How to Build a Skeptical Startup - $8k per month in 10 hours per week - Episode 194

Spotify | Apple | Youtube

Sponsor: Tacklebox

If you have a startup idea and a full-time job, come join us. Apply here. Or, if you want a one-off workshop, check these out.

This Newsletter:

We’ll send it out with the podcast now (only took 194 episodes). Hope it’s helpful. Reply with things you’d like included in the future. Forward to people who might enjoy it.

Also, early subscribers here will have the option of getting the post our Tacklebox Members get each Sunday. Here’s last week’s. Reply “Sunday Email” if interested.

Why This Episode Exists:

Today’s episode will help you approach the hard question that you’ve always hoped would just answer itself:

When should I quit my job and go full-time on my startup?

The question is extra tricky because it’s counterintuitive - you assume it’s about your startup, but it’s really about your life. What are the conditions you need to create to quit your job? If you don’t explicitly set these, you’ll never reach them.

An excel exercise is a good start 📊 - how much money do you spend each month? How much money do you have? What’s the minimum you’re willing to live on?

This’ll lead to a number - your goal. To quit, you need your startup to generate X amount of revenue, or you need to raise Y amount of funding. Life, and startups, work much better with a goal (a surprisingly great book on the topic I highly recommend - The Strangest Secret).

If you don’t want to do your own math, there’s a standard number/goal our members have been successful with in the past. We call it - The Skeptical Startup.

The parameters are simple:

• Your startup needs to make $8,000 per month in revenue

• While you work roughly 10 hours per week on it

Before you quit.

These numbers seem arbitrary, but are, as you’ll hear in the episode, magical. They insulate you from bad customers and bad problems.

A quick example: if you’re going to charge $10 per month for your product, you’ll need 800 customers to get to your “escape the job velocity,” which, almost certainly, won’t happen. That’s just too many customers.

The framework forces you to work on problems that are painful, urgent, frequent, growing, and expensive, and on customers happy to pay you a big margin to take that problem off their hands.

Let me know what you think.

-Brian

The References

• The Strangest Secret

• Small Surface Area (Farnam Street Blog)

• The Alchemist

Timestamps:

00:30 When to Quit Your Job
03:25 Life Expenses Excel Sheet
04:05 The Skeptical Startup Framework
06:25 The Idea: Home AV Improvements
07:44 Smooth Jazz
08:22 The Logistics of $8k
11:26 An AV Marketplace
12:46 Reduce the Surface Area
15:27 The Search
16:30 A Lead for the AV Startup
19:16 The End - Your Goals
19:26 A Goal Framework

Transcript - Feel Free to Read it Like a Longform Article:

Today, we’re going to have some fun.

We’re going to start what I call a Skeptical Startup. And we’re going to do it because nearly everyone working on a startup while they’ve got a job is hamstringing themselves.

There’s a question that sets up shop in the mind of every entrepreneur building something while they’ve got a job: when do I quit and go after this idea full-time? How will I know when it’s time to make the jump?

It’s a hard question, so it usually stays unanswered.

This is a disaster. Lack of strategy around this question has killed as many startups as competition or lack of funding or team has, combined.

Today, we’ll help you build a firm strategy for the question and set a north star, with a little help from The Skeptical Startup.

Whenever a new member joins Tacklebox, during our first meeting I always ask:

Do you want to eventually work on this idea full-time, and, if so, when?

It takes them less than a second to answer: Yes, they’d like to leave their job to do this. And the time frame, almost always, is- quote - by the end of the year.

Great.

My next question, a seemingly straightforward follow-up, is, what needs to happen with your startup for you to leave your job?

This question makes founders act like I asked them to define pornography in front of a grand jury.

“Hmm…. good question… Well… I think I’ll…I think I’ll… know it…uhhh when I see it?… Maybe?”

This is a big problem, but it’s not surprising. You’ve never worked on a startup before, so how the heck could you know what a startup that’s working looks like? And it’s not unreasonable to assume that once you get there you’ll know it when you see it. But, you won’t.

Ask any entrepreneur at any stage how their business is going and they’ll kind of sigh and shake their head and stare off into the distance like John Dutton in Yellowstone and mutter, “who knows.” Because there are always positive signs and negative signs and they’re all emotionally charged which means we’re irrational about them. It’s never obviously working. There will never be all green lights.

So, for founders, this plays out exactly how you’d think.

People thrash on their idea for a while, it’s never clearly working well enough to quit, so they don’t. A year passes and the startup quietly takes a back seat then disappears. Or, they lose momentum well before a year because it never seems like that moment of clarity - that moment of obvious potential that’ll let them leave - is coming. Because it isn’t.

So good startups, founders with potential, clock back in at Deloitte.

