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Fast Cash vs. Slow Equity

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Re: Fast Cash vs. Slow Equity

#21

Post by shooker435 »

There's a hidden glimmer of wisdom in here, which is to let your (cash) customers contribute to funding your (equity) business growth.

My theory is a niche consulting firm can perform services to make enough money to build out a product, and better yet, they're being paid to learn about user requirements along the way.

I'm on a similar journey right now, and it's always difficult balancing the dopamine and temptation of a short-term cash injection at the expense of development time spent on the core product we're scaling.

Re: Fast Cash vs. Slow Equity

#22

Post by startshipbanana »

anovikov wrote: post #3

Equity business is thoroughly inaccessible to the vast majority of people, especially the IT people. It requires being an insider at least to a degree, and it requires apart from knowledge and skills, at least some luck. I've seen a lot of extremely bright, talented and hardworking people trying to play that game - all failed, some ruined their entire lives simply for refusing to give up for too long. While those who…

I don't understand why people are so opposed to starting a bootstrapped consulting company. You can start as a single man shop and then hire people and expand.

I'm running a consultancy in a LCOL area. Last year we made 400k revenue, 150k profit and 40% growth. We already have verbal agreements for around 400k worth of sales for this year. We have the employees for 600k revenue and if we manage to bring in more sales we can grow the team to meet demand. 600k revenue would mean 250k profit for us.

I can easily see us growing the company to a few million revenue in the coming years. Making lots of profit while having the option of selling the company for a lot of money if a nice offer comes along. Sure it won't be making me a billionaire, but I can easily see myself building generational wealth here.

My country has public tax records for all companies over 250k revenue. The story is very often with product companies that they have burnt 2, 5, 10 million to achieve 2-3m ARR while still making a loss.

Re: Fast Cash vs. Slow Equity

#23

Post by michaelt »

windward wrote: post #6

I think a good chunk of services I receive from small businesses are underpriced due to people not realising the business they're starting has an upside similar to being an employee but with much greater personal financial risk and working stress. There's really not that much scalability to something without franchise potential.

Perhaps the personal financial risk and working stress isn't as great as it might seem?

Imagine I'm a qualified plumber. I've got my own tools, vehicle, and insurance.

I can work as a subcontractor for a local plumbing business. They'll pay me $250 per day when they have work for me. I get no income when there's no demand, and I get no holidays or sick pay.

Or I can start my own plumbing business, and charge customers $100 per hour. Sure, I've got to pick up the marketing and giving quotes and sending out invoices - but if I can get the work coming in, I get a lot more money.

Re: Fast Cash vs. Slow Equity

#24

Post by ahoog42 »

shooker435 wrote: post #21

There's a hidden glimmer of wisdom in here, which is to let your (cash) customers contribute to funding your (equity) business growth. My theory is a niche consulting firm can perform services to make enough money to build out a product, and better yet, they're being paid to learn about user requirements along the way. I'm on a similar journey right now, and it's always difficult balancing the dopamine and temptation…

This is exactly how we built viaForensics in 2009. For the first five years, we performed mobile forensic investigations and gave trainings based on the Android and iOS forensic books we wrote. We were able to self fund software development for the first five years. When we moved from forensics to mobile app security, we required more capital to build our automated software which led to our Series A.

Having an established business with customers in revenue, obviously significantly helps in the fundraising process and evaluation. The other huge advantage is you can benefit significantly from the Qualified Small Business Stock statute which provide an exemption/shield on federal taxes when you sell that is the _greater of_ either $10m or 10x times your valuation at the time of funding.

Re: Fast Cash vs. Slow Equity

#25

Post by pbronez »

shooker435 wrote: post #21

There's a hidden glimmer of wisdom in here, which is to let your (cash) customers contribute to funding your (equity) business growth. My theory is a niche consulting firm can perform services to make enough money to build out a product, and better yet, they're being paid to learn about user requirements along the way. I'm on a similar journey right now, and it's always difficult balancing the dopamine and temptation…

Yes, but it takes strong leadership. Service and Product companies have important structural differences in many areas, including finance, culture, technology infrastructure, and project management. I’ve seen many companies start on one side, try to add the other, and fail hard.

Re: Fast Cash vs. Slow Equity

#26

Post by shubhamjain »

The more apt framing of this article would be something along the lines, of "The Agency Trap." The author grew his marketing agency to $1M quickly. That might sound great for HNers here, but there are reasons why such businesses don't attract handsome valuations. You always have to keep grinding to keep the inflow of customers, you're never free, and growth is directly tied to the number of employees. Additionally, such business can have severe ups and downs depending upon market conditions.

Building a product, on the other hand, is slow at the start but after a point, the rewards start showing up. The inflow of cash is consistent and keeps growing while the costs remain the same.

There's nothing wrong with the agency business, but it'd be a smart bet to use at least some of the proceeds into building something long-term. Some agencies, notably 37signals, have been quite successful doing that. Most, though, never do it.

Re: Fast Cash vs. Slow Equity

#27

Post by lumost »

shubhamjain wrote: post #26

The more apt framing of this article would be something along the lines, of "The Agency Trap." The author grew his marketing agency to $1M quickly. That might sound great for HNers here, but there are reasons why such businesses don't attract handsome valuations. You always have to keep grinding to keep the inflow of customers, you're never free, and growth is directly tied to the number of employees. Additionally, s…

Most B2B firms live in the grey area between consultancy and product for most of their lives. I’ve known of more than one database company with greater than 50% of their HC tied to bespoke asks from top clients.

In my opinion, the difference is really in whether the core founders can scale super-linearly with HC, and whether you can maintain a wide enough spread of clients that you can afford to lose a few of your biggest and not care beyond the signal you get on how your product is doing in the market. Practically, every top B2B startup fails the latter test to some degree.

Re: Fast Cash vs. Slow Equity

#28

Post by bluGill »

shubhamjain wrote: post #26

The more apt framing of this article would be something along the lines, of "The Agency Trap." The author grew his marketing agency to $1M quickly. That might sound great for HNers here, but there are reasons why such businesses don't attract handsome valuations. You always have to keep grinding to keep the inflow of customers, you're never free, and growth is directly tied to the number of employees. Additionally, s…

If you run an "agency" business then you should always be promoting junior employees to full partner. They start our doing work that you find for them, but after a few years of training from you they are now bringing in their own work and should be treated like an independent business owner in your space that you agree not to compete with (which would be against monopoly laws if you were not the same company) and once in a while one covers for the other for vacations/sick. Lawyers regularly change the name of their company to reflect changes in who is partner.

Not all employees become full partners. Most do not, but it should be clear to everyone what hard work is required to become a partner and they should see examples of it happening.

Re: Fast Cash vs. Slow Equity

#29

Post by Atreiden »

anovikov wrote: post #15
croon wrote: post #10

Earlier quoted context omitted.

It also requires you already have enough money to not need any returns for a few years.

That is a much smaller problem, most people in IT have it.

Citation needed. From my experience, being able to go two years without income is an extreme edge case.

Re: Fast Cash vs. Slow Equity

#30

Post by throwway120385 »

shooker435 wrote: post #19
nicgrev103 wrote: post #16

Do not read this as- If you have slow growth you have an equity business. It's more likely you just have a shitty business.

Or you haven't found product market fit yet, which sounds like what happened in the Kit.com example referenced in the article.

I think better advice here is to say that you should plan to spend time learning enough about the field you're trying to enter that you can see whether you are working toward fit or whether you're working away from it. In other words everything that you should do when building a new product should be geared toward quickly validating whether what you're building is what people want. If you don't have a plan for market validation you don't have a business yet.
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