Thursday, June 17, 2010

The Young Man's Business Model

I've had an idea bouncing around in my head for awhile that randomly came together recently. And given I have a blog, I thought I'd write it down. This idea came from 3 experiences I've had - and here they are:

Mini-story #1:

In my early 20's I pretty much did 2 things. Ride motorcycles and code. Oh, and given my motorcycles were always sort of junky and I beat the snot out of them, I spent plenty of time fixing motorcycles too - I guess that's 3 things then. (If you think I forgot dating or went to bars or some such - nope. We're good. 3 things).

Every now and then we needed an "old man" (like in his 40's or something) to help us fix something when it was beyond our self-taught abilities. Now when I say "old man" here and throughout this article, I don't necessarily mean "old" (and I don't necessarily mean "man") - I mean "experienced". Experienced at whatever I'm interested in at the time - or more specifically, experienced at what I wasn't experienced in at the time.

And as far as fixing motorcycles, what struck me was the way he'd go about it.

A rather common case would be something like there being one final screw holding on some engine part that we needed to replace, but it was buried deep inside the engine - i.e. you could barely see it. My first reaction was to wedge a screwdriver in there as far as I could - and see if, with luck, brute force, and karma, I could turn it enough to get it out.

The old guy on the other hand never went this route. He merely looked at it a moment, then immediately started taking off the neighboring easy-to-remove piece of the engine. Once that was off, he then effortlessly put his screwdriver in to remove the now exposed screw. Now mind you, the old-guy's way was my back-up plan - but I was betting that my brash exuberance would payoff in a slightly quicker result. Sometimes it did - sometimes it didn't - and sometimes I broke screwdrivers.

This trade-off of investment up-front versus brute-force hope became so obvious that my friends and I used it as vernacular. "Do you want to try this the 'young man' way or the 'old man' way?". It was surprising how without any further explanation we would know all the precise steps involved in both for whatever situation.

Ok. That was mini-story #1, here's mini-story #2. This is a business story but its actually surprisingly similar to the previous one whether you know it or not.

In 1997, I was writing a Java optimizer (this made a lot of sense when Java was interpreted) called DashO. Somewhere along the line I was introduced to a guy at Adobe, who (I was told) wanted exactly what I was building.

When I finally spoke to him, it turned out that the Adobe guy didn't really want Java optimization at all. What he wanted, was Java application size reduction. It had literally become a show-stopper for what he was developing. He was clear that money wasn't a problem - if I could solve his issue, he was a customer.

Wanting to please my newfound (big-time) customer I said "Sure! I can add that in!". Then I shrewdly secured the Adobe guy as a beta tester. This changed the direction that my product took and added about 2-3 months of development, but given the payoff, it seemed worth it.

About mid-way through those 2-3 months my partners and I had lunch with a veteran ("old man") business guy that for some reason seemed to like us and liked to keep tabs on our progress. As I excitedly told him the story of Adobe waiting anxiously for our product, his reaction wasn't as I expected. I thought he'd be excited for us, but instead he had a look of disappointment on his face.

Me: What? What's wrong - this is awesome - Adobe is our first customer!
Old-guy: So you spoke to Adobe. Directly to an internal guy that's a customer
Me: yeah!
Old-guy: And he has plenty of money to solve his problem.
Me: yeah, tons!
Old-guy: And how much of that money are you going to get in the best case?
Me: erm. um. We'll sell a copy.
Old-guy: Right. A copy. Maybe a few if you're lucky.

Old-guy went on to discuss how that deal should have gone. Adobe had effectively contracted me to build them a product that didn't exist (this was true). It was possible that no other customers would ever want that functionality (possible). Simply put, they had a specific business need, lots of money to solve it, and had hand-picked me to be the solver.

I should have structured the deal as a contracting agreement. Charging on a per-hour basis to develop their product using what we already had as a base. Then, give them a discount rate on the hourly rate in exchange for full-rights to further develop and sell the product as our own. This would have been a 6-figure deal which would have meant a lot at that time. What's worse is you might be thinking that I missed an opportunity to fleece a customer - but I argue you're wrong. In fact, that arrangement would have actually brought more value to the Adobe.

In the old-guy's arrangement, Adobe would have then had a hand in guiding the project and making sure all the features they wanted were in the soup. Not to mention, if I didn't build this for them, they simply would have had to hire someone else to do it - probably spending lots more.

Once in awhile, you have a fucking-duh moment - and for me, this was one. If you're thinking "well obviously" then clearly you've done this before, at that time - I hadn't.

Story 3 - a recent breakfast.

