when I think about it and I just don’t want to deal with it. Does this emotional connection as a founder, CEO, that maybe a professional CEO would not have because they didn’t build the company, they don’t feel it in their bones and somebody is just saying nasty things about them online and I just wanted to kind of remove myself a little bit from that.  

Rob Walling:
Yeah, I experienced the same thing. We don’t talk about that very much, but that stuff takes a toll on you. I don’t know if you got threatened, but I got threatened multiple times with where I’m like, “Do you mean that? This is becoming a safety issue.” It’s a law of large numbers. It’s like at a few hundred customers you kind of know everybody, at 1000 users, customers, it becomes a lot. And then we eventually had a free plan, so we had 30, 40,000 users at a certain point. It’s like you’re going to get some mentally unstable, demanding, narcissistic folks. And yeah, I can see it. Everyone sells. Like I say this, everyone sells eventually. I never thought MailChimp would sell and they eventually sold. I mean really, I had all these examples and they’ve all sold except for I think Basecamp is probably the one that I think about. 

So then I guess the question then is you start feeling like, all right, I’m burning out. This business is obviously worth a lot of money, but how did you know when it was time to sell? Because you could have sold it at a million ARR or two. It’s like do you just arbitrarily pick a point? What was it like for you?  

Eran Galperin:
So because we received so much inbound interest, I did really have a lot of insight into where an optimal result might happen, and it did seem to really funnel around a few million in ARR. That’s where a lot of the bigger players that can actually pay the big multiples start getting interested. At the lower ARR there’s definitely interest, but people would try for bargain. The multiples are lower, the terms are not as good, and I saw a very direct line to that number. With our growth numbers I was running this kind of projection P&L where if we continue at the same pace that we’ve been growing and add a little bit to it every few months, and it ended up being almost to the dollar accurate all the way up to 3 million. So as long as I was continuing with the trend that I built there, I’m like, “You know what? I’m good. I don’t need to sell now.” 

Unless I see crazy warning signs. And by the way, those crazy customers, those were the warning signs, like, “Is this it? Is this where I’m taking a tumble down death row for the company?” That did make me wonder, maybe it’s time to sell now before I really run into that customers that tries to ruin our business. But as long as we kept on that trend I could see the path. It didn’t seem too long. So if it was like five years into the future, I would not be able to do it. But it was about two years into the future I was like, “I think I can hold on for that and have a life-changing outcome there.”  

Rob Walling:
And let’s talk through the sales process because you’re one of the few people that I can talk to about how painful this is. And here’s the hard part is if you go on social media, if I say on this podcast, “Oh, it was so stressful. It was really stressful. No, trust me, it’s really stressful.” People say, “I’m sure it wasn’t that stressful. And also you walked away with money that you never had to work again. So really just deal with it.” But it drives people, it can drive people to the edge, to the brink, to the point of not sleeping to the point of I started having, hallucinations is not the right word, that would take it too far, but I started making shit up in my head that just wasn’t true. And at a certain point, Sherry, my wife was like, “Hey, do you know that that’s not, you’re in a weird place. You’re really fighting with people in a way that’s not healthy for you.” 

So for you, you worked with Discretion Capital folks on the podcast. No, A&R runs that and helps as a sell side advisory for SaaS doing multi-millions. And what was the process like for you? You can talk maybe a little bit about the mechanics of it, of how it actually panned out, but also personally, emotionally, what that all felt like.  

Eran Galperin:
Yeah, the process was much more stressful that I anticipated, and it’s mostly psychological in its core. First of all, it’s a very technical process. That’s another thing that I didn’t anticipate everybody reads about due diligence. It seems like a very straightforward thing. You just provide the documents for the company, you let them look at your code base, la-da-dee-la-da and you’re done. And it’s so great, but it’s actually so technical and complicated. There were times during due diligence and it’s mostly around stuff like taxes and company structure that the other side’s legal team would just disappear for three, four days a week looking into something. And I’m like, “Is this a big problem? Is this a small problem? Is this taking down the deal?” I just have no idea. And this kind of ambiguity where you have no idea if things are going well or not for weeks at a time, it really gets to you eventually. 

And it’s a lot very minute things written in some contract from few years ago, and it’s like, “Is this a problem? It looks so minor. Is this really a problem?” And they’re like, “We don’t know. We’re going to need more time to find out.” It’s like, “Sounds bad.” But you just stick with it and eventually you get through due diligence and then you have the purchase agreement aspect. I thought once we’re done with due diligence, we’re done. We just need to sign the contracts and get on with our lives. But hell no. That was just half of the process. It was crazy.  

Rob Walling:
You keep spring [inaudible 00:29:21]. Yeah, you just don’t know.  

Eran Galperin:
Yeah, you just don’t know those things. Luckily I had Einar to provide some emotional support. He told me that basically his role once the process starts is to be therapist for the founders. And it pretty much ended that way. Every time I would go to him, it’s like, “How big is this issue?” And it’s like, “Don’t worry. It happens in every sale process.” Like, “Okay, if Einar says it happens every time, it’s fine.”  

Rob Walling:
It’ll be okay.  

Eran Galperin:
So he would calm me down and this would happen a lot. Him and my lawyer, I want to give credit to Kaiser, just did an amazing job, especially during the purchase agreements. Every word in those agreements can have such a long-term effect on your life and you’re like, “I don’t even know what any of this means.” So having a really good lawyer that is patient and kind enough to explain it in a way that you can understand is so important. 

And still, we would get hung up on things where us and the buyer had some sort of disagreement on, and is this solvable? I don’t know. And again, days would go by, weeks would go by from my end, this is the only thing going on in my life other than running the business, but they’re dealing with multiple deals at the same time. So I don’t know if they’re just ghosting me or actually busy. Is this a tactic that they’re using to get me to come to their side? It’s super stressful. I usually consider myself a very even-keeled person, and I was taken aback by how stressed I got near the end of the deal. Even though we had all this inbound interest, I felt like if this deal falls apart and we go back to market, we will be able to get a really good outcome regardless. 

But I just didn’t, once you get too deep into it, you hate so much to go back to the beginning, do the due diligence again, like, “Oh my god, to go for that will be a nightmare.” So yeah, near the end of the process, I literally got insomnia. I would lie down in my bed, refreshing, looking for emails from the lawyer that I felt like, “Okay, I have to get out of bed, respond to this now, otherwise I’m going to stop this deal for the weekend because it’s a Friday.” And it’s got to the point where once I turn the phone off and I’m trying to go to sleep, I just can’t fall asleep. So it’s like, “Okay, it’s eight A.M. I’m just getting up. I didn’t sleep today. I’ll just keep going.” And, “Oh, what do you know? Another email came in from the lawyer. So good thing I didn’t go to sleep.” And it just stayed like that for the last couple of weeks of the process.  

