You remember that scene in Monty Python where the guy explainst that the parrot is not dead, it's just "pinin for the Fijords!"

Well, we went from posting daily (or twice/daily) to a few times a week to ... silence for a week at a time.

Well, two products in beta, a couple of unexpected PO extensions from existing clients (thanks guys!) and a nasty flu that someone brought in from a second grade hot lunch and some tasks had to get put on pause. 

But we're back now, thankfully, and it all looks under control.  Look for more posting goodness! 

The otherwise very very smart Don Dodge posted this gem that gets some bits right:

I talked to a Facebook App developer at the ReMix conference. He told me his app is generating 300 million page views per month. Wow! Then I asked what kind of CPM (Cost Per Thousand) ad rates he was getting. He shrugged and said somewhere between $0.02 and $0.05 per thousand. That pencils out to between $6K and $15K of advertising revenue per month for those 300 million page views. Pretty good for a couple of young hacker/coders with very low overhead, but not the kind of business that commands million/billion dollar valuations.

Basic Assumptions

What I don't know about Facebook could fill Wembly Stadium with just enough room for a Flock reunion, so let's assume:

• This is app is at the median of the top 50 Facebook apps
• The actual income is at the top range of $15K/month
• The top app earns 10X what the bottom app earns and it's a smooth distribution

So, the total revenue for all 50 companies is around $12M a year.

No Money In the Ecosystem

Take these three data points:

• I have a friend who runs a three person shop that supports Cisco routers for a fairly large school system. He billed $3M last year. That is $600K/person.
• We work with a small Oracle outsourcing shop (5 guys in the US and 25 in India) that billed $7M last year. That is $230K/person, but if you cost average that by salary dollar the number is $700K/person.
• There was a local business paper article about a 12 person company that does custom Microsoft VP/Apps/whatever programming and just broke $7M in total revenue or $580K/person.

What's the point?

There is a LOT of money in the Cisco, Oracle, and Microsoft ecosytems. I'm sure all three of these remora companies are too small to even barely come to the notice of Microsoft/Oracle/Cisco.

If any of them were doing Facebook work they'd be #1 with a bullet.

But I bet the 25th largest Facebook Widget Maker can get some 1:1 time with whomever they choose.

Let's review: $12M/year in the Facebook ecosystem and, what, a couple billion for each of the big three? Hmm, well, there may be a network effect from the users of Facebook, but the outside world is starving to death.

Wiser Words

Let's parse one particular part:

Pretty good [$15K/month] for a couple of young hacker/coders with very low overhead, but...

It may sound good to make $15K/month, but that is only a buck eighty a year. Take 50% out to pay for taxes and basic health insurance and you're making $90K. Hope you don't have any hosting or other costs....

So, really, it's krep income, even when you come near the top.

Valuations

The next bit is even more interesting:

... not the kind of business that commands million/billion dollar valuations.

Good lord, Facebook is "worth" $15B to Microsoft and a host of other people and it's certainly going through money like this bubble will never pop.

Let's look at the valuations of our ecosystem companies for a second:

• Oracle - Market Cap=$112B, Rev=$20B, Operating Margin=34%
• Microsoft - Market Cap=$280B, Rev=$58B, Operating Margin=40%
  
• Cisco - Market Cap=146B, Rev=37B, Operating Margin=25%

(By the way, if you aren't impressed with a HARDWARE company like Cisco having a 25% operating margin, you should be.)

So, Facebook is worth 10% of Cisco or Oracle and 5% of Cisco? I think we know that is crazy talk. But if that is the talk, then why is Dan dissing the 300M page views of a Facebook widget maker? Isn't Facebook just a bigger aggregator of page views?

Do Some More Facebook Math

What did Zuckerberg have to say about Facebook revenue on a con call in January of this year:

Revenue for Facebook for 2007 will be $150 million, as has been widely reported. But for 2008, Zuckerberg projected revenue to be increased to $300 million to $350 million.

Currently they have 450 employees, so this year their revenue was $333K/employee, which is not bad.

Next year they plan to have 1,000 employees ... yes that keeps their revenue/employee pretty much flat.

Remember the 25th most popular widget maker pulling in $180K gross/year? He's not looking too stupid, relatively.