I recently had breakfast with a guy I met at an entrepreneur event. He was CTO of a pretty popular website. When he first described his site, I liked the business model a lot. His site fed him data that allowed him to refine his real product: pre-built server boxes which he sold to companies that allowed them to use his software internally.

Visions of sugar-plums and multi-million dollar deals immediately started dancing in my head. As he talked, the rolodex in my mind quickly flipped from person to person. I thought of potential customers, potential partners and even maybe people appropriate to join his team. His product was good, and not that he asked me to, but I couldn't help forming a deal network in my head.

I asked about his sales infrastructure. His answer left me wanting but I figured he was probably still fleshing it out (a very hard task). I almost rhetorically asked about the sales cycle. There wasn't one. Now I was getting confused.

As we talked more it became clear that he and his company were following what I'd call the young-man's business model.

He was basically building a (good) product, then laying it out on the web for all to see and hoping to get a million eyeballs. The viewpoint of the business is to get eyeballs, often from things like Digg or Techcrunch, and then figure out how to keep them. And then amazingly often, this really is the step where entrepreneurs have no clue what happens except they are sure the next step is "and then Profit!".

This is an extremely innocent look at business - and in some sense, its the most logical one if you simply have no other avenues.

This model isn't wrong but now to me (who has of course only recently come to rather shocking self-realization that I am... an "old-man" at how I view business) it seems like a business model without considering connections. Deciding to make connections for your business of course isn't conscious. When something happens, the first thing that pops in your head is "Boy, Fred needs to hear about this". And depending on how many Freds you know dictates how often that idea pops in your head. (and of course, the more Freds you know, the more Freds you will know).

My old-man/young-man nomenclature may not be perfect but it might be statistically correct. Its probably safe to say that on average a 30 year old has a generally more business connections than a 20 year old. From there people simply follow business plans as they occur to them.

To me, my friend at breakfast had a sure winner if he had put together a solid sales and marketing infrastructure. His product should have been selling inside 6 figure deals with several month sales cycles. Now clearly, this model doesn't apply to everything. And plenty of new Web 2.5 startups don't fit this mold - but I also think many people underestimate the idea. So far it seems the evolution of all businesses, even something so webby as Facebook eventually becomes about making deals with big partners at least as much as its about eyeballs.

It wasn't so long ago that saying your new startup was monetized by ads wasn't scary. Some companies go right from eyeballs to ads and to sell-out. Thats great work if you can get it. But the number of eyeballs is limited. Its scary to think that, but on the web, we tend to give value away and "make it up on volume". The only problem is you need a hell of a lot of volume to make up for free. And 6 billion people isn't all that many when it comes down to it.

Personally I think web businesses are growing up. The eyeball business model is getting to be like Market street in San Francisco. Everyone is pierced, shaved, screaming, or on fire. They're crying for attention and they have to keep shouting louder than everyone else to get it.

I have plenty of opinions about business models, but to me, the best business model is one that makes your customer money. I didn't say "saves" them money - big difference. Also, its better yet if that customer is a business. You need less businesses as customers to be successful than if you had individuals as customers. A common sweet-spot is BtoBtoC. Supply to businesses that supply to consumers (and of course, make them money).

If you don't have a ton of business experience, try this - think about your next great web app, then imagine the slickest (or sleaziest, your call) old-man salesperson you ever met sitting in front of you. Picture the idea that this guy is really good at persuasion and networking. He can't code, you may not like him, and he wears shoes you wouldn't wear on halloween, but he's good at what he does. Then imagine handing the old-man 5% of the company (I know its hard, try - remember, its just pretend). You need him truly on your side.

If you had access to the old-man and his imaginary immense rolodex of connections. How else could you sell this? What value could you bring to some customers that currently you can't reach?

Your real business model might be hiding like that last screw holding on part of the engine. Despite you stubbornly breaking screwdrivers, you might not get to what you need. It might just be worth asking yourself, "WWTOMD" - What would the old man do?

35 comments:

keck said...

Great post! As a 30-yr old pushing into entrepreneurship, I identify with nearly everything you say here.

I've started looking at things more in the old-man way as well, and not just "we'll make a better $X and then we win!"

Bill Chapman said...

Good Post, I am a soon to be 30 year old who has been self employed for most of his 20's. I have been a partner in businesses with multi million dollar potential and seen them fail because the "Old Men" I was involved with had completely misunderstood how to run a successful technology company. I think that there is this allure of the web and of technology and some experienced businessmen fail to see technology projects as something that needs more than a virtual presence to become a successful venture. I have found that traditional businessmen frequently have either a complete misunderstanding of how to profit though technology or they have an "If you build it they will come" attitude where they think you flip the switch on your web app and all of a sudden you have customers. With that said, I will admit that I am starting to also feel like the old man myself. I learned a lot of hard lessons early in business and I'm now finally starting to see them pay off.

