Photo by psiaki

Why I Bought My Next Startup (Instead of Building It)
This is part 2 in a series covering my acquisition of HitTail; part 1 went to the top of Hacker News last week and I have a slew of questions from that discussion that I will answer next week.

But first I want to address the most common question I hear when I tell someone I acquired a startup:

Why did you buy instead of building?

If you’re a developer you’re probably scratching your head wondering how I could pass up the chance to do the awesome green field development. A new project with no legacy baggage…this is the stuff we live for!

But I did indeed opt to plunk down my hard earned cash instead of hunkering down for 6 months in my dev cave, and what follows are my reasons for doing so.

Reason #1: Saved 12-18 months
I have a little theory that a v1.0 should take 4-6 months from inception to launch. This includes time for marketing (which should start before you write a line of code), planning, development, launch, etc…

And if you have the luxury of working on it full-time then by all means you should get it out the door faster. Almost without exception, the sooner you get in front of real customers the better off you’ll be.

But in general, this is “Rob’s Theory of Time to 1.0″: 4-6 months, 300-600 hours.

But there’s another time frame, and I call it the “time to flywheel.”

A flywheel is a large, heavy wheel that requires an incredible amount of effort to get moving, but once it’s moving it can continue to do so under its own momentum for quite some time, without additional effort. The time it takes to get your business to “flywheel” will vary, but I’ve found that it’s typically 6-12 months after launch.

“Time to flywheel” is not profitability, but an app is typically on a rapid trajectory towards profitability when it hits.

It’s also after you’ve confirmed you’ve built something people need and are willing to pay money for, and have found your market (some would say product-market fit). You’ll also have some marketing channels that are bringing in new customers for less than they pay you during their time as a customer.

This is the point where you have a bit more work to do in order to scale, and when smart founders who are interested in funding begin to seek it out. My typical estimate when asked how long it takes to get there is 12-18 months. Some companies can pull it off in 9, for others it takes 24 if they are ever able to achieve it.

But the sweet spot is around 12-18 months.

Getting to “flywheel” is a slog. It’s painful (and yet also exhilarating). And frankly, I’m not a patient person when it comes to growing a business.

Given the hourly rate at which I value my time, and the value I place on 12-18 months of effort, buying an application like HitTail is a ridiculous bargain. It may be the best deal I receive on anything I buy during the next year.

Reason #2: It Has “Good Bones”
There’s something to be said for acquiring an app that’s already worked out the v1.0 kinks. HitTail has been around since 2006, and although some of the software architecture and code structure leaves something to be desired, a lot of bugs were ironed out in the early days.

Any problems that existed when I took it over had crept in over time due to changing APIs, lack of maintenance, and failed hardware.

In general, the code had been purring away for 3 years without intervention, and that indicated one thing to me: this thing had good bones.

“Good bones” is an expression realtors use about a house to indicate that the major systems like plumbing and electrical are solid, but that the house may need cosmetic upgrades like new paint and flooring. It means the house is pretty solid as it stands, and that with a bit of effort it could be more attractive and more valuable.

It’s an expression I would apply to HitTail, and one of the reasons I decided to acquire it.

Reason #3: Dramatically Reduced Market Risk
When you set out to build and launch a product there are three types of risk: product, market and execution.

• Product risk looks at whether or not you’ll be able to build the product. These days, most web apps we see have only a small amount of product risk.
• Market risk looks at whether there will be people willing to buy your product if you build it. This is the risk factor I encourage founders to look at the most, especially before they write a line of code. Market risk is the deadliest of the three because if you build something for which there is no market, it’s nearly impossible to adjust course later and fix it.
• Execution risk is whether you can pull off the whole package. Can you bring everything together, build and launch the product, and get it in front of the right prospects?

Given these, market risk is the one that scares me the most. Every time.

I have confidence in my ability to execute, but anything I can do to reduce market risk early is a no-brainer. Buying an app with paying customers is one of the best ways to ensure you have something people will pay for.

Reason #4: Better than Outsourcing
I talk a lot about outsourcing. Last year I paid $100 or more to at least 15 contractors ranging from developers to an infographic designer. And I’m a firm believe that you must learn to outsource or hire employees if you want to grow a business.

But I would take a completed product over a spec every time.

Outsourcing works, but avoiding the possibility of hiring a crappy developer, building the wrong feature set, and the enormous amount of time you need to invest to manage a development project is typically well worth the purchase price.

Counter-Reason #1: “If you buy, you’re not a real founder!”
This is from my internal monologue that attempted to talk me out of the acquisition.

At one point I actually stopped to wonder what people would think of the fact that I didn’t build HitTail myself from the ground up.

Are you a real technical founder if you don’t write every single line of code for your v1? Or at least oversee every single line of code as it’s being written by your team?

I’ve built and launched apps from the ground up in the past. Am I still a real founder if I skip it this time?

The conclusion I came to is that it doesn’t matter.

Growing HitTail into a more profitable business is the next phase of my learning (and the next test of my chops). Both personally and career-wise it’s the right decision.

Everything else is semantics.

Conclusion
If you’re interested in hearing more about due diligence, which things I attacked first after the acquisition, thoughts on valuation methods, and answers to other questions from the Hacker News discussion, stick around for part 3.

Photo by psiaki

Based on the title of this post you might be thinking I have mad stacks of money in the bank.

That I’ve had a few “exits” and instead of hunkering down and writing code for 6 months I opted to talk to a few of my buddies at the yacht club and purchase a primed and growing social network for somewhere in the mid-seven figures.

Indeed, I did buy my latest startup, but the deal was done from a spare bedroom of my suburban home in Fresno, California for less than most people pay for a new car. And the funds came from revenue generated by my portfolio of web applications and websites that I’ve built over the past several years.

This acquisition is a long story, but if you have a few minutes let me tell you the best parts.

My Background
If you haven’t followed this blog in the past, I’m a guy who launched several web startup/product ideas, acquired several more, had many failures and enough successes that I was able to shut down my consulting firm back in 2008.

My apps range from an SEO keyword tool, an ASP.NET invoicing system, a web application for creating wedding websites, and a handful of others.

If you’re interested you can read about one of my acquisitions from a few years back in a post titled The Inside Story of a Small Software Acquisition.

I’m all about figuring out what’s going to make a person happy and then going after that with ravenous determination, instead of pursuing what we’re told is going to make us happy by the tech press (raise funding! exit big! lose control of your company and get fired by the board!).

So I tend to focus on ideas that have a 1000x higher chance of success than the next un-monetizable social website you have in mind, but the success I strive for is a bit more modest. Probably close to 1/1000th of the payout of a big exit.

But I believe this approach is far more likely to make you happy, and far more likely to actually make a difference in the lives of more than the handful of people who hit the startup lottery each year.

I believe this so much that I’ve written a manifesto and a book and hundreds of blog posts on the topic, and hold a conference every spring that focuses on self-funding your startup. I’ve put all my eggs in one basket, and that basket and the eggs were bought with money from my own self-funded pockets.

In Search Of…
So that’s an intro to my startup philosophy, but where was I? Aaaah yes…the search.

After co-hosting MicroConf in early 2011 I was on the prowl for the next big thing. After a few weeks of soul searching I determined I was going to build a SaaS app. Another week left me with a short list of problems that entrepreneurs need help with (since I’m pretty familiar with the space), and after another few days had them ranked in order of my interest.

In the top 3 was the following problem: entrepreneurs need more organic search traffic to their websites. That phrase may sound exciting to you, or it may be a complete snooze-fest.

The bottom line is that many successful startups (far more than you hear about) are masters at SEO. People don’t tend to talk about SEO as a sexy marketing approach, but it can generate enormous amounts of highly-targeted, high-converting traffic.

Depending on your market, the ROI can be better any other traffic source you can find (with viral traffic the most common exception).

As I pondered the entrepreneur SEO question I realized there was an application I’d been using for years that pretty much fit into everything I mentioned above, and it was all but abandoned. Imagine the luck!

HitTail is a tool that tells you the most promising organic search terms you should target based on your existing traffic. It has an algorithm that analyzes your visitor stream in real-time and provides you with a simple list of precisely which keywords you should be targeting to maximize your organic search growth.

And I’d been a user since 2006. Even through the five day outtage in early 2011, and the semi-regular downtime throughout 2010 and 2011.

Customers were bailing on the service because of the frequent downtime. But there was a hard-core customer base that had been around for years and had stuck with the service because the main algorithm that provided recommendations had never stopped working, even though everything around it had crashed and burned.

Closing
On a warm day in early June I cold emailed the owner through the website contact form. I have to admit – I didn’t know if I would get a response at all. But within 24 hours we were off and running, discussing a potential acquisition.

The site was once great; marketed by a high-end NYC PR firm. But when the firm had focused its attention on other things the site was neglected, and the technical headaches ballooned as the original developers left the company. Needless to say, the owner was definitely interested in discussing an acquisition.

