A couple of months ago, I was brainstorming various business ideas with one of my mentees. He had an interesting business idea that was similar to Spotify but with a unique twist. After listening to the idea, I immediately told him that the idea was much more complex than he had envisioned, and that this idea required the resources of a startup. This meant that this wasn’t something he’d be able to do on his own; he’d have to bring another person (or two) onboard to help out. Looking for investors or advisors wouldn’t be a bad idea either.
His other idea was building an ecommerce store that would sell products in a specific niche. This was an entirely different idea, a much simpler idea. I immediately explained to him that this idea didn’t require him to find co-founders or look for investors. Indeed, this was something that he could begin working on right after our phone call.
The point I was trying to make is that building a startup is far from the only way to assert yourself and build something of your own. In some cases, it is actually an unnecessarily hard approach. This is something most people completely miss because they think that startups are the only way to make money online. Actually, this couldn’t be farther from the truth.
Part of the reason people don’t realize this is because they’re living in the startup bubble place such as San Francisco, Silicon Valley, New York (and international cities like Berlin) where everyone and their mom (and dog) seem to be working on their startup. It’s hard to think outside the box and build a simple money-generating business when everyone around is applying to startup schools, pitching investors and salivating at becoming the next Dropbox. It’s hard to see the forest from the trees if those trees are covered with the typical thick San Francisco fog.
How startups work
Paul Graham, the founder of Y-Combinator, a venture capitalist firm that invests in startup, had this to say about the economics of startups:
Economically, you can think of a startup as a way to compress your whole working life into a few years. Instead of working at a low intensity for forty years, you work as hard as you possibly can for four. This pays especially well in technology, where you earn a premium for working fast.
His point is that you must work very hard initially in the hopes of building something huge and getting a huge payoff later.
Another way of looking at it is that a startup works like a one-time shot, you pick a market, build a product and try to hit bulls-eye very quickly. If you succeed, the users start signing up and if you’re lucky, the revenue starts pouring in. That’s called traction.
But if you don’t succeed because you can’t market or because your product sucks (usually a combination of both), you’ll be wasting lots of time working on something that doesn’t really matter. That, in a nutshell, is the economics of startups.
Many startups fail for exactly this reason: it’s really hard to know what you’re doing the first (or second, third) time around. It takes a special cocktail of expertise, raw intelligence and luck to get it right and succeed. Having worked at several startups and even started a couple, I’ve been intimately familiar with this arduous and tricky process.
It’s a business model that requires a huge upfront cost of your time and energy. It requires you to forget everything in the world and work like hell. If you’re young and single and don’t have many commitments, then you can probably afford the time investment. But if you’re a bit older with a wife (and even children), you’ll be making an enormous sacrifice for a payout that may never come. It can also break apart your family.
But is working many hours per day the only way to become financially independent? What if you don’t want to work 16 hours per day for several years? What if you want to travel around the world while funding your travels by making a bit of money on the side? What if you want to work a good amount and still have time to enjoy life with friends and family? If what you want is a bit of free time for yourself and others, then building a startup is probably not for you.
That’s one of the crucial differences between starting a traditional business like a mom and pop ice cream store (or an ecommerce site that sells various widgets) which tends to grow slowly and predictably and building a startup, which, with the right idea and execution can grow fairly quickly, and if not, crash and burn altogether leaving you dazed and confused.
Startups are always a great deal for investors
From the point of view of a startup founder, a startup is a very tricky thing. While there’s a chance you might succeed, the odds are overwhelmingly against you if you’re not exactly sure what you’re doing. The odds are no better than playing slots at a Las Vegas casino.
That’s not the case for another type of individuals who invest in startups: venture capitalists (VC). From a venture capitalist standpoint, a promising startup is always a great investment. When VC’s invest in startups, they know that not every startup will succeed, so even if one startup out of ten hits a homerun and ends making a lot of money, they will recoup their failed investments in the other nine. As long they invest in a good number of startups and if just one startup “exits” (i.e., goes public or gets acquired) they make their investments even if all the others fail.
Here’s a top ranked review from a very popular book written by a well-known venture capitalist, Mark Horowitz (he’s partners with Marc Andreessen, the co-founder of the first Internet browser, Netscape). The book is called The Hard Thing About Hard Things.
This book is like countless “how to be a leader” books on the market, and says a lot of the same things. Only this time you get it from the perspective of a guy flailing to build a silicon valley startup to a point where he can unload it on some unsuspecting buyer and walk away with enough money to retire at 35, on the backs of the poor schlubs who wrote the code that got him there in the faint hope they’d get rich too. That’s an interesting perspective, and one that says a lot about silicon valley, the venture capital culture, and the business world in general. [emphasis added]
Thus, a startup provides a very convenient way for venture capitalists to make lots of money, which explains why startups are heavily hyped as the sole model for economic success and financial freedom. The more people start startups, the more money there’s for venture capitalists to make while not necessarily losing money on startups that fail unlike the guys that spent their waking hours toiling night and day on those startups.
