I am a serial entrepreneur. I hooked up with my business partner in 2000 as we launched our startup Designstate in the Netherlands. We bootstrapped the company from zero, with no seed funding whatsoever, and in 3 years we grew the company to 12 employees and half a million USD in yearly revenue.
Five years later we did it again. We launched Firstfocus, again without any seed funding, and organically grew the company to 10 employees and about $400k in revenue.
Now, in all honesty, Designstate went bankrupt and Firstfocus operated at a loss for years. It was never a walk in the park. We didn’t get rich and had to survive off a tiny salary. Over the entire 10-year period, I lost money instead of gaining it.
So what went wrong?
The curse of the well-staffed service company
Both our companies were service companies. We sold an IT service to our clients and hired developers to do the coding. We billed our clients per hour and paid our employees a flat monthly salary. In Designstate we worked with senior developers. Five years later in Firstfocus, we tried something different by hiring more junior and medium-level people.
The first strategy was successful but high-risk. Our senior devs were very expensive, but they delivered high-quality work in a short amount of time. We billed our clients by the hour and earned a small margin on each hour worked. But our company got into trouble when we unexpectedly lost a project. The high salaries of our benched employees wiped out our financial reserves, and Designstate quickly went bankrupt.
Firstfocus also struggled. The economic crisis of 2008 spurred our clients to demand fixed-price contracts. Our team produced good work but at a very slow pace. Employee costs outpaced income, and we operated at a loss for 5 years. My partner and I kept the company afloat by lowering our salaries. I survived but had to dig deep into my personal reserves.
Looking back, it’s obvious my business partner and I made some tactical mistakes:
- In Designstate, we hired expensive devs without having a good backup plan in case of an economic contraction. We did this in the Netherlands, where it is very expensive to fire employees. Our strategy worked in an expanding economy, but the 2003 economic crisis wiped us out.
- In Firstfocus, we hired junior/medium level devs to keep costs down. But the 2008 crisis forced us to sell our services as fixed-price. The team’s slow development pace eliminated our margin. The company survived but consistently operated at a loss.
In both cases, an economic crisis destroyed our service-oriented business model.
If you’re currently in a service-oriented startup, and you used seed-funding to quickly grow a team to 10-25 employees, you need to be very careful. The next economic meltdown is overdue, and service companies are very sensitive to economic shocks. You’re going to need a lot of runway to survive, and odds are your company won’t be around in a couple of years.
So what’s the solution?
What if we simply stop hiring?
Let me propose a radical new idea:
We are only allowed to hire someone after yearly revenue has grown by $300,000
So this is the 300k rule – you, as a founder, have to generate at least $300,000 in yearly revenue before you’re allowed to hire your first employee. This new person you’re bringing in then has to help you grow revenue to $600,000 before you can hire again. And so on, until you’re a 4-person team making 1.2 million per year.
This sounds crazy, right? But let’s explore the idea a little further. What would happen if we adopt this rule?
Here are a couple of bad business habits that go right out of the window.
You can no longer step out of your area of expertise
How often have you heard someone say “I have a great idea for a mobile app, but I need you to program it for me”. I’ve often heard this, and 9 times out of 10 the idea was actually terrible.
Let’s face it – if mobile app development is not your area of expertise, you’re going to have a very hard time judging if an app is going to be successful or not.
The 300k rule forces you to stick to what you know because you’re going to have to do everything yourself.
You can no longer exclusively offer an hourly service
Let’s say you’re launching a startup that offers some kind of hourly service to your clients. You’re an expert at what you do, so you are going to ask $100 per hour. Are you out of the woods?
Nope. You’re going to make only $211,200 per year. That’s not enough, and you’re already working non-stop. To hit the target, you need to ask at least $142,05 for your services, get enough clients to be able to work around the clock, and never get sick or overworked. Good luck with that.
The 300k rule blocks you from taking the easy way out by offering a non-scalable hourly service. You are going to have to offer a fully scalable mix of products and services.
You can no longer sell products that require complex aftercare
Okay, so now you’re going to sell a premium product. You sell at $5000 and each client requires a week of configuring and tweaking to get up and running. This is more or less what we did at Firstfocus. How’s that?
The aftercare now limits you to $260,000 per year. Again, you’re working around the clock and we are assuming you can attract one new client every week for the entire year.
The 300k rule forces you to only sell products that require almost no aftercare. Anything else will not scale.
You must offer a mix of reinforcing products and services
300k is a steep target, and a single product or service is not going to cut it. You cannot expect to sell a $5000 product every week, or work continuously at $142,05 per hour for an entire year. So what’s the solution?
You will have to develop more than one product or service. You can either create new products and cross-sell, or encourage upselling by developing spin-off products like courses and books.
The 300k rule forces you to develop a suite of reinforcing products and services to boost your revenue.
You need to hire partners
Let’s say you’ve finally found the perfect mix of products and services that scale well, and you hit the $300k goal. It’s finally time to hire an employee. What profile are you going to look for?
Chances are your $300k are going to keep you pretty busy, so the new hire will need to bring in $300k on their own. You’re looking for someone proactive with a can-do attitude who can help grow the business with you. A partner, not an employee.
The 300k rule forces you to hire partners, not employees.
What if you were to adopt the 300k rule? What would it do to your business?
- You would offer a product or service in your area of expertise.
- You would not rely exclusively on an hourly service provided by a team of expensive employees.
- All your products and services would be extremely scalable.
- Your product and service suite would encourage cross-selling and upselling.
- You would hire carefully, looking for partners instead of employees.
If I were an investor, this is exactly what I would be looking for in a startup.
So what do you think? Will you adopt the 300k rule?
Also published on Medium.