How does this math work again?

Summary

There aren't very many people making money adding value to Facebook, it monetizes it's users poorly, and management plans to ramp staff and keep revenue/employee flat this year.

I was pondering yesterday's post about Mowser's demise and ran across an old (last boom) stack of business cards from VC's, startups, and "advisors." So I decided I would try a very unscientific snowball sample experiment and grab the top 20 cards and see what I came up with.

Winners

• The Monster Board Who? You know them as Monster. This card was pre-merger, so around 1998 I guess. Ok, they may be getting their lunch eaten by the hippies at Craigslist, but still. Big winners.
• RedHat These cards were right next to each other, so also a 1998 vintage. Shoot, another job opportunity worth $5M for just being there missed.
• Butler Technology Solutions I'll just give you the money quote from their website:
• "Winning in business requires solid strategy, steady performance and Yoga-like flexibility. " (I guess down-dog wins in the end.)
• Ultimus Still rocking good workflow stuff and have not gotten killed by the 27 different flavors of Microsoft and BPEL out there. High quality development offshored to Pakistan.
  

Alive

• NetCentrics Still doing the consulting and "product development" thing.
• ElementK Just not quite Special K but still around to provide IT training.
• NetGift.com Still loading, albeit slowly. There are generic shopping sites besides Amazon and Zappos?
• AccPac Bought by Sage.
• InfoTech Document solutions, bought by Ricoh.

Dead Pool

• MedicinePlanet.com Used to supply travel health information, now the website points at the WHO. I'm sure there is a story in there somewhere.
• OfficeClick.com Ten years ahead of their time, they had a hosted application suite for temps to use onsite for immediate productivity. I suspect they were killed by Office. Now their site points to dsl.com.
• PacketCom.com Site does not load, guess we didn't need yet another next gen telecom system after all.
• Poertera They used to do Learning Management Systems, now they:
• We create value-aligned business models with our clients that provide mutually beneficial financial returns.
  
• Infocruiser Hosting and dial-up (remember that?) internet. Site does not load.
• Nuforia They were new media before there was new media. Some shop in SFO bought the bones. I mostly remember them because they had these rounded edge business cards that made all the cats from Asia laugh. Long story.
• Opus360 "Staffing and training solutions for the digital age." And doesn't that sound Victorian now? They are long dead.
• YipiNet  Yes, "YipiNet dot com" - not all the terrible names are happening now. They had "online coaching for executives" in an age before the internet was pervasive. Dead, dead, dead now.
• nCommand Don't know what they did and their website has disappeared and the domain is for sale.
• Tandem Big computers for big money, bought by Compaq in 1997 (told you this was an old stack of cards!) and the domain isn't even pointed at anything anymore!
• Constallar Mega-ETL vendor, lacked tech to go with their sex appeal, ran out of cash, but threw great parties. Website dead.

Odd Ball Stuff

I don't want to make fun of people (google knows all, sees all) but I did run across

• A beautifully made card for a "Medical Intuitive-Astrologer." I am not sure what that is or where it came from, but I did sniff the card to see if it smelled like patchouli.
• At least a dozen cards from the late 90's with out a web address or email.
• Tons of cards with no cell phone numbers. Remember $600 cell phone bills for roaming in Philly for two days?
• My NEXTStep card stack. Sigh. Anyone want to buy a cube with an optical drive?

What's the Lesson?

Well, it's kind of obvious - the odds are stacked (30% win, 50% alive, 50% dead), even if you assume that I threw away the stupidest ones. (I did)

Here is the real hint: I pulled 10 VC firms and 10 Law Firms at random and they were all still in business.

Hmmm. Remember learning that the only people who really made money in the California gold rush were the guys selling picks and eggs? Still true.

I was reading a very sad, frank, and wise notice from Russell Beattie about the death of Mowser, his mobile browser project. I know, and you know, that most startups die young, the ones that don't mostly become zombies living on consulting, and the small remaining percentage are bought for peanuts by larger companies lusting after their IP and management team.

But it is still sad.

And before anyone misconstrues anything I am about to say, I've been there, so I am very sympathetic.

