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What The Rails Security Issue Means For Your Startup

January has been a very bad month for Ruby on Rails developers, with two high-severity security bugs permitting remote code execution found in the framework and a separate-but-related compromise on rubygems.org, a community resource which virtually all Ruby on Rails developers sit downstream of.  Many startups use Ruby on Rails.  Other startups don’t but, like the Rails community, may one day find themselves asking What Do We Do When Apocalyptically Bad Things Happen On Our Framework of Choice?  I thought I’d explain that for the general community.

Nota bene: I’m not a professional security researcher.  Mostly, I sell software.  In the course of doing that, I (very occasionally) do original security research.  I did no significant amount for these bugs, aside from mitigating them for my own applications.  I am currently engaged in a Ruby on Rails security safari, and anticipate publishing the results of that in February, after responsible disclosure to the relevant security teams.  If you don’t know enough to know whether I’m trustworthy with regards to generic advice, pay someone you trust to get advice on this.

Don’t skip this post because you’re not a Rails developer.  If you’re reading this blog, this matters to you.

Background: What Has Been Happening in Rails-land?

Ruby on Rails recently released two sets of security patches (announcements here and here), in response to related vulnerabilities discovered in the frameworks.

How bad were those bugs? Severity: Apocalyptic.  They permitted attackers to execute arbitrary code on virtually ever Ruby on Rails application, without requiring that the application do anything to enable the attack other than “be hooked up to the Internet.”

What does “execute arbitrary code” mean?  Literally, it means that the attacker can choose to have your server execute any code they can dream up.  In practice, it means that you lose the server that the code is executing on.  Any further access to that server or applications on should be assumed to be compromised.

What went wrong?  This has been covered in more detail by security researchers, in posts such as here and here.  A brief description: Ruby on Rails makes extensive use of a serialization format called YAML, most commonly (you might think) for reading e.g. configuration files on the server.  The core insight behind the recent spat of Rails issues is that YAML deserialization is extraordinarily dangerous.  YAML has a documented and “obvious” feature to deserialize into arbitrary objects.   Security researchers became aware in late December that just initializing well-crafted objects from well-chosen classes can cause arbitrary code to be executed, without requiring any particular cooperation from the victim application.  Since then, the bug hunt has been on: security researchers have been actively finding lots of ways in the Ruby on Rails code base, and in related code bases, to cause the application to deserialize YAML which is in some way under the control of the attacker.

So far this has included:

  • Rails, for programmer convenience, used YAML to implement JSON deserialization.  JSON is designed to get into Rails quite easily indeed — just POST it at the server, wham, YAML.load(attacker_data) happened.  (The actual mechanics of achieving that were more complicated, but that’s the practical upshot.)
  • Rails allows XML documents to include YAML attributes.  That decision has caused a bit of head scratching, since it seems like a curious choice for most programmers in the community, but be that as it may this allowed posting XML at Rails apps to be trivially exploited.
  • Rubygems used YAML to hold metadata about each gem submitted to it.  An attacker was able to create a malicious gem, cause the Rubygems web application to evaluate the metadata contained in it, and thereby compromise the Rubygems server infrastructure.
  • February will see more compromises, with my certainty of this prediction approaching my certainty that the sun will rise tomorrow.  There exist many, many other code paths in Rails to get to YAML.load().  Some of them will be found to be amenable to attackers, either (worst case) for all or substantially all Rails applications or (still bad case) to Rails applications whose application logic involuntarily cooperates with the attack.  (i.e. In the worst case, attackers root every unpatched Rails app on the Internet.  In the best case, attackers only root some apps and they often have to have an expert do a modicum of marginal work to do so.)

Ruby on Rails security sucks lolz amirite? No.  Well, no to the nuance.  Software security does, in general, suck.  Virtually every production system has security bugs in it.  When you bring pen testers in to audit your app, to a first approximation, your app will lose.  While Ruby on Rails cherishes its Cool-Kid-Not-Lame-Enterprise-Consultingware image, software which is absolutely Big Freaking Enterprise consultingware, like say the J2EE framework or Spring, have seen similar vulnerabilities in the past.  The recent bugs were, contrary to some reporting, not particularly trivial to spot.  They’re being found at breakneck pace right now precisely because they required substantial new security technology to actually exploit, and that new technology has unlocked an exciting new frontier in vulnerability research.  It sucks for users of Rails that Rails is currently on the bleeding edge — believe me, after having lost 3 consecutive nights to patching my own applications, I know — but it would suck much, much worse if the Bad Guys had found these first and just proceeded to remote-own every Rails app on the Internet.  That is, by the way, an achievable scenario.

