12 Rules For Building Your First Profitable Startup
I’ve been obsessed with Internet Startups for almost a decade now, and I still find myself consuming as much content as possible about the best way to startup a company that is setup for success. As luck would have it, I am actually running a profitable startup now, so I figured I would assemble a set of rules I wish someone had given me when I was trying to start my first few companies.
Now, I know for every rule in this list, you can name exceptions. I get that. And I don’t care.
This list is for someone looking to start their first Internet Startup who is interested in bootstrapping a reliably profitable company that can then open the door to the next big project.
That’s my plan; I am running a profitable company, and I plan to use it and the experiences and capital I am getting from it to slingshot myself into the next, probably riskier project. The rules below are compiled together because if you can design a product that follows all of them, you have a much better chance of investing your time and energy into something that stands to be profitable and successful.
I firmly believe first time startup founders shouldn’t be trying to build the next Reddit or Facebook. Yes, I know they’re both profitable (now). However, they’re both exceptions to the rule of both the markets they’re in. They’re great ideas to pursue after you have money in the bank and are not risking everything on your idea. Until you reach that point, I think you should focus on ideas that, while smaller, can much more easily be made profitable.
This is just my opinion and I know many out there will think I’m an idiot. That’s cool. I dig that. But hopefully those who don’t think I’m an idiot and are looking to get started in the world of internet startups will find this set of rules useful.
I have two main goals for this post:
- To provide a set of rules for first time startup founders to follow to help increase their chances of building a successful, profitable company
- To use as many tacky stock photos as possible
Rule #1: Sell something
This seems so outrageously trivial to even mention, but there is unfortunately a disease amongst (especially younger) startup founders that all you need to be successful is something that is popular or “viral”. Building a site with a ton of traffic and then slapping ads on it and profiting is something that is an exception to the rule…more often than not, your “business” will fail far before you’re ever able to even attempt to monetize.
I said “business” because by definition, if your company isn’t selling something, you have a project, not a product. The Internet has opened the doors for “companies” that raise lots of venture capital money and grow a huge user base without even beginning to think about trying to be profitable (Ya know, that one metric that trumps all others in the business world? The bottom line? The…never mind).
Now I know a lot of people who make their living exclusively from either ads or affiliate marketing, arguably having never “sold” anything for the lifetime of their business. These people are highly specialized and have niche knowledge that most simply don’t have (hell I couldn’t do what they do). Unless you are starting with lots of capital, focus on profit first. Always. It is risky as hell to target growth first and then monetize later.
Rule #2: Build a product your customer can directly or indirectly use to make money
There are two types of ways they could make money with your product (There are actually a lot of ways, but for simplicity’s sake, I’ll stick to the two main ones):
- They either resell your product or sell whatever your product produces (such as a website builder, SEO report tool, etc)
- They use your product to cut down their own spending or eliminate the need for certain employees (Think automated time tracking, automated invoicing, etc…anything to reduce the amount of administrative work they might be paying disposable employees to do).
Monetizing the average internet user is hard. Yes, it’s possible. Yes, there are lots of startups out there that have figured it out. But the success rate of B2B companies is almost always going to be higher than B2C companies because business owners understand that what they need to operate their company oftentimes costs money.
In this internet world we live in, most consumers are appalled at the idea of having to pay for anything ever. So rather than fight that uphill battle, target customers who are ok with the idea of spending money and you’ll be able to sleep much more soundly at night.
Rule #3: Build a “must have” product, not a disposable “nice-to-have” product
If you frequent any sites like Hacker News, you’ll inevitably see a lot of people posting their “startup” ideas for review by the community, and a good amount of them are really neat projects, but they aren’t mission critical products. If you want to increase your chances of early stage success with your first startup, you need to focus on building products that once your customer has started to use, they will be in pain if they have to get rid of your product.
The idea of building products that solve customer’s pain points is spot on; there are few better ways to ensure success in a startup than by building something that directly alleviates your customers’ problem.
