How to Derive Revenue Streams for a Business

Would I survive the first year of business?

Will I be able to pay the rent?

Turns out: Yes!

How did I get there? What financial decisions did I make? I will explain the above chart in this article…

Decisions

As entrepreneurs, we make an incredible amount of decisions on a large array of topics. One of the most important topics in a young business is the financial topic, which is closely related to the growth topic. The following TL;DR will summarise these particular decisions:

• Does my business want to grow fast? I need tons of cash.
• Does my business want to grow slowly and steadily? My personal savings might suffice.

That’s essentially it. Notice also the explicit usage of the word “want to”. Because we have a choice who we want to be as a small company.

Growth as the defining financial strategy

Making that decision about whether to grow or not wasn’t easy, nor obvious to me. At first, I did want to grow much faster than I ended up doing. I saw great potential in jOOQ, both technically as well as from a market perspective. I made a business plan and analysed the growth potential. 5 years ago, jOOQ nowhere near saturated its market, so how could I achieve that? I would have to invest into various areas, mainly development and marketing, perhaps sales.

If I wanted to invest heavily, this would have meant paying salaries, and quite competitive ones, too, if I wanted to make this a Swiss company. The median salary for software engineers, depending on the source (e.g. payscale), is around CHF 100,000 (roughly the same in USD) per year. For something as complex as jOOQ, median salaries won’t suffice, I would need very skilled engineers who are good at infrastructure logic, not business logic – at least, that’s what I thought / still think. So my savings might not be good enough.

To put this into some perspective, and credit the fact that I started this business from quite a privileged situation: When I started this business, I had about USD 100,000 in cash, as a result of coming from a middle class family environment, having worked in IT in Zurich for 7 years slightly above the median salary (see above), without family until 2016, and leading an ordinary, not too shrill life style – being a software engineer and all. I think these things are important to mention. I, for one, have always been privileged on various levels of my demographics.

Anyway, so there were various options:

• Start this business as a one man show. This would incur the least costs and thus also the least risk, but obviously also the least growth. This is what I ultimately chose. Note, the growth compared to what I did before (develop jOOQ as open source in my free time) was a roughly 400% increase in my own invested time, and an increased quality of life, because I no longer had to develop jOOQ in my free time.
• Hire one employee from my savings. In 2013, jOOQ was already quite mature, so this employee would ideally be someone in marketing who can significantly contribute to growing jOOQ. The ROI would probably be much higher than if I would hire a developer who could add new features and maintain jOOQ for the existing user base without really contributing to growth. If I were to invest my entire savings, this would work for 1 year, and without salary for myself, at first. Quite a risk, but doable
• Hire two employees from my savings. Much better than just a marketing person would have been to hire a marketing person and a developer. Growth would be even higher, because I could focus on something entirely else than maintaining jOOQ. But risk would be higher as well. I could pay only 1/2 year’s worth of Swiss salaries, prior to generating significant revenue.
• Offshoring the work. This is a very interesting option for companies in countries like Switzerland. Our purchasing power is much higher than that of countries in e.g. Eastern Europe or Asia, perhaps topped only by Norway, meaning that with my not too extraordinary Swiss savings, I could hire an extraordinary number of people abroad. I will blog about hiring soon, separately.
• Getting VC to finance the additional work force. Venture Capital (VC) seems very nice at first, because it’s significant. As an entrepreneur, you can offload the financial risk to someone else, get tons of money to start running your business very quickly (e.g. hire 5-10 people immediately). But it has a large price. Mainly the fact that investors don’t care as much about your product as you do. They care about their ROI. Unless you find a very benevolent family member or friend who just happens to like you and your ideas, you will have to buy out your investors eventually. In fact, I did get in touch with a few local investors from Zurich. I don’t have a good network, so I probably got in touch with the wrong ones. They were all utterly incapable of understanding what jOOQ was – but to give them credit, they did try to hear me out. One of them educated me about NoSQL being the brave new world of VC and DBMS. They wouldn’t want to invest in a dead technology, such as SQL. Showing them Oracle’s impressive and exponential long term market cap didn’t help. “It’s dead. DEAD!” I can be very glad that I don’t have such technologically illiterate people on my board. Obviously, my pitch must not have been good enough, either, but I would really prefer someone who grasps my added value for the market on their own.
• Getting a loan from a bank. There’s a middle ground between using your own savings and getting VC: The classic approach where you get a loan from a bank. Again, jOOQ was already a mature product when I started the business, so a technologically savvy bank clerk might offer me a reasonable interest rate on a loan. That way, I could have hired 2-3 people for some time prior to getting revenue. Just as with VC, you will eventually (or continuously) have to buy out the bank, by paying interest rates or by paying back the loan. Banks are less greedy than venture captialists. As long as my business doesn’t file bankruptcy, I “only” have to pay them the interest rate. They’re not looking for a unicorn-style ROI. I don’t know how easy it is to get a loan, though. I have not evaluated that path.