Rob Walling:
Yeah, it’s brutal. It’s brutal on your mental health and on your physical health. Not sleeping is rough too. Then that, just everything else is distorted. You can’t get through that, but you made it to the finish line. We started with this conversation, hearing you refreshing that bank balance and seeing all the zeros, huge sense of relief. You’re still a CEO of Gymdesk, but what are you doing now as you look ahead over the next six months, five years? What’s on your mind and what are you doing with regards to Gymdesk and with other projects?  

Eran Galperin:
Yeah, so as I mentioned, one of the goals, or rather one of the reasons for selling the company was due to burnout. And when I was talking the terms with the buyer, I mentioned that I would like to step down as CEO after the company is sold and probably over the course of maybe a year or two, eventually walk away from the company or at least have the ability to do that. So currently I’m still the CEO. We closed the deal two and a half months ago. We’re in the process of recruiting a professional CEO to come in and take over for me. 

I literally had an interview just before this call, an hour long interview, by the way, it’s been a fascinating process interviewing for the CEO position. I’m talking to really incredible people and I’m super excited to potentially work with those people. With me taking a small role in the company, mainly focusing on product. That’s where I feel I can make the most impact at the company. I’ve been doing well in the other aspects, but those are definitely not my strong suits. So going back to focusing on product and over time, reducing my involvement in the company. I still hold some minority stake in the company, so I want it to do well, but maybe more on a consultancy basis eventually. 

The main thing for me right now, and I already started doing that, is I’m looking to help mentor other B2B SaaS founders from that zero to one and a potential sale process, and also do some angel investing in that same realm. So I’m talking to a few founders already. Those conversations actually are incredibly invigorating for me.  

Rob Walling:
You get to see the other side.  

Eran Galperin:
Yeah, I’m just incredibly happy to talk about those topics. It’s like I have somebody who also understands what I’m talking about and having those conversations kind of like what we’re doing right now.  

Rob Walling:
Yeah, this is the best job I’ve ever had, what I do both on this podcast, but running my heart on a TinySeed, I get to do that every day. And you see the appeal of it. It keeps you in the game, it keeps your head sharp, but you don’t necessarily have to do the grind that you did for so many years where everything’s hanging by a thread. If someone just heard you talk about, “Hey, I am mentoring and potentially angel investing, they wanted to reach out to you, what would be the easiest way for them to reach you?  

Eran Galperin:
So I have my personal website, it’s EranGalperin.com if you just Google my name, you’ll find it. You can contact me through there. Also, I’m on Twitter and LinkedIn, easy to find. Feel free to reach out if you want to talk. I’m super excited to talk to founders about B2B SaaS. It’s kind of my thing right now.  

Rob Walling:
Yeah, and it’s not just, “Hey, talk to me if you want me to invest or something.” But it’s like you’re pretty free with your advice and you have obviously a lot of knowledge and experience having grown this company in extremely competitive space and having an incredible life-changing exit.  

Eran Galperin:
Yeah, it always gets me worked up to talk to a founders in the early stages and hearing about what they’re doing. It’s like, “Wow, that’s so exciting.” So yeah, I love having those calls.  

Rob Walling:
Eran Galperin, thanks so much for joining me on the show today.  

Eran Galperin:
Thank you so much, Rob. Been a pleasure.  

Rob Walling:
It was an absolute pleasure having Eran on the show. I hope you enjoyed this episode and took away some motivation and some lessons and some learnings that will help you grow your business this week. This is Rob Walling signing off from episode 728.

Rob Walling:
Welcome back to another episode of Startup For the Rest of Us. I’m your host, Rob Walling, and every week on this show, I talk about building an incredible life through startups. Usually, it’s bootstrapping and mostly bootstrapping. Sometime, I have venture-funded startups come on and talk about their experience. But realistically, it’s all about founders, humans that are trying to make a difference in their lives and the lives of the folks around them. Entrepreneurship has been the number one force in my life that has changed it for the better. It brought me from making $4 and 50 cents an hour at my first job and $17 an hour in my first job out of college to where I am today, in a position where finances are no longer a major concern in my life. And that feels like a very weird thing to say based on where I came from. 

So in today’s episode, I’m going to talk about building wealth, and specifically, I’m going to talk a bit about my story, the story of Sherry and I building wealth over the past 20-something years. And I’m going to talk about the activities we’ve done in order that have brought us the most wealth in our lives. And I realize that talking about money can be a taboo subject. I’ve never been someone to share my MRR and act like I’m building in public when in fact, I’m actually bragging in public. But I do think that many of us who are out to find freedom, purpose, and relationships, we need to find a way to make enough money to quit the day job or to augment our day job or at a certain point, to make enough money that we never have to work again. Because as much as most of us will say, “I don’t actually care about the money, I care about the freedom,” the money is the means to that end, the money is the means to get to freedom. 

Before we dive into that, you should check out, MicroConf Connect at microconfconnect.com. This is our online community and forum. We host it in Slack and we’re approaching 7,000 members. They’re bootstrapped and mostly bootstrapped SaaS founders. Recent conversations in Connect, including a debate about magic sign-in links, how long you should spend diving into a niche before deciding on the product offer, how to safeguard your product from misuse during free trials. At what point in your journey should you invest in a conference booth and more. It’s a vibrant and highly moderated community. Very high signal-to-noise if you’re looking to find and hang out with other misfits like you and I, head to Microconfconnect.com. 

Let’s dive in to a lesson on how to build wealth. And look, I could say how to get rich. That’s the gauche way of saying it, but I feel like there a way to talk about this topic tactfully and to talk about it respectfully and to talk about it frankly, with grace and thanks because if nothing else, I have an incredible amount of gratitude for what entrepreneurship has done in my life and the life of my family, and that’s why I want to share this with you today. So last week, I was on Twitter and I saw a tweet from Christopher cgimmer and he said, “My two greatest investments, number one, starting a business, number two, buying Bitcoin.” And that tweet reminded me of an essay, really a half-form blog post that I wrote a year, maybe two years ago. 

I thought of turning it into a tweet thread. I thought of posting it on the blog and just never did. But it was a reflection on the life that Sherry and I have built. And I started thinking through what are the ways that we lifted ourselves up from, I’ll say, humble beginnings. I won’t go into it too far, but between Sherry’s family and my family, we have convicted felons, we have drug addicts, we have folks who have been on food stamps, some folks who are still on food stamps. We’ve had people in and out of jail, we have alcoholics, we have a lot of stuff. And I’m not saying this to play the politician role of, oh, look at the humble beginnings we came from. But in all honesty, where we are today is a far cry from where we started. And the number one reason for that is entrepreneurship. 

Now, obviously you could say, well, Sherry and I would’ve been okay even without entrepreneurship, and maybe we would have, we were working salary jobs before I started companies, and could we have built a great life, just the two of us working hard as salaried employees? Of course we could have. So I don’t want to sit here and act like entrepreneurship is the only reason that we’re alive today and the only reason we own a home or anything like that, because salary employment and investing in the stock market was the path that we were taking, and we were doing fine. We were certainly middle class and doing well. 

