Random musings on startups, coding, SEO, and everything in between


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:

  1. To provide a set of rules for first time startup founders to follow to help increase their chances of building a successful, profitable company
  2. To use as many tacky stock photos as possible
Let’s get started…

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

This directly extends the first item in the list. The best customers to try and monetize are those who will take your product and use it to make money in some way.

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):

  1. They either resell your product or sell whatever your product produces (such as a website builder, SEO report tool, etc)
  2. 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

I think the easiest way to explain this is to give an example of what you should NOT do. Think about Groupon. They have tens of thousands of employees. They have this many employees because:

  1. They have a massive sales staff to keep deals flowing in for each new day
  2. 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:

  1. Increases their chances of appealing to and pleasing a very specific type of user
  2. 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:

  1. 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.
  2. 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

Closing Thoughts

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.


About the Author


70 Responses to 12 Rules For Building Your First Profitable Startup

  1. Jack says:

    This post is far too thorough with too much quality content and as a blogger it offends me very much.

  2. Sofa says:

    Great article, Numbers 5, 8, and 12 seem the most important to me.

    One issue with your site though is that I get “ajax error” alerts from your footer scripts.

    where_go_count.onError = function() { alert(‘Ajax error’ )};

    Probably just want that to log.

    • admin says:

      yeah, been getting reports of that from a few folks, going to disable that plugin for the time being.

      Thanks for reading!

  3. Brennan Dunn says:

    Hey! You hit the nail on the head. I’m guilty of a few of these (namely, competing on price – I need to charge more!)

    But thanks for the kind words about Planscope, I’ve had a LOT of success and testimonials from customers, and you’d be amazed how many people I recommend NOT to use Planscope – it’s super targeted: freelancers and consultants who tend to work with more naive clients. But that’s a big enough group. And as a solo founder, if I can get 1000 people paying me $20… I’ll perfectly happy while able to offer a very focused product that helps a niche.

  4. Brandon says:

    Can you give us more insight about actually find a product idea that is a “must have”. I admit it sounds really easy, but it’s not so simple to implement. Do you have any ideas or suggestions for someone having trouble finding that idea?

  5. Yohann says:

    Excellent post! A little explanation about why you chose some stock photos would be nice to have! :)
    Cheers

    • admin says:

      Hey Yohann,

      I tend to try and pic ridiculous images for my posts because I find it ironic. Though I am no hipster in real life, I suppose this is the most hipster thing I do :)

  6. John Turner says:

    Love all of this, but #7 might be my favorite. So sick of hearing people saying “I could’ve built Twitter,” but damn is it hard to get people to use stuff like that.

    • admin says:

      About every 3-6 months I try to start some sort of community, be it a forum or a Q/A site or whatever. They always run out of steam after a few weeks.

      I honestly think there’s an opportunity here for a company to be created that specializes in getting communities jumpstarted. I think it’s a matter of getting quality content on the site, simulating a lot of activity (a la Reddit in the early days) and then getting lots of social media exposure so you can attract new users quickly while activity is high.

      • Love this post..

        Although point 7 has me shaking in my boots as my next Startup is just that.. a community website!….. oh boy.

        It is niche, B2B and I have given the business model a lot of thought – feedback from people I’ve spoken to means I’ve had to change the model and pricing a few times..

        To help with building attractive content to drive growth, I’m recruiting an expert faculty who will provide direction and authority. I will also work with that faculty to generate resources, such as benchmarking reports and Webinars, that add value and benefit to entice membership – which has a fee. So I really really hope I’m covered..

        But I can clearly see where you are coming from and just hope I don’t go down in flames when it launches…

        If I do its probably back to being a desk jockey somewhere while dreaming up a new app (keeping one eye-ball on this post).

        ps. love planscope – awesome stuff.

  7. Chris says:

    Great article, I would second all of your points and follow similar internal rules for our own start.

    Awesome!

  8. Huy says:

    Definitely hit the nail in the head with the segment about trying to build a site that requires a community. I’m finding out the hard way that it takes a lot of community-building know-how to successfully launch one of those.

    • admin says:

      Huy, make sure you document all of your efforts whether you succeed or come up short. I think to become good at starting a community you have to really review your previous efforts and keep trying new ideas until something sticks.

