Lessons I Learned Running my Startup

When I look back at the experiences I have had in my career, none was a greater learning experience than running my own startup. Running a small company taught me a ton about business model generation and managing a startup, much of which I have applied in my consulting work since then.

My Startup

Social Contxt graphic in Business Model Generation blog post

In 2009, after three years of digital strategy consulting for nonprofits and the disappointing loss for a campaign I worked on, I decided to start my own company. I was inspired by the stories of successful nonprofit and political technology companies such as Blue State Digital and Development Seed, and decided to follow my dream.

I was green, but not a completely inexperienced manager. I had run a few political campaigns and nonprofit programs, so I knew how to manage finances, hire and manage people, build a brand, and run an organization with fairly minimal resources. I was also fortunate to have worked for consultancies that gave me responsibilities like launching new practices, and let me peek behind the curtain at how the company was run.

So, with a couple thousand dollars and a belly full of ambition, I created Social Contxt, a boutique digital agency with a mission to help the social sector better leverage social media for social change (I actually think that was on the company’s website at one point). I learned a lot about business model generation through this experience.

My Business Model

As mentioned earlier, I wanted to follow in the footsteps of companies that build a product, or products, for the nonprofit sector, then offered consulting services related to those products. Many of the companies I modeled mine after funded product development through client projects – customers paid them to build product features that met their organizational needs, then the company generalized the functionality for a larger customer base.

I started by offering standard agency services – digital strategy, graphic design, website development, and marketing consulting – to small- and medium-sized nonprofit clients. The revenue generated from these services was used to hire staff that would develop products in addition to servicing clients.

As I learned what the needs of the market were from client projects, I used these common use cases to define features for a series of products. The first of these was Activ8, a Drupal distribution preconfigured with features commonly found on nonprofit websites and integration with some of the leading social media platforms and products. I didn’t sell the product – I charged a flat fee for installation, which covered our investment in product development. On top of that, I billed hourly for custom design and development. Down the line, I intended to offer the CMS as a SaaS product, and would move to a monthly subscription model at that point.

Our Successes

Over the short lifespan of the company, we had some noteworthy successes:

  • We were profitable within the first 30 days given my ability to quickly bring on clients
  • Our first product launched within a few months of the company being open
  • We had a couple of customers using our product within 30 days of launch
  • We received seed funding from MailChimp to build our second product – an application that integrated their product with Hootsuite
  • We open sourced our integration between BSD Tools (a nonprofit CRM) and Drupal
  • We partnered with Blue State Digital, an agency much larger than ours, on a few large pitches (which we unfortunately didn’t win)

The team grew to six people within a matter of months – myself, a full-time operations and marketing person, a business consultant/CFO, and three contract designers and developers. We had a nice office space at MassChallenge, which we got in exchange for pro-bono services offered to the organization.

Regularly, people I met at industry networking events commented that they thought we were much bigger than we actually were, which spoke volumes about the great work done by Austra Zubkovs, our operations and marketing person.

Why I Closed The Company

The first quarter of 2011 was a tough time. We didn’t bring in any new business, and had to end a relationship with a hostile client which we banked on a long-term relationship with.

In addition, the funding agreement we entered for development of our second product paid only 10% upfront, promising the remainder after the product was launched. So, while not bringing in much new revenue, we were losing money trying to bring our second product to market.

You can do the math. It reached a point where, in order to keep the company running, I would have had to take out a loan. I didn’t want to take on debt to keep the company afloat, a promise I made to myself before I started it. It was a hard decision, but in April 2011 I closed shop and took a digital strategy position with a large advertising agency.

Mistakes I Made That You Can Learn From

Business Model Generation - Business Model Canvas graphic

So there are a few lessons from this story that you can learn from to hopefully increase the chances of your business succeeding in the long term:

I Wasn’t Strategic in Choosing What State I Registered In

This may sound odd, but the state in which you register your business matters. A lot.

Many websites you read tell you not to worry about the state you register in until you want to take on investors or go public, but that mostly applies to entrepreneurs looking for an exit. I, as many small business owners, intended to grow and run my company.

State regulations and taxes can cripple a small business. Massachusetts, where I registered, has amongst the highest corporate tax rates in the country. There are also state rules around filing taxes and reports quarterly, which for a new business owner can be complicated or expensive to hire someone to do for you.

The state you register in is a core part of your business model. Definitely do your homework before deciding to register in your home state. Even a nominal savings on business registration costs and state taxes can give you additional capital needed to get your business off the ground.

I Registered as the Wrong Form of Business

I consulted with an accountant early on, and I was advised to register as a Sole Proprietorship. The reasoning I received was “it will be easier to do your taxes that way.” Fair enough.