So I made my offer and she countered with 5x the amount. Choke! I’ve acquired many web apps in the past, and I wasn’t prepared to pay “dot com” pricing for it. Although it had been mentioned in Inc Magazine, BusinessWeek, The Wall Street Journal, PC World, and many other mainstream news outlets, given what I know about rehabbing applications I had a firm figure in mind.

The site generated revenue but it was losing customers and the hosting bill was hefty given the performance requirements of the site (it’s basically performing real-time analytics).

It took three months emails before we settled on the final terms. The close was swift: I had a lawyer draw up an agreement, and we used an escrow service to handle the money transfer. It was a clean deal as deals go, and at the end of August, 2011 I was the new owner of HitTail.

And I was running scared…

Step 1: Like a Chicken With No Head
The big issue is that the server hardware was sketchy at best. It had ancient hard drives, an installation of Windows Server 2003 that hadn’t been refreshed for 5 or 6 years, and two SQL Server databases that had not been re-indexed (or had any visible maintenance) for 3 years.

All the while continuing to handle 10-30 DB inserts per second. Every day. For years. There are literally over a billion rows in the database and no one had touched it since 2008.

So I scrambled. I found an awesome DBA on oDesk and moved the 250GB database to a new cloud server infrastructure. A few weeks of prep and an all-nighter later I was feeling much better about HitTail’s stability.

Step 2: The Funnel
The next step was plugging the funnel. To give you an idea of the state of the site, here’s a glimpse of the home page from a month ago (and I think this is how it had looked since 2006):

In addition to design issues there were major leaks in the sales funnel. Examples include:

• Many 60-day trials had never ended. There was no script running that ended them so people continued to use the site for free for years.
• During the trial period a user received exactly zero emails. No reminders to check out their fancy new suggestions. No inquiry as to why they never installed the code. Zip.
• The website was architected such that it was easy to just wander off into the sunset and never be heard from again. No effort had been put into moving people from content pages back into the main marketing website that promoted the benefits of using the product.

Beyond that there were broken features. Oy vey, were there broken features. I commented out 3 or 4 “top line” features that were such a big deal they appeared on the pricing plan page. But no one had used them in years because they didn’t work!

And the algorithm that made suggestions was operating at around 10-20% effectiveness. In other words, due to the way Google had changed the way it passed URLs in the querystring, the algorithm was missing a slew of valuable keyword suggestions.

I can almost hear the voice in your head: “Something must be done!”

And that something involved me hiring a developer and a designer to help me revamp this thing (both contractors, of course, since I don’t hire employees). I also put in quite a bit of coding time myself.

And three months later, the joyous visage you see below you was unveiled upon the world (this is the new HitTail home page, replacing the one I showed above):

I’ll be the first to admit: it’s blue. But I like it. And so do people who need organic keyword suggestions, apparently, because it’s converting very well so far.

Conclusion
Those are the highlight of how, 4 months after acquiring a dying web property, I brought it back from the dead with the help of my ragtag team of intrepid oDesk contractors.

And you may be wondering why I bought a startup instead of building it from scratch. Stick around for that; I cover it in part 2.

There are far too many details to include in a blog post, so if you like audio and want to hear even more about the acquisition, I was interviewed on this very subject for 90 minutes on TechZing. Check out episode 165.

I can’t believe it’s this time of year again. MicroConf is in the air. If you’re starting, or thinking about starting, a self-funded startup this is the place to be in April.

My co-host and I are crafting a line-up of speakers that will be speaking to your specific needs as a bootstrapper, rather than someone with a bazillion dollars of funding in the bank. Honestly, MicroConf is unlike any conference you’ve ever attended.

First things first, here are the things we’ve nailed down so far:

MicroConf 2012: The Conference for Self-Funded Startups and Single Founders

• April 30 / May 1 at the Hard Rock Hotel in Las Vegas, NV
• Hosted by Rob Walling and Mike Taber

Speakers Include

• Peldi from Balsamiq
• Hiten Shah of KISSmetrics and CrazyEgg
• Rob Walling, author of Start Small, Stay Small
• Patrick McKenzie of Bingo Card Creator
• Mike Taber of Single Founder
• And many others…

128 pre-release tickets will be available next week (until we sell out).

Who Should Attend?
Anyone launching a startup with no outside funding who wants to hang out with and learn from 128 of today’s leading founders and entrepreneurs. We are intentionally keeping the conference small based on feedback from last year.

Wait…you didn’t hear about last year’s MicroConf?! You must check out this blog post or this podcast episode. Then sign up for the early bird notification list.

Sounds Awesome, What Should I Do Next?
We’re limiting total attendance to 128 and expect to sell out quickly. If this is up your alley, here are the next two things you’ll want to do:

1. Sign up to be notified about discounted pre-release tickets here
2. Tweet it!

It’s going to be a blast! Hope you can make it.

Photo by Seattle Municipal Archives

I received the following question from a reader a few weeks back:

I’m considering creating a mobile app and I want to know quick/effective ways to validate some of my assumptions. Is it more effective to put out small experiments that test your assumptions, or are surveys of the possible users a better approach?

My answer: it depends on what you’re trying to test.

In general a survey is going to give you decent results for little effort. A survey takes 20 minutes to put together (SurveyGizmo or SurveyMonkey), email it, and you get some info. It’s a simple approach that doesn’t take a lot of time.

However, it’s nowhere near as accurate as putting out experiments. Experiments that ask someone to buy something, sign up for a list, or perform some kind of behavior are the only real way to know if something works. But these kinds of things take so much longer to put together that you have to balance this level of effort with the value they provide.

If you had unlimited time I would always recommend experiments. But surveys save you time, so you’ll inevitably have to rely on them or you’ll never start building your app.

Two things you can’t get from surveys: actual conversion rates and pricing info. You can ask “would you sign up for this list” or “would you pay $x for this” but these are useless questions.

If you need this kind of knowledge, do an experiment. For most other information, surveys can be a solid, time saving approach.

I’m interested to hear your thoughts in the comments.

Here’s a screencast I recently recorded with Derek Halpern of Social Triggers where he gives me a thorough review of the marketing website for my book Start Small, Stay Small: A Developer’s Guide to Launching a Startup, with specific ideas on improving conversions.

Once you’re too close to a design it’s hard to view it with an objective eye. That’s where external feedback from a knowledgeable source can help you discover potential improvements, as Derek has done in this video.

Please enjoy – it’s just over 15 minutes and it’s filled with insights on building a high-converting marketing website.

Direct link

Photo by stevendepolo

I received the following question from a reader:

I was wondering if you had any thoughts on cost of customer acquisition for freemium businesses. When you calculate it out, it seems that paid marketing efforts like AdWords are almost universally doomed to fail. Our lifetime value of a customer is only around $1 when you factor in a high initial churn and all the free users. I imagine companies like Evernote are in a very similar position since they have a similar pricing model.

We are obviously hitting social media, PR, etc. quite hard, but I don’t think paid acquisition could possibly work here. Have you seen paid acquisition work for freemium businesses?

My Thoughts
I’ll admit up front: I’m not a fan of using freemium in a bootstrapped business. While I didn’t write the post Why Free Plans Don’t Work, I wish I had.

If you have funding then freemium is possible to pull off, but growing a company organically using its own revenue doesn’t work when you have an extremely low customer lifetime value (LTV).

I think of freemium like trying to build a campfire in the middle of a dry forest. If you are sufficiently skilled you can build a nice, warm fire, but you’re more likely to burn the whole place down. I don’t know of any bootstrapped business that have used freemium successfully (though I’d love to hear about them in the comments), and I know of many funded businesses that have not used it successfully.

Typically, low LTV businesses only work when there’s some kind of viral loop in place that ensures every customer you sign up brings in X more customers. This lowers your cost of acquisition to such a level that you can turn a profit eventually.

The problem is that pulling off a viral loop is extremely difficult; you either have to be an expert in doing so (a la Peldi, Sean Ellis, or Matt Inman) or get really lucky…or both. And I hate basing a business on luck and outlier-class talent.

Adjust the Funnel
So yes, your intuition that paid acquisition strategies are not going to work with a low LTV are correct. However, if you look not at every user who signs up, but only those who sign up for your paid plan, you will have a higher LTV (though a lower conversion rate).

Instead of thinking of it as “I can only spend $1 to acquire a free user” you can think of it as “I can spend $50 to acquire a paid user,” and look at optimizing that funnel.

Also, keep in mind that some of your freemium users may convert over time…Dropbox indicates they get a decent percentage of their users converting to paid within 12 months (I think it’s 3%?). The problem is that you need piles of cash to sustain yourself while you wait them out. And you need to have funds to support the other 97% who never convert. Both of these typically require some kind of funding.

If you are in a business where everyone else is freemium I would encourage you to think about charging for your product. Go upmarket or figure out a way to differentiate. What can you build that will provide your customers with $19, $39 or $79 per month of value?

Unless you have a large bank balance, I’m not sure how you can begin to compete with free unless your product is very, very different from your competition.

