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What is your exit strategy?
My previous post relating to the business side of software seems to have met with positive reception, so here is another one. Let me know if you like it, or if you are interested in tech only content.
My father told me the secret for getting rich when I was just a little boy. It goes like this:
- Buy cheap
- Sell high
Unfortunately, I think that the .COM bubble made it clear that two yuppies in the living room don’t really add value that would make people buy from them.
So another strategy is needed.
One of the nicest past times is day dreaming.
Here are a couple of nice dreams of getting rich quick:
If I make this widget, I can sell it for 50$. It is going to cost me 15,000$ to write it, but then every sell is practically free. I only need 300 sales to start earning money! If I sell just a 1,000 of them, I am going to earn 35,000$, and I can keep selling it forever.
It is like Manna from Heaven!
Or this one, which should be more familiar to anyone who isn’t in software:
I can go to the bank and get a mortgage on this house, they will cover 90% of the cost, so I only need to bring 15,000$ to get it. I pay 15,000$ and I have a 150,000$ assets in my hands. Mortgage payments is only 1,000$ a month for 15 years.
I can rent it for 1,500$, so the house covers the mortgage and I get 500$ a month for doing nothing. In 2.5 years, I get my original 15,000$ back, I still have the house, which is going to be worth 175,000$. I can sell it then and make 35,000$ profit!
It is like Manna from Heaven!
Now, I think that you can agree with me that those are pretty common thought patterns for people. They are also true. Think about it, wouldn’t you want to make 200% – 300% profit in a short amount of time?
Both schemes are valid ways to do so. Well, sort of.
The problem with the two schemes outlined above is that they have (in technical terms), absolutely no error handling. In fact, people paint the picture in terms so rosy that I suffer from pink overload.
Generally speaking, there are few things that hold true in business as well as this statement:
The higher the return on investment, the higher the risk.
With the real estate example, let us say that you have a month in which you have no renters, can you pay the mortgage? Out of your own pocket, that is. If not, you are likely to start spiraling down. And if you can pay the mortgage, can you pay city tax? What happen when you have a renter that is there, but doesn’t pay? You got legal costs to evict them.
And that is completely ignoring something like the current recession.
Just to give you some idea, you bought the house, rented it, and on the third month, the renter stopped paying rent and refuse to leave. It is going to take 30 days to evict them, and another 2 weeks to get a new renter. Your out of pocket expenses are going to be 2,000$ for the mortgage (for the two months in took to resolve things), another 1,500$ for the legal fees and probably at least two bottle of anti acid for your ulcer.
Oh, you might be able to recover some of the costs if you go after the renters (add more legal fees), but that assumes that they are able to pay, and the money is only going to show up sometimes in the future (if at all). In the meantime, you have better be able to cover the unexpected 3,500$ expense that just dropped in your lap.
With software, let us say that you quit your job to work on your widget. You spent a lot of time & effort on that, then you start selling it. In the first three months, 50 people buy it. Your underlying assumption about the number of buyers was overly optimistic. You are out of a job, out 12,500$ and feeling cheated.
Where it the Manna from Heaven?!
One of the things that I like about being in the army is that it thought me to plan. I can write an pretty good op plan, and that is close enough to a business plan. Most op plans have standard sections:
- Goal
- Mission
- Our forces
- Enemy forces
- Obstacles
- Dangers
- Contingency plans
- Abort
Whenever you are going to plan something big, you have to sit down and plan for the things that are going to bite you in the ass. I generally try to divide things into two categories. Contingency plans are for when the situation is recoverable. Abort is for when it isn’t, and I want to get out with as little damage as possible.
With software, that means that you have things like user studies, betas, etc. With real estate, I am not an expert so I am not going to comment. I would say that not getting in over your head is a good plan no matter what.
Final thoughts, figure out what your exit strategy is before you go in.
Figure out the cost of that exit strategy along with the cost of entering the game in the first place. That is the amount of money that you are putting on the table. And another final word of advice, that money is at risk, and the higher the return, the higher the risk. If you want to sleep well at night, make sure that you aren’t risking the money that you need to buy bread.
Comments
And that is exactly why i dont have my own software company yet... No exit strategy
"30 days to evict them"..? Well, not in Germany, no. It can take months to get such a person out of your place...in the meantime your place gets trashed. You will have to repair it once you do get the person out. Any contingency I can imagine for such a situation is either forbidden or unethical, which is why I never got myself into being landlord.
But, if you are seeking success, you need to banish thoughts of exit strategy. The real secret of success is to try again, again and again until success cannot be denied to you anymore.
I recently wrote about that on my blog and linked to good, relevant read from Boston Globe: http://devcomponents.com/blog/?p=439
"...scientists point out that most of the variation in individual achievement – what makes one person successful, while another might struggle – has nothing to do with being smart. Instead, it largely depends on personality traits such as grit and conscientiousness..."
Denis,
That is also a great way of getting bankrupt.
My exit strategy is let someone else foot the risk. You can take their money instead and if they go under and jump off the sinking ship like the rat that you are :)
Joe,
That also means that you are unlikely to make much, though
@Ayende,
Maybe... If you keep at it blindly. However, remember, one definition of insanity is to keep doing exactly the same thing and expect different result. That applies here...
