Patrick McKenzie on Leveling Up

Written 2021-03-17 — Updated 2022-06-10

Author: Patrick McKenzie
Source: Leveling Up – Patrick McKenzie (Patio11) – MicroConf 2015
MicroConf 2015
Flying Geese Curve
- This is looking at how countries develop. They go up a series of multiple s-curves.
- Countries just starting to industrialize often start with textiles or something similar that anyone can do and has been done for centuries preceding industrialization. Over time the country gets about as much growth as it can from textiles, but in the meantime the populace is richer and more educated, and there are resources to get into the next, more complex but also more profitable, thing.
- So they move on to things like steel, and then from there on to automobiles, and so on. At the beginning of the curve things are not so great but you improve over time. E.g. Japanese cars from 50 years ago weren't very good but now they're among the best in the world.
- What happens as you move up the next s-curve is that a lot of your current s-curve industries start to come from trade with other countries.
Flying Geeks Curve
- Patrick's version about moving between businesses. You start out with something really simple that isn't actually a great business, but it gives you experience to move on to the next thing.
- This was at the time that Patrick was starting Starfighter, and he couldn't have done that without doing Appointment Reminder before, and Bingo Card Creator before that.
Unfair Advantages
- How do you know when you have an unfair advantage?
- People tell you that you are especially good at something
- People say something is especially hard, but you happen to find it easy.
- Think about how your unfair advantage can scale to another business.
Your First Business
- Patrick calls this the "tutorial."
- The most important thing about your first business is that you start one.
- Ship something!
- Optimize for learning over perfection.
  - You're not looking for crazy growth curves that will make VC salivate.
  - At this stage it's better to start something sooner because you need to learn all the lessons that you can only learn by doing.
- Start accumulating unfair advantages
- Cover minimum viable financial goal. It doesn't have to make you rich, just enough to cover basic costs.
- You will almost certainly not be known as the person who made the first thing that you made.
Probably Don't Do a SaaS
- SaaS is not a great first business.
- It takes a while to get something running, and losing motivation is a big problem.
- You have to keep it running, take care of outages regardless of if you're making much money on it.
  - It's not great to have angry customers calling you at 3AM because your SaaS with MRR of $300 is down.
- It takes a while to get revenue
  - Appointment Reminder took 18 months to even reach $1200 a month.
The Glide Path to SaaS
- Create something related to your target market that doesn't involve all the stress of a SaaS
  - "In your target market" is important because it means that the audience you build may actually be interested in the next thing you do.
- Collect email addresses through newsletter, etc. This sets up an audience for
- Launch a productized consulting business
- And then convert it over to more of the software doing the work.
- Typical Pricing Models for Plain SaaS
  - $29-$49 for tier 1 (Go for $49!)
  - $99 - tier 2 with higher quotas or more feature or something
  - $249 - tier 3 tends to bring in more enterprise requirements and stuff
- Productized Consulting Base Offerings
  - Instead, you can do something like this:
  - $99 a month for SaaS application access. This won't exist right away but is the transition plan to open up to the downmarket as the business gains steam and you're ready to scale.
  - $500 a month for consulting within some quota
    - Ex: We'll implement and run 3 A/B tests a month on the website we make for you.
    - Extra reporting, etc.
  - $2500-$10000 a month - Extensive work with your team creating, implementing and managing the work.
  - Sell a few of these before day 1 if you have the credibility.
  - This really needs to be something where you don't mind spending the next five years doing at least some of this work manually. "But it's a great business" won't keep you going and excited about it when the actual work is a slog or something you don't really care about.
Leveling Up
- As with the s-curves, you should be able to scale up the ambition with each business.
- Scale of problem
- Engineering acumen needed
- Sales and marketing
- Sophistication of business operation
Getting Out of a Business
- When is it time to stop?
  - Business not helping you achieve your goals (personal or professional)
  - No more marginal advantage — You're approaching the asymptote on the s-curve for this business
  - Sometimes you just know it's time to go
- If your business is profitable, you can put it into maintenance mode
  - Shut down marketing, keep it operating but don't really do anything else, and maybe hire a virtual assistant or someone to help with support requests.
- Sell the business
  - If it's medium revenue without requiring a bunch of expertise to operate, it's in the sweet spot to sell.
  - Outsourcing work before selling helps because it makes the ongoing work more formal and reduce effort on the owner's part to operate it.
  - The buyer may not have your level of technical skill or even be technically savvy, so you can make early decisions that help with this.
    - Using well-established tech goes a long way here since there will be more help and documentation on how to use it.
  - Businesses that solve ongoing problems that never go away are easier to sell.
  - "Diverse and defensible" traffic sources put a buyer's mind at ease.
  - Having the servers for the business in its own account can help a lot since moving servers between account is a hassle.
  - Checklist before Selling
    - Understand everything about your finances and have documentation for everything.
    - Make sure the assets are all easily transferrable to another party.
      - It may not be easy to transfer servers from one account to another, for example, so best to have this in order before you have to deal with it in a panic.
    - Minimize your ongoing time commitments to the business, because everything left here is something the buyers will have to deal with.
    - Understand it'll take at least few months
  - Sales brokers can help a lot in dealing with unexpected hiccups and buyer shenanigans
    - The broker will get a bunch of information from you, find buyers, deal with all their questions, handle escrow, transfer accounts, and so on.
    - All communication will be between you and the broker so you don't have to deal with talking to all the different potential buyers.
    - Patrick had a buyer try to cut the price in half as the deal was closing, and his broker dealt with all the hassle of ending the transaction and finding a new buyer.
- Shut it down
  - It's also ok just to shut it down. Try to do right by the existing customers if it's a SaaS
  - Give them advance notice, help them transfer somewhere else if applicable, etc.