About the author: Robert Graham is a solo founder and maintains a blog about the experience. Robert has been working in software since 2005. He is a Ph.D. dropout who spent time working for Google. Someday he’d like to work for himself.

I don’t know if I have ever read an article about time management that didn’t have a collection of statistics about how much TV the average American watches followed by telling you that those hours are now free for you to use.

That advice isn’t really useful. Giving things up is hard. How do you quit TV? What if you don’t watch much? Isn’t quitting an addictive habit hard? What if you really enjoy watching TV? Read on, my friend.

I’m going to talk you through a few ways to better manage your time in order of efficacy.

Plan
It’s not the freshest idea in the list, but it may be the most critical. A saying that comes to mind is, “If you aim at nothing, you’ll hit it every time.” Writing down plans and goals for your time will force you to be realistic about how much time you have to spend and make you more aware of where you spend it. I use two planning tools for time management.

I write down a list of 6 things I want to accomplish every day. Often the list contains some easy wins, but the consistency of forward progress is the key. All those small wins are like compound interest. Not only did you get something accomplished, but it will usually grant you satisfaction that will build your momentum. I use a notepad and Google Tasks for my lists.

I also mentally track time estimates in my head for activities I do in the evening that are not producing. Here is an example:

• Arrive home 5:30 pm
• Dinner and Family Time 5:30 – 7:30 pm
• Chores 7:30 – 8 pm
• Watch Top Gear 8 – 9 pm
• Work Time 9 – 11 pm

Some days have more time available and some less. Don’t plan to multitask. Focus. Your accuracy in accounting for an evening or day will improve over time. I know I’ve only got 2 hours in this evening for work before I arrive home. That means I best plan how to use it well.

Prioritize
I have a good friend that never buys a drink when we eat out. I often do. We make jokes about this distinction frequently. I don’t spend a lot of money, but I really enjoy a tea or a soda with certain meals. He doesn’t really care for either.

This friend spends most of his time in the wood shop he made in his garage and he turns my cokes and sweet teas into shapers, joiners, lathes, and a nice table saw. I like the idea of wood working, but I’m not much good for it in reality. I am happy with my choice to buy a drink because I get value from it. Make sure you get the same value from your time. You won’t choose the same things as others, but you need to be sure you get value for what you do choose.

You don’t have enough time to accomplish what you want to. Start there. What are the one or two major things that could 10x your business? What actions can you do today to get closer to those? It is probably not learning Photoshop and it’s usually not writing code. Pick the most critical high-level items according to your goals and then pare down the scope.

You should outsource what you can. Ruthlessly optimize the rest. Find 80% solutions to problems. Apply the MVP philosophy to design, marketing, and SEO.

Environment
Research shows that people will eat less if they use smaller plates. It also tells us that you will eat less candy or reconsider getting seconds if it is six or more feet away. This makes sense. Much of landing page design and conversion optimization on the web is aimed at reducing any possible friction points like these. No matter how minor the barrier, it will hurt your conversion rate.

Changing your environment is a lot easier than changing your behavior. More than that, it’s a much better strategy to change behavior. My wife and I haven’t had cable in years. About a year ago we moved our only TV into a spare bedroom of our house. Each time we add these minor barriers in our environment I think about television less, I turn it on less, and I watch less.

Group dates for teens is an example of parents changing the environment to change behavior. Many restaurants increase turnover with noisy, sense-overloading environments. The more you consider it, the more examples and uses you can come up with.

Automation
You do things in life that you don’t have to.

Buy timers for your sprinklers or get a sprinkler system. Subscribe to grocery staples on Amazon and save money and time. Automate your finances and bills. Pay others to take over tasks like lawn maintenance, car maintenance, draft writing, and even answering email. Get RescueTime and automate focusing on your work.

Remove any recurring tasks from your plate to add more time you can spend getting things done. If you’re writing code make sure you automate repetitive tasks as you go. I can spin up a new instance of my production server from backups using one command, and I have a checklist so I don’t have to think about the procedure when I do it.

Recharging
I do some activities that burn me out and others that make me more apt to continue getting things done. I have only recently begun to isolate what tasks do this for me.

Many people assume that leisure activities like watching TV or playing games would let them relax and recharge, but I find that they leave you with less energy and make you more likely to continue being unproductive.

The type of task that gives me energy is productive in some sense, simple, mechanical, and repetitive. The best tasks for me are unloading the dishwasher, doing the dishes, cleaning up clutter behind my daughter (18 months old), and taking out the trash. These are easy to accomplish and usually gear me up to do work. Another good friend of mine prefers mowing the lawn or grilling. Pay attention and find the tasks that add energy for you.

You can stop watching TV if you are willing to change your environment. If you adopt each of these strategies you will be amazed what you have time for. Back to work! Right after this show…

Photo by iamjohntmeyer

The more I learn about startups the more I realize that one’s chance of succeeding is a continuum rather than some kind of binary state.

In other words, when you read a blog post that talks about “X Ways to Succeed with Your Startup” what they really mean is “X Ways to Potentially Increase Your Chance of Success With Your Startup. But the second title is too clumsy so we bloggers abbreviate.

With that in mind, I’ve had this list sitting around for a long time, debating the best way to present it. The problem with this kind of list is that some people read it and see they are doing some of the things I’ve listed and they panic. This panic results in a need to rationalize their behavior and convince themselves they are not travelling a path to certain doom. Who wants to admit that?

But that’s not the point this list. As you read it keep two things in mind:

1. Doing any one of the items on this list is not a recipe for failure. But from my experience observing and working with over 1,000 entrepreneurs, each one will have a negative impact on your chance of taking your company to profitability.
2. This applies to bootstrapped companies. Funded companies can break these rules since the money they have sitting in the bank provides them with a bit of a reality distortion field.

#1: Choosing a Market with Funded Competition
I’ve seen first-hand how funded competition can crush a bootstrapping company.

AdWords go from $.50 to $5 per click overnight. Your funded competitor hires a PR firm and appears in Inc., Fast Company and Wired in the same month. And your search engine rankings drop as competitors hire high-end SEO firms.

It’s not that you can’t beat funded competition. But taking them on head to head is like wrestling 2 weight classes above your own. Instead of attacking them head on, I recommend avoiding the head to head conflict by choosing a niche that the funded competitor can’t afford to enter. Which leads us to our next one…

#2: Not Targeting a Niche (Going Horizontal)
This is perhaps the most common mistake I saw two years ago. I’m pleased to see this changing recently; I’m not sure if people are listening to myself, Jason Cohen, and others who have espoused the benefits of going niche or if it’s just the obvious approach these days.

Niches are easier to penetrate, cheaper to advertise to, have less competition, higher profit margins, and word of mouth is a vibrant force. All of this combines to make vertical niches the best option, by far, for someone bootstrapping a company.

#3: Doing Everything Yourself
Launching an application, even a 1.0, requires hundreds of hours. Everything from graphic design to coding, marketing to setting up a payment processor. If you are convinced you have to do every single step yourself you are decreasing the chance that you will make it to your launch day.

I’ve actually dubbed this need to keep everything under your control one of the most common startup roadblocks, and I talk about it in more depth (including how to avoid it) here.

#4: Basing Your Business on One-time Sales
This is one of the more recent lessons I’ve learned: one-time sales suck. On the first day of every month you start with zero dollars in revenue, and you have to hustle like crazy to hit your number. Starting from zero revenue every 30 days is no way to grow a business.

The more I’ve watched successful businesses grow, the more I realize they always have a built in recurring revenue stream. Netflix went from one-off movies to subscriptions back in the late 90s. Many desktop software vendors are moving to subscription billing. And I hear more and more people espousing the benefits of recurring payments, including Dharmesh Shah at his recent talk at Business of Software 2011.

If you’re building a product with a one-time fee I encourage you to look for a way to turn it into a recurring revenue model.

#5: Choosing an Idea with a Two-Sided Market
Having one group of people to market to is hard enough. But having to find and reign in two groups of customers is just brutal. Examples of this include Elance, eBay, Monster.com, and any sort of ad-supported website (since you have to sell to advertisers and visitors)

It can be done. It’s just doubles (or triples) the amount of marketing needed to get off the ground.

#6: Going Freemium
This topic was covered by Ruben in this guest post. Suffice to say, free plans rarely work for bootstrapped companies.

#7: Ignoring the Numbers
You can’t make money charging $1 per month. Wait…you can, if you have millions of customers. The problem is, getting to millions of customers requires more money and time than you have right now.

Trying to make money selling an app for $1/month is crazy unless your market is gigantic and you have the expertise or the funds to reach them (and even then, support will kill you).

Let’s look at some numbers:

1. If your goal is a meager $2k per month you need 2k customers.
2. To begin, that’s a lot of non-technical customers to support for that little money. You’ll still be working a full-time job at that point so it’ll be nights and weekends. Not cool.
3. To get 2k customers with a 1% conversion rate you’ll need 200k unique visitors (total, not monthly). If you crank really hard on promotion and word of mouth I can imagine you’ll ramp up to 1k-2k uniques per month. Even at 4k per month you’ll be waiting a long time to hit that 200k mark.

