If you are planning to play it big on the world’s tech scene as a rockstar startup, do not read this any further. Are you interested in creating a low budget (50K-500K) tech startup that you want to exit for a profit? Then you might want to read this article.
What is a Nano/Micro Startup?
These individuals are professionals in their field of interest. They work for small to large companies. They have practical ideas about new products or services. But these ideas are not big enough to get external funding from venture capitalists.
These ideas also are not likely to turn into a public company. Their niche ideas solve real-world problems. But, the niche is often too small for a big company to jump in headfirst.
What to build?
Build a tech startup that solves a real-world problem for an existing market. A market that is willing to pay you for your solution.
Don’t create something that requires educating customers or building new sales channels.
Both of these activities are expensive and require external funding. Short-exit startups should focus on:
- Improving an existing product or service by saving time or cost
- Bank on the existing market and not need to build a new one
- Rely on existing sales channels to sell its product or service
- Rely on existing marketing channels to promote it
Do you need colossal traction?
The short answer is: no. Your selling point for the new owner is that you cannot create significant traction for a valuable product or service. So you do not need to get busy with a high volume of traction. You need just enough revenue generation to make it a product or service with potentials.
For example, say you create a subscription-based service that has 1000 paid subscribers and 10,000 unpaid free users. If you charge ten dollars per subscription every month, your gross revenue is:
Gross Revenue = (1000 x $10/mon) = $10K/mon
So if you want to sell such a business to a prospective buyer, you can expect anywhere from ($10K/mon x 12) x 3 . to ($10K/mon x 12) x 10.
A $10K/mon startup can be sold for $360K to $1.2M depending on the future prospect of the category of business and scalability of your technology
You might ask what magician’s hat I am pulling these numbers from, right? Well, they are based on my personal experience in helping tech investor friends with tech due diligence over the last decade. I cannot cite some online references here that you can look up to get reassurance. But, this is the ball-park estimates that I have seen over the years. I have multiple micro startups in development right now. All of them are spread between consumer and enterprise niches. I hope that we will be able to exit them with the gains that I have observed in similar deals.
When to Sell?
You need to sell as soon as you have enough traction to give you the return that you want from the company. For example, say a startup that has a subscription service cost $100/month per customer. Now, if the founder spent $200K building it and want to 3x exit at $600K, the math goes like this:
$600K = ($100/customer x N customers x 12) x 3
Here N = 167 customers. So that means that this company can have 167 customers, which gives its projected revenue to be ~200K/year.
How long will it take to get 167 customers for such a startup? It all depends on what kind of sales channel exists for such a business. If the business can tap into existing sales and marketing channels, it should be able to get such a customer base over the course of 1–3 years with reasonable success.
What if you love your startup and want to hold on?
That is perfectly fine. Nothing wrong with growing a startup to its full potential. As long as you have a great team and a cash-flow positive business model, this can be a thing you do for a while or for the rest of your life. I love the idea of long-lasting companies and making a brand name. But what I love and the reality in my current life is not conducive to such a wide-eyed dream. So I urge first-time entrepreneurs and business owners to try to exit the first business as quickly as possible with positive returns.
Who will buy your company?
This is the million-dollar question. There is no simple answer that works for every startup. I can only speak from my experience. Most small startups get acquired by a larger competitor. However, such acquisition is often time-consuming and comes with a ton of conditions. One common condition is that the founder become an employee of the bigger company and spends anywhere from a few months to one or two years to make the transition smooth.
However, a better buy for a nano-size startup — say run by a single founder with no employees — is a tech investor/marketer who can hone the marketing and sales to increase the revenue. There are many micro tech investors/marketers who are buying small startups and turning them into more profitable companies and possibly selling them for a bigger return to larger companies.
I will do a follow-up story on where to find these tech investors/marketers if there is interest in the future.
Building a business is an iterative process that most of us go through without realizing it. Every iteration, we make better decisions about things that didn’t go right in the last round. Trial and error is the oldest algorithm of new business.