But as we look at this list of things that allowed us to build wealth, you’ll notice that entrepreneurship is number one, spoiler. But a bunch of the other ones came because entrepreneurship made enough money that then we could take several bets on different things that we wouldn’t have been able to if we didn’t have that money in the bank. I’m going to be honest, I was actually a bit surprised as I ran through this list. I’d never really thought about it before and to look at which activity contributed cash in what order was pretty fascinating to me. 

So in this episode, I’m going to walk through seven wealth creators, and this is not investment advice. Think of it more as a story. The story of Sherry and I coming out of college with 100, $200 in a bank account and building what I feel like is a pretty successful life that I’m very grateful for. And there was a ton of hard work, nights and weekends constantly for several years. I don’t do that anymore, but there’s probably six, seven years of basically clocking nights and weekends to start companies on the side as I was trying to figure it out. There was definitely some skill that Sheri and I built up through putting in the hours or through going to the library or through being on the internet and studying and learning. And obviously, there’s some luck involved as there always is. 

In addition, this is not investment advice. This is just the way that we think about allocating our money. And this may or may not work for you or even be relevant. So with that, first item on the list is selling companies. And for the most part it’s selling companies that we started from scratch. Sometimes it was selling companies that I acquired. So HitTail was a SaaS app that I bought in 2011 for $30,000, and by the time I sold it in 2015, the total revenue it generated plus the exit amount was just over $1 million. And one might say $1 million, Rob? That doesn’t sound like that much money. To us at that point in our lives, it was the first moment that we had life-changing money, “life-changing money,” not never have to work again, money, but it changed the way that we went about our day to day. It was the first time I ever saw $100,000 in a bank account, was working on HitTail. 

HitTail was highly profitable. It had a 90% gross. No, it had about an 85, maybe 90% net profit margin, net profit because it was just me and a couple contractors. And one might say, “Well, you had $30,000 to buy HitTail. I don’t have $30,000.” Guess what? Three years prior, I didn’t have $30,000 either, but I built businesses like .NET Invoice, I wrote Start Small Stay Small. I had a portfolio of small products and I saved the money from those as well as consulting that I was doing a few years prior to get that 30,000. So I truly stair-stepped my way up over the course of, depending on how you count, it was either six years or 11 years to get to that point where I could acquire a SaaS app and grow it. And I had built the skills to do that and I’d put in a lot of hard work along the way to be able to do it. 

Prior to that, I had, at any given time, I had around a dozen. It was like between nine and 12 small products doing hundreds to single digit thousands per month. And I cobbled those together to make a full-time living. And it was a great lifestyle. I worked 12 hours, 16 hours a week. We had young kids, but I was always worried that I wasn’t going to have revenue or income the next month or the next year. And I was constantly thinking about, am I going to have to go back and get a job? Am I going to have to go back to consulting? And once you taste the freedom of not doing those things, you really don’t want to go back. I became unemployable pretty quickly. Now, moving from that life-changing to sunset money where you can just ride off into the sunset. Some people call it FU money. You could say it’s never have to work again, money, but that of course was selling Drip. 

And one might say, “But Rob, you invested 150,000 or $200,000 into getting Drip built. So when you sold it for millions of dollars, I can’t do that because I don’t have 150 or $200,000.” Guess what? I didn’t either three years prior, but I bought HitTail for $30,000 and grew HitTail, which was doing, it was around $2,000 a month at the time. I grew it to 30,000 MRR and socked that money away in a bank account, put it away, put it away, put it away. So I had money in a business bank account to where I could pull that out and build Drip. This is why I get a little infuriated when I see comments, I’ll see them on the YouTube channel, for example, where I talk about if you have an unfair advantage, if you have an audience or if you have a network or if you have money, then use it. And someone will post a comment with, well, if I was lucky enough to have an audience like you, I didn’t build my audience because I was lucky. I built my audience because I’d put in almost 20 years of hard work. 

And I know people who build it a lot faster than that, but however many years you put in, it’s not luck, it’s about putting in hard work and reaping the rewards. And so I can imagine someone listening to this and say, “Well, I don’t have $150,000 to build Drip. I don’t have $30,000 to build HitTail. I don’t have $11,000 to buy .Net Invoice,” which is what I bought it for back in ’05, ’06. I didn’t either until I did freelance work on the side in addition to my day job and saved up enough money to buy .Net Invoice, and then parlayed .Net Invoice into money in the bank to buy HitTail and then parlayed that. You know what I mean? It’s like it took us a long time. 

If you think about it, the typical startup journey you hear about these days, “typical,” I’ll put in quotes, people say, “Oh, in three years I quit my job. In a year, I quit my job. In five years I became a millionaire.” I started building and trying to launch software products really around probably 2002, 2003, and I had my first thousand dollars revenue month in ’05, ’06. Think of how long that is. That’s a lot of nights and weekends, and it’s not what you see on Twitter today. It took us a long time because we had no backstop. We did not have parents who would bail us out if we went to zero, if we lost our apartment, if we didn’t have money to pay for it, we couldn’t move in with anybody. Not having a backstop makes it really scary and it can make you risk averse, which is what we were because we had to show up for our jobs every day and trade dollars for hours because we had to make a rent payment because we had no backstop. 

And so I did a talk several years back called 11 Years to Overnight Success, where I started the timer at 2005, which is around the time I acquired .Net Invoice and ended it in 2016, which is when we sold Drip. And that was the moment where I never had to work again. And it took us 11 years to get to that point. Why did it take so long? Because I stair-stepped, because I did it carefully and because we did it in a pretty risk-averse fashion such that we would never lose the house. We didn’t put a bunch of money on credit cards, we didn’t take out a second mortgage to invest in our business. You might be more risk-averse. In fact, you might have a backstop if you have rich parents, if you have $200,000 in the bank that you’ve earned and saved or that someone gave you, that’s amazing. Then you can take bigger risks and you can do it a lot faster than we did. 

But we took one step in front of the other and put in hard work, luck and skill over years. And frankly at this point, decades. When I say think in years not months, what I actually mean is think in decades, not years, but that would be too painful to tell people when they’re first starting out. So that was number one, selling companies. And I realized I included running HitTail, meaning taking profit off of it. So I muddied the waters a little bit. But realistically, the number one driver of wealth building for us has been exiting companies. And the beauty about selling is, at least in the US, the tax laws are so favorable because they give you long-term capital gains in your tax rate is far less than if you draw profits out of a business. 

In addition, depending on how you’re growing and what the multiples are, you can often sell for 10 years worth of net profit or 15 years worth of net profit. So you dramatically accelerate the amount of cash you get today, and that allows you to make other bets that may pay off for you as we did in 2016. 