These days I advise people to go up-market and try for $30/month and $50/month price points. What can you build that will provide that much value to customers?

#8: Starting Your Marketing Once Your Product is Complete
If validating your idea, creating an instant beta list, having your best launch day ever and building links over time isn’t enough, how about building confidence in yourself that your idea is completely kick ass during the 6 months you’re sitting in your basement coding it up?

Rumor has it that DropBox had 200,000 emails by the time they launched, based on driving a ton of traffic to a landing page with a single video that discussed how the service was going to work once it was built. These days when people ask me if they have to build a product to pitch investors, I tell them they can…or they can gather 200,000 emails. Call me if you do this and I’ll write you a check.

For more on the specifics of how to approach this, check out Why You Should Start Marketing the Day You Start Coding.

#9: Expecting it to Be Easy
You’ll often hear that the number one cause of death among startups is running out of money. For bootstrappers this is not the case. When you’re launching from your spare bedroom, out of money is where you start. From day 1 your goal is to go from out of money to covering hosting.

So for you, stalwart bootstrapper, the number one cause of death is not running out of money, but running out of motivation. If you start with the expectation that you’ll be able to take your company from nothing to $100,000 in revenue in a few months working part-time, you’re going to be more likely to throw in the towel when it doesn’t happen.

And the day you decide to throw in the towel is the day your startup dies.

No, it’s not easy to start a company. But knowing you, it’s why you decided to start a company in the first place.

Photo by earthlightbooks

This is a guest article by Saba Younus. Saba currently works as the operations manager (Sumo) at AppSumo. When she’s not working to create the best experience for each and every user, she spends her time scouring the web for juicy details about the startup world.

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Who says a bootstrapped startup can’t succeed?

A lot of entrepreneurs think they need piles of money to make their startup a success, but that’s not always the case. Here are 10 bootstrapped companies that did it on their own with no outside funding.

Startup #1: Goldstar
Goldstar is the world’s largest online seller of half-price tickets to a broad range of live entertainment.

How’d they do it?
Starting with $1000 ($800 being paid to the state) Rich Webster, Jim McCarthy, and Robert Graff noticed something wrong with the ticketing business.

Venues were giving away tickets for free to shows that were unsellable. Instead of being able to fill up a show, venues found themselves with a lot of unwanted seats. The trio quickly realized that it was a lose-lose situation for both the consumers and the venues, and decided to take action. “No venue wants to be told that their product is worthless, and no customer wants to go see a show that’s unsellable,”  said Robert Graff.

In October of 2001, Webster, McCarthy, and Graff decided to do just that and GoldStar was born. They were able to get the company off of the ground by focusing on their solution for popular undersold shows.

Already disenchanted with the waste of funds and inefficiency caused by accepting VC investments they’d seen at another Startup, the trio decided against seeking any outside funding. “We purposefully didn’t want anyone else’s money because we didn’t want their advice” said Graff.

Today, Goldstar works directly with 4,000 venue partners to connect them with their huge and growing audience. Venues list tickets with Goldstar to sell to their members for a discounted price. The company has over 1.5 million subscribers and offers over 900 tickets to events at one time.

Startup #2: Carbonmade
Carbonmade helps over 100,000 people create online portfolios that require zero HTML skills.

How’d they do it?
Starting as a tool for one of the founders to update his portfolio, co-founders Spencer Fry, Dave Gorum, and Jason Nelson launched a self-funded, $12 per month plan in 2007, alongside their established free plan.

Looking back on their previous experiences working at startup companies, the founders decided to bootstrap their business in lieu of seeking outside funding. By generating a steady revenue from consulting projects and sales, the founders were able to spend time growing their business slowly.

Instead of spending tons on advertising, the site got noticed when bloggers started sharing the site with their communities. They continued to gain traction up until 2010, when they were able to exclusively focus on growing the site.

Today, Carbonmade is a bootstrapping success story, growing from a tool built for a personal portfolio to being used by over 200,000 people to showcase their artistic talents.

Startup #3: Litmus
Litmus is an email marketing tool allowing 30,000 customers to test their designs in all major email and mobile clients.

How’d they do it?
Founders Paul Farnell, Matthew Brindley, and David Smalley started Litmus in 2005 with a used computer and $800 dollars. While still in college doing freelance web design they realized that there was a need for a faster and less expensive cross-browser testing tool.

In order to answer their need and test if they could build a better service, they built the site and launched in one weekend. Farnell shared this first version with a group of designers on an email list he had been a member of for years.

Charging from the start, their initial version allowed users to see a web site on only a few different web browsers. Within a few months they had received positive feedback and around a 100 paying customers.

Included in that first version was a “coming soon” section, listing additional features that they had planned on adding. Instead they ended up listening to what their customers wanted and adding completely different features.

“These were the things that we thought were cool and we thought people would be excited to use, and, to an extent, people thought they were cool ideas, but they would say, yeah, they would be good, but what we really need is this other thing, which we maybe had considered but had ruled out as not being that important, said Farnell.

Today, Litmus has had over 30,000 customers, 1 million+ in revenue, and is growing by around 10% a month. They have no plans of selling the company or taking in outside investment. Farnell says,  ”Why would we want to give up the flexibility and freedom we have right now?”

Startup #4: Github
Source code hosting for companies and open-source projects, Github is used by nearly a million people to store over two million code repositories.

How’d they do it?
Founded in 2008, GitHub offers public and private source code hosting to companies and open source projects using either git or subversion.

Chris Wanstrath, PJ Hyett, and Tom Preston-Werner began GitHub as a solution to their own problem: they loved git but there was no way to share their codes with others. Started as a weekend project, the three spent money out of their own pockets to cover the cost of a domain, hosting, and started sharing their idea for free with their friends.

When they made the decision to make GitHub into a full time business, they scraped together the funds needed to setup a legal entity instead of seeking outside aid.

The real challenge they faced was supporting themselves financially as the business grew. Opting to eschew the traditional road of venture capital funding, Tom worked both at GitHub and at a full time job, while Chris and PJ consulted on the side. They paid themselves small salaries and setup monetary goals for the business each month. With some effort and patience, the three watched their salaries finally grow as profits from their paid plans started rolling in.

Today, GitHub has over 100,000 users, thousands of paying customers, and almost a million repositories – with thousands more added each day. In January 2009 they won a Crunchie for best bootstrapped startup.

Startup #5: FastSpring
FastSpring is an all-in-one e-commerce, merchandising and fulfillment solution to sell digital products online with over $45 million in revenue.

How’d they do it?
Started by four previously successful startup founders that were working for the same company, FastSpring was created  in order to solve current industry problems. Realizing that customer service, new technology, and price were important to businesses selling digital products, the founders began working together remotely to address the market needs.

Agreeing that bootstrapping the company was “common sense,” they started with $30,000 contributed from their own pockets. The biggest issue that the four founders ran into was finding a suitable name for their company.

Playing catch up to their competitors co-founder Dan Engle stated that they, “under estimated the quantity and quality of the functionality that we would need to build in order to even be on par with other companies in this space.” However one thing that they did do from the beginning was to talk to potential customers in order to find out which essential features were needed before launch.

Taking no salaries and doing all the work themselves, three of the four founders lived off of prior businesses they were running while the fourth was able to work on the business while living off his savings. They slowly built up their salaries as they brought in more customers and now are able to pay themselves a “nice” income.

Today, Fastspring can hardly be called a startup anymore; it processes payment pages for over 8,500 clients, has earned over $45 million in revenue, and been featured in 2010 as the Inc. magazines 41st fastest growing company.

Startup #6: SparkFun
SparkFun is an online store for electronic bits and pieces that brought in revenue of over $10 million in 2010.

How’d they do it?
After blowing up some electronic parts and searching the internet for replacements, founder Nathan Seidle saw a business opportunity for an online electronic parts store.

Starting the business with about $2500 in credit card debt, Seidle originally purchased a random assortment of products, unsure of what would sell. Orders started trickling in, about 1-2 per day, and all of the sales profit was funneled back into the purchasing of more products to sell on the site.

About reinvesting in his company Seidle said, “You take all the money you make and buy more inventory with it…I think it was more than 3 years before I was able to buy a new winter jacket.”

Seidle quickly realized that a bootstrapped startup is a cash guzzler and tightened his belt on personal expenses while continuing to expand his product base.

Today, SparkFun has a wide following and boasts over $10 million in revenue. From it’s humble beginnings in 2003 in Seidle’s living room, SparkFun has grown into a favorite supplier for the increasing popular “Maker” community.

Startup #7: Grasshopper
Grasshopper is a virtual phone system for entrepreneurs, allowing 100,000+ small businesses to create a more professional image.

How’d they do it?
Grasshopper was started when two college classmates, David Hauser and Siamak Taghaddos , wanted to solve the problem of  how to create a professional image while just starting a business.

Allowing entrepreneurs the capability of giving phone number extensions, even while working remotely, helped them seem like a larger company. “It is a capability [that lets] a one- to five-person team of entrepreneurs sound like a big company,” Taghaddos said.

