So if you’ve been reading my work for a while, you know I’m pretty gung-ho about what I like to call the “financial upside” you deliver to your clients.
The ROI. The real reason they hire you in the first place. etc.
But over the months, I’ve got a lot of really good feedback and criticism around this, and I’d like to take a few moments to respond with some tips that I hope will help you if you’ve ever questioned, “How on earth do I figure out the ROI of this project?!”
In this article, I’ll be talking about working with new startup companies. Next, I’ll be answering how you can price according to value if you bill for your time (e.g. hourly.) And lastly, I’ll talk about how you can use these tactics when working with a department of a big business who might be many floors away from the department that handles money.
The “Greenfield” Company
Quick: What’s the product of zero and any positive number? Yep, it’s zero. Or cast as currency, $0.
A lot of us work on brand new projects for more-or-less brand new companies (e.g. startups.) There is nothing to multiply… yet.
If there’s one thing I’d suggest is to take me a bit less literally when I say ROI. The “return” doesn’t need to be money. It’s whatever’s important for the client.
I tend to work with a lot of SMBs who hire me in the same way I might replace a bank with too many fees or bring on a part time sysadmin for Planscope. I have revenue, and I have expenses. If I can bring down expenses, I make more money. If I can add more revenue, while flatlining expenses, I make more money. Or if I don’t need to worry about the server failing while I’m flying across the ocean, I’m more likely to make more money (e.g. lower risk of everything exploding and losing paying customers) and I’m more able to maintain a little peace of mind. These are things that businesses tend to value — decreased cost, increased revenue, and insurance.
So if you’re working with a SMB, instead of rambling on about features and colors and standards, talk about how those things relate to the three things above… Cost, Revenue, and Insurance.
But let’s say you’re working with a startup… they might not even care about revenue. Let’s face it, a lot of these “hot startups” are pretty vain. They want that stamp of approval from TechCrunch, or massive growth so they can be bought by Google or Facebook, or they want to say they founded a startup much the same way someone might say “they’re in a band.”
The return they’re looking for might not be profit. It might be user count. Press coverage. Or some other vanity metric. But it matters to them.
So if you’re selling to an ambitious founder, you’ll want to understand what he or she desires. Is it a lifestyle business? A small business they can run with a few employees through retirement? Or to become the new Mark Zuckerberg?
These things matter. And you learn these things through lots of discussion and probing. And once you know what the “ends” are, you’ll want to take everything I’ve been saying about communicating the potential ROI and your worth, and translating it accordingly.
Here’s a real life example that sort of paraphrases an email one of my coaching clients got the other day: You’re approached by a founder who’s convinced he’s has an idea that will have a valuation of $100MM in less than 3 years (quick exit). He wants it done quickly and cheaply, and constantly references the perks of offshoring (he sees you as someone who will hammer nails where he wants them to go; a commodity). But he wants a local partner, and even throws out an equity offering (if he really thinks his idea is worth what it is, the last thing he’d want to do is give that out; but he wants you cheap, and he’s likely not swimming in cash.)
Let’s imagine you ignore my advice of RUN AS FAR AWAY AS YOU CAN, and that you entertain the idea of a proposal… what would you say?
- Quick exit: He’s looking to make a lot of money very quickly. You can go a long way and put yourself to the front of the prospects list by asking him what his exit strategy was, and offering suggestions for getting to that goal faster. Help him exit faster or for more money, and propose the right path to making that happen.
- Commodity: He thinks that all things being equal, a coder is a coder. A designer a designer. And so on. If code can be acquired for cheaper overseas, then why not? Well, the third point — the “equity offering” — and the fact that he’s approached you in the first place means that he’s using cheaper labor to price anchor you. He wants you to know that he knows you’re going to be expensive, and that you can be scared into underbidding. Help him understand that you will help him significantly reduce the risk that this project will go belly up and it won’t turn into a high-valuation exit. Take the focus off the code or the design.
- Partnering: If the founder is convinced that this idea will materialize into a profitable venture and has the funds (personally or through investors), there’s no reason whatsoever that they should try to give you equity. But when those conditions are not met, they likely will. I make it very clear that I’m a professional, and my job isn’t to take on risk. The founders and their investors are on the hook for either crashing or burning or making a boatload of cash; my job is to get paid for services rendered. Try to determine if the prospective client either can’t afford you and wants to partner (thus, this project won’t likely work out), or just wants to take the lowest risk approach possible and get you for cheap with a cash + equity offering. If the latter, I’d strongly advise trying to mitigate risk in your early discussions and reject any equity offering. I’ve been there. It’s hell to manage, hell to setup, and rarely pays dividends.
I consider the above example to be pretty toxic. I doubt I’d get past the qualifying stage with them. But hopefully this extreme example will help you get a little more insight into “reading between the lines” and determining what and why a prospective client really wants.
So this sums up my thoughts around working with startups. I hope this helps you find success if you find yourself in a startup situation.
In my next article, I’m going to respond to everyone who’s ever asked me how you can price on value when you’re billing by the hour (or whatever time interval you prefer.)