Was anyone actually compromised?  Yes.  The first reported compromise of a production system was in an industry which hit the trifecta of amateurs-at-the-helm, seedy-industry-by-nature, and under-constant-attack.  It is imperative that you understand that all Rails applications will eventually be targeted by this and similar attacks, and any vulnerable applications will be owned, regardless of absence of these risk factors.

Will anyone else be compromised?  Yes.  Thousands upon thousands of Ruby on Rails applications will be compromised using these vulnerabilities and their spiritual descendants, and this will happen for years.

  • Many Rails developers have not reacted to this news with the alacrity they should have.  (See next question.)  These applications may be compromised already.
  • There are many Rails applications which were created years ago, which are not under active development any more, for whom no-one is responsible for applying security patches.  Any of these applications which are publicly routable on the Internet will be compromised.
  • There are many Rails applications which are installed by end users, some of whom do not have security expertise.  For example, Redmine — an open source developer productivity tool — is commonly installed at individual companies.  Every publicly accessible Redmine instance which is not patched will be compromised.
  • Ruby on Rails lacks a CMS with the mindshare of, say, WordPress, which is good, because every unpatched Ruby on Rails CMS delivered to a non-technical company to serve as their website or backend to their mobile application will be compromised.
  • There are many developers who are not presently active on a Ruby on Rails project who nonetheless have a vulnerable Rails application running on localhost:3000.  If they do, eventually, their local machine will be compromised. (Any page on the Internet which serves Javascript can, currently, root your Macbook if it is running an out-of-date Rails on it. No, it does not matter that the Internet can’t connect to your localhost:3000, because your browser can, and your browser will follow the attacker’s instructions to do so. It will probably be possible to eventually do this with an IMG tag, which means any webpage that can contain a user-supplied cat photo could ALSO contain a user-supplied remote code execution.)
  • Many companies — including ones which do not even consider themselves Ruby on Rails shops — nonetheless have a skunkworks project running somewhere.  For example, they might have a developer who coded a quick one-off analytics app, which is accessible outside the firewall so that sysadmins could check server loads from home.  If the app is on the public Internet, it will be compromised.
  • Many Ruby on Rails shops have good development practices and no longer have the “monorail” anti-pattern, where everything their company does is in one gigantic Rails app.  They have already patched most of their main apps, but they missed one.  Maybe it is the customer support portal at admin.example.com.  Maybe it is a publicly accessible staging server at EC2 spun up by a developer who has since left the company and not shut down because, hey, $20 a month.  Maybe it is a 20% project by a junior engineer which he has on the back burner for the moment.  It doesn’t matter why this app was forgotten: if it is publicly accessible, it will be compromised.

What was the proper way to react to these patches?  Patch immediately, install a workaround immediately, or pull the plug on your application.  (“Pull the plug” means disconnect it from the Internet or shutdown the server while you get a mitigation plan into place.)  You should have distinct memories of you or someone under your employ having at least two separate incidents in the last four weeks in which they dropped everything they were doing and immediately took action to resolve these problems.  Immediately means exactly that: right now, not during the next schedule code spring, not tomorrow, not in an hour.

I was up at 3 AM Japan time applying these patches, twice.  If the next patch drops at 3 AM your local time, someone should be applying it immediately.  Computers can count to big numbers very quickly indeed.  A six hour window between a patch dropping and the start of business the next day is more than enough for an automated scanner running on a botnet to have tried compromising substantially every Rails app on the Internet.  (Do you disagree?  You are overestimating how hard it would be to find your application.)

Aren’t you exaggerating?  Our application isn’t particularly high risk!  We aren’t high-profile, it doesn’t have obvious monetary return for exploiting it, etc etc. Good thing you aren’t really saying that, but you might be at an Internet cafe next to an engineer who has poor reading comprehension, so help me explain this to him: nobody needs to care about your application to compromise it using these vulnerabilities. They can be exploited in a totally automated manner over the open Internet, requiring zero knowledge of e.g. what version of Ruby you are running, what version of Rails you are running, what your URL structure looks like, etc.  (Somebody suggested “How would you determine which servers were running Ruby on Rails?”  Answer: It’s absolutely trivial to detect Rails applications in a scalable fashion, but why bother?  Fire four HTTP requests at every server on the Internet: if the server is added to your botnet, it was running a vulnerable version of Ruby on Rails.)