The painful part of all this is that it isn’t really a startup problem - it’s a framing problem.

The question isn’t just about your startup being ready for you to work on it full-time, it’s about your life being ready for a startup to be the main thing. What are the conditions you need to feel comfortable shifting over. If you start with those conditions, you can back into metrics your startup needs to hit.

An early piece of homework I give our founders at Tacklebox is a simple excel sheet. What are your monthly expenses. How much money do you have saved. What are you willing to cut down on and what is non-negotiable. This all ends in a number - the amount you need coming in each month for you to live. The goal is to get that number as low as possible, but the more important thing is that you know what it is to create boundaries.

Now, to quit, you either need a business making X amount of money each month with Y going into your pocket, or you need to have raised enough funding that you can pay yourself Y amount of money each month. And you know I prefer you go after the first rather then the second.

You won’t quit before one of those two points, but you’ll definitely quit the moment you hit either.

Which brings us to… The characteristics of the Skeptical Startup.

—

The idea for the Skeptical Startup came from a handful of founders that have come through our program over the years. These founders were… skeptical. Not skeptical of their ability to be successful as entrepreneurs - they were 100% confident in that. Skeptical that the idea, as structured, was worth their time. Because they valued their time so highly.

So, they showed up at Tacklebox with rules. And the two rules one specific founder had are the rules that have come to define the Skeptical Startup.

Rule 1: The business has to make 8k dollars a month in revenue before they leave their job. And the minute it does make 8k per month, they put in their notice.

Rule 2: They’d work no more - and no less - than 10 hours a week to make that happen.

The thinking was, if they couldn’t get the business to $8/month in 10 hours per week, it wasn’t directionally strong enough to leave their job and pursue.

And, as you probably guessed, it worked. It took this founder about 9 months and a bunch of false starts to iterate their way to a problem and a customer and a duct tape and bubblegum, mostly wizard of oz product that made $8k per month. And then, they quit. And now, that business makes 10x that a month. And that approach - pick a revenue number you’ll leave at and figure out how to get there - has worked multiple times.

So, those will be our rules today. The business has to make 8k per month, and the founder will work 10 hours a week. By the way, if you’ve listened to our pod before, you know we aren’t the “make 8k with your side hustle!” type. Even saying that sentence made my face scrinch up like I ate a bad pistachio.

But, setting 8k as a revenue target is magical for two reasons.

First, your brain loves a goal and the organization that flows from it. The first line of one of the best books I’ve ever read, The Alchemist, sums it up:

"When you want something, all the universe conspires in helping you to achieve it."

And second, because the math of 8k forces you to make hard decisions. Which we’ll get to.

And, because I can’t help it - we’ll use an actual startup idea I had as an example to nail this puppy home.

I’ll introduce the idea now, we’ll listen to a little smooth jazz, then we’ll apply it. We’ll get you out of here in the next 10 or 15 minutes, and you’ll be motivated as heck or your money back.

Here’s the idea.

I have a podcast. Don’t believe me? You’re listening to it. Boom. You might even rate it 5 stars on spotify or itunes later.

Anyway, I record this podcast from my office in Connecticut, which has, apparently, terrible acoustics. When the show took off a bit last year, I bought a nicer mic and high quality cables and the rotating mic arm and a pre-amp and I use what I think is good software. But, my sound quality is still mediocre, as many of you have written in to gently remind me. I’ve considered putting felt tiles on all of my walls or getting a little egg crate enclosure thing but I don’t know if that’s the problem. About a month ago, I caved and bought an even better mic. But apparently that still wasn’t the problem, because the sound still stinks. I’d argue it’s worse.

All I want is for someone to come in and set up my office for great acoustics - and lighting, which is also a problem and why we don’t have the video of these on youtube - so that I can just hit record and not worry about buzz or plosives or my kid crying on the other side of the house or ruby barking.

I’m in a hole and I just want to overpay someone to throw me a rope. And I can’t find anyone to.

Sounds like a great problem to solve, right?

Well, let’s put it through the Skeptical Startup framework and see.

After…. a little smooooooth jazz.

TACKLEBOX

The Beautiful, Painful Logistics of 8k

When I said we’d have to make $8k, you probably did a little internal math. Depending on how much numbercrunchers you played as a kid you might’ve quickly known 8k per month is 96k a year. Most people, with most businesses, can find a way to live on 96k per year in revenue. Obviously the costs of businesses vary and everyone is different and on and on - but 8k per month is a good number for most people to quit.

More importantly, 8k per month is the destroyer of bad customers and bad problems.

Here’s what I mean.

How could you make 8k / month?

You could have 800 customers pay you 10 bucks each.