Grasshopper was started with approximately $250,000 from personal and family savings, as well as credit cards. Even though they started with $250,00 they used what is called “negative cash converting cycle financing.” This means that they did not spend money until they got it, allowing them to be extremely conscious of hiring and spending money.

Before they were even able to start building they needed to obtain the proper equipment. Without raising any funds, the founders decided to funnel what resources they had to achieve their vision for Grasshopper.

Profitable within 2 months, their first year Grasshopper had $423,000 in revenue, in 2007 $8.8 million. Today, Grasshopper has over 100,000 customers with pricing from $9.95 – $199 a month.

Startup #8: Clicky
Clicky is real time web analytics running on over 350,000 web sites.

How’d they do it?
Started in October of 2006, founders Sean Hammons and Noah Merritt, wanted to provide an affordable and simple solution to real time analytics. Why bootstrap? Hammons says, “Owning 100% of your company and not having to answer to shareholders is ridiculously satisfying.”

Initially made as an internal tool for a previous company Hammons and his previous boss Merritt realized the potential immediately. Funded by Merritt’s savings, Hammons coded the project for release over a fourth month period.

Without any strong connections at the time they spread the word by contacting hundreds of bloggers and posting in forums. With a marketing budget of zero dollars, they initially had trouble getting anyone to try their service out. Finally, a big break occurred when they were able to obtain a single blog post on a “largish web site.”

After a few months they were making money, and dealing with scaling problems. Without doing any marketing they credit their affiliate program to be a major factor in growth. From the beginning they had the affiliate program in place allowing every user to take advantage of  20% per paid refferal’s payments.

Today, Clicky has about 150,000 customers with 15,000 of those paying between $4.99 and $24.99 monthly, not including their custom “white label” service.

Startup #9: WooThemes
WooThemes is a one stop theme shop of designs and cutting-edge commercial themes for WordPress.

How’d they do it?
Working as a virtual team, Adii Pienaar, Mark Forrester, and Magnus Jepson founded WooThemes in January of 2008. Sales started coming in almost immediately, making it possible for the team to stop freelancing on the side and focus completely on the business.

Believing in organic growth, WooThemes has grown at a steady rate of 10 – 15% monthly. Buying themselves time initially by doing freelance work, they were able to avoid taking on any initial funding. “We’ve been making money from the very first minute we released our first themes, which means that we didn’t need to pay back loans or really invest in any infrastructure when we started out,” said Pienaar.

A positive by-product of growing their business organically is founder happiness. Pienaar says, “With WooThemes we’re trying to find that balance between financial ambition and the happiness that WooThemes creates in our individual lives.”

Today, WooThemes has over 40,000 users and more than 1.8 million downloads, generating over $2 million in revenue. Co-founder Pienaar gives this advice for hopeful startups; stick it out and bootstrap for as long as you can, seeking outside funding should be kept as a last resort.

Startup #10: AppSumo
AppSumo is a daily deals website for the coolest web applications in the market, bringing massive savings to over 200,000 happy web geeks.

How’d we do it?
Launched in 2010, AppSumo is a daily deals website offering the coolest web apps and digital goods for technology geeks.

It all began when our co-founder Noah Kagan was helping run a payments company for Facebook games and noticed that partners were having a hard time finding new cloud applications and innovations in web distribution. Noah realized this was a niche not to be ignored.

For $60 Noah hired an outsourcer to build the back-end of what would be AppSumo and Noah built the front end using open-source member registration code. Within a month the site was launched; traffic was generated via Reddit ads and Noah sold over 200 of his first deal – 50% off pro accounts at imgur.com.

Following that minor success, Noah teamed up with co-founder David Cramer. They came up with the company’s core vision: to help solve distribution for startups and eventually all digital goods.  David rebuilt the entire site in Django/Python and AppSumo launched it’s next deal in June 2010: a productivity bundle that was featured on Lifehacker. They sold 500 bundles, proving that this was a service the community wanted.

AppSumo exists for one reason – to make our customers happy and help them succeed by providing them with low-cost tools and learning materials that are relevant to their career and today’s business climate. Everyday, AppSumo offers a deal that’s guaranteed to help you win (or at least become a better entrepreneur).

Today, AppSumo has nearly 200,000 subscribers, thousands of paying customers, and a growing fan base of individuals, startups, and businesses.

This is a guest article by Karl Falconer. Karl is a software engineer with more than 10 years of experience who specializes in agile web development and web services integrations. He authors a software development blog at http://www.falconerdevelopment.com/.

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There comes a time in a software developer’s career where they reach a crossroads and ask themselves, “What next?  What should I do next to keep my edge?”

When I arrived at this crossroads, I did not feel challenged by the software projects I was working on and began seeking something new. After much internal debate, I made the decision to step out of my comfort zone and shift my from the hard skills of software development to include more soft skills like marketing, and business development, with the ultimate goal of starting a software company.

Throughout 2010, I studied the ins and outs of launching a product by reading books and blogs and talking with friends and colleagues. I paid particular attention to articles about failure, so I would not make the same mistakes with my own product. In midsummer of 2010, I began work on my first product, which would later become MicroMaximus.

The Product
MicroMaximus was born out of my own frustrations with my business checking accounts and the minimum number of monthly debit card transactions. After searching the web, I found there was no existing software product I could use to automate these transactions. I quickly realized there was a larger potential market with a different type of banking product called a Reward Checking Account (RCA).

RCA’s are special checking accounts that offer high-interest yields on a maximum balance if you are able to meet a set of monthly requirements. One such requirement was to use the RCA’s attached debit card a minimum number of times, typically 10-15 transactions. They were typically offered by community banks as a way to compete with larger national banks.

The business model was to offer consumers with RCA’s an alternative to meeting their monthly transaction requirements that could be scheduled for a small amount of money, $1. If MicroMaximus was able to generate revenue of $1,000/mo it would be a huge success in my eyes.

Since I already had an interest in Personal Finance, I was very familiar with many of the blogs around the topic, which is where I first learned of RCA’s years earlier. These blogs provided me a starting point in researching my product idea.

I set up a Google Alerts for terms relating to my product. The frequency of alerts showed me how “hot” this topic was, and allowed me to reach out to both bloggers and commenters about the product, most of whom provided very positive feedback.

I also found that the company, BancVue, which markets Reward Checking Accounts to banks was on the 2010 Inc 500 list with an impressive 2170% 3-year growth. Armed with what I believed was product validation, I set out to do what I do best, build software.

Lesson #1: Marketing Is More Than Just Making Customer Aware of Your Product
Like most of the advice I’ve read, building the product was the easy part. Marketing was the real challenge. Although I did set up a landing page to collect e-mails, in my rush to actually launch MicroMaximus the pre-launch landing page was only available for a few weeks prior to the launch.

After launching, I reached out to personal finance bloggers with the following message:

Greetings,

I am reaching out today because I think you and your readers would be interested in finding out about a service I’ve recently launched called MicroMaximus. It is specifically designed for reward checking account holders, or those who are interested in finding about reward checking accounts and maximizing their savings. I created it out of my interest and passion in personal finance and my experience and skill in programming and development. The website is www.micromaximus.com.

Here is a short blurb about MicroMaximus and its benefits:

MicroMaximus is the only online scheduling system that puts the power back in your hands. You can schedule your 10 debit card transactions for the month – eliminating the #1 account holder complaint – and ensure you get the highest return month after month. No long-term plan, no high fees, no hassle.

If your readers have reward checking accounts or are interested in personal finance, I think they will benefit from this. If you agree and would like more information, here are some ways we could work together:

• Review: I can send you whatever information you need to write a product review
• Guest blogging; I can provide you with a guest blog post
• Interview: I can provide you with an interview on MicroMaxiums and why it was created

If you are interested in these options or have any other ideas, please don’t hesitate to reach out. Thank you for your time and consideration in helping me spread the word about MicroMaximus. Please let me know what questions or comments you have and I look forward to hearing back from you.

–
Karl
Founder, MicroMaximus
Email: karl@micromaximus.com
Twitter: http://twitter.com/micromaximus
Website: http://www.micromaximus.com/

I was optimistic this approach would provide MicroMaximus with exposure to its target market, however, the solicitations yielded no positive feedback. [Editor's note: Approaching bloggers cold these days is not a viable marketing strategy.]

Next, I started with banner ads on six different sites, all with respectable amount of traffic and site rankings. The ad campaign ran for several months with only a few click-throughs, and even fewer sign ups.

Despite the poorly performing banner ads, I decided to continue my marketing efforts with afew sponsored blog posts. I made arrangements with several bloggers to use the software and write a review of MicroMaximus. Here are some of the reviews:

• Review from Buy Like Buffet
• Review from My Personal Finance Journey
• Review from My Journey to Millions
• Review from MoneyCone

The reviews were well received on their respective blogs and while this approach did help present the product to many targeted customers, and continues to have a positive impact on my SEO, this strategy did not result in many new customers. Simply put, MicroMaximus didn’t solve a problem many people were looking to have solved.