The true key to startup success is to make a product so good that you alleviate your customer’s original pain point, and then make the idea of losing your product the new pain point.
Rule #4: Replace part of your customer’s workflow with a better solution
So after reading the previous rule, you might be wondering how you go about making a “must-have” product. The easiest way to do that is to look at your prospective customers’ current business processes and identify steps or tasks of theirs that can be simplified, automated, or eliminated.
An example: there are a ton of companies launching lately that can do intelligent transactional emailing. What the hell is that, you ask? These products can do things like “Email a reminder to setup a new project to any customer who signed up for a free trial more than 2 days ago who hasn’t already created a new project”. This is an incredible tool, and is sure to increase your conversion rates significantly, and it would be an absolute pain in the ass to have to do such a thing by hand if the product didn’t exist.
Take your customers’ pains and build something that is so delicious they can’t help but pay you.
Rule #5: Have a “no-touch sales process”
I have no idea if “no-touch sales process” is actually a phrase or not, but I like it so we’re going to use it for this rule. A no-touch sales process is the exact opposite of a high touch sales process. A high touch sales process generally consists of multiple steps, lots of hand holding, and a complete inability for your customer to buy your product without having to interact with a human being on your end.
A real life example would be the process of buying a car. You can’t just walk up and swipe your credit card at a car vending machine and drive away, you have to jump through multiple hoops before getting those keys.
The simplest way to think of a no-touch sales process in web apps, and the internet in general, is that if your customer doesn’t have all the information about your product and the ability to buy your product ON THEIR OWN from you while they sit in their pajamas at 2:30AM and you’re sleeping, then you’re just asking for failure. We are living in a global economy, you will have customers in every damn time zone in the world as you start growing. Your customers need to be able to give you money at any time, as simply as possible, without you having to do a single thing.
Rule #6: Build something that can scale independently of your staff
- They have a massive sales staff to keep deals flowing in for each new day
- They need a shit ton of customer service people to service all of their customers.
They aren’t running a scalable company. Their growth is entirely dependent on the size of their staff. They aren’t using the advantages technology and automation give us all in any way whatsoever. Hence why their balance sheet is so god awful.
The more customers you can pack into the same server architecture, the more sales you can get without having to hire new staff, the higher your customer-to-engineer ratio, the better you are at winning the Internets.
The internet has given us all the opportunity to launch a company for the cost of a month’s worth of hosting (and with companies like Heroku, not even that anymore). Build a product that’s growth is independent of the underlying staff responsible for it.
In fact, same goes for underlying technology as well. I’ve seen many newer web app developers say that they’ll put each customer on a different VPS or give them each a different database so things are more sharded and secure. For the love of god, stop fighting against modern technology. Centralize everything. Unless you’re building medical records systems or something, follow convention (if you’re building a medical records system, you shouldn’t be taking advice from this post anyways, get out of here).
Rule #7: Avoid products that rely on a community to exist and grow
I’m using the example of a community here, but there are a lot of other examples as well of certain products you should avoid building as your first startup. The underlying maxim for this rule is this: don’t build a product that’s value is dependent on something out of your control.
It’s really damn hard to build a community.
It’s really really damn hard to build a community of people who don’t just lurk in the shadows.
It’s really really really damn hard to build a community of people who actually actively participate.
If the value of your product goes up and down based on the amount of participation from the community, you’re kinda fucked.
I can’t stress this enough.
Yes, I know there’s lots of big communities out there that arose from the dirt and are so cool and popular, but few if any got their start entirely organically…so unless you have Paul Graham blogging about you or already have a big following in some form or fashion, stay away from community based startups for your first startup project.
Rule #8: Build a specialized version of an ordinary product targeted at a niche you’re acquainted with
I’m a pretty good coder, and I feel I have a good grasp of startups and how to strategically design a web business. That being said, I would never try to beat Basecamp at their own game. Going head to head with Quickbooks Online makes me want to be sick. “Hey, let’s build a better Youtube!”…just, just stop it.