You may not want to hear it, but number two on our list is cryptocurrency. And I know some people are cringing. I’m not a crypto bro, I’m not a crypto maximalist, but when I started hearing about crypto in let’s say 2014 or ’15, I was intrigued by it, but much like investing, I didn’t want to spend any time focusing on it because I was busy being an entrepreneur and I wanted to focus on growing a company. But after selling Drip in 2016, we obviously had a large sum of cash and I wanted that to last the rest of our lives. And a very interesting side effect of having a large amount of money is that you can make larger than sensible bets on very risky things. 

So prior to that, we had made a few angel investments, and of course, that’s lower here on the list, but we’d made some angel investments in startups. And I started thinking of crypto as an angel investment and I told Sherry, it’s either going to 100x or it’s going to go to zero. So let’s put an amount of money into crypto to where it goes to zero, it doesn’t matter to us. And here’s the thing, it comes back to entrepreneurship because if we hadn’t sold Drip, then could we have put $1,000 into crypto? Yeah, probably. And do I think putting 1% of your net worth or 2% or some very small amount into risky bets is a good thing? I do personally. 

In fact, we have done it with angel investments and with cryptocurrencies. Do I think everyone should do it? I don’t know, it depends on your risk tolerance, but to me, I saw what [inaudible 00:14:55] calls asymmetric upside, which is, if this can potentially 100x, could I put $1,000, $10,000, $50,000 into it? Well, it depends on how much you’re worth, right? If your entire net worth is $50,000, that would be foolish to put 50,000 in. But if you literally have millions and millions of dollars sitting in a bank account, is it foolish to put tens of thousands into something that could potentially be worth millions someday? Maybe. So is it super risky? Of course. But over the course of, I think it was seven months, eight months, we basically dollar cost averaged less than 1% of our net worth. So it was tens of thousands of dollars into several cryptocurrencies. This is ETH, it was Bitcoin, I think it was Litecoin at the time. I think I picked three or four. 

And again, it was either going to 100x or it was going to go to zero. And when I say dollar cost averaging, what that means is instead of buying a big chunk all at once, you buy a small amount every day, every week, every hour, whatever it is to get up to your target allocation. And I genuinely wrote it off, expected that money never to come back. Much like any angel investment check we write, I don’t include that in our net worth anymore. I consider that it’s zero until it’s not. And one could say, “Well, you got a little lucky.” Yeah, probably also could have bought two years later when it crashed. Also, could have bought a couple years after that when it crashed. 

But if you dollar cost average in and you don’t put any more in than you can lose. It just didn’t seem that risky. I’m pretty risk averse person. I’ve never had a backstop. And so for context, we started buying ETH around, I think it was somewhere between six and $10, and Bitcoin was at 600 or so. And obviously, as of this writing, they’re at 3300 and 66,000 respectively. Which just feels bizarre, right? Crypto to me was just a mechanism. It was just a thing that could go up. I have no desire to persuade you to purchase it, right? And I’ve gotten into discussions where people will ask the usual question, well, why is it valuable? Why not just buy gold, isn’t it a bubble? And it’s like, I don’t know. I just view it as an angel investment. It’s a lens of opportunity. And again, never could have done this without having the exit. 

And the interesting part about this is within months, it started going up, I think it was six or eight months, it started going up so quickly that actually, it scared me because it went from tens of thousands up literally into the single digit millions, and it became almost… It was like a fear of liability about the volatility. And so we started dollar cost averaging out as much as we could. Back then it was actually hard to sell crypto. There were all these limits on exiting, and that was a good thing because I think we would’ve sold more than probably would’ve been wise. We were held in by these limits, and those limits allowed us to leave more in, that then of course grew over the following five, six years. I just don’t think we would’ve kept it that long. 

So I’ve appreciated how those limits probably went against the scarcity mindset of, oh no, it’s going to go down and we’re going to “lose” a bunch of money even though we’re still playing with house money. So in the subsequent years, we have definitely sold seven figures, obviously playing with house money plus, plus, taking chips off the table, but still have enough that if it continues to go up, that we ride that wave as well. So what’s the learning there? Is it everyone should buy crypto? Is it everyone should dollar-cost average into risky assets? I think it’s that making money creates opportunity and allows you to make bets on things that otherwise you never could have. And again, this is where it comes back to entrepreneurship. 

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Number three on this list is running profitable companies or owning profitable products. Some software, some knowledge products. So think of things like running HitTail, running my product portfolio back in the day. Dr. Sherry Walling, my wife runs Zen Founder, which is a very successful executive and start-up founder coaching practice zenfounder.com if you want to check that out. I had a micro agency back in the day. And of course, book sales, since we publish our own books, you can actually make decent money if you sell 20,000 copies like the SaaS Playbook has sold. There are no big hits in this one. This one is really number three on the list by virtue of how many years we’ve done them. 

Sherry has run Zen founder, I think since, I don’t know, maybe 2013, 2014, so a decade. And I ran HitTail for five years. It was highly profitable. The product portfolio was six, seven, eight years. Sherry’s written two books. I’ve written four books. Each of these things, we just have done them for a lot of years, so none of them was a breakaway, mad influx of cash, but each of these was either additive to our day jobs or it was a nice steady income stream to keep us going long enough to have some of the other big hits. 

Number four on the list is angel investing. And for a while, I’ll be honest, this was number two on the list, and this is mostly due to an angel investment that I was able to make in WP Engine. There are also a few startups we’ve invested in that have returned, I’ll say single digit multiples. So let’s say a 3x, a 4x, a 5x, which they’re nice, but they’re not the return that the WP Engine did. And we also have a couple that kick off dividends that again, are nice to haves, although we pay income tax on them. 

But realistically, the power law plays out here through my investments. Sharon and I have 20 plus angel investments on our own in addition to the ones through TinySeed. And when WP Engine had what I think was considered a private equity growth round in 2018 or ’19, we got bought out and that was enough money that we could pay cash for our next house, which we had to do because I didn’t have a job. I couldn’t get a loan because I didn’t have a job. Think about the irony of that. This was after selling Drip, but after having all this, but angel investing is another one that is 100x or go to zero. And any money that we’ve written, we’ve basically written off the moment we write the check. 

And again, someone might say, “Well, I can’t angel invest.” And it’s like, well, you got to make money first, right? We only were able to do it by building companies and having enough revenue that we had money in the bank that we could potentially invest. In addition, who invested in WP engine? Well, it was a handpicked list. It was oversubscribed. And Jason Cohen approached me and said, “If you want to invest, I’ll save money in the round for you.” Why did he do that? Because he had read my blog and he had read Start Small Stay Small, and he said, “I think you could advise me on virtual assistance and potentially email marketing and potentially SEO. These were things that he saw that I was knowledgeable in. 

