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Why I Bought My Next Startup (Instead of Building It)
This is part 2 in a series covering my acquisition of HitTail; part 1 went to the top of Hacker News last week and I have a slew of questions from that discussion that I will answer next week.
But first I want to address the most common question I hear when I tell someone I acquired a startup:
Why did you buy instead of building?
If you’re a developer you’re probably scratching your head wondering how I could pass up the chance to do the awesome green field development. A new project with no legacy baggage…this is the stuff we live for!
But I did indeed opt to plunk down my hard earned cash instead of hunkering down for 6 months in my dev cave, and what follows are my reasons for doing so.
Reason #1: Saved 12-18 months
I have a little theory that a v1.0 should take 4-6 months from inception to launch. This includes time for marketing (which should start before you write a line of code), planning, development, launch, etc…
And if you have the luxury of working on it full-time then by all means you should get it out the door faster. Almost without exception, the sooner you get in front of real customers the better off you’ll be.
But in general, this is “Rob’s Theory of Time to 1.0”: 4-6 months, 300-600 hours.
But there’s another time frame, and I call it the “time to flywheel.”
A flywheel is a large, heavy wheel that requires an incredible amount of effort to get moving, but once it’s moving it can continue to do so under its own momentum for quite some time, without additional effort. The time it takes to get your business to “flywheel” will vary, but I’ve found that it’s typically 6-12 months after launch.
“Time to flywheel” is not profitability, but an app is typically on a rapid trajectory towards profitability when it hits.
It’s also after you’ve confirmed you’ve built something people need and are willing to pay money for, and have found your market (some would say product-market fit). You’ll also have some marketing channels that are bringing in new customers for less than they pay you during their time as a customer.
This is the point where you have a bit more work to do in order to scale, and when smart founders who are interested in funding begin to seek it out. My typical estimate when asked how long it takes to get there is 12-18 months. Some companies can pull it off in 9, for others it takes 24 if they are ever able to achieve it.
But the sweet spot is around 12-18 months.
Getting to “flywheel” is a slog. It’s painful (and yet also exhilarating). And frankly, I’m not a patient person when it comes to growing a business.
Given the hourly rate at which I value my time, and the value I place on 12-18 months of effort, buying an application like HitTail is a ridiculous bargain. It may be the best deal I receive on anything I buy during the next year.
Reason #2: It Has “Good Bones”
There’s something to be said for acquiring an app that’s already worked out the v1.0 kinks. HitTail has been around since 2006, and although some of the software architecture and code structure leaves something to be desired, a lot of bugs were ironed out in the early days.
Any problems that existed when I took it over had crept in over time due to changing APIs, lack of maintenance, and failed hardware.
In general, the code had been purring away for 3 years without intervention, and that indicated one thing to me: this thing had good bones.
“Good bones” is an expression realtors use about a house to indicate that the major systems like plumbing and electrical are solid, but that the house may need cosmetic upgrades like new paint and flooring. It means the house is pretty solid as it stands, and that with a bit of effort it could be more attractive and more valuable.
It’s an expression I would apply to HitTail, and one of the reasons I decided to acquire it.
Reason #3: Dramatically Reduced Market Risk
When you set out to build and launch a product there are three types of risk: product, market and execution.
- Product risk looks at whether or not you’ll be able to build the product. These days, most web apps we see have only a small amount of product risk.
- Market risk looks at whether there will be people willing to buy your product if you build it. This is the risk factor I encourage founders to look at the most, especially before they write a line of code. Market risk is the deadliest of the three because if you build something for which there is no market, it’s nearly impossible to adjust course later and fix it.
- Execution risk is whether you can pull off the whole package. Can you bring everything together, build and launch the product, and get it in front of the right prospects?
Given these, market risk is the one that scares me the most. Every time.
I have confidence in my ability to execute, but anything I can do to reduce market risk early is a no-brainer. Buying an app with paying customers is one of the best ways to ensure you have something people will pay for.
Reason #4: Better than Outsourcing
I talk a lot about outsourcing. Last year I paid $100 or more to at least 15 contractors ranging from developers to an infographic designer. And I’m a firm believe that you must learn to outsource or hire employees if you want to grow a business.
But I would take a completed product over a spec every time.
Outsourcing works, but avoiding the possibility of hiring a crappy developer, building the wrong feature set, and the enormous amount of time you need to invest to manage a development project is typically well worth the purchase price.
Counter-Reason #1: “If you buy, you’re not a real founder!”
This is from my internal monologue that attempted to talk me out of the acquisition.
At one point I actually stopped to wonder what people would think of the fact that I didn’t build HitTail myself from the ground up.
Are you a real technical founder if you don’t write every single line of code for your v1? Or at least oversee every single line of code as it’s being written by your team?
I’ve built and launched apps from the ground up in the past. Am I still a real founder if I skip it this time?
The conclusion I came to is that it doesn’t matter.
Growing HitTail into a more profitable business is the next phase of my learning (and the next test of my chops). Both personally and career-wise it’s the right decision.
Everything else is semantics.
Conclusion
If you’re interested in hearing more about due diligence, which things I attacked first after the acquisition, thoughts on valuation methods, and answers to other questions from the Hacker News discussion, stick around for part 3.