The Aftermath

I think Russell can say it better than I can:

Seriously... A salary will be a good thing to have again. I'm *thousands* of dollars in debt to my family and friends, maxed out on every credit card (all of which are in collections), on my last chance for my apartment (if I bounce one more check...), had my car repossessed *twice*, electricity turned off, cellphones switched off, landline canceled outright, and on more than one occasion (this weekend in particular) eaten little more than buttered macaroni as I waited for an overdue PayPal deposit to arrive (3-4 days? Come on!). Having a steady income will be a welcome mental break, believe me.

So, here's the thing, did he make a mistake or, even in hindsight, was this the right way to fund his company?

VC or Credit Card Debt

Well, that's the question, unless you're Guy and have been rich and famous for so long you forget why.

There is no answer. I know that's all very Yoda, but there it is.

The Third Way

Jeff Bezos is supposed to have sat down and gone through all the different items that could plausibly be purchased via the internet (pet food: no) and settled on books.

My last startup we went though a host of things we could startup that had serious FY money potential and that could be started while we were still consulting and earning our basic dough.

You see, we'd both done it the VC way and the credit card way and, since we didn't like the outcome of either, we went for the third way.

India

If I wanted to start a company without going into debt and without selling my soul to a VC, I'd go live in India and insource my project. 

A good mid-level manager who was willing to move to India could easily make $50K USD, which is the equivalent of $400K in SFO.

Take your partner with you, share an inexpensive room. You now have $70K to play with to hire technical people.

Which, in the good old US of A might get you a semi-palatable Flash programmer, but in India one can get a very good technical programmer for $15K.

Bootstrap four or five good programmers and be there to supervise them.

Plus, should things go badly, as they likely will, you now have an impressive resume to take home to the US.

You can rinse and repeat this process in China or Vietnam if you like, but I prefer curry to eel.

Keep A Stiff Upper Lip

Personal advice to Russell and everyone else swimming in the dead pool - it's all very survivable, and likely you'll take another run at the brass ring. I did, and I believe you can catch it if you work hard enough.

I am not a big fan of "top 10" lists because my teeny tiny dinosaur brain can only remember two or three of the points, which makes me feel like I'm treading water watching eveyone else evolve their way ashore and I've left my proto-feet behind somewhere. But someone recently sent me this ancient (1994 era) email that had Bonnie McElveen-Hunter's:

The Ten Commandments For Failure

• Thou Shalt Have Little Faith
• Thou Shalt Pick Thy Partners with Wanton Abandon
• Thou Shalt Make the Quick Buck
• Thou Shalt Have No Enthusiasm
• Thou Shalt Seek Easy Street
• Thou Shalt Do It Alone
• Thou Shalt Not Be Accountable
• Thou Shalt Have No Sense of Humor
• Thou Shalt Give Nothing Back
• Thou Shalt Believe Failure is Final

Wow, there is a lot in there, but let me divide this into three piles and then I'll pick the three that I need to remind myself to remember!

No Brainers for Business Success

I think that a few of these jump out at me as being really important and obvious:

• Thou Shalt Hav No Sense of Humor
• Thou Shalt Believe Failure is Final
• Thou Shalt Not Be Accountable
• Thou Shalt Do It Alone

Anyone out there who is overly serious, self-important, arrogant, and the Lone Ranger? You are so headed for a fall. I know guys like Steve Jobs like to be the famous front man, but it's not like he's actually designed or built or programmed anything that was famous. Sure, he makes decisions and micromanges and drives people to nervous breakdowns, wait, dang, don't work for him - it's a trap!

An Embarassment of Riches

But some of these are things that most startups have too much of, not a dearth:

• Thou Shalt Have Little Faith
• Thou Shalt Have No Enthusiasm
• Thou Shalt Make the Quick Buck

Have you ever seen a zombie startup that is running on denial, manic positivism and leaping from the last big thing to the next big thing? Uh, huh, you sure have and so have I. It's hard to write off your dream, but sometimes you just have to move on.

Remember these Three Rules for Success

I liked these a lot, not because I don't "know" it already, but because it's good to be reminded of important ideals in a new way:

• Thou Shalt Pick Thy Partners with Wanton Abandon
• Thou Shalt Give Nothing Back
• Thou Shalt Seek Easy Street

Now these, these are good.

