Jacques Mattheij

technology, coding and business

It Takes Three Years to Build a Business

Recently I came upon a post on hacker news about a man that had quit his job and that recounted his failure, after a full six months. http://news.ycombinator.com/item?id=3102143

First of all, I’d like to thank the author for having the guts to write this out, some of it is really painful and he’s quite the man to stand up like this in front of large community and speak his mind. That alone marks him as someone that will one day make it big.

Ed Weissman seems to have good advice on a personal level monopolized, so I’ll pass on that. I would never be able to say it as articulate as he did, the offer of contacting him was particularly classy. Real gentlemen apparently still exist.

What I do have to add to this story is a simple bit of wisdom with respect to building businesses for those that intend to one day quit their day job.

It takes time. Three years to be precise.

Why it has to take three years is something that I have absolutely no idea about but it seems to be about right, based on countless observations of people that start out to create a business and how long it takes them to gain enough traction that they can rightfully say their business is on the way to being successful. One man consultancy shops, airlines and everything in between. Three years. Sometimes a bit less, sometimes a bit more.

Typically it goes like this:

  • in the first year you lose money. Earlier on more than later in the year

  • somewhere during the second year you break even.

  • in the third year you finally make back all the money that you had to add in the first

The reason why it works this way is simple enough (even if that doesn’t explain the timing). Customer acquisition is a time consuming process and a new business does not have several things that help a lot in gaining new customers:

  • a reputation

  • a network

  • existing customers

It’s like being the guy or girl without a partner. If you don’t have a partner, it is hard to find one, but once you do have a partner everybody seems to flirt with you.

A new business is like that. People might even consider doing business with you, but nobody wants to be ‘first’ for fear of being burned. So what they do is they will play it safe and they’ll choose someone that already has a reputation and existing customers, and they’ll find that someone (or company) through their extensive network of contacts built up over the years.

You initially don’t stand a chance. So it is hardly surprising that the author of that piece found it difficult to get enough work at a high enough rate for his consultancy business to get off the ground. In another 6 months he’d be further in the hole but he would have had a bit more traction and so on.

Once you get that first customer (or the first couple) you are on your way to an eventual success. One customer will lead to another, which is the basis of your network. Happy customers are references which you can use to cement your reputation. And once that wheel starts turning it will speed up. And before the third year is out you’ll be in demand to the point where you will probably have to raise your rates to control the influx of new customers. But it takes time to get there and the first year is terrible.

The bad news here is: If you plan on quitting your job, you want to start a consultancy business and you have less than 18 months worth of expenses in your savings account, then you shouldn’t do it unless you have a very large amount of work lined up. And even then you’ll need to be more frugal than Ebenhaezer Scrooge, in case any of it dries up or a customer doesn’t pay on time (or at all!).

Another option is to start your company on the side, while you have a regular job that pays for your basic needs. Like that you essentially have infinite runway, even if the take-off will be slower because a lot of your good time is already spoken for. Some jobs are more flexible than others in this respect and therefore more suitable for the purpose.

Once you have enough money salted away to deal with unforeseen circumstances, economic dips and the like you can always fire your boss. But don’t do it too soon, or you will fail on the way to eventual success.

The only thing Olek (the author of the original piece, if you read this Olek, feel free to drop me a line, if I can help I will jacques@mattheij.com) really did wrong here was to misjudge the amount of time it would take to get some traction. 6 months would seem to be enough. But those first six months can fly by without enough income to add a seventh worth of runway. And once your savings are gone that’s it. So make sure you calculate your runway right and realize that it takes much more than 6 months to make it, and that it will probably take you three years to be in the black for the three years in total.