The Timeless Way of Building a Company
Not so long ago1, a student at the University of Texas at Austin began assembling PCs from stock components out of an off-campus dorm. He bought the parts, customized personal computer systems to the specifications of his customers, and sold the resulting PC at a profit. Michael Dell is now worth around $60 billion.
Building a company was once a simple (to articulate) proposition. First, become adept at making or doing something. Second, begin selling that thing for a profit. Third, use the profits from selling that thing to hire more people who can help produce more of that thing, thus making more profits, and growing the business. This might be among the best examples of the Lindy effect.2
This also feels somewhat antiquated and retrograde in a world where Amazon spent over a decade before it turned a profit, VC-banked ventures are ultimately more likely to close their doors than turn a profit, and unicorns like Uber and Lyft, in terms of lifetime net profit, still haven’t.
Infusion
The fact is, the type of thinking that returns to simple principles like “pre-sell your first customer, build something the customer will love, then repeat” is infectious and permeates every element of an operation. Seemingly reductive notions like “sell something at a profit, then use the profits to make and sell more of it” seem trivial when read. And yet, much of the modern tech landscape is an obfuscation or an escape from this idea.
When we solicit capital from investors, what are we asking for? Are we seeking the resources to amplify an idea, the insight to scale efficiently, or access to desirable partners and markets? Or is it an avoidant reaction to the simple problem we have yet to solve—how to make a thing and sell it for a profit?
Bootstraps
The idea of bootstrapping a startup is essentially an expression of the simple idea with which this piece began. It is also, in some regards, a signal. A business developed and grown without external capital is necessarily sound. Unless its founder was already a billionaire, the employee salaries are paid with the revenue the business generates. If the business has existed for several years, steadily increasing headcounts and posting increasing revenues, then few additional assertions as to its viability are required.3
In turn, new ideas internally are assessed by a similarly simple, time-tested strategy. Do they generate ROI over some acceptable time frame? Once we demonstrate that potential, how can they be scaled? What alternative uses are there for our time and resources? Even asking these types of questions and determining an appropriate method with which to calculate their answers is a valuable exercise.
Timelessness
There are timeless ways of building that describe patterns of problem-solving that generalize.
Sometimes one assembles a product from standardized parts, customizing which parts are assembled from the preferences of the user (Dell). Sometimes one buys/builds something large, then sells its components because their value, when sold a la carte, exceeds the cost of the larger entity (e.g. build a high-rise and sell condos or buy a business and sell off its pieces4). Sometimes one recognizes that a large number of people waste a small amount of time doing something, then builds something to accelerate the process (OpenTable). Sometimes one recognizes that a process occurs faster if a standardized process is implemented (Malcolm McClean and his intermodal shipping container). Sometimes one recognizes surplus capacity and monetizes it (AirBnB).
Eventually, we recognize opportunities to apply these patterns to an increasingly broad array of problems. The world of incubation and building 0-to-1 technology is no different.
There are always faddish mechanisms of raising capital. Some succeed, some fail spactacularly.
But then, “make something and sell it for a profit” was a valid strategy in antiquity and remains so today. Seems good enough for now and forever.
1 You might think the 80s were a long time ago, and if so, congratulations on being 25. I’m not.
2 The summary, for the unfamiliar, is the phenomenon in which the life expectancy of an idea grows with age. In other words, if the idea is good enough to have endured for centuries, chances are, it ain’t going anywhere.
3 I suppose, there is some esoteric counterexample wherein a business places a series of risky bets, emerges on the winning side repeatedly, and in so doing, grows and funds itself. Traditionally, this is where cynical folk deploy terms like “survivorship bias.” I might implore the reader to consider the Bayesian logic of whether, given years of growth in revenue and headcount, absent outside funding, it is more likely that the business is sound or that the business is exceedingly lucky?
4 Richard Gere in “Pretty Woman” might have preferred erector sets, but he made his living selling off pieces.