Anthony Bucci said...

Solid post.

Adam Bard said...

Great post! As a 23-year-old pushing into entrepreneurship, I identify with practically nothing you say here. But, I'm going to try to take your advice anyhow, because it sounds like you know what you're talking about.

However, it still seems like a tough proposition to sell to the internet at large anything that's not free. How would you go about getting good, paying customers for your web app?

Jason said...

Good post.

As a software engineer, and a motorcycle connoisseur, I've attacked things with the big screw driver and hoped for the best. In both programming, and mechanics.

I realized usually much too late, that it wasn't the best way to get to the end result.

Matthew Elder said...

Amen!

stiennon said...

When I was 18 I had a job on the farm. The farm general manager was most definitely an "old man". One day, while trying to replace a front wheel on the Case tractor we broke off the stud the lug nut fit on. We took the hub in to the co-op to another old guy. He very slowly, very carefully drilled and tapped a hole in the the broken off lug. It was reverse threaded so he could then screw in a bolt to the left and as it tightened would start to remove the lug.
The GM told me to watch as this guy would apply pressure, squirt liquid wrench, and apply pressure. It took half an hour but he got it out. "This is how old guys do it, not like a brash young guy" he said.

Kristoff said...

Thank you.

DJN said...

GFantastic read man, thanks for the insight. I love learning from those more experienced in the different channels of life.

Dave said...

Excellent! great insight into the young man vs. old man model, and nice names for them. Of course, it makes me realize that I'm an old man chronologically but still a young man sometimes in the business world ;-)

jamiequint said...

this is the best post i've read in quite a while. thanks for writing it.

IfOnly said...

Great inspiration.

I wish I had a witty comment about how this relates to me or a cool anecdote about a young man's experience but I don't unfortunately...

Anyways, well written, a touch of humor and very instructive...

Good job!

Jason Darrow said...

This post caught me by surprise. I almost stopped reading after the first couple paragraphs, but I'm glad I didn't.

I've been consulting for the past couple years. On a number of occasions I've been asked to become a partner or take part in some revenue sharing mechanism. These people always seems to believe in the build it (a web site) and they will come scenario.

After two years I've seen a couple sucessful ventures. However, most of the time things simply don't work out. It is either a people thing, money thing, or we build it and --Surprise-- people don't come. In all this time my sticking to my guns and getting paid for my work at the time has always worked for me.

Maybe someday when I hear and idea not based off of "The Young Man's Business Model" I will jump in and work for the big payoff at the end. However, nobody I encounter thinks about how they will make money off the Internet wihtout trying to attract as many eyeballs as they can and hope that somehow they will make a profit. As if, as you suggest, things will somehow take care of themselves at that point.

To be completely fair I haven't thought of a way to cash in either so I do what I can and make a decent living. You translated into words what I have thought but could not articulate. Thank you for the refreshing read.

Jeff Bellamy said...

"Supply to businesses that supply to consumers"

In my years of business I have positioned and repositioned my company in the market.

At one extreme I had one company who we contracted with. This was great when their business was booming but it hurt us when they slowed down.

At the other extreme I had all end consumers which meant higher margins but also a lot of expense and running around to manage all the accounts.

Of course the best situation is to have a blend.
Some large companies to cover your overhead with their lower margins and slower pay cycles.
Some smaller companies where you get a bit more profit and a bit quicker pay.
And end customers.

Visualize it as pouring rocks in a container; big rocks and then smaller rocks to fill in the gaps and then gravel to fill in the smaller gaps.

Yours Truly

Jeff Bellamy

Prasanna said...

Nice post..
Many practical tips for budding entrepreneurs,which is hardly available in any book...

amolpatil2k said...

Like you said, business is quite complex. There are so many variables that even experience provides no guarantee of our having tamed enough of them. On top of all that is this new age of the Internet, which has literally turned business models on their head.

Why most brick and mortar businesses fall under a particular format is because those revenue models here have proved to be most stable in the long run. The Net is so young and evolving at such a pace that literally no one can vouch for the stability of ANY revenue model.

To predict if a particular revenue model would turn out to be stable, we need to look a first principles. Personally I would look at multiple levels of abstraction such at those that exist in programming languages.

Some very big and stable companies need to supply the Lego blocks while the small people full of ideas try to make various objects out of them. If some particular design does not work or is ahead of its time, it can be broken and reshaped with the minimum of irreversible loss.

Fuchs said...

This makes me remember what I know about Google history and how it started.