Aren’t you exaggerating? Clearly this would take a lot of specialized expertise to exploit! Yep… the first time. Now that people know how the exploitation is done, however, you could do it by just copy/pasting one of the proof-of-concept scripts or b) running a browser bookmarklet. (I am not passing out that browser bookmarklet, because I think that would inevitably lead to mischief, but just know that you’re rootable in a click if you didn’t take action on this. And, by the way, have been for three weeks or so now.)

We’re A Startup.  What Happens If We Lose A Server?

If you lose one server, you will lose every server, with very high confidence.  If, for example, you are a Python-using shop which had a Redmine instance running around with no code on it, and you lose that Redmine server, you can expect a skilled attacker to then pivot from that privileged location within your network to start compromising other servers on your network.  At this point, you need to have done absolutely everything right to make it impossible for that skilled attacker to prevail, and you almost certainly have not.  (Compelling evidence that you’re not as good as you think you are: you already had one vulnerable application which could be compromised over the open Internet.  To a certain philosophy, that isn’t your fault, but the attacker gets root regardless of whose fault it is.)

The actual steps a pen-tester would take to root your other boxes are pretty academic after they have one.  (For example, you can start probing other machines on the network for vulnerable services, use credentials found on your compromised machine to suborn other machines, take over routing hardware using vulnerable administration panels and then start intercepting all network traffic, etc etc.)  Just take it as a given, you will lose.  Companies much larger and smarter than you lose everything when this happens, essentially every time it happens.

We’re A Startup.  What Happens If We Lose Every Server?

A short preview of coming attractions:

  • You will lose the next several weeks out of your schedule dealing with this issue.
  • You will have to take down all of your applications and rebuild all your servers from scratch.
  • You can assume the attacker now has a copy of your source code, all credentials you have, all your databases, and all information you had like e.g. log files.
  • Do you take credit cards?  Were you taking credit cards through an exploited application?  You now have a PCI-reportable data breach.
  • Your local jurisdiction may have legal requirements that you notify the people whose data just got exposed.
  • You now have a public relations nightmare on your hand.
  • In addition to compromising any customer data you possessed, you have made it possible for diligent attackers to compromise those customers elsewhere.  The most trivial example is, if you did not implement password storage correctly, you have just handed the attackers a list of email addresses and associated passwords which they can now re-use on higher value targets like e.g. bank accounts or Gmail, because many users re-use their passwords everywhere.  (You use bcrypt?  Wonderful.  Did  the attackers turn it off when they rooted all your applications?  Can you conveniently check that, knowing that you cannot trust the contents of any logs on those compromised servers?  No?  OK, so instead of losing all the passwords, we can upper bound exposure at only all users who logged in since the attack started.  That’s an improvement… sort of.)

Basically, it’s Very Bad, but not the end of the world.  You’ll probably need expert help to get through it, like you would need if e.g. you got sued.  Unfortunately, lawsuits generally give you weeks of notice and progress slowly, but security vulnerabilities often give you negative several hours notice and get worse for every minute left unchecked.

We’re A Startup.  We Don’t Use Ruby on Rails So We’re Totally Cool, Right?

Can you enumerate every account on the Internet where you have a password and also every service consumed by your business?  Go ahead, take as long as you need: it is very important that you don’t miss one.

OK, let’s start with the obvious: Look for analytics providers and other folks on that list who have instructed you to embed JS on your website.  If I do this exercise, I come up with at least three results here.  Do any of them use Ruby on Rails?  (Are you sure?  Remember, if they have at least one Rails app on their network…)  Great.  If they didn’t patch in a timely manner, you should assume that Javascript you’re embedding on your website is in the hands of the enemy.  It is now a cross-site scripting vulnerability against every page it is embedded on.  Do you embed it on e.g. log in pages or anywhere your admins expose their own all-powerful admin cookies?  Boo, now the enemy has your password / cookies / etc.

Alright, let’s move down the line: Look for anybody who implements OAuth/Facebook Connect/etc.  Do any of them use Ruby on Rails?  Are you sure?  If they haven’t patched, you’ve handed the union of all privileges over the linked accounts to the attackers.

Alright, let’s move down the line: Consider everybody who has a copy of a password which you re-use elsewhere.  (You shouldn’t be re-using passwords, or variants of passwords, but I ignored that advice for years so I’m betting a lot of you did, too.  Maybe not you, specifically, but you know that chap in marketing who is great with people but thinks MSWord is complicated?  Consider whether he has access to anything sensitive in your company.  He does?  Well, sucks to be you then, but good on your for password security.)  Do any of them use Ruby on Rails?  Are you sure?  Did they use bcrypt/scrypt/etc to properly secure passwords at rest, and did they patch these vulnerabilities fast enough to prevent attackers from pulling them off of the wire?  Are you sure?  If you’re not sure of all of these things, consider every password compromised and take action appropriately.