We all have weird hobbies, or backgrounds, or interests. Smash those together with your technical know how or design talents and build a niche targeted product.
Example? https://planscope.io/ Sure, you could probably use Basecamp and do about the same kind of stuff as PlanScope. However, PlanScope is targeted at a very specific type of customer (namely, a digital consultant or small agency with clients). They specialized the generic project management software we’re all so used to and targeted it at a specific niche.
This limits their market size, yes, but it also:
- Increases their chances of appealing to and pleasing a very specific type of user
- Doesn’t force them to attack a bunch of 800lb gorillas all at once.
Rule #9: Don’t avoid competitors
“WTF you just said avoid the big guys!” Yeah, I know. However, I think a lot of founders make a misstep when they’re planning out their ideas when they stop in their tracks if they see competitors out there. Competitors are a good thing. Why? A competitor with customers is a market validator. What does this mean to you? It means you don’t have to spend your time and money finding out if anyone will actually buy your shit.
Piggy back off of your competitor’s efforts in finding the market you want to target and then kick their ass by building a better product. There’s always room in any market for something simpler, faster, or more beautiful.
I’ve covered this in more detail here: Competitors Are Awesome You Dummy
Rule #10: Never compete solely on price
Careful readers might have noticed that I didn’t list lower prices as a way to compete in the last rule. That’s because pricing your product as the cheapest solution simply so you can market it as the cheapest solution is a great way to go down in flames. Your product’s price should be based on the 10x Rule. What is that, you ask? The 10x Rule is that your product should deliver 10x more value than the price of your product. So if your product costs your customers $99/month, you should be delivering about $1000 in value.
You might be thinking “How the hell can I charge so little for a product delivering that much value?” Well:
- Your product shouldn’t cost a lot to run. Servers are cheap, storage is cheap, bandwidth is free at a lot of hosts nowadays. Something like Basecamp probably costs 37signals less than 1% of their gross revenue to run their technical architecture.
- Imagine you built FreshBooks. I would imagine FreshBooks has replaced more than a handful of bookkeeper’s jobs since its inception. Even a part time employee can end up costing thousands per month. So your cheap little SaaS product all of a sudden replaced an employee and the customer who bought your product LOVES YOU NOW.
Even more careful readers will also realize from this rule that the 10x Rule is a very powerful marketing tactic. You’ll invariably still get potential customers who will complain about your pricing. But if you ask them if they “Pay more than $3.33/day to their book keeper to do the same job?” you can very quickly change their minds. Spin it spin it spin it.
Rule #11: Build something that you know can exist for at least 2 years
Most startups hit their sweet spot at about 18 months. Yes I know there are exceptions. But don’t pick a fleeting idea for your startup. Don’t try to capitalize on something trendy. Oftentimes the most boring niches and products are some of the most profitable.
The internet allows us to start a whole new company every 2-5 years, which is unprecedented. I plan to start at least 5 companies in my life. That’s a ridiculous notion when compared to even 20 years ago. Capitalize on this ability and build awesome companies that can last 2-5 years.
The internet moves fast, you need to move with it but you still need to give your ideas an opportunity to grow.
Rule #12: Don’t plan for exits or VC money
If your business plan includes the phrases “get acquired” or “raise a big round” you 1) need to stop reading TechCrunch and 2) need to rethink what the hell you’re doing. Exits are the exception. VC rounds are the exception. Focus on selling your product for a profit. Nothing else is as important as selling your product for a profit, I promise.
Focus on selling your product for a profit
Focus on selling your product for a profit
Focus on selling your product for a profit
Of course, it’s entirely possible to build a wildly successful startup that doesn’t follow a single rule in this list. And that’s what makes the tech world so awesome to be honest. My goal with this list isn’t to provide the ONLY set of rules for building your first profitable startup, but instead to provide a SUGGESTED set of rules that will hopefully set you up the best for success in your first startup.