When you're decideing on people to hire or companies to partner up with, take a deep breath, You've got to live with those people for a long time. Read our A Managers Hire A People article - it distills down 40 years of hiring experience in high tech.

And when things are going well you need to help someone else prime the pump. Take on an intern, pick an office charity, free your people up to do service work.

Finally, if what you're doing seems easy, well, you're probably about to step into an open manhole cover. Time to do some risk management!

You know, when a tanker full of eggs hits a rail car of charcoal and they roll into the propane factory? You don't get omlettes for Lubbock, you just get a stinky mess.

Digg Is Not A Stinky Mess

Well, it's a fascinating mess, some sort of mixture of socialism run amuck and web bubble captitalism.

By socialism I mean that people profess to want to "do good" while gaming the system like mad, pretending money doesn't matter and not understanding the tragedy of the commons.

(Capitalists would profess to being efficient, game the system like mad, say money is just a score counter, and sell you a share in the commons. More for a share on the golf course side.)

In any case, it's a chaotic system with Ron Paul screeds fighting with lolcats for front page attention by 10M readers. You have ardent wikipedia like zealots burying anything sniffing of SEO or SPAM or just not-what-we-like. You even have an entire sub-industry of people selling tools and techniques and Amazonian Mechanical Turks to game the system.

I liked the grand Bazaar in Istanbul too.

So Digg Went Down. Again.

Surfing over to Digg in the morning is my personal equivalent of choosing the long supermarket checkout lane so I can finish The Enquirer. So what do I see first thing this morning:

No, you're down because your servers crashed like, well, like that egg truck earlier. It may well have been because your engineers made an excusable mistake - we've all been there. But I think it is because of bad management.

Hubris, Look It Up

Kevin Rose, who I admit bugs me, said in Amsterdam recently:

Moreover, the Digg-founder told me that the company is large enough now - 55 employees - for things to happen on their own. He used to panic when the servers crashed, now he has a team to take care of a crisis like that.

Kevin, dude, get a team that prevents crisis. Better yet, and I know this is going to sound strange to a 30 year old, hire some guys in their late 40's and early 50's who've run data centers and development teams bigger than your current company. Ask them to put some process in place.

I will quote your own words back at you:

Interviewer: So the first question that comes to everybody's mind is: how can you handle three start-ups at the same time?

Rose: "It's a matter of getting the right management in place".

Ok, so you've clearly got the wrong management in place. Not because your system went down (though that really shouldn't happen) but because it happens often enough that nobody was surprised.

Moving Forward

I dunno what to say. I've heard the same rumors as everyone else - "Digg for sale at $200M" or "$400M Buyout of Digg Rumored."

I will say that if I were giving Kevin some advice I'd tell him to pick one company and pay 100% attention to it. I'd pick Digg over Pownce or MyBlogLog or whatever else he's got going on.

And if he didn't listen I'd pick up the phone and start calling friends who had tens (or hundreds) of millions in stock from Webvan, Pets.com, Scient, etc, etc.

I was over on Mixed Martial Arts and saw the best google ad in a long time:

It'd take a long time to make a million bucks at $20K/month! 

But, for some reason, it seemed very apropos given that the topic was Entrecard taking $112K on a pre-money valuation of $998K. It wasn't the odd numbers that caught my attention because that sort of thing is always negotiated and you get some strange round-offs.

It was the odd deal.

First, What is Entrecard?

It takes a bit of time to tease out what is going on since there are no fees, etc. It turns out that their business plan is to get footprint (they are on 6,500+ blogs) through cooperative advertising.

Imagine if instead of getting paid when someone clicked an adsense link on your blog you got a google credit to buy a keyword. Also then you'd have to imagine that you could click on the ads on your site and get paid for that too, but put that aside for a moment.

Short Term Revenue

To bring in short term cash:

Once per day we will allow a larger company to drop their card into the inbox across the entire network. This will not appear on your website anywhere, but rather only in your inbox when you log into entrecard. You will also receive 5 bonus credits for visiting these sponsors. We will also allow for sponsorship opportunities for our system emails and all of our RSS feeds.

