A lot of people are familiar with the dangers and risks of starting a business.[caption id="attachment_1176" align="aligncenter" width="700"]
...You know what's cool?[/caption]What if people don't use your product? What ifGoogle enters your market?What about those gruesomefailure stats ?Shitty, right?If your goal is financial success, it seems, starting a business might not be the best way to go.But what if it could be?What if you could break down a business model in a way that would give you more confidence that your business wouldn’t be another failure stat?In 2011, when I was working that 9-5 sales job, I came across this video by David Heinemeier Hansson, the creator of Ruby on Rails andpartner at Basecamp (formerly 37Signals).In the video, David does a terrific breakdown of a beautifulbusiness model - subscription revenue - that makesthe lofty goal of building a million dollar business incredibly attainable.Here’s the formula:
Simple? You bet.Too good to be true?I think not.If you can suspend a little bit of disbelief... when you break down that big number ($1,000,000) into it's component parts, it becomes surprisingly digestible.So let's do it.
Assuming you can build a product or servicethat averages $50/month of revenue per user (well known as “ARPU” - Average Revenue Per User), the foundation for the formula is set.To put this number into perspective, we average $48/mo right now with our mobile app for street teams.It's not hard to imaginemany different ways you can create $50/mo of value for customers, from X-of-the-month clubs, to online membership sites, subscription software tools.Looking particularly at business contexts, $50/mo isn’t much for almost any business to spend on a product or service that helps them save or make more money.
If you focus on generating revenue and profit with a small team, you don’t have to build the next Dropbox or Spotifyto make a great subscription business.1,667 is a relativelytiny market.To put that number into perspective, there are 40,000 Chinese restaurants in the US.If you built a product or service that served Chinese restaurants in the US for $50/mo and attained just 4% penetration, you’d be a million-dollar business.Further…
Early on, my buddy and successful SaaS entrepreneur John Campbell offered me a great nug of advice.He told me that 1,667 customers is a great goal, but that we shouldn’t focus on that when we were getting started.Instead, we should break it down:
Most subscription startups die going from 0 to 15 customers, he told us.It's in your first 15 customers that you’ll build a product that people would actually use.When you’re just getting started, then, you can forget about your grand goal of 2,000 customers.Just worry about building for the first 15.It was tremendously liberating advice early on, freeing us up to focus on the immediate next step instead of worrying too much about the future.
For most people, it would be life-changing to make just a fractionof that.True, this formula assumes a top-line revenue goal, which should not be confused with net income.But more and more, especially in the world of subscription software, low overhead and minuscule variable costs are bringing the two numbers closer to one another.So say you have one co-founder, and together you build a product that you sell for $50/mo. At just over 400 customers (freakin' 1% of those Chinese restaurants!), your little business will be generating $250k in annual revenue, and you and your partner would quite likelybe clearing 6-figures each in net income.Not to mention you’ll be building an asset that has it’s own sale-value that is some multiple of your annual revenue.Those are big wins in my book, and a great place to start.
I was confidentthat wecould build a product that would create $50/mo of value for customers.I was confidentthat wecouldbuild a product that, to start, 15 customers would find useful (...and eventually 100, 500, 1000+).And, bottom line, I took a look at my meager $40,000/year salary, and I knew we could beat it.This simple breakdown gave me the confidence to make the jump to starting my own business, and the focus I needed to stay patient once we got started.
If all this is so clear and so simple, why isn’t this formula talked about more often?Why aren’t those who are supposed to support startups and entrepreneurs the most - the angel/seed investors, accelerators and the tech press - encouraging more young entrepreneurs to pursue these nice $1M outcomes?As it is, the humble ambition to reach $1M, while a fine financial goal for most of us, is not what investors, accelerators, or the tech press are going for.It’s not their business model.When they make investments, they know that MOST of their portfolio companies will end in no returns.They expect a handful will return the money or make modest returns.And, they hope, one or two of their investments will be a runaway success. A 50-100x return with a Billion-dollar exit.The big hits, in theory, make up for the losses. So they want you to swing for the fences, even if you’d be content with just a comparatively safe $1M “base hit".And the tech press? You won’t hear much about these nice $1M/year businesses, because there’s not that much to write about!There’s no big events for them to publicize. No big marquee fundraising events, no massive sales to Facebook, no big IPOs.While a nice $1M business might change your life and be a game-changer for your customer base, it won’t necessarily be a massive story that the tech press can latch on to.So we don’t hear much about these nice $1M businesses.
Despite what I just said about investors, accelerators, and the tech press, I don’t hate them or anything.On the contrary, I deeply admire and respect them, and even aspire to join their ranks in time.What I mean to make clear is that it’s just a different game.So, if you’re a young, first-time entrepreneur, it’s important that you recognize that what’s a win for you and me (ie - making more than double your market salary with $250k/year, on your own terms…) is not a win for them.Don’t get caught in the trap of thinking that the path of accelerators, big fundraises, TechCrunch headlines, and a massive exit is the only way to start up.For most people, there's a better bet.Instead of worrying about all that, just think:What subscription product can you make that will create $50/mo of value for 15 customers?*** It turns out those failure stats are bullshit, anyways.