What I did not realize at that time was it also put me in direct risk of a lawsuit, which put my personal assets at risk. A financial advisor later recommended I incorporate as an LLC in order to minimize those liabilities.

The process of changing from a Sole Proprietor to an LLC wasn’t that big of a deal, but it was time and money I could have saved. It is also much more of a hassle when switching between other forms of business. The process is different from state to state, some requiring approval by a government agency or the courts. Save yourself the hassle and incorporate as the form of business you intend to be in the long term, unless there are financial or legal reasons not to.

I Didn’t Do Sufficient Competitor Research

I discovered a few months after launching Activ8 that there were a number of much larger vendors that were also launching similar products. These companies had better reputations, larger customers bases, and more capital to invest in developing and promoting these products.

And frankly, as I believe these other companies have now learned, there isn’t a market for turnkey Drupal products. The Drupal brand works against product companies in that regard – potential customers want to customize the CMS because it is open source. That’s its appeal, it can be tailored to an organization’s specific needs. There was not one installation of Activ8 that we didn’t customize, which made productizing it challenging.

I could have pivoted at that point, but I had already invested significant time and money into a product that didn’t have a chance to begin with. For a small company, those resources are not easily recouped.

All this to say, it is critical that as an entrepreneur you do your due diligence to research the viability of a product and size the market before launching a business.

I Didn’t See a Market Shift Coming

This is a tough one, because we aren’t psychic. We cannot predict when there will be major changes in our industries. But, staying on top of changes and trying to ride the wave rather than fight it is important.

Digital is forever changing, creating volatility for digital agencies and product companies. We were building a content management product at a time when:

  1. Organizations were struggling to figure out how to leverage social media for their causes
  2. They were increasingly hiring staff to bring the services they once outsourced in-house
  3. Nonprofits began turning to products targeted at the corporate sector to manage social media and digital engagement with constituents

That last point is critical. We were building a product targeted at the nonprofit sector, when that sector was looking to the corporate sector for inspiration and turning to products that sector used to meet their needs. These products were more established in the market. They supported best practices that the corporate sector established for social media management.

Our business model was predicated on the assumption that the nonprofit sector had specific needs as it relates to social media management, and our products should be tailored to those needs. So, we myopically continued to develop a product during a major market change, not recognizing what we thought was an open market was really a crowded one.

We did not build into our business model plans for market testing our products, which also contributed to the lack of market appeal of Activ8.

I Didn’t Factor in Seasonality

The first quarter of the year is a tough time to sell services to the nonprofit sector. Organizations are just coming off of end-of-year fundraising from the previous year, and it’s financial reporting season. Many organizations are not starting new projects until the frenzy of financial reporting is over.

Not having planned for that, I made heavy investments in growth and product development at the end of 2010, without factoring in a decrease in revenue at the turn of the year. That really hurt the company.

Understand the industry you are in, and how seasonality affects the sales cycle. Build into your business model and budget how you will deal with these ebbs and flows.

I Didn’t Protect Our Intellectual Property

Somewhere along the way of developing our second product, communication with the funder stopped. We continued product development, but the funder would not show up for meetings, gave me the run around when responding to emails, and dodged my calls.

Turns out they stole our idea and built the application themselves. So, we never recouped the money invested in building the first version of the app.

It is important to protect your product ideas, because you never know if/when someone will steal them. Having patents on product ideas allows you to more easily pursue legal action in these cases. You can also use intellectual property as a revenue generator, either going after companies that used that idea for licensing fees or minimizing tax burden by paying licensing fees into a subsidiary of your company.

Our Burn Rate Was Too Fast

It is very tempting to scale a company too early. There can be many false positives that indicate rapid growth, like a sudden surge in business which is just due to seasonality.

At the end of 2010 we had an influx of business, which was just due to organizations wanting to offload extra cash by investing in technology or ramp up for end-of-year fundraising. I took that as a sign of rapid growth, and hired more people and invested in operational things we probably didn’t need at the time (e.g. new software, new computers, a new website).

Don’t rush growth. It is better to plan for incremental growth in your business model by setting milestones to achieve, and planning for the organization needed to support achieving the next milestone incrementally.

Our Costs of Goods Sold Were Too High

In hindsight, I paid our contractors more than I should have. This was a philosophical decision on my part – I wanted to create jobs in this country and pay people a fair wage. But, the drawback is we spent a lot of money to make money. When it came time to continue run the business without steady income, this accelerated our burndown rate.

This is probably obvious, but as much as possible create a business model where you minimize spending on operational costs in your early years. You should focus spending on developing and selling your product.

 

Hopefully there are some useful takeaways from this long post. If you have other experiences you would like to share, or lessons learned about business model generation, please post them in the comments below.