Or have 80 pay you 100. Or 8 pay you a thousand. or 2 pay you four thousand. Or a whole bunch of other permutations that would be really bad podcasting to just continue to list out.

Immediately, you start realizing things.

First, 800 customers paying you $10 while working 10 hours a week seems impossible. And it almost certainly is. That’s just an enormous number of people. And it’s unlikely they’d all want the same thing - so, whatever you built would need multiple features out of the gate. It’s just not happening.

What’s funny is when I ask founders in the early stages of their business how much they’d like to charge, they usually quote something like 10 or 20 bucks a month. But, just knowing the 8k math makes them realize it is probably not worth their time to build a product delivering that little value. It puts the emphasis on customer acquisition, which is hard and expensive, especially with such a low payoff. You’ll kill yourself to get 50 customers and it won’t cover your monthly coffee bill.

Next, maybe you think 80 customers paying $100 is good, and it’s much better, but still, 80 customers is a LOT. You’ve got to find them, convert them, take payments, build a product they all can use to solve their problems. 40 paying 200 or 20 paying 400 starts to feel like the floor. But, who pays 400 bucks a month for something? And who pays it every month? Because we don’t want to find someone and get them to pay us $400 only to have to find another person to pay us $400 the following month.

And if you aren’t selling something customers will pay for each month, the math gets scarier. If you’re selling organic cotton onesies to babies, and you sell 8k worth in one month, it’s likely you gotta find 8k worth of brand new customers for the next month. Yeesh.

Thus, 8k is the destroyer of bad customers and bad problems. It creates fantastic, brutal transparency.

It let’s you realize that there are very few types of customers and problems that will let you reach escape velocity, with escape being escape from Deloitte.

Your core job, then, is to find them.

Podcasters Note - Escape from Deloitte just exploded to the top of my book title ideas.

—

Back to the podcast setup idea to see how this looks in real life.

I bet my problem - that my sound quality is awful and I want it to not be that - can be solved by someone locally. Someone in the AV world has to live within 20 minutes of me, and they could walk in and create a setup for me in an hour. So, why not build a marketplace for this?

Because of the 8k.

Let’s say the AV guy charges $500 to fix my setup. I’m happy to pay it. Maybe the business takes 20% of that as the marketplace - maybe. That’s a hundred bucks. Maybe the AV guy pays $100 per month to be on the site. Do the math to get to $8k. You need dozens of AV people doing dozens of jobs each month. It could happen, but, it doesn’t feel realistic. So you start to see that the marketplace business model, while unbelievably attractive at massive scale, looks horrendous early on. Taking a few bucks on transactions you kill yourself to facilitate is a beast. If you’re going to take it on, go into it with your eyes open.

But for me and the AV idea, this 8k math lets me know I need a better problem and a better customer.

—

Reduce the Surface Area

Shane Parrish, of the fantastic Farnam Street Blog - I’ll put it in the show notes - talks a lot about Surface Area.

Here’s a quote:

“As a rule, the larger your surface area, the more energy you have to expend maintaining it.

If you have one house, you have a relatively small surface area to maintain (depending on the age and size of the house, of course). If you buy another one, your surface area expands. But it doesn’t expand linearly – it expands slightly above that. It’s all the same work plus more.

The thing about surface area is that the more you have, the more you have to defend and maintain. The larger your surface area, the more you are burdened with mentally and physically.”

Most of our early founders fail because of the size of their surface area.

And the biggest swallower of surface area is different types of customers.

To be successful, you’ve got to make your first customer wildly successful. They need the Kunal Shah delta 4 step up in value- their previous solution was a 3 or 4 out of 10, you give them a 7 or 8 out of 10. Delta 4. Then, they’ll pay a huge margin and tell everyone about what you do. The margin, and the word of mouth, are how you’ll grow.

If you have multiple types of customers with multiple goals, your surface area expands exponentially. And it’s unlikely you’ll get to the level of depth, from a customer understanding perspective and a product perspective, to get that delta 4 step up. You’ll have to nail it for multiple customers. Not happening.

So, the 8k plus the 10 hours a week force you to focus on your surface area and protect it. The only customers you allow on are the ones that have the ability to launch you out of the first phase of any business. If you’re selling to consumers who are highly reticent to pay $10 a month for anything, you’re sunk from day one.

You need to find a handful of customers who will pay you a lot of money to solve an urgent, painful, expensive problem. One that’s frequent - it shows up every month - so you don’t need to go find new customers each month. One that you can go deeper than anyone else on, using your surface area to find the nuances in the specific problem and a strategy to solve it.

The 8K and the 10 hours narrow the type of customer you can conceivably work with. And this is good. Because now, you have focus.