Longer Term Revenue

Once the network is very very large:

When the [Entrecard] economy is in great shape, we will roll out a credit exchange for bloggers to sell their credits to advertisers, and we will take a commission.

So you can sell advertising slots (and thus traffic) like, well, like you do today for lots of other people.

A Revenue Model

Since Entrecard has 6,500 blogs in their network and can place an ad a day on each of them, that means they can serve up 2.3M ad/days/year. If every ad/day gets 10 views and they get a CPM of a quarter that is $6K/year in revenue across your revenue.

Which is not bad to start off with, because if you can scale up your blog network to fifteen or twenty million you have some serious dough rolling in.

I'm not dissing 6,500 blogs, but there are probably a million or more created every single day and these guys are getting naught point diddly percent of them. I looked through their "featured" page and didn't see any biggies.

I reckon that this model is pretty much stuck to the bottom end of the market. This is not stupid because that is the biggest part of the market, and if you can serve it right and with low costs, then you can get very very big - see WalMart.

And this "traffic for an ad-a-day" model really works in the bottom end of the market where people live on their sitemeter stats and are excited when they break a 100 for a week in a row.

Why do I say low volume blogs only? Because a big traffic blog doesn't want marginal traffic from other blogs, it wants placed ads (at best) or expensive adsense ads (at least).

Also, as a side note, this is why google bought blogger and why it has always amazed me that adsense isn't a default on all blogs. (Yes, I understand why, but they barely push it.)

You can also see that they aren't exactly ramping crazy revenue or traffic - look at the valuation.

Clearly these guys are not getting valuation based on hype. Facebook is losing money hand over fist and is "worth" billions pre-money to Microsoft (who are not stupid).

So they are getting their valuation based on revenue.

As a side note: this is why I would NEVER have released the details of this deal. Your competitors and the general public can find out a lot from a little.

Valuation Information

Ignore the $112K number because it's really three numbers: $34K in three tranches. So the revenue valuation ends up with the end-of-period revenue of the company - or in a year. Differently put, Andrew Te paid $112K for 15% of a company based on it's valuation at the end of a year.

Nice trick, and that tells us that the Entrecard guys really needed that money.

I know $34K can sound like a lot of money, and if you've hooked yourself up into Amazon's Web Services (like I said you shouldn't), then you've got to write that check every month. I know they're there because their model spreadsheet showed hundreds of thousands of bloggers signing on every month and they (thought they) needed the capacity - and I might have done the same.

For example, if your last 12 months revenue was $50K, then the investor will say: "Five times trailing is a pre-money of $250K."

But if the last month was $8K and this month was $10K, then you'd say "At a growth rate of $2K/month over the next 12 months our revenue will be $252K so our five times leading valuation is $1.26M!"

And if you're hot hot hot then you say, "Our growth rate is 25%/month so our yearly revenue will be $670K and our five times leading valuation is $3.3M."

So, yeah, if you're trying to figure out how strong someone is you can kind of look at their valuation and see what they managed to pull off.

The Devil Is In The Details

One of the things you often see with tranche based investment is some really tough conditions for the seller. Looking at the valuation options you can see that the Entrecard guys fell towards the bottom.

How can I say that? Well, remember that they're really only getting $34K, which is what percent of $250K? Right.

If they use the money to keep paying Amazon and to, say, quadruple their blog base, then, hey-ho, they get the next $34K. And so on.

And if they miss their numbers, I am betting that there is some ugly change of control stuff in there.

Conclusion

Look, I'm not saying they shouldn't have taken the money, and I'm not dissing their business plan. I hope to never be in the position of having to take VC money again, and if I do, I hope it's a big big pile for a teeny tiny piece of the pie.

Earlier this week I had a perfect storm of things go wrong at work, any one of which would have been likely to infuriate me on a normal day. Combine them all together in a row, thrown in a quick round trip flight on United Airline (motto: You Think K-Mart Has Lousy Service?) and then add in several off-diet expensive-but-yucky airport food meals that made me gain three pounds. Result: One Ready To Explode Guy.

Bad Temper = Bad Decisions

I'm about as old as a dinosaur and one of the things I've learned is that I make bad decisions when I'm mad. Really really bad decisions. It's not that I haven't made good decisions when I was tee'd off, I have. It's that the ration of good:bad decreases. (Or increases, if that is what I meant, I have never properly understood how to say ratios.)