One of my friends who is an actual security researcher has deleted all of his accounts on Internet services which he knows to use Ruby on Rails.  That’s not an insane measure.  (It might even be inadequate, because all the folks who are compromised are probably going to lose their database backups as well.  Well, if they have database backups.)

These are just a sample of ways in which these vulnerabilities can ruin your day.  They are very much not an exhaustive list.  If you believe in karma or capricious supernatural agencies which have an active interest in balancing accounts, chortling about Ruby on Rails developers suffering at the moment would be about as well-advised as a classical Roman cursing the gods during a thunderstorm while tapdancing naked in the pool on top of a temple consecrated to Zeus while holding nothing but a bronze rod used for making obscene gestures towards the heavens.

Somebody Dropped A 0-Day On Rubygems. What If It Happens To Me?

Yes, that certainly sucks royally.  Rubygems wasn’t even exploited using the patched Rails vulnerabilities — an attacker just learned something which worked (again, we’re on the leading, bleeding edge of security research here), applied it in a novel fashion, and compromised the Rubygems application.  As of me writing this it looks like we avoided the Ruby-ecosystem-wide apocalypse that would have happened if they had started backdooring gems, but let’s just focus on the immediate fallout: their system got compromised.  What if one of yours did, like that?

The first step is a preventative inoculation: If you run an application on the Internet, you should today establish a security contact page.  It only needs to include two things: a working, monitored email address and a PGP key.  Bonus points for giving some sort of public recognition to people who report security vulnerabilities to you in a responsible matter.  This helps to co-opt some security researchers so that they e.g. get in touch with you about the problem prior to just going ahead an exploiting it.  Software security has a curious system of social norms, where scalp collecting both builds both karma and pseudo-currency.  It’s bizarre, but just take this on faith: having a security page with a working email gives you a certain amount of We Should Avoid #’#(ing Their #()#% Up Without Asking First street cred.  (Naturally, like any social norm, that is a preventative measure rather than a panacea.  However, given that it is a well-understood norm, it gives you a bit of an edge in the PR battle should someone decide to just drop a 0-day on you.)

Good security pages to pattern after: 37signals (I particularly like how this page works for responsible disclosure while, in a dual-audience fashion, also doubles as being great marketing copy), Twilio, Heroku (again, dual audience), etc.

Have a plan for responding to security incidents. I call mine the Big Red Button. Thomas, a security consultant friend of mine, accurately observed that these probably caused the first Big Red Button events that many folks in the Rails community have ever had to deal with. We should learn from our experiences here.

For example: I pushed the Big Red Button at 3 AM in the morning, twice this month, to apply critical security patches and work-arounds.

So did I do a great job of addressing this problem? No, I did a pretty effing atrocious job of addressing this problem. Specifically, I have two old-as-the-hills Rails apps running on 2.3.X at the moment. Waaaaay back in 2010, Mongrel and Rails had a bit of a compatibility issue, and I solved it via a monkeypatch. The monkeypatch relied on a hardcoded version number, which I have been hand-incrementing every time I update Rails. It’s literally on the redeploy checklist, next to a note “TODO: This is stupid and should be fixed when I get a moment.”

I did three Rails app upgrades locally, three test suite runs, and three sets of smoke tests when applying one of these patches. The one in the middle happened to be Appointment Reminder, which is an application that has to be up during the US workday. Unfortunately, because I was exhausted while following my deployment and smoke test checklists, I a) forgot to bump the version number in that monkeypatch and b) did not follow the part of the smoke test which would have clued me on to “This is going to cause log-ins to fail on some browsers.” That resulted in some breaking downtime for some customers during the US workday, and me having to send an apology to all customers. That sucked horribly.

I have now fixed my monkeypatch to not require hard-coding the Rails version, simplified some of my deploy procedures, and am working in the next several months on beefing up my testing suite. Also, lesson learned about resolving “TODO: This is stupid” when it would take 5 minutes to do rather than having it blow up in my face.

There, that’s an experience I went through. Now you know the punchline, so hopefully you don’t have to go through it as well.

Similarly, we can observe:

  • We need an updated list of all applications running on our servers, so that we know when a problem with a technology stack affects them, even though this sounds like a boring Big Freaking Enterprise IT Department requirement. (And gulp their dependencies.)
  • For each tech stack we support, we need at least one expert following the primary source for security news for that tech stack.
  • We need whomever is responsible for product development and/or ops to, effectively, carry a pager for drop-everything-and-do-it-now resolution of security issues, just like we’d do for e.g. the server has fallen over or “our building is, physically, on fire.”
  • These requirements suggest minimizing the number of tech stacks we work with, even if that means passing up the new hotness occasionally.
  • Just like we have e.g. insurance on the building physically burning down, we should have some upfront investment in security. Good forms might include security training, outside consulting, or (if we’ve got a lot of money) contributing work towards securing tech stacks we rely on.