So did I “earn” that? I don’t know. It was a combination of hard work because I put two to 400 hours into my blog every year between 2005 and 2011. A lot of times during lunch hours at my day job. When other people went out to lunch, I would go and I would write. So there was some hard work there. Was there luck? Absolutely. And was there skill? Yeah, it’s debatable, but that was the first angel check we ever wrote. In fact, we were not accredited investors. And so there’s a bit of luck there that he was willing to do what’s called a friends and family type situation. So I’m super grateful for Angel investing. 

Now, if we had never done angel investment, would we still be fine? Would we still be well off? Would we still have wealth? We would, but it’s that nice to have thing that allowed us to level up our standard of living. And to be honest, it’s just pretty fun. I love being involved in startups, as you can imagine, as my life’s mission is to multiply the number of independent self-sustaining startups in the world, and therefore, angel investing being number four on this list is apropos. 

Number five is salaried employment. This is working for other people. Both Sherry and I had many W-2 jobs in our lives. It’s the default. It’s what you do when you’re starting out, most of us. I kind of wished I was just a contractor freelancer when I started, but I was too risk-averse, and I wanted a steady paycheck to pay for that apartment that we lived in in Sacramento, California, where the rent was $720 a month for a two-bedroom place back in 2000. Nothing wrong with salaried employment. I learned so much. I really learned how to code as a salaried employer. I learned how to hire. I learned how to interview. I learned how to manage. 

I think folks who don’t have a salary job before they go out on our own are at a bit of a disadvantage if you haven’t learned those skills. So would I say you should get a salary job before going out on your own? I wouldn’t say that. Some people naturally can just do those things, are better at management, are better at hiring. They have the confidence, somehow they just figure it out. I was not one of those. I was very inexperienced. I was very timid. I was scared to do things like interview other people. I didn’t know how. And I learned those on the job and it made me a better entrepreneur once I decided to strike out on my own. 

Number six of seven is investing in what I’ll call typical investments like stocks, bonds, REITs, and so on. The challenge that we saw there was you need money to make money. You can put money away every month, which we were doing. Oh, hey, I’ll put $400 a month away, or $1000 a month at a certain point, or even $2,000 a month. And so in a year you save 6,000, 12,000, 24,000. And when you think about how much you actually need in the bank or in investments to retire, that’s a lot of years. There’s a reason you might have to work 40 or 50 years to get there. And so I quickly saw that although Sherry and I were making money, and we could afford a home in California, I saw that we were not going to get rich by saving. And that is something I think in the early days, again, 20, 25 years ago, I thought we could penny pinch or save our way into wealth. 

And some people might do that, but I didn’t see it as a path for us. And that was one of the motivations for starting companies. One, I wanted freedom, but also, I wanted an opportunity to be more in control of my income. And the idea that I needed more money to make money was frustrating to me because no matter how much I saved, it just didn’t grow fast enough. And by the time we were starting to make money, like real money from HitTail or Drip, we had saved up, I think it was around $350,000 in investments. And we were what? In our early to mid-30s. And so that’s not terrible, but that’s a lot of years and a lot of working to not have enough money to be able to retire on. 

These days, we are almost more in the barbell strategy. You can Google that if you haven’t heard of it. But we have, I’ll say, a traditionally small amount of money in typical investments like stock bonds and REITs, and we have more money in highly risky assets like a crypto, collectibles, startups and other alternative assets. And then we have a bigger chunk in extremely safe assets like cash or these days in the high interest rate environment in savings accounts or an equivalent that paying four or 5% on cash makes sense to do that. So I’m still a proponent of stocks, bonds, REITs and et cetera. We still have money in there, but it’s definitely become more of a background thing I’ll say, or just something. It’s an infrastructure thing of we put this money in and it’s great to watch it grow in your index funds, but it is not a major driver of wealth. It’s more of a way to maintain wealth or to grow wealth, but not to actually make wealth. 

And the seventh and for the most part, final thing that gave us any type of noticeable amount of money, obviously there are things like savings account interest over the years. Have we made single digit thousands? I’m not going to include stuff like that, but this is the last one that I think has made us tens of thousands or hundreds of thousands in lifetime wealth. And this was investing in real estate and it was in the early ‘2000s. We since have not bought a bunch of real estate. As I said, I have money in other things, and I know there are folks out there screaming at the microphone talking about the amazing tax write-offs. And I know there are tons of advantages to it, but it’s not something that we are presently in. 

The thing I was looking for was an edge. And so in the early ‘2000s in Los Angeles, we were buying up units and houses with two on a lots. And so we at one point had like seven units. And you could do this through leverage, right? I think it was three or four properties and seven total units. Many of them unpermitted as they are in LA. And you could do this through leverage because you could buy a half a million dollar or a $300,000 property with 5% down or something. And that cut both ways because when the market plummeted, of course, then you are losing a ton of money. But what I realized was that we had no edge, in that we had money and other people had more money and other people had inside deals and other people knew more about real estate than we did. And as such, I felt like I was the retail investor who was getting taken advantage of. And even though we owned these homes and there was some equity in them, we were really at the whim of the real estate market in LA. 

And as it started to crash in, it got soft in ’06, it started going down in ’07 or flatlining, and then in ’08 it started plummeting. We sold all of that because I didn’t want to be in debt, hundreds of thousands of dollars to the banks or have my properties foreclosed on. And it was something that that was the moment. If you think about that timing, that ’06, ’07, ’08, that was the moment that I had the realization of what is my edge? Well, my edge is I’m a software developer, I know how to write code. Is there a way that I can monetize that? Because not everyone can do that. And that’s when I realized, oh, if I learn to market and I know how to code, almost no one does that. And so that turns you into a pretty incredible force because if you can write copy and you can position products and you can do SEO, you can run ads, you can build something that people want and are willing to pay for, there are very few people that can do that. And that is where I realized I had the edge. 

And so at that point, we did sell the real estate that we had, and it sounds like we were real estate moguls or something. It’s like we were leveraged to the gills. And if in total we made 100,000, $200,000 over, it was many years of nights and weekends, as I was also doing software products. I was that guy that was trying to figure out the hustle. How do I raise our lot in life? How do we get out of working dollars for hours and making $30,000 a year, $50,000 a year, and actually get to a point where we have enough money that we can “make a difference,” right? That we have enough money that we can now make money by investing in typical investments or by dollar cost averaging into crypto. And that of course, led me to entrepreneurship, to software entrepreneurship and also writing books and all that. I just can’t underscore how much that changed mine and Sherry’s life. 

So to recap, seven ways that Sherry and I made life-changing wealth in our life, number one is selling companies. Number two is investing in crypto. It sounds so weird to say. Number three, running profitable companies. Four, angel investing. Five, salaried employment. Six, investing in typical investments like stocks, bonds, and REITs. And seven, investing in real estate specifically in the early ‘2000s. 