This is a non-exhaustive list of options. For each growth scenario, there are different financial paths that might lead to the growth goals. Curiously, however, it seems that quite a few entrepreneurs don’t see these paths as options towards a previously designed goal. They choose an option first (often VC), and think about life choices later.

Why this bias towards VC?

Over the past 20 years, during the hypes of the Internet in the 90s and now the hype of social media in the 2010s, we’ve seen an incredible amount of startups that raised ridiculous amounts of money for … let’s face it, incredibly stupid products, on a added value / perceived value ratio basis. In 2012, Facebook acquired Instagram for nothing less than USD 1B. To think that such a small company with such a simple product could be so valuable is really unthinkable.

In a much more classic business world, we could read about one of the biggest mergers the world has seen until that date, that of Lafarge Holcim, a corporation in the building materials industry, which I dare say employs a bit more people and has more tangible output than Instagram, and definitely produces more value in this world. But perhaps its products are commoditised value with very low margins. Which meant the merger’s resulting company was valued “only” 50 Instagrams. That was in 2014. These days, social media people have become more arrogant. They would refuse such offers, even turning down offers several orders of magnitude higher. So, LafargeHolcim is valued 1.5 Snapchats? Heh. Well… we’ll know in hindsight what the true value of social media really was, apart from political influence and manipulation.

We’re talking about the successful startups here, the tip of the ice berg. The ones that succeeded in their growth strategies, the ones we still talk about after years, the ones which are ultimately designed to exit either in an acquisition, or an IPO (which is like a public acquisition). I have no doubt that Mark Zuckerberg wanted only growth from the very beginning. I have no doubt that Kevin Systrom and Mike Krieger (from Instagram) wanted only an exit with a company like Facebook, from the beginning. And that’s fine.

But most companies are not this way. I truly believe that most founders do not want to exit. While there’s an offer they cannot refuse for everyone, most founders really want to run a business. Not for the money. For what the business stands for. They want to add value to their niche, and enjoy doing it for many years. The financial implications are a means to an end, and if successful, a nice side effect of doing business. There’s an interesting move in our industry back towards this way of thinking about business, as can be seen in this NYT article.

Or maybe, this isn’t a move, just the fact that the media may have gotten bored of the same old stories promoted by Silicon Valley and other tech hubs. Because the “classic” business of bootstrapped companies has always been there. Read Laura Roeder’s impressive story. Learn about Basecamp. And I still wish Axel Fontaine from Flyway will eventually share his exciting story, too. Such companies exist at all scales. And they all share one key goal: Independence. Not only do we not have to report to investors, we never had to “hustle” to them, either, which wastes valuable time we can invest in products and our customers’ success.

My choice of doing a one man show

Not all of my decisions were conscious ones at first. Just like there is survivor bias in stories like mine, there is “justification in hindsight” about the paths chosen. Such as being able to spend time with my kids rather than focusing on growth. The kids were born 2 and 3.5 years after I had created my business. To be honest, at first, all I knew was that I wanted to continue making jOOQ awesome for everyone, and that I wanted to do this myself, rather than being employed e.g. by a company like Red Hat. I had not dismissed the VC path for the reasons mentioned before: because of a conscious decision of not wanting to grow that fast. I had dismissed it mainly because of my bad experience with technologically illiterate venture capitalists, and the bad experience some of my friends made with VC money from inexperienced investors, who would chime in on every stupid and irrelevant decision they made. I was simply too lazy to find better VC.