Lesson #2: Reduce External Dependencies
The business case of MicroMaximus has a few flaws that I was never able to overcome.

Although I never specifically targeted people without Reward Checking Accounts, I could see a demand from people who would like to use these accounts but were put off by the monthly transaction requirements. Even though I had people in this target market tell me that a service like MicroMaximus would be very useful, no one ever signed up. Opening a new checking account and transferring funds is not a simple task and could take several days to accomplish, so many people would never get past this part.

Even today, RCA accounts offer great interest rates when compared with alternative investments. RCA interest rates have been steadily declining over the past 3 years, however, driving some people to close their accounts. The business model of MicroMaximus depended on high interest rates that would entice consumers to opt for RCA’s over other types of liquid investments.

I pictured my market as moderate net-worth individuals who turned to RCA’s as an alternative to previous high-yield accounts like CD’s and online savings. It seems as though most of these people stayed away from RCA’s — most likely because of the monthly requirements.

Lesson #3: Create a Painfully Simple Value Proposition
I did my best to craft the value proposition in a clear, concise manner, however I think many people still struggled to see the connection of how using MicroMaximus (spending money) actually earned them more money.

It seems that no matter how the copy was written, most customers saw the value proposition as “I spend a dollar with you, and get nothing in return.” In reality, customers had no reason to trust that MicroMaximus was offering a legitimate service that would put money in their pocket.

I also made the mistake of assuming my customers would understand the service and see the value of MicroMaximus if only they were made aware of the product. What I didn’t consider was how difficult it would be to market a product that disrupts a customer’s current behavior of reaching their monthly requirements. It didn’t matter than MicroMaximus offered a more cost effective solution.

Conclusion
While the financial goals of MicroMaximus were not realized, the launch did succeed in providing me valuable experience, lessons that I believe will allow me to succeed in the future. I learned the importance of building strong relationships: personal, professional, online/offline, and customer relationships.

With this network in place, there are resources for mentorship, product feedback and motivation, all of which will keep you focused and on a better track to success. Even as a solo-founder I depend on other people to help me create a successful product.

Launching a startup is risky — being the first to create a niche product is a huge risk. In the future I intend to focus on mitigating that risk by allowing other businesses with capital to validate that a market exists for my software. Knowing who your competitors are will enable me to build off their success and further reduce my risk.

It is rare to hit a home run with your first product, and the greatest lesson I’ve taken away from MicroMaximus is to learn from the mistakes I made, and make another attempt at launching a startup.

Photo by Stinkie Pinkie

In his essay How to Start a Startup, Paul Graham famously stated there are three things needed to create a successful startup:

• To start with good people
• To make something customers actually want
• To spend as little money as possible

This list is pure genius. However, over the past several years running my own businesses and working with hundreds of entrepreneurs, I’ve found a fourth ingredient that’s necessary for a company to succeed:

Customers must give you more money than what you spend to acquire them.

I realize this is an obvious statement. But here’s the kicker…

Once you understand that a customer will generate a specific amount of revenue during their entire relationship with you (called your lifetime value of a customer), and that you want to spend less than that amount to acquire them, this leads to a more practical point:

How do you know, in advance, how much it will cost to acquire a customer unless you know how you’re going to do it?

Let’s think about this for a moment. When most of us think about a startup we think about the sweet new technology we’re going to use, we (hopefully) talk to customers to find out what they really need, or we size our market using a top-down or bottom-up approach depending on how realistic we want to be.

(Hint: if you’re looking for funding, use top-down. If you’re bootstrapping, use bottom-up.)

But we rarely think about the specifics of how we are going to reach prospects, and how much that’s going to cost. The reason is that the answer is pretty scary in most cases. And nearly impossible to measure in others. It’s a lot of guesswork until you really dig in and actually try the marketing approach yourself.

A Look at One Acquisition Approach – Google AdWords
Since this will be easier to explain with an example, let’s start by looking at the cost of acquiring a customer using Google AdWords.

If you’re bidding on a term like  ”invoicing software” you might have to pay around $4 to rank in the top 3. If you can convert 1% of your visitors to customers this means you need 100 clicks for each purchase, making your cost per acquisition (CPA) $400.

If, however, you convert at 0.5% your CPA jumps to $800. Ouch…this is why you can’t make money charging $1 per month.

Your lifetime value of a customer (LTV), cost per click, and conversion rate are critical in figuring out if you can build a profitable business or if the competition is too strong. The problem, of course, is you can only obtain one of the three numbers needed before you begin marketing your product. But you can make an educated guess at the other two.

Calculating LTV
If you have a product with a one-time purchase price (something like DotNetInvoice, which sells for $329), your conservative estimate is to assume your LTV will be that purchase price minus payment processing fees. I know you’ll be adding add-ons, upsells, and annual maintenance plans.

But in my experience these account for a small bump in LTV unless they convert well, which is the subject of another post.

If you own an application with a recurring pricing model, you need to know your price point and churn rate for each of your plans in order to calculate your LTV.

Churn rates are all over the place depending on the growth stage of the company, the industry, etc… When you’re just starting out you’ll probably have monthly churn in the 5-10% range. Some larger SaaS firms get their churn below 1% per month (see this post for some average annual churn rates based on SaaS company size).

Taking monthly churn at 8%, your total number of paying customers at 100, and your monthly price at $19, your lifetime value of a customer works out to $237.50. This is calculated using the following simple LTV equation (there are more complex formulas for LTV that take expenses into account):

LTV = # customers/churn * price

LTV = 100/8 * $19 = $237.5

With this number in mind, Google AdWords is not going to work unless you like buying high and selling low.

As an aside, even if your CPA using AdWords was $100, you would still need a pile of cash to finance your customer acquisition process since your lifetime value will take 12.5 months to arrive in your bank account. This is one case where venture funding makes complete sense.

How About a Few Others?

Facebook
Most Facebook clicks run in the $.80-$1 range with no effort, but using tricks I mentioned in this guide to cheap startup advertising you can get clicks in the $.10-$.20 range.

If you convert 1% of traffic with an average cost per click of $.40, your CPA will be $40.

If you convert 0.5% you’ll be at $80.

SEO
SEO is a tricky one since your investment will pay out over time rather than send you a few clicks and die. If you can get in the top 3 for a keyword that will send you 200 clicks per month with minimal maintenance, but you need to spend $1000 (or a lot of up-front time), would you do it?

If you can convert that traffic at 1% you’ll make 2 sales per month. If your LTV is $250 per customer this is $500 in future revenue per month. As long as you have the cash to fund it, this is quite an investment.

Cold Calling
If you decide to go the cold call route you’re going to make 10 or 100 calls yourself to develop a script, but after that you’re going to hire a service to make the calls in order to keep your business scalable.  After setup fees, telemarketing services charge $15-$20 per hour. If they can make 20 calls per hour and close 1 out of 100 calls, you’re looking at a CPA of $75-$100 depending on the hourly rate.

Note: I’ve never used a telemarketing service and the numbers above are estimates only. If you have more experience with real costs and conversion rates, please post a comment.

Word of Mouth
Word of mouth is free, unless the referral requires a high touch sale. If you can encourage word of mouth with a healthy referral bonus, you can see pretty easily how this can work in your favor.

If your LTV is $250 and someone refers a new customer, sending them $50 or $100 is an easy sell. This explains how HostGator can pay up to $125 in cash for a referral; they know their LTV.

It  also explains how companies can afford to give you a $50 gift card for attending a webinar. They know their LTV and their conversion rates from the webinars. From there it’s simple math to determine what they can put on that gift card and still make a profit.

Conclusion
There are hundreds of approaches to acquiring customers. The point of this post is not to explore the economics of every one, but to get you thinking about the financial nuts and bolts of your marketing before you build your product.

Building something customers want is a critical step in the process of launching a successful startup. But if that’s your only metric of success, you may be unpleasantly surprised when you find out you can’t acquire a new customer for less than $250 when your LTV is only $150. Unless you’re doing dotcom math you’ll be out of business in no time. (BTW – If you are doing dotcom math you’ll have venture funding and be a billionaire in no time).

My hope is that this post encourages you to take your best shot at estimating your LTV and CPA before launching your startup and, better yet, encourages you to get out of your comfort zone and actually try some of your proposed marketing approaches before writing a single line of code. (BTW – if you’re looking for info on how to do that, I talk about it in chapter 2 of my book).

Photo by Eleaf

Survey.io is a tool that helps you edge into customer development. It’s a free tool put together by Sean Ellis and Hiten Shah as a way for product owners to easily survey their customers using pre-written questions.

You enter your product name and voila – 8 questions that Sean Ellis has used many times to achieve his massive successes with companies like DropBox, Xobni, LogMeIn and Lookout.

I’ve had this on my to-do list for DotNetInvoice since Survey.io launched, but wanted to wait until our QuickBooks integration launched, which finally happened last month. I was further spurred into action at MicroConf; one of the key takeaways from the conference was that I need to be talking more to my customers.