  9. Anthony says:

    Great article full of practical content. A must read for all to get a grip on the hardwork that is required for success. Its easy to get lost in the dream and miss practicality sometimes (IMO). Thank you for writing this piece.

  10. ktr says:

    Great article, thanks very much! Quick question: any recommendations / links regarding “intelligent transaction email” launches? I’ve been interested in potentially using a service like this, but haven’t seen any that fit my fancy.

  11. tom says:

    I wish I had read this about 8 months ago (but then, you would’ve had to have wrote this at least 8 months ago) when I started doing my first startup. I swear to God, I think I did everything your list is warning not to, and got my ass thoroughly abused in the valley.

    Anyway, great article.

    • admin says:

      The wonderful part about getting beat up in the tech startup world is that we all have a lot less to lose if we go out of business (hopefully) since we don’t have physical storefronts, tons of employees, and inventories. Sorry to hear about the ass beating, but hopefully it’s just fueling your fire for your next attempt :)

  12. Clint Lenard says:

    Great post! I actually kept this open in Chrome so I could finish reading it, but Chrome crashed and then the page had a bandwidth error. Glad to see it’s been resolved. Looking forward to reading new posts!

  13. Taylor says:

    I am also insulted by the intelligence of this article. Sheeesh.
    How can I continue being a startup martyr with rediculous advice like this.

    Can’t I just build it and they will come…..

    P.S. you rock.

  14. Ted says:

    Great stuff, Darrin. Point #8 reminds me of “Crossing the Chasm”.

    The other important point is – by focusing on a niche, instead of a generic area, you can also charge more, since your product is pre-formed for the intended user.

    Need to build more than a template, but less than a new product…

  15. Fab says:

    This a great post. Definitely gonna pocket this for another read.

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  17. Tamara Field says:

    I like your blog a lot. I am on my second start up and a lot of what you say rings true. My motto in general is that you need to service as many customers as you can. Sounds simple but if your company is a law firm, for example, and you are the only lawyer, you are limited by your time to service your clients. If you are web based, and automate as much as possible, you can service more customers by yourself.

    Also, it should be mentioned that you can’t wait until you know everything about your business before you start. Most things you are actually going to be ‘learn as you go’. Sounds crazy but I started a hosting company in 1999 and didn’t even know Linux. I did have a background in programming and systems administration, so I learned pretty fast and had upper level support from the data center, but it was kinda crazy in the beginning. If you wait to learn everything you will need to know, it might never happen. Sometimes you have to ‘just do it’. That’s essentially what entrepreneurs do.

    Also, I was able to sell my first company but the process was agonizing and took forever. We sold our customer base to a competitor. Not sure if I will sell this company or at least for a while. Selling a company takes a lot of your time and it means your source of income stops. And most people would be surprised how fast your money can disappear when you get it that quickly.

    • admin says:

      Wow Tamara, great comment! I agree with all of your insights, the whole idea of analysis paralysis affects so many startup founders out there and it’s important to focus on just sitting down and doing the work and seeing what happens rather than speculating on the outcomes.

      I would love to chat with you about your previous startup acquisition process and your revised thoughts about approaching that process again in the future if you’re interested in having that conversation. Just let me know!

  18. You have me rethinking the whole community building thing now, you make lots of great points, but this one resonates the most with me. Thanks for writing this , lots to learn here!

    • admin says:

      Thanks for reading Jeremy, I hope to expand each of these rules into individual full posts so hopefully I can help you out a bit with some examples and tips from what I’ve learned about that rule specifically.

  19. Brecht says:

    You’re dead on with this. I have a profitable online app that follows most of your rules. To some extent #11 scares me, 2-5 years is not enough. I’m approaching my 3rd anniversary. I’m also using my breadwinner as a sort of personal incubator for other projects and who can ever know how long a thing will run but I think the idea is to iterate and grow your product. Starting 5 companies is a fck pile of work. Building a bigger badder product or adding more reasons for the same audience to pay me is what I’m thinking about lately as an alternative to running off on every idea I have for a new company, god knows I’m not short of ideas for companies… time, resources and capital (mostly time) are another matter.