And then, there was a very fortunate offer from a large customer of a previous employer. One of the largest Swiss banks, whom I had already worked for, offered to hire me as a consultant to do some SQL and PL/SQL development for one of their ops teams. I had known the entire ops team already, I had known their E-Banking system very well, so it was a mutually beneficial offer. They would get the expertise in both the technology and the system, and I would get some easy money, that I could even connect to my growing business. Working directly on their Oracle based production system meant to be able to gather tons of valuable insight into tuning productive Oracle systems, learning more about the requirements of another real world jOOQ customer segment. Something I could not do before, as a developer, with no access to such systems. This meant three things:

• Getting tons of ideas / input for the technical jOOQ blog, which means better marketing
• Getting additional material for the SQL Masterclass, my SQL training
• Just enough cash flow to pay my rent and cover basic costs, such that I didn’t have to touch my savings significantly

Perhaps, without that offer, my business would have evolved quite differently. I might continued looking for external capital. I might have failed the business without such capital. It’s difficult to say. One thing is for sure. Given my rather risk averse nature, this offer helped me be “lazy”, business wise, and opt for not choosing a more exciting, more straining path where growth is not an option, but the goal.

In hindsight, it was absolutely the right choice. At the time, oh boy, I was not sure at all about this path.

What a privilege!

Again, survivor bias is strong in me, but let’s take another moment to appreciate the fact that in our industry, when landing just a very small consultancy gig with a large corporation who has the money (you wouldn’t believe how much money they have), it’s possible to run a business like mine very easily, which produces much more than the median salary, sparks joy as the kids say these days, and adds tons of value to many other businesses. Because what we need to succeed in our industry is just the skills, a laptop, Internet access, and sufficient funds for the salaries we pay. Compare that with creating a company in the pharmaceutical industry, or some engineering field. Making software is incredibly easy!

Back to consultancy

Since creating this business, I’ve met many other entrepreneurs. Few of them disagree: Consultancy is a very nice to have additional asset in a company’s revenue stream. Make no mistake. It doesn’t scale indefinitely. I always say:

Providing consultancy means that I earn money when I work

Building products means that I earn money when my customers work.

But a product like jOOQ requires a lot of initial investment in all fields including engineering, marketing, sales, etc. Providing consultancy only requires a good network and niche skills, and that’s pretty much it. A consultant helps other companies with knowledge and/or workforce, when the other company carries their products’ risks. The hourly rates of a consultant are much higher than what we need to pay the consultant/employee directly. The margins are big, and if a project runs for a long time (such as my contract with that bank, which has been running for 5+ years now), then the cash flow can be very beneficial for other parts of the business.

Or not. Some entrepreneurs stop here, and provide only consultancy. That’s not what I would want to do, but it’s a perfectly valid business.

Data Geekery’s revenue streams

Back to that original chart. Here’s a rare glimpse into how Data Geekery’s revenue can be divided into three distinct streams, “products”, or activities over the years. Each bar is a quarter, and the lines are in CHF. The accounting is not super accurate. Some payments are delayed, which explains some of the gaps:

Legend:

• Blue (Bottom): Consultancy: Steady income, helping start the business
• Green (Middle): Licensing: Long term scaling, through subscriptions
• Black (Top): SQL Trainings: Almost effortless, easy money as a bonus

Or, showing percentages:

Notice:

• The importance of consultancy’s contribution is steadily decreasing over time, which means the business is scaling. Given that this is still (until April 2019, stay tuned) a one-man-show, it’s fair to say that Data Geekery has been financially independent from consultancy early on – which is great. It accounts for less than 20% of revenue now (even if the hourly rates have increased significantly over time)
• The SQL training is very cheap money! This is like consultancy on steroids. And if it can be recorded as video, which I’m still hoping to do in the future, it becomes a full fledged, scalable product. In fact, if you like teaching, and if you like money, just focus 100% on the training business. Someone else builds the product for you, all you have to know is how it works and how to explain it! If you need an example, check out what Brent Ozar is making on a Black Friday sale
• The license business, however, is the most profitable one in the long run. It was my original goal to make this the main business of Data Geekery. And even if growth was slower than it could have been, it has been very sustainable from early on.

These figures are very specific to my business, of course. If I had chosen to grow faster, the ratios might still be the same. I might still have allowed clients to “rent” my employees for some consultancy and training, because why not make that easy money? Or not, the jOOQ license sales would have definitely grown faster, and I might have chosen to focus only on that, and on new products.

Conclusion

As always, these articles are not meant as advice, but as testimonials of what has worked for me. Be careful of survivor bias. Privilege does play a large role. Some things worked out despite my choices. But if financial independence is something you strive for, I’m sure there are some hints in this story that might work for you as well. I’ve found this a very rewarding path to go, and am looking forward to many more years to come.