Hope you enjoyed this. It’s a bit of a story walk down memory lane, but also trying to pull out some learnings that I hope can help you as you move forward. And thanks to Christopher Gimmer for posting that tweet and reminding me of this thought process that I had a year or two ago so that I could revisit it here on this show. It’s been great being with you here today. If you keep listening every week, I’ll keep recording. This is Rob Walling signing off from episode 709.

Rob Walling:
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I’m Rob Walling, and in this week’s episode, I do a Rob solo adventure, where I’m going to talk through a few topics, always bringing it back to being a bootstrapped or mostly bootstrapped startup founder. Before we dive into that, I want to let you know it’s your last chance to get tickets to MicroConf Atlanta. The event is April 21st through the 23rd. Speakers include Rand Fishkin from SparkToro, Asia Orangio from DemandMaven, Stephen Steers, myself, and Dr. Sherry Walling. It’s going to be hosted and emceed by me and Lianna Patch of Punchline Copy. 

I’m also going to be doing a fireside chat with Ben Chestnut, the co-founder of Mailchimp. He does not do very many public appearances, and so I’m very excited to host him at MicroConf this year. MicroConf.com/us, if you’re interested in grabbing tickets. Again, tickets are going to sell out soon, so if you’re thinking about joining me and about 225 of your closest bootstrap founder friends, head to MicroConf.com/us. My first topic of today is how the startup world and the bootstrapper, MicroConf community, and I’m kind of breaking those. 

Those are overlapping Venn diagrams, but they really are two different things. I think of the startup world as probably being more of the Silicon Valley high growth stuff, and then bootstrapping, and MicroConf being maybe a subset of that with some overlap. But the idea is that the startup world struggles to not only learn from prior art, but to credit prior art. It’s two related things, but they really are different. So if you’re an academic and you go, let’s say get your PhD in psychology, or in computer science, and you’re writing papers or writing a dissertation or a thesis, it is 100% plagiarism if you claim someone else’s idea as your own, without giving credit. 

It doesn’t mean you can’t talk about ideas that you’ve heard elsewhere, but you give them credit. So if you go on Twitter and you say, “I had this great idea, it’s to do things that don’t scale,” or even if you don’t say, “I had this great idea,” but you go on and say, “Here’s a secret to success, little known, do things that don’t scale in the early days so that those will eventually lead you to be able to scale up,” but you never mention that Paul Graham wrote an essay called Do Things that Don’t Scale, and he wrote it back in, I don’t know, 2006 or 2007. And it is a very commonly known idea and thought that he came up with, and you don’t credit that, you are plagiarizing someone else’s idea, because the people reading that think you came up with it by default. If you say something and don’t credit, they believe you came up with it. Not a week goes by … 

Literally, not a week. Sometimes it’s more than that, that I don’t see someone on Twitter, or YouTube, Reddit, Hacker News, claiming a concept, or even not claiming it, but not crediting a concept that’s pretty well-defined, that either I invented or Paul Graham came up with, or Jason Cohen, or Hiten Shah, that has pretty obvious and clear prior art, and it’s not like someone saying, “Oh, work hard for success.” Right? That’s a pretty generic way of talking about it, but if someone says, “You have to work hard, and you need skills,” and then there’s a little bit of luck involved. Well, obviously, that is exactly the framework that I talk about for achieving success, is hard work, luck, and skill, and so you can rephrase those two things or whatever, but if you pick those exact three things, the odds of that being a coincidence that we both came up with it, that you came up with it on your own without the influence is pretty unlikely. 

And this is really common, like in the creator maker influencer space, the info product, info marketing space. People are just kind of plagiarizing, and I find it frustrating, I think, as someone who does a lot of deep thinking about this stuff and comes up with a lot of frameworks, and seeing things, whether it’s mine or someone else’s, it just never feels right that folks on the internet, in the startup space, I don’t know why they feel like they need to do that. I don’t believe that it’s an accident. I think it’s pretty intentional, but the thing is, is it’s not just crediting prior art and just saying, “Oh, yeah, that person came up with this idea, but here, I’m going to build on top of it,” or, “Here is how I implemented it,” or, “Here is how it impacted me.” It’s not negative to you to just say that, to just give the credit, but the other thing is not just crediting prior art, it’s learning from prior art, and I see so many folks trying to reinvent the wheel and justify it by saying, “Well, I’m going back to first principles,” or, “That’s rule of thumb, common wisdom, therefore, I’m going to go against that.” 

Like the teenager in the family, every what, generation rebels against the prior generation, right? There’s an example of Ryan Breslow, Breslow. I don’t know how you pronounce his name, but he was the founder and CEO of Bolt, and he was the guy … I don’t know, he’s a 20-something who just thought he knew everything, basically, and he went on Twitter, and what, flame Stripe and Y Combinator as being some type of mafia, or a cabal or whatever. Anytime I hear this type of phrasing, I’m like, “Oh, boy, someone really wants some clicks rather than fighting the good fight.” 

But anyways, Bolt was giving loans to their employees so that employees could buy stock options, and then Bolt lost 97% of its value, and so anyone who took out loans to buy their stock options now owes the company money, sometimes thousands, sometimes tens of thousands of dollars. At the same time, this founder, Ryan Breslow, sold millions of dollars of his shares in secondary, so he seems to walk away okay, but it’s kind of a disaster for employees who are now on the hook for these funds. The thing is, this was already attempted. If you listen to the All-In Podcast, you’ll hear David Sacks talk about this, where this had already been attempted in the ’90s, and it was proven to be a disaster, but he was touting it as this great new invention, this employee-friendly thing. A, did no one tell him this is a catastrophic idea, they tried this 30 years ago, and this same thing happened, or B, did people tell him, and he waved that off, right? 

He said, “Well, no, I’m going back to first principles. They did it differently. They did it wrong in the past.” I’m not saying we should be tied to every mistake that everyone makes in the past and never try things that didn’t work, but you have to learn from that art and do it differently. You have to learn from the failures and not just try the same thing again and expect a different outcome. 

If we are not as a community learning from prior art and reading books like Paul Graham’s Hackers & Painters, or the old blog post from Joel Spolsky, old posts from Peldi Guilizzoni, Patrick McKenzie, my books, my old blog posts and podcast episodes, if you just come on the scene and you don’t read any of that, then you can’t stand on the shoulders of giants. There’s a reason that in academics, you study and you go to school to learn what people before you have learned, so that you don’t have to reinvent everything from scratch every two weeks. If you come on the scene and you don’t read any of that, then prior to yesterday’s Twitter feed or Hacker News, do we just start over from zero every week or two, and we don’t drag anything along with us? Now, you could say, “Well, dragging things along is baggage,” and I want to, once again, go back to first principles, but at least know, “What’s been tried?” At least know, “What’s been talked about?” 

