Once you’ve conjured the nerve to block-out the siren call of the Venture Industrial Complex and decided you’re up for the challenge (and reward) of building your technology company the old-fashioned way, what does the road ahead look like?
Over my career, I have heard thousands of stories from founders about why they started their companies and what ups and downs they experienced along the way. The narrative below is a brief composite of the inspirations, challenges and milestones of those stories. These founders built successful companies by skipping the venture capital route and by betting on themselves —still the most common approach for technology companies though it gets very little press these days. Hopefully what follows either rings true to you as you look back on what you built or, if you are just starting your journey, it helps you prepare for this tried and true path.
Chapter One: Taking the plunge. Anything you can do I can do better.
In your few jobs since college graduation, you’ve gotten to know an industry pretty well. You have spent a lot of time face-to-face with customers and understand their exact needs. You’ve surveyed the competitive landscape and are convinced that your customers could be better served with a new product, or a unique approach to an existing product, which doesn’t yet exist. You are in your mid-thirties to mid-forties and while now probably isn’t the best time to start a business (with young kids and all) you are pretty convinced you have a great idea.
Soon, you can’t ignore your entrepreneurial itch and decide break out on your own. Maybe it’s you and a partner, or maybe you fly solo. Regardless, you do it the old fashioned way – with savings, credit cards and a healthy support network of friends and family.
Leveraging your great customer relationships to generate interest in your product idea, you know you have willing buyers when you actually build the product to generate revenue. Soon, a single customer turns into two, then three and so on building the business one customer at a time to let allow you to hire staff along the way to help meet the small, but growing demand. Your deep knowledge of what customers need combined with your deep commitment to customer service set you apart in your niche and the early successes start to pile-up. You are not out of the woods yet, but things start feeling real.
Chapter Two: Finding solid ground. Adapting your way to early success.
You’ve now reached a critical juncture: these early days determine how market-driven you are. As my friend says, “the bloodless verdict of the market” decides the trajectory of your success or failure. Because you eschewed venture capital funding, your own money is on the line and you don’t have the luxury of building products they don’t want, just to pivot into some new plan. You don’t just need paying customers, you need ones who will generate a good margin, too.
But you focus on profitability. That’s what enables you hire people, make the product better and keep customers delighted. If they need it like you think they do, they’ll often pay a premium for it.
Customers are funny; when you spend time actually listening to them, you find they are rooting for you. They have a problem, and they can’t wait for you to fix it for them. They will give you the benefit of the doubt if you earn their trust. You don’t have to get it perfect the first time around. Every entrepreneur has a gut-wrenching story about some complete failure with a critical customer and an equally inspiring tale about redemption (often with the same customer!). The market-driven focus and profit discipline you develop in this phase will serve you well as your business really starts to expand.
This isn’t the TechCrunch way to riches, and there are no “go-big-or-go-home” scenarios here. You won’t be building your Silicon Valley street-cred by burning through tens of millions in funding after a half-dozen pivots. Realistically, at some point after your early success, you will find yourself staring at your bank balance, scared to tell employees you might not make payroll next month, unsure how to tell your supporters that this crazy experiment appears to have failed. I have heard plenty of stories about founders throwing up in the back yard at night from the stress, ashamed to show their spouse they couldn’t handle the pressure. But unlike the Sequoia-backed startup darlings, your travails won’t be covered by Wall Street Journal bloggers (read here, here and here for a classic VIC company arc over eighteen months). For you (and for all the others that make it) something breaks your way; you make payroll and you get some momentum behind you that sustains the company going forward.
Chapter Three: Planting the flag. The satisfaction of staying power.
With the early bullets dodged and some strong tailwinds at your back, this is when it gets fun. You’ve finally reached the expansion phase where the customer base continues to grow as does your team. The product gains new functionality, or perhaps new products emerge, to better service your clients’ needs. Even your waistline expands as the long work hours prevent you from getting any fresh air most weeks.
You finally start to get the satisfaction of building something with staying power, because one bad break isn’t going to close the doors of the business. You know what that feels like and this stage feels entirely different. As an added benefit, you’re able to pay yourself and your employees well. You remain both close to the customers and deeply involved in the product strategy; though you do get to take a vacation every now and again thanks to hiring a staff, including maybe a few of your old colleagues, who can get stuff done when you are out of the office.
With the product selling well and a growing customer base, the big challenge now is determining how to scale all the things that have made you great – product insight, world-class customer service, dedicated employees. Admittedly, this is an excellent problem to have, but there are plenty of companies that reach this stage and find it a long, flat plateau.
Chapter Four: Are you still playing to win, or just not to lose?
Eventually, a successful business will reach the What Next? stage. Unfortunately, you have most of your net worth invested in the business, and your friends (maybe your financial advisor, too) have been telling you for a while that you need to diversify. Your extended family thinks you’re crazy to worry because from the outside it seems like you have everything. But whatever material success you have, you have ten-times the stress piling up back at the office. Many founders say this is the time that they stop playing to win and start playing just not to lose, when they start making decisions for safety rather than for success. Acknowledging this means you are pretty self-aware. So what do you do now?
As the business owner, you’ve got two options: double down, or divest (all or some of) your interest. By doubling down, any profits are immediately re-invested into the company to sustain further growth and success and that may not happen at as fast a pace as you’d like. It’s also risky because you aren’t sure if you have the right people in the key spots to take the business to the next level. And you are further away from the day-to-day operations than you have ever been so how do you know you aren’t missing more of the issues? And what is the next level anyway? With the profits and the resilience you’ve built into the business, is the next level even worth it? A lot of times it is, but we will get into that in more detail in a later post.
Divesting your interest, on the other hand, allows you to reduce your personal financial risk and can be done in at least four ways: pass the baton and sell to your employees, raise equity to recapitalize the business, sell to a strategic buyer like one of your primary competitors, or sell to private equity while keeping a minority stake in the business.
Each of these options provides varied strategic and personal benefits but each has their drawbacks, too. Regardless of the decision you make in the “What Next?” phase of the business, the fact that you made it here is a testament to your business acumen and validation of your decision to pursue entrepreneurship the old-fashioned way.