You can find a way to be successful in almost anything you choose. Just look around and you'll see someone found a way to do it. Certainly not by giving up :-)
The argument can go on and on... in the end is all about happiness, enough is enough and balance point. For me I am happy with what I am (not my programming level though) and I just ordered the book Building Domain Specific Languages in Boo.
The discouraging thing is that successful people make it look so simple. :) I'd agree though with Dennis about not getting carried away with exit strategies. It's important to evaluate, and re-evaluate the situation objectively, but you don't necessarily want to give yourself an easy way out because by human nature you'll probably end up using it when you should just pull up the shirt-sleeves and work through the pain.
The hardest thing has to be figuring out how to lead, and not follow. Trying to get rich by reading someone's book is just like trying to participate in a pyramid scheme. It's one thing to look for inspiration in others; it's another to blindly follow a trend that they make sound so simple.
One of my favorite quotes from Dogbert:
"Beware the advice of successful people; They do not seek company."
I've looked at property as an option here in Australia and it's absolutely insane at the moment. Everyone is obsessed with "negative gearing" which is essentially using loss as a tax offset. However, few seem to realize that they are still taking a loss month-to-month which really compounds the issues you raised, and there's no guarantee that the rules around negative gearing won't be changed in the next 5 years. You've got to be prepared to take a loss of $50/week or so (After tax offsets) unless you really spot a bargain property, which, of course, realtors are snatching up themselves.
My strategy is pretty basic for now. I spend my own time and energy which would otherwise be spent playing video games or watching TV. I hope to have a demo-able version of a product within the next year. Worst-case it's valuable experience I can use on my Resume while I trudge through other people's antiquated sludge at work. :)
Denis is reading that article wrong.
The article talks about grit and perseverance and seeing a problem or strategy through to the end, not failing over and over again.
Exit strategy for a programmer trying to become an ISV? Stop daydreaming and find a job dude... Do you really need a plan if you're starting solo? Are you going to make it yourself? What is the plan worth if this is your first attempt at business? Probably you will laugh at it few months later if you really find out how the situation looks like.
good article. Especially the daydream parts. People often forget that most companies started are dead within a year and the majority won't make it after 5 years. Also, often people forget that as with companies, products often fail, simply because users don't buy them or there aren't enough customers.
With software there's an additional factor: often software products tend to have a coolness factor which quickly vaporates into nothing, leaving a barely usable tool.
Stelios of Easyjet once said: "Take risks, but risks you can afford". As a person who owns a company now for over 12 years and was nearly bankrupt in 2001 because a product I made sold 0 (that's zero) licenses after a year of work (a CMS) I can only fully agree with that: see every step you make as a risk, and calculate if you can afford the risk. If so, do it, if not, don't. By calculating if you can afford it you automatically consider consequences of the risk and the 'what ifs'.
Though there's one aspect you can't influence and which is important for success: luck. Be there at the right time at the right place with the right tool. I was with LLBLGen Pro, I think you are with nhprof IF you manage to make it a multi-o/r mapper toolkit. Every successful business had luck and others didn't. That's not cruel, it's the way how life works.
@John Farrell - One definition of "perseverance" is "continuing in a course of action without regard to discouragement, opposition or previous failure; persistent determination to adhere to a plan of direction; insistence"... Also, take a look at my 2nd comment above where I expand on my thoughts.
@Frans Bouma - The harder you work the luckier you get, wouldn't you agree?
"Luck is what happens when preparation meets opportunity.” Seneca said. You have to be ready and prepared to be lucky. Your success with LLBLGen Pro is due to your hard work. No amount of luck can replace hard work. Of course, timing and place is important, but that's because you have incomplete information when making those decisions so you gamble.
It's like playing roulette. The ball gets thrown in-there and you guess where it will stop. If you get lucky, your guess is right one. But, if you had all information, weight of the ball, the curve of its fall, the speed of roulette, etc. and used that to calculate where it would stop, you would not call it luck.
@Denis: interesting view. I can't argue with that. Though I'd like to add: I consider it partly luck, because I had the idea to create the commercial tool at the right time. Getting that idea at the right moment is IMHO luck. Creating it into something useful and something people buy isn't luck of course. I should have explained the luck part better ;)
@Ayende: This is great stuff! Contingency plans are important! When you don't plan for the unfortunate events (@Denis: The UNLUCKY events) and they occur, it can make for some really rough times or even having an exit plan thrown onto you that causes the most damage. Like the bank repossessing the house. In the spirit of try, try again, you could go out and get another house, but this time you are going to plan better. I think Denis is agreeing with your article, but overlooking that he does some of this unconsciously.
Being successful is working hard and working through the failures. And learning from the failures. The reason you need a good exit plan is because the odds are that you are going to fail at least once on the way to success. I don't think anyone would argue that point.
I've heard that many successful entrepreneurs lost their first million.
I like it.
I like this topic. Tanks feh teh Sharon (thanks for sharing)!
Did my blog name inspire your blog subtitle, or do great minds think alike ("Unnatural acts on source code" R Us)?
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