So two weeks ago I dove in head first and emailed the survey to all of our customers. The results were surprising…

The survey consists of 8 questions covering how people found out about DotNetInvoice, how they would feel if they could no longer use it, what they would use as an alternative if DotNetInvoice were no longer available, and several others.

The idea behind the survey is two-fold: to determine if you have a core group of users who really need your product, and then find out the most important features for them, what other features they want, etc…

The problem with traditional surveys asking “What should we build next?” is you might get 40 feature suggestions, but you have no idea which ones are going to cater to your core group of customers, and thus hopefully result in more sales to customers like them who really need your product.

I’m not going to run through the details of every question, but rather share some insights I took away from the survey and how it will shape the future of DotNetInvoice. Keep in mind these are specific to DotNetInvoice and may or may not apply to your product (I recommend using survey.io to find out for yourself).

Insight #1: SEO Traffic Converts Extremely Well
Of people who responded to the survey, 85% of people originally found us through Google. Since the survey was only sent to existing customers, this number blew my mind. Search engines account for less than 40% of our overall traffic, but they appear to have a much larger impact on sales.

I should know this information. I have Google Analytics setup to track goals. But Analytics tells me that that only 37% of our sales come from search engine traffic. But I’ve always known that Google Analytics is a victim of the “last click problem” whereby it assigns the conversion to the last thing a user clicked, rather than how they originally found out about your product.

But I didn’t realize it was off by this much.

I had attempted to use KISSmetrics last year to avoid the last click problem, but I ran into problems with the tracking. But the first thing I’m going to do is get it going again to figure out which of these numbers is correct.

If it’s really 85% I know where I’m investing my time over the next 6-12 months.

Insight #2: We Appear to Have Product-Market Fit
According to Sean Ellis, there is a good chance you have product-market fit if more than 40% of customers would be very disappointed if they could no longer use your product. We are at 48%, followed by 33% who would be somewhat disappointed.

While I would like the “very disappointed” number to be in at least the 60% range, I do find some salvation in the fact that we seem to have found a core group of users who really need our application.

It also appears that the majority of “very disappointed” respondents operate within one or two related verticals. This is great news not only for the future of our marketing, but for our product development. We’re now looking to focus our efforts on specific features that should increase sales in these two niches, even at the expense of sales in others.

Insight #3: We Have Competition I Didn’t Know Existed
We’ve been aware of Freshbooks for years, and 37% of respondents indicated if they could no longer use DotNetInvoice that they would go there. However, the shocking stats are as follows:

• 26% of respondents said they would write their own if DotNetInvoice were no longer available
• 22% said they would use no alternative at all, which I think means MS Excel or MS Word

The key action item here is to update our marketing messages to properly capitalize on our previously unknown competitors.

Our home page will soon include verbiage along the lines of: “Stop using Word and Excel, save time and get paid faster with DotNetInvoice.”

The headline on our developer landing page will likely change to: “Don’t start from scratch, start with DotNetInvoice.”

Insight #4: Our Primary Benefit is Not What I’d Thought
For years I’ve thought our #1 competitor was Freshbooks, and so have geared some of our marketing on our key advantages over them: you stay in control of your data, and source code is included so you can customize as much as you need.

However, it had not occurred to me that the following would come back as our primary benefits:

1. Automated invoices and reminders
2. Easy/Simple to use

Perhaps retaining control of your data and having source code is an expected feature for our customers, so they didn’t bother to mention it? Because while we currently tout automated invoicing and our simplicity, these are not our #1 marketing message, since the competition essentially has both of these features as well.

So I don’t expect to make any changes to our messaging based on this realization, but I am pleased to now have a mental list of the top 4 reasons people are most likely to buy DotNetInvoice.

Conclusion
For 15 minutes of setup and 90 minutes parsing results, this was one of the most fruitful 105 minutes I’ve spent in some time. The findings above, along with a few others are going to shape the direction of DotNetInvoice for the next year or more.

As an aside, I’ve started an email newsletter where I’ll be publishing a more detailed look at my survey.io results in the future, along with several unpublished marketing screencasts and other techniques I don’t talk about on the blog. If this sounds interesting, you can sign up at the top of my sidebar.

Photo by Kevan

A reader recently emailed with the following question:

I am working with my business partner on building a web application and the domain name I’m looking for is already registered.I have done a ton of searching on the web, including forums like OnStartups and can’t seem to figure out which way is the best. Everyone seems to have contrasting opinions.

I am thinking of other ways to register my applications domain name, and I thought of a few possible solutions:

• www.my-site.com
• www.mysiteapp.com
• www.mysitehq.com (I saw that 37signals uses this for some of there web apps and liked the idea)

I was wondering if you thought this made a big difference or not.

My Response
If you’re shooting for SEO and “mysite” is a term people are actually searching for in Google, an exact match domain is best, followed by the one with the dash (to find out if people are searching for this term look here, but watch out for these common mistakes).

However, if you want to seem like a legitimate business I would go with app or hq. You could also consider www.mysite.net. Personally, I like app the most since hq seems like you’re ripping off 37signals.

If you’re really going to be standing behind the business and making it a focus of your efforts for the next year or more, I would not use the dash. But if this is more of a niche site that will mostly rely on search traffic (and be monetized with ads rather than as an actual application) you can consider it, as it does come with an SEO boost.

Photo by Images_of_Money

I recently received the following question from a reader:

[When we spoke at a recent conference] I had been thinking of a $1/month price point [for my product aimed at teachers] to make it a “no-brainer,” and you strongly advised against it, suggesting $5-7 at a minimum.  Are you concerned at all about the fact that teachers could continue using the existing work-around solution? I wonder if I provide enough value to rationalize $5-7. Maybe it would be better for me to find more ways to add value rather than lower my price point?

My Response
Trying to make money selling an app for $1/month is crazy unless your market is gigantic and you have the expertise or the funds to reach them (and even then, support will kill you).

Let’s look at some numbers:

1. If your goal is a meager $2k per month you need 2k customers.
2. To begin, that’s a lot of non-technical customers to support for that little money. You’ll still be working a full-time job at that point so it’ll be nights and weekends. Not cool.
3. To get 2k customers with a 1% conversion rate you’ll need 200k unique visitors (total, not monthly). If you crank really hard on promotion and word of mouth I can imagine you’ll ramp up to 1k-2k uniques per month. Even at 4k per month you’ll be waiting a long time to hit that 200k mark.
4. These days I’ve been advising people to go up-market and try for $30/month and $50/month price points. What can you build that people would value that much?

In your case you have a hard pricing constraint because teachers don’t have a lot of extra cash lying around to spend on software. But I don’t see any way a niche product can work with a price point of $1/month. Even at $5-7/month it’s going to be extremely difficult to build revenue beyond a few thousand dollars.

Photo by Dave Rodenbaugh

Anytime you spend 3 months planning an event, whether it’s a wedding, a product launch, or a conference, you need a post-mortem. A time to reflect on things that went right and things that needed work.

This post is my post-mortem for MicroConf 2011, which took place last week in Las Vegas, NV.

Mike Taber (my conference co-host) and I had a 45 minute conversation about it that will be published next week as episode 46 of our podcast, but when we stopped recording I felt like we had just scratched the surface of discussion topics. There were so many interactions packed into 60 or so hours that I’ve had a hard time getting my head around them.

This post is an attempt to review the awesomeness that happened as well as the stuff that I’m hoping we can change if we wind up holding MicroConf in 2012. If you’re looking for specific information about the talks I don’t cover them here, but I’ve included a list of write-ups from attendees at the bottom of this post.

What Worked

Speakers
The fact that Andrew Warner, Hiten Shah, Ramit Sethi, Sean Ellis, Noah Kagan and Patrick McKenzie were in the same room sharing their deepest startup secrets blows my mind. One fear if we decide to hold MicroConf 2012 is how we’d replicate this kind of line-up again. It was so awesome it will be hard to follow.

Attendees
I was also blown away by the quality of MicroConf attendees. I should have assumed that anyone who would pay $500-600 out of their own pocket, plus airfare and hotel, is serious about their business. And it showed…the level of interesting stories, informative conversations and instant connection was as high as any conference I’ve attended.

As one person said to me the first night: “The speakers are just an excuse for all of us to get together and connect.” Indeed.

Size
Our original vision for MicroConf was to have 225 attendees. The final headcount was 105. I saw this as a bad thing heading into the conference, realizing the size might limit the value for speakers and attendees.

By the end of the first day I knew I was wrong. In fact, I began to receive feedback pretty quickly that if we have a MicroConf 2012 that we should cap the number of attendees at 125 or 150. The intimacy of a group of 105 vs. 225 is enormous. I spoke personally with almost every attendee, and nearly everyone I asked had been able to have conversations with several speakers.

Mission accomplished. This is one thing we won’t be changing.

Welcome Reception
The night before the conference we held a welcome reception in a pub where 75-80 of us hung out, had a few beers, and got acquainted. The momentum from this initial gathering carried into the event. We got this idea from the Business of Software conference, and would absolutely do it again.