    • admin says:

      Hey Brecht,

      The 2-5 number really was pulled out of thin air to be honest, it was based on what I know of the lifespan of most online companies. It is massively dependent on the 1) niche you’re in and 2) type of product you have. If you built an inventory web app for hardware stores, I’m sure you could run such a company for a decade or more. Something more “trendy” probably has less of a lifespan on the average.

      “I’m also using my breadwinner as a sort of personal incubator for other projects and who can ever know how long a thing will run but I think the idea is to iterate and grow your product.”

      This is the exact same mentality that I have. Essentially these rules are compiled in support of my belief that your first startup should provide the seed capital you need to take on more risky or convention flipping ideas you have later in your career. It’s not for everyone of course, but it sounds like you and I have very similar business philosophies :)

  20. Chris Aitken says:

    Really enjoyed this article … similar to others I wish I had found it sooner :-) But seriously appreciate the thoughtfulness of the advice.

    Cheers, Chris

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  22. Emily Shenton says:

    I’m not in the tech scene but in the social enterprise sector in the UK and alot of what you say here is applicable to what I am doing now and the space we are operating in. I guess the same good old fashioned principles of business apply anywhere. How frustrating ;-)

    • admin says:

      Hey Emily, that’s really interesting to hear that you’re seeing a correlation! I think it all really boils down to reducing the scope of the risk you’re taking on when you’re bootstrapping your first startup since there is so much to learn about business in general your first time around.

      Thanks for commenting!

  23. mike says:

    Really liked the 12 points as well.

    At the start of the article you say “I firmly believe first time startup founders shouldn’t be trying to build the next Reddit or Facebook”. I wish I could agree.

    Startups take a huge amount of time and why shouldn’t you go big??

    When I started building my local search engine, no one was talking about startups like they do today. I feel fortunate that I had the foresight to have a business model that fits into your 12 rules.

    I’m just coming out of stealth mode and look forward to the crazy ride ahead.

    thanks for sharing your experience

  24. Jon says:

    Uhm, so much good content here. Humorous and pithy, what more can you ask for? 8)

  25. Greg says:

    Thank you for this. It’s exactly what I needed to get my ass in gear. I have an idea in my niche of expertise, but I’m not a coder. Any suggestions on where I can find and vette someone to help me build it out?

    • @greg That’s the million dollar answer. EVERY developer I know who is good at what they do is booked solid. I’ve been gleaning advice from entrepreneurs, developers, and peers—here’s a quick summary of what I know:

      • Teams of 2 or 3 work well (developer, designer, and business person. Or dev, designer/business)
      • Work on a small project before you enter into your main idea. This way you can assess compatibility and how each person delivers on their promises
      • START SMALL. Get your idea out there with only what’s needed to operate. You can always revise and revise more
      • Be weary of hiring someone who has no vested interest in your success. People will tell you what you want to hear to get your business then do a poor job. This is not always the case but I’ve seen it happen many, many times. Someone who will partner with you is ideal since your idea will involve so much more than you ever expected and budgeted. Also worth noting, dev’s get propositioned all day every day with partnership inquiries. To catch their attention you’ll likely need to offer ownership AND good pay.

      That’s my two cents!

    • A good place to look for a CTO is https://angel.co/

  26. Great article! Totally agree and my favorite is is #9 – especially in a new space.. Gives extra validation to your idea!

    Thanks!

    Arjun

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  31. Sumedh says:

    Great article, Its amazing that many people just ignore point no. 1.

  32. james says:

    Solid advice for anyone looking to SaaS, but don’t be so quick to ignore the profit potential of ad and affiliate based sites.

    There’s a ton of cash in user generated content. reddit, forums, blogs, the list goes on for miles.

  33. jason says:

    I really appreciated the “no touch” sales strategy. Making the buying process clear, reasonable and cogent on its own is a simple idea, but easily overlooked.

    Great post.

  34. Sal says:

    Gold! Great advice all in one place and a good reminder for when we stray from the path. Thank you

  35. heather says:

    Beautiful. I loved the point that B2B has a better likelihood of success than B2C…obviously that’s your opinion but I like the justification you provide.

  36. John Ware says:

    What about Facebook client for iOS? What do you think about that kind of startup?

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