Worse Ever Bad Decision Made When Mad

At an earlier startup we negotiated a $12M round with a fund-of-funds that wanted to get some exposure to the boom in tech. As this was right before the bust, you may assume that they got more exposure than they really wanted. But at the time everyone and their grandmother's bond fund was buying into tech startup.

So we negotiated a deal with these cats, and while they were not VC's per se, they were very very smart and tough people, who checked us out from top to bottom, inside and out. Like seeing the doctor after 40, but with a spreadsheet instead of a glove. At the end of several months of work, and tens of thousands of dollars of legal bills (on my side alone, who knows what they spent) we had a rough draft of a contract and were just fiddling with valuation and board seats ($20M or $18.5M, 3 seats or 4.) I must admit that I was negotiating pro-forma and really was already getting a better valuation than I'd hoped and losing fewer board seats.

Then, after it was all settled, I got the final copy of the contract and they'd slipped in warrants for 15% of the company.

What you can't see is what signs he's making with his paws.

I even slept on my answer, thinking that would help me be more reasonable and let me re-enter negotiations.

Not As Smart As I Thought I Was

Because, you see, I'd confused letting some time lapse to letting my temper subside. So the next day, feeling deceived, I called them up and read them the riot act and, basically, told them where they could stick 12 million one dollar bills folded up into tiny little points. Not that you could have fit them all in there, but the piledriver I suggested they rent might have packed a few more in.

Now, this is a very human response to being systematically deceived, but it was foolish on many levels.

Wait, Deceived?

Yes, well, someone doesn't come up with a perfectly worded 4 page section in a contract overnight, with full references to other sections special provisions. So they'd always been planning on putting this section into the document right before signing. And, thus, I was deceived and duped into spending the things that are most scarce in a startup:

• Money
• Time
• Attention
• Energy

Why It Was Foolish

Well, turning down the money because they would be bad business partners would have been fine, assuming one had other options (we suddenly didn't) but turning it down mad was foolish because:

• I burned bridges. I have those guys in my contacts list so I can avoid them because I can only imagine how stupid they thought I was.
• We needed the money. Knowing what I know today, I would have taken the money. Could I have come to that conclusion if I was calm and focused? Maybe.
• Their plan was to manipulate me. They weren't making a mistake in slipping that stuff in. The only reaction where I could have still been in control was if I'd remained calm. So they won as soon as I got mad and started reacting without calm, deep, and mature thought.

Getting Smarter

Now I know that time does not equal calm, and I have learned to recognize when I'm stomping around mad, or even just sitting working on strategy stuff in a rapid simmer. So today I have restricted myself to working on the administrative items that I hate but have to be done: review of next year's health care plan, lease renewal review, reading all the inbound customer comments for the week (yes, I still do that), etc, etc. All things where I might take a to-do, or have to get something done, but all transactional and places where even a bad decision is not disastrous.

And if I'm not better by Monday, I'll know to keep myself out of the game until my head is ready to go there and do a good job.

So you're rocking along, doing some pretty good dollar consulting, and you build a small product, internal use only, to help you get your fixed price projects done more quickly.  And now you're really pulling in some bucks.

Disaster Strikes

A junior consultant you just hired from Compsci-U gets drunk at TGIF with the client and spills the beans about your groovy-o tool.  The client, who is billing $100K/month with you, demands a demo.  Upon seeing the (very rough) demo he wants to drop down to $10K/month in consulting and $25k/month in tool charges.

You want to fire Mr. Junior Consultant-man but you do the math:

$100K/month @ 25% (gross) margin = $25K/month (gross) profit

versus:

$10K/month @ 25% gross margin = $2.5K/month (gross) profit

$25K/month tool use at 100% (gross) margin = $25K/month

Total (gross) profit: $27.5K.

Total (gross) upside: $2.5K

Hmmm, up $2.5K plus you have fewer heads on sticks to worry about getting drunk and telling the client what is really going on.

Brief break for the hula dance of victory.  With some Walk Like An Egyptian dancing thrown in.

