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do quit your day job

July 14, 2006

Phil has an interesting post about why MicroISV's shouldn't quite their day jobs as they're starting up their businesses. I disagree with Phil, but before I get into the specifics I think it's important to cover the MicroISV "camps". Most people seem to view MicroISV's as one group, however, I have always viewed them as two distinct groups. Group A (for lack of a better term) is the side money group. They have a decent idea, they've started working on it, it may or may not be viable enough to become a full time business. If sales are good enough to do it full time they would love to do that.

Group B are people seriously dedicated to starting a company as a full time endeavor and (this is important) financially able to do so. Anyone who in a reasonable time frame can't save enough money to realistically quite their jobs is automatically in group A.

I don't think one group is better than the other, just that they exist. If you read most articles by MicroISV's it's easy to see which group they're in. Are their ideas small in scope, in non-competitive markets, in niche markets? Those are group A. Group B tends to attack markets with higher price points, require lots of customer contact, require at least some startup money.

So given the two groups I think Phil's article applies nicely to group A, but is poor advice for group B. Here's why:

You should quit your day job if you've properly planned for your business and have a reasonable chance at success. Success meaning you would be covering your lost wages plus some. You know if you have a good chance by doing your homework. That doesn't mean having an idea and starting to code. That means having an idea and spending months researching the market, is it big enough, can you charge enough, what's your value proposition versus competitors, etc etc.

Let's take a close look at Phils downsides and I'll add my thoughts along the way:

"1) The cost to launch is now the money you make from your mISV minus the amount of money you would have made at your job. So even if your mISV is a huge success, if it takes 3 months to develop, and you make $80k a year, you've lost $30k in salary to start your business. Just to get dollar one. You may also need to eat into savings to pay the bills, add that to the startup costs."

True, but this is not necessarily a negative thing. It's a misconception that you can start your MicroISV for nothing. In this case you'll be trading time for money. 3 months salary is a pittance compared to what it costs to start most businesses. Again if you've planned properly this is not a surprise and you'll have funds to cover or have made expense cuts to cover or most likely both.

"2) and 3) don't really change"

These referred to not needing a physical location which I agree with

"4) You now need to pay your OWN salary before you pocket a single dime. Even if your significant other/parents support you, you're still $80k in the hole from where you started."

True, but again not necessarily a negative. First you're working for yourself not someone else. What's that worth? More than 80K to me. Second, what's your upside at your current job? So in year one you're 80K down. How about in year 3? More than likely your business has a much higher upside 3 years out than your day job.

"5) Risk is now extremely high. 90%+ of businesses fail. Your idea for a Web based stop watch may not look like such a good business plan when your out of savings. You are now in a sink or swim situation, if your business isn't profitable in say 3 months, you may have to shut down. What if month 4 was where your business would have taken off? I can tell you that the 10% that do succeed usually don't do it by their 3rd month."

Man I hate the 90% of all businesses fail argument. That stat has been around forever and covers ALL businesses. You're not starting a deli. You're starting a software business for next to nothing (even if it's 80K) where you margins will be somewhere between 80->99%. A guy who starts a deli is trying to live on 5% margins and he needed a 400K bank loan to get started.

Again the rest of his point is error due to poor planning. Of course if your planning is poor and you try and do a web stopwatch you'll fail. There's no market there. If you've only given yourself 3 months to succeed then again you'll fail.

Here's the big secret on how to do this and fail for the right reasons. Your pre-planning needs to be 100% focused on making your success or failure about the execution. So you need to plan away those things that are not execution related. It's really not that hard to do. Make sure you can survive for enough time to see if it works out. Make sure you're going after a market with enough money in it to support a new option and where a small fraction of it will make you a success. Make sure you start marketing your product "before" it's ready so you have a few customers when it is.

If you plan away those risks then your main risk will be execution. That's a risk you'll have to live with and if you fail you fail, but it will be because you didn't build a great product not because you ran out of time or ran out of money and your chances of failure will certainly be below 90%.

Phil did have one more quote that had me yelling at my screen

Given the above scenario, it could take basically $50k to make your first dollar. If you invested that in stocks, you have a much higher probability of making a profit then with your business. You could take a $50k loan to startup a traditional retail business and probably still have better odds of making a few bucks or breaking even.

This one is just way way off. If you've ever invested in the stock market then you know it's a lot tougher than outlining a software business and takes just as much time and effort. The second line is just not even in the ball park of correct. 50K isn't enough for a down payment on the loan you'll need from the bank to start a brick and mortar retail business. I worked in retail for almost 10 years before getting into software. Let me tell you it's low profit, high overhead. If you think you can get your software company up and running for 50K that's a deal and it should be viewed as such.


I think that's it :-)

Phil much love! Not knocking on you, just sharing my take on the idea :-)

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