And you can make a case to disagree with it, but even that, just knowing what the common wisdom is, and then zigging when everyone else is zagging, at least make that a deliberate decision, not just a decision of, “I’m going to do this because I didn’t educate myself that I need to actually market and sell this,” even though, every week on this podcast I’m saying that. You go and start a B2C business, it has high churn, and you’re surprised everyone is price sensitive, even though every other week, I talk about that. You go and start a B2C two-sided marketplace, try to bootstrap it with no audience, even though I’ve said it so much, it’s become part of the Startups For the Rest of Us drinking game. And look, I’m not saying just me. I’m not saying, “Oh, I should say things, and everyone on the internet should hear it.” 

It’s not the case. There are so many smart people with experience that are talking about these things, and yet, there are so many people who are making the same mistakes over and over because they’re not doing any of the learning or the research on their own in order to stand on the shoulders of giants. As you start your journey, it’s hard enough already. Learn from the mistakes of others. You do not have to make every mistake yourself, and hopefully, if you’re a creator, if you’re recording videos, if you’re putting out podcasts, if you’re tweeting, that next time you mention someone else’s idea or framework, that you give them credit. 

My next topic is a concept I mentioned on a podcast four or five years ago, and then poof, it just disappeared. I had forgotten it. I think it was during an interview, and the idea of it … I want to bring it back up today because I’ve realized that there’s a lot of value in this framework. It’s about early stage product validation, okay? 

So if you’re a later stage founder, you may want to skip this section, but the framework I’m calling the 2-20-200 validation framework. So you know how I have the 1-9-90 rule, right? That’s where I think about 1% of tech companies should consider raising venture, about 9% should consider raising some type of funding, whether it’s angel, TinySeed, indie funding, whatever, and then about 90% should just bootstrap. It’s directionally correct. It’s directionally accurate. 

As Braden Dennis said on the show a couple of weeks ago, “This 2-20-200 validation framework is similar, directionally accurate.” The idea here is that there are three steps, three stages that can happen in order as you try to validate or invalidate a startup idea, and the numbers stand for the approximate number of hours that I think you’re going to spend doing them. So two hours, 20 hours, 200 hours. And the idea here is the first stage of two hours is something you can do relatively quickly. So if you have five different ideas that you’re thinking about evaluating, well then, you spend two hours each to do this very first step. 

And that first step really involves just implementing the 5 P.M. Idea Validation Framework that I’ve talked about on this podcast. You can Google that if you aren’t aware of it. I’ve recorded a YouTube video about it, and I am including it in my next book, which is about the earliest stages of building and launching a SaaS, and that book is already written, actually. I’m just going back and revising a few elements of it, but 5 P.M. Idea Validation Framework is something that, where you go through several steps and you can do it in literally a couple of hours. So if you have five ideas and you want to spend 10 hours over the course of a weekend, or a week, to just get a little better picture of which of these ideas might be the winner … 

And when I say winner, I mean better than the others. You go through the two-hour stage of the 2-20-200 framework. 20 hours is where you take it to the next step, and this is where you either do landing page validation, or you speak one-on-one with potential customers, or you do both. I tend to do both when I’m thinking about building a product. The idea, of course, is that if you’re going to have a marketing funnel and a low-touch product, then you put up that landing page and you try to drive traffic, and the way that you’re going to ultimately market the product, and you see what kind of opt-in you get, and you see what kind of traffic you get, and you see how many emails you collect, versus if you’re going to do high-touch sales, and obviously you want to have more conversations, I think doing both is always better. 

The idea behind 20 hours is, “How long does it take you to put up a landing page and/or reach out to your warm network for these conversations or reach out to your cold network for these conversations?” Set up ads. SEO takes a while, but cold outreach, whatever you’re going to do to start gathering qualitative and quantitative data around this. You’re not just sitting in a research modem like you are with a SEO keyword tool maybe within the two-hour section of this, but you’re getting out and spending more time. This is where, if you have five ideas, you probably don’t want to do all five ideas at the 20-hour mark. 

It’s just a lot of time to invest, and that’s where the first stage, where it’s only two hours into each idea, is helpful to maybe narrow you down to one or two, and then you move on to this second stage, where you spend 20-ish hours. And then the third stage is the 200-hour stage, and that’s where you think about building an MVP. And, of course, an MVP can be a no-code MVP. It can be a human automation MVP, like I talk about in Start Small, Stay Small, or it can be a full-blown coded MVP, and whether we call it an MVP or a V1 or something to get into the hands of people to see if they like it, what parts of it resonate and what don’t? And honestly, I’m putting together a video course right now for MicroConf that’s going to be out in several months, and I dive more deeply into this because there’s a lot to say about it. 

But the idea behind the 2-20-200 framework is to level-set in your mind that it’s not just this big amorphous cloud of “Validate.” It is there are specific stages that you can go through. I’m not saying this is the only way to do it. You can validate any way you want, but this is just a repeatable way to think about, “How am I going to go about being a little more confident?” This is the thing, right now, you’re probably 0% confident that this is a great idea. 

After two hours, are you 10 or 20%? After 20 hours, are you 30, 40%? After 200 hours, do you get to 50, 60, 70%? If it works, maybe. That’s kind of the goal, is to get a little more confidence before you invest a ton of time, tens of hours, if not, hundreds. 

You get a little more confidence, that the thing might work and that you might actually be building something people want, because that really is the hard part, right, building something people want and are willing to pay for. Credit to Paul Graham for saying, “Building something people want.” I added the and are willing to pay for, but doing that is really hard. I’m not saying everything else is simple, but there certainly is more of a playbook once you’ve done that, and my hope is that the 2-20-200 validation framework can be a sort of … It’s not a playbook per se, but sort of a compass or a guiding light as you think about validating your ideas. 

All right, my next topic of today is about design by committee and why I have always believed that it is by far the least efficient way to do things and that you just get bland, crappy output. Your art or your product or whatever it is usually sucks if a bunch of people have input into it. One example I can think of is every school project I ever did, where it was a group project, the more people involved, just the worse the quality was, right? Unless it was like a hand-picked group of people who are all on the same page and had the same vision, it was like the vision just tore everybody in different directions. And even at larger companies that I’ve worked at, after Drip was acquired, or with TinySeed, which isn’t a huge company, I tend to keep input to a minimum of, that everybody around here is really smart and competent because that’s what we like to hire, that’s who I want to work with, but I bring in one, maybe two people even to make really big decisions because the moment that I have six, seven, eight, nine people weighing in on a decision, A, it grinds it to a halt, and B, I find the output is subpar. 

And that two exceptional people who are on the same page with a similar shared vision can build incredible things, but the moment you get to three, four, five, it can often derail that vision. One example of this is a Metallica album called St. Anger. And if you’ve ever watched Some Kind of Monster … That is a documentary. It’s like two and a half hours. It’s actually pretty long, but it’s of Metallica almost breaking up. 