Money Left on the Table

Hey, wait, all those RFP's and client requests you couldn't fill?  Now you have people.  Time to start dialing!

Revenues go up, bench time stays low.

What is a Tool?

I am using it in a generic sense. It might be an actual tool that takes input and produces output, like WordFinder.  It might be data, like D&B records.  It might be a newsletter, like ValueLine.  Heck, the Yellow Pages is a product.  There are different kinds of products: Shrink Wrap, Custom Off The Shelf (COTS), Consumables (newsletters), etc.....  You'll know which category you're in, and they have different sales characteristics, but at the end of the day, they all fall in the tool bucket and the discussion below applies.

Defensible Business

Consulting is a human resource constrained business so growth is hard.  Suddenly you see how you can sell maybe a quarter of your customers this tool and double your top and bottom lines with the same resource base.  You're rich.  Well, you do have to start investing in resources to improve, grow, and bullet-proof your tool.  So maybe you're just doing better and not well. Still, it's easier money in many ways.

Plus you are suddenly holding a defensible business with a 99% margine.  Before a competitor could come in, offer to do the same job at 80% your rate, and boot you out.  How would the client know the difference?  But now there is this cool tool where the client can pay 35% what they were paying before and get the same benefit.  It's a win-win because they won't be able to get the service cheaper and you can't come under much (if any) price pressure.

Business Fundamentals: Cost / Payment Cycle

When you first start a consulting business you can finance it by floating your expenses on your credit card while you wait for clients to actually, you know, pay.  After a while you learn to build up a bank account so that you don't have to use your home equity line or pay big Amex penalties while you wait for your client's AP department to cut and mail a check.

If you're pretty smart you prepare a bigger reserve before you hire your first non 10-99 employee so that you can pay their salary and expenses too.  If you're like me, well, you're just glad that you put 20% down on your house 15 years ago.  Eventually, though, you learn to keep a tempting pile of cash around (business reserves) relative to

• Employee headcount
• New employees costs and ramp time
• Bench time - expected (occasional) and sudden (client driven)

Costs Start to Rise

If you're really really smart you got ahead of the cost cycle, otherwise you eventually figure it out in time.  (Else you're reading this post from a post-Dilbert cubicle slapping your head!)  But what is probably surprising you is the rising costs of maintaining your cool new tool.

See, the tool got built by the guys on the bench because they need to do something wihle they're not working.  And you figured, hey, if my guys are only spending 10% as much time at client sites then....

But it doesn't work that way over time. Consultants are the king of the one-off – each client gets a customized solution.  It’s very hard to step back from that and introduce release cycles, source control, Q/A,  and a one size fits all mentality.  In fact, your consultants probably can’t do that and you’ll need to hire dedicated product staff and not just guys on the bench.

Regardless, the product gets more complex so you need dedicated resources.  But you have better margin, revenue, and gross dollars to pay for them, so on you plunge. 

And then you need bigger office space.  And you need support staff.  And so on and so forth.  Suddenly you're spending a LOT of money building in features that will be required for future sales.  And now you have a product manager - how did that happen?

The Sales Revolution

Suddenly you have a sales guy.  Or you realize  you need one.  Maybe at first your senior consultants were making the sales for you, but as costs of building and maintaining the tool rise you realize that you need to convert more and more of your customer base to tool users.  And you need to poach, er, convert your competitors customers, which is a much more sophisticated and complex sales cycle.

So now you have a salesguy absolutely eating money as he travels around and does the needful making sales.

Industry Conferences

Got a spare $50K to $100K lying around?  Because now you feel you need to go to the industry conferences.  If not for leads, then certainly for branding (whatever that means for you).  Good luck keeping it down to one or two conferences!

Revolution In The Ranks

Back when your consultants ruled the roost they were busy and happy and well bonused. Now they're carrying water for the product guys, there is some strife, and you're having higher turnover.  Oh, and consultants are paid bonuses based on utilization.  With shorter engagements and because you're spreading them across customers suddenly you have to bonus people for bringing in less money.

Remember your Reserve?

Before, with a staff of a dozen people, you were keeping $75K to $125K in the bank to cover salaries, float, bench, and expenses.  Now you have thirty or forty people and only a dozen of them are pulling in steady and predictable monthly revenue.  So what's your reserve now?  Maybe $350K?  Oh, wait, you've signed up for two conferences so you need another $50K set aside for that.