In other words, you’re basically being brainwashed that the only way to strike rich is by building a startup and seeking outside investment.
“I live in a gorgeous beachfront Rio de Janeiro villa and sell screwdrivers for a living”
One of the things I discovered after I began living and traveling around the world after living for a decade in San Francisco is that most successful people aren’t building or even thinking about building a startup. Most of the self-made guys I met living and roaming in places like Rio de Janeiro, São Paulo, Lima, Medellin, Bangkok and Bali wouldn’t know a single thing about startups if someone put a gun to their head.
What these guys do know how to do really well is to make a lot of money. They’re businessmen not startup experts. Many of them run several businesses in different niche areas. Some of them are running e-commerce stores that sell very basic things that everyone needs like screws or power tools. Many guys are running simple SaaS businesses charging customers $5-50 per month for a service. Others are building high-trafficked websites in all kinds of niches that people are interested about and sell advertising or sponsorships. None of what they’re doing even closely resembles a startup and because they’re profitable, they don’t need to seek outside investment.
It’s safe to say that these guys are living very comfortable lives. Many of them are easily making several thousand dollars per month (many guys I’ve met are easily clearing $5,000-15,000/month). This is the money that’s coming into their pockets today—right now. Plus they’re actually enjoying their lives because they’re living in an exotic foreign country, and not working in overpriced Silicon Valley/San Francisco while waiting for some “payoff” down the road.
Learn to gradually build value
Startups are inherently risky. You toil for many months and even years before realizing that no one wants what you’re selling. Fortunately, there’s another way. Instead of building a product you’re not even sure will sell, a product that won’t be profitable for a long time, start building a brand around what you already know how to do well, like yourself and what you do.
Why risk creating some product without an audience, when you can work on something that you’re sure will achieve some level of success?
Take something that you’re good at, something where you can add value and begin talking about it. Create a website and sell your knowledge. This knowledge can encompass pretty much anything. If you’ve learned to do something important, chances are it will be of value to others as well. Not only is this the most straightforward way to make money, it’s also the easiest.
The beauty of pursuing this path is that you can immediately get started with something that matters: adding value and making money. This way you’re not spending time obsessing and perfecting your idea (remember: ideas by themselves are worthless). You’re not spending time searching for a co-founder. You’re not spending time attending various workshops, seminars and meetups. You’re also not begging investors for money. You’re simply telling people what you’re doing and then selling them value. You’re the captain of your own destiny. Making money is the best validation that what you’re doing actually matters.
Many very successful people that you’ve heard about started out this way. Joel Spolsky, who everyone knows and respects in the tech/software world, first built out a very popular and then decided to build a startup, stackoverflow.com, a Q&A site for programmers, which is now in the top 10 sites in the world and is worth several hundred million dollars. Matt Mullenweg, the founder of WordPress, started out by building a simple blogging platform, that over many years grew to powering almost half the Internet and making Matt fabulously rich.
Freedom to do how you want to do
Generally speaking, starting a startup involves a few necessary steps. It’s necessary to form the proper legal and tax structure, figure out the ownership with other co-founders and investors. It’s important to also find the right tax home for your company so that you are not paying more in taxes than you should. You’ll also need tax advisor assistance when filing quarterly and annual taxes.
All of this gets in the way of you doing what you do best: build the best business you can. That’s why one really good piece of advice I’ve received over the years is to not worry about all the legal and tax structures until the business makes decent amount of money. That means start out right away and worry about building an actual company later, when it becomes a necessity from a legal or tax perspective. This keeps you nimble and free instead of being boxed into some company structure.
When you forego worrying what kind of business you must create, you simply build a sustainable and long-term business by first creating value instead of taking on investment/debt for an idea that might never materialize. Unlike a business that you’re building slowly, startups are incredibly sensitive to market conditions since they rely on cheap credit being widely available. And, as we all know this credit evaporates and money becomes expensive whenever there’s a market crisis (see the famous dotcom crash of 2001, and the financial crisis of 2008).
A business that makes money today, even if it’s not a lot initially, is always better than a business that might make money in six months or a year. Besides, if you really want to, you can always build a startup later. Since you’ve created lots of value and build a massive audience, you would know exactly what your audience is interested in and willing to pay for. This will allow you to create a product or service that you will absolutely know your audience wants and is willing to pay for. This is by far the easiest and most straightforward path to financial and location-independent success. Something that you can start doing right now.
Interested in building your own passive, location-independent business? Want to avoid needless trial and error? Want to start off on the right foot under proper guidance?
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