Thirty years ago, before I left a good job as a systems programmer to be a full-time entrepreneur, I’d come home from work with a head full of business ideas. Each one was better than the next. All my ideas were propelled by the dream of being my own boss, setting my own schedule, and doing what I loved. I just had to walk away from a perfectly good, well-paying job to do it!
All entrepreneurs are risk-takers, but there is a distinct difference between taking a risk and being reckless. If I was going to walk away from a perfectly good job for a chance at being my own boss, then I wanted to be the boss of a sound business. A business that wasn’t going to implode, run out of cash, or get squashed a few months into its existence.
I Let my Fingers Do the Walking
The research for my startup business was simple by today’s standards. In 1986, there were no search engines, no social media—no internet! I had to conduct a market analysis of sorts by combing through a relic of time long ago called “The Phone Book.” What was I looking for? Potential customers, of course. I had an idea for something that was unique, different, and not easily repeatable—an idea that would help me be successful. But, I needed to find the right businesses to approach. I was looking for the types of businesses that had the kind of problems I could fix in unique and innovative ways.
Three Criteria for Starting a Business
I went to college for engineering, not business, and I was more of a “test the business idea” kind of guy than a “read a book about it” guy back then. It was clear to me that my set of criteria for starting a business was going to weed out the less promising businesses and help me focus my search. I realized that, if I was going to have any chance of implementing my new business idea without getting my idea ripped off by some young upstart combing through a phone book, the idea needed to meet the following three criteria for business:
1. A Respectable Barrier of Entry
I always wanted whatever business venture I would undertake to be significantly difficult. I don’t mean so hard that I couldn’t do it. For example, I wasn’t going to start a business where I teach people how to speak Mandarin. First, I have no idea how to speak Mandarin. Second, there are people out there who can speak it and could easily copy my business model if they wanted to. Just because an idea is difficult doesn’t mean it’s a smart decision to pursue.
What I mean by difficult is, the business model should have a level of complexity intense enough that it will create a natural barrier to entry for other entrepreneurs, decreasing the odds of the business model being copied. There is nothing more disheartening than starting your own business and having someone else copy your idea, siphon off your customer base, and erode your hard-earned market share. If the business is complex for the general population but simple for you, all the better.
2. An Unlimited Growth Cap
Perhaps you want to start a small business near where you live, with a cap on the kind of hours and effort level you have to put in. This puts a cap on what you can earn, and there is nothing wrong with this! Starting a business isn’t so much about the money as it is the lifestyle. You can, and should, have the lifestyle you want.
However, for me, I had already quit a good job to start a company. I might as well have a chance at a limitless upside.
Since one of my criteria for starting a business was to have unlimited earnings potential, it ruled out businesses that charge by the hour because there is a finite number of hours in a day. I wanted something that could scale up infinitely, uncoupled from time constraints.
I didn’t think of this hours-to-earning concept immediately. I thought of it after a long day of toiling away at my initial business endeavor, building and coding custom software I was writing. I realized that, no matter how fast I got, I’d only be able to write a finite amount of custom software.
No, the big money was in writing one type of software that worked for many people and only needed to be written one time! This simple idea is what ultimately lead me to explore the phone book—looking for the right business types. Over time, my business model lead me to the Software as a Service (SaaS) industry, where I reside today as the CEO of Patriot Software, an online accounting and payroll software provider.
The limitless-upside option may not be for every entrepreneur, but that doesn’t mean you should stop looking for ways to scale that will make you more money for the same hours. Even if your work is something that logically charges by the hour—like say, a private sports instructor—consider recording video of yourself teaching and then sell access to the videos online. People can see your instructions a limitless number of times, and you can charge them an unlimited number of times!
3. Steady Cash Flow
There are two incredibly powerful words in business that every entrepreneur should become giddy at the sound of: recurring revenue.
The power of recurring revenue is how it allows you to forecast projected cash flow in both smooth periods and turbulence. It’s stable income, and in the business world, stable income is like a steady supply of oxygen—it gives you breathing room! Perhaps one of the most valuable accounting tips for startups is to pursue a business idea that will generate recurring revenue.
A business with recurring revenue works something like your cell phone bill, cable bill, or utility bills. They are services you pay for monthly, or yearly, without even thinking about it because it’s such a standard part of your life. Even if your business doesn’t scream recurring revenue, there are ways to add a recurring revenue component to your operation. If you’re a roofer, you can add yearly service and maintenance plans to your offerings. If you teach cooking, sell lessons in packages. If you run a blog, offer year-long subscriptions to premium content. And, if you’re in software like I am, you can offer monthly plans to access your service.
For my business, I wanted to offer a product or service that I could sell again and again to the same satisfied customer, instead of selling something once and starting over. I wanted my business to grow like a snowball ball heading down a hill.
In 1986, I found the winning combination for recurring revenue and started writing software for the employment industry. Our network of executive recruiters, customers of what is now Top Echelon Network, Inc., have made us the nation’s largest and strongest network in the industry. Top Echelon has thrived and is the second oldest of my five successful companies. I took what we learned with Top Echelon and rolled it into my next business, one with truly limitless potential—Patriot Software, Inc.—which is an SaaS-based business model.
This article was written by Mike Kappel from Forbes and was legally licensed through the NewsCred publisher network.