Hmmm, by now you're at the beginning of the turnover cycle for install base customers, but since new customers are signing up it's all gravy.  Except that now revenues are growing at a slower rate.

Inflection

Andy Grove, the most paranoid and brilliant man in the semiconductor business, describes an inflection point as where a business fundamentally changes from catepillar to moth.  You're just noticing that your consulting model is necessary to your product sales model, but that your company is built around a product model.  You've reached an inflection point.  He also noted that capital is the grease that rides you over the bump.

A Little Planning Meeting Discovery

Usually on a Saturday, usually right after a tight payroll, usually after the cash reserves go down two months in a row, usually this is the discovery:

We need capital to get past this inflection point

You briefly consider using your reserve but then remember that many of your staff own guns.   So you think that maybe the partners can go lite on salary, but they're already only pulling down $40K/year, or less than half the company average, so not much blood left in that rock.

But you've run the numbers, and while you can keep going like this for at least a year, you're going to have to either go back to being primarily consulting or somehow find $1M to just push through the wall.

Enter the VC

To Be Continued....

On November 1, 2007 we launched Promote My Site and on November 8th we figured out that Google Hated Us and on February 29th 2008 we woke up to find our site was now a PR3.  How did we do that?

Tiger?

Well, ok, maybe a bear cub.  But it feels very tigerish to go from the sandbox to having almost every page on your site in google's primary index.   Like when you hit a really good 3 wood off the tee box and you feel like Tiger even though your ball is 60 yards back from where his would land.

What Kind of Difference Has It Made?

A lot in terms of search results driving traffic.  We still post daily, and we get a fair number of people who come to the main site just to read the daily post, but more and more of our traffic is coming from people searching for terms that we put up on the white board six months ago and said: we need this traffic organically.

How'd You Do It?

It was pretty straightforward:

• Fill out the google form for recosideration
• Write good content every day
• Spend 1 month laying a base of decent inbound links
• Reply to every post with an incomming link

I don't think any of that is rocket science, but ti does require daily application and attention.

Dense Content

Not as in stupid, but as in longer posts predominate.  We have an average time-on-site of over six minutes and three pages.  I think our average post is 400 words, so that is about right in terms of reading speed.

I think that adding images and diagrams to our stories has also helped our readers.  I love a good Victorian novel but I know that sometimes when I hit a blog post that is a giant field of text, I just think, "I will read that later."  As if.  So we've tried to balance quick loading times with some visual relief.  But we've also tried to make sure that the images relate to the post in a useful or humorous way.  One of my favorite SEO blogs has these great pictures all over it but they're essentially eye-candy and don't relate to the story.  Which kind of annoys me while it puzzles me - if you're going to take that long to dig up a photo, why not get one that applies to the story?

Tools

We have seen a LOT of people coming to our site to use the tools (Digg Friend Finder, Backlink Pinger, and Yahoo Store SEO Analyzer) and they tend to stay on the site even longer than the readers.  We also see a lot them come back several times a week.  This is especially true for the Yahoo Store SEO Analyzer - there is a great deal of SEO functionality goodness there, plus re-doing a store is an interactive/iterative process.

Linkbait

We haven't ever set out to write linkbait.  In fact, most of our posts are pretty boring to the general public - we are aiming for SEO business people and practioners  And while they will enjoy linkbait, and may even admire its creation, it doesn't speak to our need for legitimacy in our target marketplace.  So we don't do it. 

Having said that, we have put out some things that we knew would attract a lot of attention: a downloadable list of 2,162 social networking and bookmarking sites, reviews of some popular SEO software, etc.  But the goal of these posts was never linkbait, which I think is pretty obvious from how they were written.

Future Plans

Actually, while we will still be careful to target good inbound words for our customer base, we're not going to pay much more attention to page rank because it is only valuable to us for two reasons:

• Speaks to competency in our chosen field - would you buy SEO tools from a company that can't rank?
• Provides us the ability to target new keywords and get good organic search traffic from them to drive business

All in all, I have to say, the 29th was a good leap day for us!