Is it 20 years ago now? Yeah, it’s probably about 20 years ago, and they bring in basically a therapist, like a … It’s like a marriage counselor. No, he’s actually a sports counselor, but if I recall, they’re paying him at 40 grand a month to be on call, and he’s trying to keep the band together. One of the things that a couple of the bandmates had an issue with was that two of the members of Metallica, Lars Ulrich and James Hetfield, had pretty much written all the songs up until then, and the band’s been together since what, the ’80s, since the early ’80s? 

So I mean, you’re talking 20 plus years, and these two guys had written almost all the songs and almost all the lyrics. Other people would come in with a riff or whatever, but then they would take it and they’d run with it, and there were some complaints, I think it was mostly from Kirk Hammett who’s one of the guitarists, that they wanted input. And so in this documentary, Some Kind of Monster, it’s pretty fascinating documentary, actually. If you’re at all into their music, it’s cool, but even if not, just seeing the dynamics and the craziness of trying to keep a band together, it’s a fun watch. I’ve seen it a few times, but one thing they do is they are writing the songs together as a group, and you can … 

It’s just painful. It is just painful to watch them come up with a riff and to hear the song be like, “This is actually a cool song,” and then they’re like, “Cool, so throw out lyrics,” and people are just throwing out random sentences that have nothing to do with each other, and they string them together as the lyrics to these songs. And so if you listen to the lyrics of that album, they’re terrible. They’re terrible, compared to the cohesive … Look, I’m not saying Metallica are the best lyricists at all before that, but at least there’s a story there. 

At least there’s poetry. At least there’s a cohesiveness to each song prior to that, but on this album, in particular, which … Look, a lot of people hate on this album, especially folks who really are into Metallica. I actually really enjoy the snare sound. It sounds like he’s banging on a beer keg, but kind of has this weird … 

It’s a different sound, and it has kind of almost a punk-ish vibe, even though they’re playing metal, but I don’t dislike the album specifically about two or three songs that are good, and the rest I would pass on, but even then, the lyrics are awful, and I don’t typically pay attention to lyrics that much in Metallica songs, but it is noticeably cringe. And I think 99, if not 100% of the reason, that is the case, is because they designed this by committee. They didn’t collaborate. They didn’t get two people or three people together and all with the same vision. It was, “You said you wanted to write, and the therapist said that we have to let you write, so let’s sit here and just write stuff out on a sheet of paper. Just call things out.” 

It almost feels half-hearted, and it certainly feels like they did not put out the best end product they could have because of this one or two people doing it could have done a much better job than the group doing it together. And so why do I bring this up, and why does it relate to startups? Well, back to my point earlier of, whether you’re on a big team or a small team, I feel like some folks are uncertain around what they’re doing and they feel like getting more opinions will add more certainty to that. And what I’ve found in rare exceptions is that the more people get involved, the more noise there is, and more chaos is created. Now, I will say that I’ve found it helpful to kind of semi-crowdsource some naming stuff recently, where I am trying to … 

I mean, I’ve had to name three books in the past. I guess it’s like maybe year, is that right? Yeah, probably last year, I’ve had to name three books and I’ll have to name a course, and I always want those names to be really good and catchy. And so I do brainstorming and I talk to some people and I go to ChatGPT, and I come up with a list, and then I narrow it down, or I come back three days later when it’s cold, and I start narrowing and narrowing, and then I start asking opinions, but I don’t go and ask 20 people’s opinion. I go to like … 

I’ll say my inner circle, and it’s like three or four people that I trust, that I know have taste and I know have an understanding of the space, and I say, “Hey, I have this handful of titles.” I don’t give them 50 titles to choose from, but maybe I’ll give them three or four, what I call short titles, which is like The SaaS Playbook, right? That’s the short title, and then I give them three or four subtitles. And with The SaaS Playbook, it’s build a multi-million dollar startup without venture capital. And so I have three or four of my tops that came out of like 50 plus, but it’s usually pretty obvious which of these I think are going to be great, and I get feedback there, and then I iterate, and I might even brainstorm again, then I go a little broader. 

I might go into the TinySeed Slack, or I might go to a MicroConf Slack, and get some input, and it’s always noisy, right? It’s always fuzzy. You’re guessing like, “Oh, all right, more people like this.” That doesn’t necessarily mean it’s the best one, I’m going to use it, but there’s a signal there, right? And then maybe after that, I might wind up on Twitter, and at that point, I’m probably trying to more confirm my own favorite pick or have two that are so similar that it maybe doesn’t matter, but I certainly don’t want to go to Twitter with 10 different options because you’re going to get 10% of the people liking each of the 10 options, and then how much good does that actually do you? 

So I do think that getting a lot of voices and input at a certain point can help, especially the further along it is, right? Let’s say you’re building a feature, you’re trying to figure out how it is complicated, how to build it, you get one or two people together, and you crank on this thing, and you put it out, and it’s art and it’s science, and you’ve got this amazing screenshot or this design that you’re using, then you bring it to some people who maybe kind of know how your product works, so they’re kind of in the space, right? And then you bring it to a few inner circle customers, and then you get broader and broader and broader, but you refine it as you go. So I’m not saying you can’t get other voices involved, but if you start with 10 people trying to design that same screen or that same idea, it is so difficult, so time-consuming to get everyone on the same page in a way that you can then be productive and actually move forward in a way that’s not just compromise. “Well, we all disagree, so let’s just do the thing in the middle,” and the mushy middle is like eating a mayonnaise sandwich. 

It’s very bland. A note to the listeners, I put mayonnaise on my turkey sandwiches. I also put mustard, and cheese, and often lettuce, and guacamole. I don’t dislike mayonnaise. Last time I said a mayonnaise sandwich, several people thought that I was ragging on mayonnaise, when in fact, what I’m ragging on is a sandwich that is made up of two pieces of white bread and mayonnaise in it. 

That is the analogy I’m going for when I say a mayonnaise sandwich. If it had turkey in it, I’d call it a turkey sandwich, but in this case, I’m saying, yeah, two pieces of bread with mayonnaise is just very bland. That’s the analogy. That’s all we have time for today. Hope you enjoyed this episode. 

Thank you for coming back this and every week, listening to Startups For the Rest of Us. If you haven’t given a five-star rating in iTunes, Apple Podcasts, Google Podcasts, Spotify, wherever your greater podcasts are served, really appreciate it. If you have, could you please go to Amazon or Audible and rate The SaaS Playbook as a five-star? You don’t even have to leave a review, I believe, and it helps me continue to progress on my mission to multiply the world’s population of independent self-sustaining startups. I’ve been doing that since I’ve started blogging in 2005, so almost 20 years. 

Yeah, next year it’ll be 20 years, and each year, as I’ve pushed that boulder up the hill, I’ve been able to increase momentum and grow the audience and grow the number of people that are impacted by this message. At this point, I do it because it changes people’s lives. I want everyone who wants to be an entrepreneur to have the same freedom, purpose, and healthy relationships that you and I do, so I always appreciate any effort you can put forth to help me continue on that mission. This is Rob Walling signing off from episode 706.