Find the customer with that type of problem, get close to them. Help them solve it. Your effort is focused on finding wicked problems and figuring out how to be useful solving them.

It’s All About The Search

The Skeptical Startup framework makes it clear that your goal is to find the right customer, then go deep with them.

Luckily, I’ve got time to do that right now, for better or worse.

Last week while playing basketball, after nailing a couple of threes - still got it - I felt that familiar pop in my right achilles. It snapped like a guitar string and rolled up into the back of my leg like a window shade. Sorry for the detail, but we’re in this together now. Call my achilles natalie imbruglia… cause it’s torn.

So I’m in the reclined position with my foot up for the next month or two and have the time to run some customer interviews. And I did. The goal was to dig around on this problem - the my sound quality stinks one - and see if there was a customer that would continually pay hundreds or thousands of dollars a month to solve a very important, very painful problem.

I made some calls to podcasters that were dead ends, but then reached out to a booking agent. I get, easily, 50 emails a week from booking agents trying to get their clients booked as guests on this pod. We don’t do guests, but they don’t do research, so here we are.

I called and said I didn’t want their clients, but I was curious - what issues came up in the past few weeks that were urgent. After a bunch of false starts, one story caught my ear:

“Well, I book a hundred or so podcasts for my clients each week, and the first question the hosts ask is about the equipment. Do they have a setup that’ll give good audio. And, lots of times they don’t. Big podcasts are maniacal about it.”

I had a lead.

So, I reached out to a bunch of podcast hosts trying to grow interview shows. The ones interviewing 10-20 people a month. How do they deal with audio for the guest, I asked? For a few, it sounded like a disaster. They send them instructions - wired headphones, room with a rug, etc., but most ignore them. Then, the podcaster has to try to fix it all in post, which can only do so much.

I jumped.

I’m actually building a business that’ll ship a full package - mic, amp, lights - with a video instructing them how to set it all up, I said. Then, an included shipping label to send it all back. It’s $200 per guest. Or, we have an unlimited plan - six months of shipments to guests for $5k.

I made it up on the spot. Then, I sent it to a bunch of hosts over email.

Two podcasts were interested. One said they’d probably do the $5k unlimited once they saw it worked. Next, with the 8k per month in mind, I reached out to a production company with a bunch of podcasts and asked how they handle it, and, again, it was sporadic and an issue. There was a path to a big contract.

8k forces you to think hub and spoke. Who are the nodes that can connect me to a bunch more nodes. Who are the influencers in decisions.

So, that’s a lead on a business. I’m not going to pursue it - I don’t know the customer well enough and haven’t thought through logistics. I also have no idea how to make someone’s audio sound good, obviously. But, that’s the type of problem that you end up with when you throw on the skeptical startup blinders.

Only big, frequent, painful, urgent, expensive problems. Bleeding neck problems. Only customers that can afford to pay and are willing to. Ideally, customers that can pre-pay - getting 6 months of payment, even at a 30% discount, gives you money to grow immediately. Which is huge.

This will also get you on the same side of the table as your customer. You want to find a problem they’re so motivated to solve that they’ll work hand-in-hand with you to solve it. They’ll put up with the learning to get the end result. And they’ll pay you to do it.

That type of close relationship with the customer leads to the type of products that end up successful.

Hold your surface area for that type of customer and problem.

And yeah I was going to call that business Sounds Good and no I’m not super proud of that and am open to better pun names.

The End - Your Goals

My old boss used to talk about how there are two types of people in the world - the ones who have goals they can shout at you within 3 seconds of you asking, and people who don’t. When we would listen to pitches, he’d always ask things like:

What are your three big goals for the year, or, frequently, what’s your biggest personal goal right now?

He said he didn’t care what the goals were, just that they existed. People who have goals tend to reach them, he said.

He used to carry around a laminated card in his pocket at all times with his three biggest goals for the year. He said he looked at them every morning when he put them in his pocket and every night when he went to bed and had for 20 years. He’d hit nearly every goal.

The Skeptical Startup framework - 8k and 10 hours a week - is a goal. It creates boundaries for you. Is it the absolute perfect goal? I dunno. Is it sporadic and somewhat random? Is it perfect for everyone? Absolutely not. But it does a great job of focusing you and creating the conditions for you to get to the next step.

If you have different goals - maybe you want to create more of a content-based business, or you really want to build a marketplace, or you’ve only got 3 hours a week - fine. But do your own version of the Skeptical Startup. Know what you need to leave, and build a business geared towards it.

Let the universe know what you want, so it can help you achieve it.

And for everyone who got torn by natalie imbruglia in their head after I mentioned it, I’ll put it in the show notes. It still holds up. Much better than my dumb achilles.

This was the idea to startup podcast.