Afterparty
On the final night Andrew Warner opened up his penthouse suite for an afterparty. I would guess we had 60-70 people funnel in throughout the night and it was the ideal private environment to recap, discuss, and process the previous two days.

Mike and I received a ton of feedback, both positive and negative, much of which is appearing in this blog post. That evening was one of the highlights of the conference for me.

Lack of Major Glitches
For a first year conference with two inexperienced hosts, I was happy there were no major glitches. The wifi had some issues for a few hours on the second day, and one of our speakers had to fly home before his talk to take care of an emergency…but we were able to deal with both issues with minimal stress or fall-out.

Before the conference I had visions of faulty audio equipment, collapsing stages, and a food shortage. But none of them came to pass.

Las Vegas
I was iffy about Vegas. I’m not a big fan; I’ve been there too many times and I don’t enjoy the vibe now that I’m a bit older. But you know what? It’s a great place to have a conference. The energy level is high even at 1am on a Sunday night. There are sights to see, gambling and drinking to be had, and a slew of good restaurants.

There’s a reason so many conferences are held in Vegas…it’s inexpensive and the atmosphere is ideal.

What I’d Do Differently

Fewer Speakers
11 speakers in 2 days was just a bit too much information. If we do it again I would look at reducing the number to 8 or 9 speakers.

Shorter Talks
An hour was the perfect length for some of the speakers, and just a bit too long for most (including me – the best talk I’ve ever given was 45 minutes long). Giving 2-3 headliners an hour each and keeping the rest to 45 minutes would allow for more breaks and more interactive segments (see my next point).

More Interactivity
When David Hauser had to fly home we improvised by having Patrick McKenzie and Hiten Shah critique websites.

Ramit Sethi had just completed his review of 4 landing pages, and these two segments were highlights of the conference. They applied the principles we were learning, brought interactivity to the group (people were shouting out their URL and having them reviewed on the fly), and generally increased the energy level in the room.

Next year, I would plan for one or two 30-minute critique sessions per day, and perhaps throw in a Q&A panel for variety.

Better Venue
The Riviera hotel in Las Vegas is not the oldest hotel on the strip, but there are certainly more glamorous places to hold a conference. We chose the Riviera for financial reasons since Mike and I were bootstrapping the conference. But if we do it in 2012 I would aim to go just a bit more upscale.

Outsource Logistics
This wouldn’t affect attendees, but Mike and I spent an inordinate amount of time putting this conference together. I wanted the experience of handing things ourselves at least once, but offloading a lot of the legwork is something I would do in the future.

Videographer
We didn’t have funds for a professional videographer (cost was $5k due to union issues) so I brought my HD camera and asked Ruben from Bidsketch to run it for 2 days. Things turned out reasonably well, but nothing compared to what a professional videographer could achieve. If the budget allowed I would look harder at making this happen next year.

MicroConf 2012?

I’m not sure yet if we’re going to hold the conference in 2012, but if you’re interested in attending you can subscribe to our early notification list here.

You can bet you’ll have early access to discounted tickets if you’re on this list.

MicroConf Write-ups

Here are several write-ups from attendees that include more detailed information about speakers and the vibe of the conference. Email me if you do a write up and I’ll add it to the list.

• (Video) Software Businesses in 5 Hours A Week: Patrick McKenzie’s MicroConf 2011 Presentation
• Ten Things I Learned At MicroConf 2011
• MicroConf 2011: 3 Surprises and Learnings from Best, Conference, Ever.
• MicroConf 2011 Write-up by Patrick Foley of Startup Success Podcast
• Bootstrapped Start-Up Lessons from Self-funded Entrepreneurs
• How a Software Conference Helps Countertop Shops
• Thoughts on MicroConf
• MicroConf: How it All Went Down
• MicroConf 2011 – Day 1 Highlights
• MicroConf 2011 – Day 2 Highlights
• MicroConf 2011
• MicroConf 2011 and Me
• How to Improve Customer Testimonials to Get More Sales

Special thanks to all of the speakers and attendees who took a chance on a first year conference, to Ruben Gamez for working the video camera, and Dave Rodenbaugh for taking photos.

Hot off the presses, download a free copy of this 52-page ebook for the price of a Tweet (or a share on Facebook). Visit www.MicroConf.com to make it happen.

I snapped each of the following on my iPhone during the past 8 months.

“Wines sell better when we put these orange ‘sale’ tags on them so let’s put one under every bottle!”

Lesson: Too many price reductions diminishes their impact along with the value of your product.

I got a fever! And the only prescription is more buttons on this god forsaken TV remote I found in Best Buy. Rumor has it three people have already used it to type their doctoral dissertations.

Lesson: When you design user interfaces like this someone in your hometown kicks a puppy.

Nice work Ikea, with two kids in tow your family friendly parking section had a major impact on my desire to return.

Lesson: What can you do to cater to your high-revenue customers?

Another nod to Ikea…personalizing what are otherwise impersonal products by providing photos of the creators and the design philosophy of the product. Mass produced, yet somehow personalized.

Lesson: Humans love stories. Tell yours on your website. Make it personal.

Quite a deal when you buy in bulk.

Lesson: Be sure your pricing makes sense.

My daily reminder.

Lesson: Ignore at your peril.

Photo by Dan Taylor

I try to hang around with entrepreneurs as much as possible. I dig people with an insatiable desire to create things, and I’m not anywhere close to being cool enough to hang out with painters and musicians.

One term I hear thrown around now and again among technical founders is “business guy” (or gal…except it’s always “guy” when I hear it). This is the mythical person who’s going to swoop in once your app is built and handle all of that business-y stuff.

You know…the stuff we technical founders scoff at as tertiary to our product’s success:

“I don’t need no stinking MBA. I got code to write!”

Code that will be magically catapulted into the hands of millions once the business guy steps in.

I think having a “business founder” is a good idea for some developers. If you don’t have the desire to learn some critical aspect of your business, then finding a partner with the requisite experience is heartily recommended. The key is to determine which aspects of your business are critical and hard to learn.

For example, here are four areas I’ve heard mentioned by developers when discussing finding a partner with business experience:

• Business filings and structure
• Taxes
• Banking
• Payment gateway / merchant account

Aside from “to kick me in the head twice a day” these may be the worst reasons ever for finding a business partner.

Each of the above “business-y” things can be handled either with a few hours of research, or by hiring an experiences professional (lawyer, accountant, etc…). Giving up equity to someone to handle what amounts to administrative duties is a huge mistake.

So if you’re a self-funded technical founder looking for a business partner, what is a good reason to give up a portion of your hard-earned equity?

Only one that I know of: successful marketing experience.

This is an area where a few hours of online research will not provide you with a passing grade, and where experience holds enormous value.

As an aside, securing funding might be another reason to bring someone on the team. Since I’ve never raised funding and don’t talk much about it on this blog I’m going to leave it to someone with more expertise in this area to comment here and let us know if it’s an equity-worthy contribution (or if hiring a lawyer or winging it with the information available in blogs and books would be a sufficient hack).

The Most Important Question to Ask a Potential Non-Technical Founder
I need to be clear: if you have any interest  in learning marketing, I heartily encourage you to keep your equity and learn this stuff yourself. A developer who can market is an amazing combination.

But some people really don’t want to stray away from the role of technician, and if that’s the case I think finding a non-technical co-founder is a decent option.

In A Fool’s Bargain: Building Software for Free (or, An Idea Ain’t Worth Squat) I ask the “money” question of someone who pitched my on building a product for them in exchange for equity:

Do you have experience marketing and selling software on the internet, and if so could you pass along links to previous successes?

You should make this the first question you ask of a potential non-technical founder. Most conversations will end here.

Photo by Stephen Poff

I’ve written a guest post for OnStartups titled The 5 Minute Guide To Cheap Startup Advertising. If you have a small ad budget and are trying to find inexpensive clicks online it’s probably worth a read. Learn from my mistakes!

It includes strategies/examples for:

• Niche advertising
• Google AdWords
• Facebook ads
• StumbleUpon ads
• Reddit ads

Read the complete article here.

Hot off the press: my Micropreneur Manifesto was just published on Change This, a popular platform for spreading ideas. The manifesto is a look at what I believe are 16 key tenets for success as a solo entrepreneur. It’s more of a high-level view than my typical writings, but hopefully it’s worth your while.

The manifesto is free (no email required), 14-pages in PDF, and was generously formatted by the ChangeThis crew.

An excerpt:

At this moment in history, we as entrepreneurs are able to do something never before conceived: launch a product completely on our own, with no employees and no outside funding, from anywhere in the world.

These single founders creating products for niche markets are known by another name: micropreneurs.

Micropreneurs may write software. They might design themes for a blogging platform. They may produce exquisite wedding invitations, or how-to books. Micropreneurs are agile, inspired, independent, knowledge seekers who can’t live with the 9-to-5 status quo.

Download the manifesto here. And if you enjoy it, share some tweet love!