How to avoid building a company that you’ll hate

How do you know if the business you’re running will enable you to live the life you want to live? This was a major question we grappled with during our year-long search for our next business venture, a process we imaginatively termed “Project Next Biz”.

This is the first in a three-part series. In this post, we’ll talk about how we defined success for “Project Next Biz”. We’ll also share the framework and exercise we used to figure that out.

  • our psychology during the negotiation
  • the risks of buying Codetree
  • and a whole lot more

A little about us

A little about us before we jump in. We’re three business-minded software devs with 45 combined years of professional experience building software. We’ve started, run, folded and sold several SaaS businesses. We’ve done venture backed and bootstrapped startups. We’ve worked at companies like Microsoft, ESPN, and MySpace. We’ve worked together before and we wanted to work together again.

Defining Success

“It is remarkable how much long-term advantage people like [Warren Buffett and myself] have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” — Charlie Munger

We’re big fans of Warren Buffett’s business partner Charlie Munger. Charlie is big on avoiding mistakes and our past ventures had given us a long list of mistakes to avoid. One mistake we’d made is that we’d never defined success when starting previous companies. We’d skipped this step and headed right to the problem/solution and financing approach.

Before you begin, decide where you want to end up.

A useful exercise

One exercise we did to figure out where we wanted to be was to write down what a day in our lives looked like when Next Biz was successful. We answered things like:

  • What kinds of things were we doing? In what parts of the business?
  • What kinds of customers were we serving?
  • What kinds of problems were we working on?
  • How much were we making?
  • What was the culture like?
  • What kind of office did we have?
  • Who did we talk to regularly?
  • How many reports did we have?

Non-Financial Success

We admire companies that focus on making customers happy, charge for it, and do it on their own terms. Their owners can control how they spend their scarcest resources: time, attention, and energy.

  1. Operational Complexity
  2. Accountability
  3. Company Size
  4. Team
  5. Nature of the work

1. Sales Model

Do you rub your hands in glee at the thought of coming into the office and talking to prospects all day? If so, you’re probably better off selling to customers with a high Annual Contract Value (ACV).

  • You have longer sales cycles
  • You have contract negotiations, and they’re often painful
  • The buyer isn’t the user. This means sales skills are often more important than building a great product
  • Churn is probably lower
  • You can get to scale quicker
  • It’s harder to get to scale
  • Churn is often higher
  • A self-service sales model is possible
  • Marketing is important to drive traffic and potential customers to your site
The 5 sizes of customers from Christoph Janz

2. Operational complexity

Operational complexity can dramatically impact quality of life. We’ve run operationally complicated businesses. One business has hundreds of software scrapers that often break. Another was a web app that relied on people to do a lot of data entry. Those were more painful than the straight software businesses we’d run.

3. Accountability

We wanted the people we work with and our customers to hold us accountable, not investors.

4. Company size

None of us want to run a huge company. 100 people would be pushing it. We’d prefer to work on the business than manage people and deal with the inevitable politics and bureaucracy that comes with that. So having a small, excellent team was better than a large one.

5. Team

We like the idea of working with nice, talented, motivated, self-managing people. Buffer, Zapier, Help Scout, and Basecamp are companies we admire who do this well.

6. Nature of the work

In every business there are going to be some tasks that you really don’t want to do but that you’ll have to do anyway. But to the extent possible we’d prefer the business we’re working on to reward us for focusing on the tasks that we actually enjoy doing. For us, those tasks are:

  • using that knowledge to make the product better
  • and marketing the product

Non-Financial Success: where we ended up

Here’s what we netted out:

  • A business that’s operationally simple
  • Being accountable to our customers, each other, and our team
  • Having a small company of well paid, professional co-workers
  • Enjoying the nature of the work

Financial Success

It’s difficult to isolate success in financial terms because it’s tied up in non-financial success. For example, if you’re aiming to be a billion dollar company, you probably need to raise money. This means you’ll have investors and a board that you need to manage (and that can fire you). Below, we share how we tried to tease out what financial success looked like to us.

Company founders are either in it for the money (“Rich”) or in it to build a lifestyle and personal identity (“King”). FogCreek and 37signals are built to be “King;” all venture-funded companies are built to be “Rich.”

At his last company, Smart Bear Software, Jason became both Rich and King by initially focusing on being King. He retained control and focused on profitability. He didn’t raise a boatload of VC money and hope his company would be acquired. His company’s profits enabled him to build the kind of company he wanted.

Do you want to be rich, or be king?
  1. Do we want to optimize for steady cash flow, or for a billion dollar company?

Steady cash flow

We’d already started four cash-flow generating companies. We’d made upside-limiting mistakes with previous businesses, so none of them got as big as we would have liked. (We’ll cover these mistakes in part two.)

Billion Dollar Company

There’s nothing wrong with wanting to build a billion dollar company. We need people that want to do this. But before you go down this road though you should make sure you really are one of those people. You want to make sure you’re doing it for well thought-out reasons and that you have a firm grasp on the math. Don’t be fooled by survivorship bias or breathless media sensationalism about the latest rags-to-riches entrepreneur — those are the exceptions, not the rule.

  • Get lucky
  • Catch lightning in a bottle
  • Have your investors’ agendas stay similar to your own
  • An $80M exit where the VC owns 20% of the company yields $16M back to the VC’s LPs. This $16M makes up 1.33% of the $1.2B that the VCs need to return. In other words, an $80M exit which most entrepreneurs would be proud of is inconsequential to a VC.
  • A $3B exit (assuming 15% VC ownership) yields $450M to LPs. This is a little over 33% of what the VC needs to return to his investors

Financial Success: where we ended up

Heads I win, tails I don’t lose that much.
Monish Pabrai, author of The Dhando Investor

Another way to figure out the Rich Vs. King question is to ask yourself which of these two scenarios is more appealing to you:

  1. You’re a founder of a closely held company. You own 33%. You’re only known in your own niche. Your name’s not in lights and no press writes about you. Your company is worth $30M. Your stake is worth $10M.

Our combined definition of success

After walking through this process, here’s how we defined success for ourselves:

  • We’re working with a small number of well-paid, well-treated smart co-workers who work at a steady pace.
  • We get to enjoy the day-to-day work of making and marketing software.
  • We’re in control of the company, not investors.

Next Up

Part two is about how we evaluated the many paths we could take to maximize our chances of success. We’ll share the framework we used to determine the problem that we chose to solve. We’ll also talk about how we arrived at our ideal financing approach.

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Co-Founder @ Savio.io. Savio helps Product teams centralize and prioritize customer feature requests to the roadmap to drive revenue and build better products..

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Kareem Mayan

Co-Founder @ Savio.io. Savio helps Product teams centralize and prioritize customer feature requests to the roadmap to drive revenue and build better products..