Page and Brin had or still have this in mind in a sense that the only important point is to create a great product and everything else will come, not sure if this is true in the Enterprise space.

Old man cases are very very common and the Google ones (and how much they are resisting) are new and breakthrough.

I'd say that at this point I'll vote for the young man. :)

Data Entry Services said...

I'm an "old lady" but appreciate your blog about the "young man's business model." Something all business people can learn from. I have added you to my blog list. Please just leave out the F - word.

Thanks!

http://www.workathomeencouragement.blogspot.com/

Laura McDow said...

I really enjoyed this post - as a young entrepreneur myself I have faced the difficulty of even just proving to the 'old men' that I know what I'm doing and can keep up with them!

Fortunately I've had the opportunity to work with some 'old men' that have really acted as mentors for me to learn from but also trying my own things.

Wendy Ragiste said...

So true, it's not the ideas or even the product that decides your success, it's knowing what to do with them and how to get the most out of it before someone bigger comes along and blows you out of the water.

Sleep Deprivation Ninja said...

The young man model is totally why my startup company is out of money and looking to sell. We focused on developing a cool product and showing it to the college kids, while our competitors focused on recruiting musicians, who in turn publicized and made money for both themselves and the competition. We never worried about marketing, just thinking, it'll explode once we give it to a few thousand people. Now we have over 10K users and a meager income each month, but no tipping point has yet occurred. We haven't tapped into the market of money making customers and now it's too late for us to invest more into doing so.

aXis said...

Awesome !! Great post. Very well written. Though I have been working only with startups till date, your post makes makes me realize am still the young man..who needs to learn a lot to be the "old man". Thanks again.

Ryan said...

I commented on this post a long time ago and I get each post to my email and I am happy I did. It's always interesting to here everyones feeling of which man they are. I would say I'm in the process of transitioning from young to old..I think in the middle has its benefits!

Angelo said...

Great post!

Annuity said...

I am delighted to reading this post, Lot of information has included in this post, which is good!!

Sell Settlement said...

I love your analogy. I have several of the same types of stories that were running though my head when you were mentioning the screw way down deep in the engine. I think a few years ago I would have tried to brute force it, but now I would take the time to remove the easy part to get at it.

I don't know if it's laziness or maturity level, but either way, I think we all become "old men" in some sort of fashion.

Thanks for the nice read.

accutane lawsuit said...

I'm in the midst of creating a business model right now. It's tough ensuring you have all the Is dotted and the Ts crossed. Blah, hopefully it works out in the end.

Thanks for the write up, it definitely helps.

Jmb in Indiana said...

"Everyone is pierced, shaved, screaming, or on fire. They're crying for attention and ..."

Classic line. Everyone of us will look back at our young man stage from our old man stage thinking only if I new then what I know now.

Great article. To me it highlights the value of networking and mentors.

David said...

I really can relate to this article. I am getting close to 30. I have been trying to become an entrepreneur for a while now. Some success and many failures. I credit this to the fact that my thinking was not where it should have been. Great post!

marketing consultant said...

Thanks for this writeup, it's helped me launch my new consulting business.

This post also put me on the track of finally acting on a website idea I've had for a few years.

Thanks for the inspiration.

Bryan said...

First: I never post on blogs. I've always read the blog entry, on some thing I'm striving to achieve (usually it's a problem I need to fix), I find the solution and move on.

And here I am. I floated on here from a old cached link on FireFox from no better use of my time and started poking around.

This blog hits home, big time. I have a computer repair business. I have years of doing it, and I can fix a hell of a lot of computer crap. The issue? I have few customers, all one-offs. I don't have money to advertise so what do I do right?

Perhaps your post is inspiring me to focus a bit better. I repair, and I sell stuff. I also have good PHP skills, and I know (for a damn fact) of a niche that gives value to businesses and customers alike. And I've invested maybe 2 days back a while ago floating the development idea around...and forgot/moved on.

Thanks for the re-invigoration. I think I'll use my existing business to front my new related niche...

-Bryan

horse matting said...

Great post! As a 23-year-old pushing into entrepreneurship, I identify with practically nothing you say here. But, I'm going to try to take your advice anyhow, because it sounds like you know what you're talking about.

Adnan Siddiqi said...

A good post. People in Valley are lucky to exercise their entrepreneurial side and even cash it but this is not the case in other parts of the world. I worked on fewer of my ideas but couldn't promote it as I couldnt find the right audience

Kathryn Sias said...

I'm also a 50 year old pushing a 30 year career to it's limits. The Young man's business model, indeed. I have my son who helps me think the "techie/newbie" information of the up and coming younger generation who, for the most part, understand internet marketing better than we "old traditional marketers". Kudo's to all of you.

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