You Should Be At Defcon 2 For Most Of February

Big security vulnerabilities tend to be discovered in bunches.

Why does this happen?

  • Blood in the water attracts sharks. Some of my security friends would hate this phrasing, because “researchers don’t cause vulnerabilities, they find vulnerabilities”, but as a businessman who depends on software for his livelihood, I had exactly zero days of the last six years spent sleepless because of the latent vulnerability in Rails, but two days this month due to the pressing need for immediate mitigation. There are many more eyes pouring over Rails — and related projects — more closely now than typically. Many of them are white hats (yay!). Some aren’t. In general, there is a virtually infinite need for software security expertise, just like there is an infinite need for software, and there is a crushing lack of expertise which can meet it. Some folks who are capable of finding vulnerabilities are, due to attention/topicality/renewed interest/commercial potential/etc, now looking at Rails as of today.
  • Technology marches on. After you have a new exploit vector to play with, you can start applying some of the technology used to discover / develop / exploit it against other code bases, code paths, etc etc. For example, the first Rails vulnerability was parlayed within a day into a similar vulnerability in the MultiXml gem. The same underlying “YAML is very dangerous” realization enabled the Rubygems compromise. If I were working on e.g. Django, I would strongly suspect that security researchers are going to see whether they can find similar patterns on Django — it wouldn’t be the first time, since e.g. HMAC tampering vulnerability disclosures in Rails were followed up by similar findings on Django the same week.

I previously had a version of this post queued up right after the first bug dropped, but didn’t hit Publish because I got busy that weekend and thought it wouldn’t be timely anymore. That post included the lines “I will bet $1,000 at 100-to-1 odds that Rails suffers another code execution vulnerability before the end of January.” If you had hypothetically taken that bet, you would have lost.

You should expect February to be a very trying month for the Rails community and startups in general. Your security team should be at Defcon 2: be ready to respond to patches with particular alacrity, and expect there to be failures in the ecosystem outside of your ability to control them. For example, I’d make sure that you can rebuild systems without requiring access to Github / Rubygems / etc, and that’s (unfortunately) the tip of the iceberg.

This Sounds Like A #$()#%ing Disaster

That is primarily because this is a #$()#%ing disaster.

For my part, in addition to taking steps to fortify my own businesses, I’m (as time permits) doing some pro-bono security work on Rails. I do not have results which can be published yet. I strongly suspect based on early research that I will, in February, and I strongly suspect that other researchers (both white hats and the Bad Guys) are much, much better at this than I am.

Get ready. It will get worse before it gets better.

Bingo Card Creator (and other stuff) Year in Review 2012

I’m Patrick McKenzie (occasionally better known as patio11). When I started my business six years ago, I was greatly inspired by a few other folks who published the minutiae of their software businesses, particularly actual sales and expenses numbers. I resolved to do it for Bingo Card Creator, my (first) software business, and then just kept up the habit. I traditionally post the year’s numbers and my reflections on what worked and what didn’t right before Christmas: see years 2006, 2007, 2008, 2009, 2010, and 2011.  (This year’s installment was slightly delayed.  Merry belated Christmas?)

Obligatory disclaimers: It is a good thing that I’m CEO and not the bookkeeper, because if I were bookkeeper I’d be fired for incompetence. When I do the official accounts for tax purposes I virtually invariably discover a few thousand dollars of extra expenses. (You might reasonably think “Then shouldn’t you outsource this?”, and you’re smart for thinking that, but sadly my part-time bookkeeper can’t always catch problems like “Patrick forgot to hand her a business trip worth of receipts.”)

On transparency: I’m weakly committed to transparency: it is nice to have but not one of my core values. I don’t impose it on other people, so when my business touches a partner or customer I generally err on the side of keeping their details private, absent specific permission to share. I also politely decline to discuss stats for Appointment Reminder, largely justified by “I don’t want this post quoted against me in a partner meeting” should I ever decide to raise money for it.

Capsule summary of 2012: I had a very good year, across all lines of business, in terms of personal satisfaction, value to clients, and profitability.   The big story was meat-and-potatoes execution: taking things which I knew how to do and knew to be effective, and applying them in fun new ways.  Some examples follow.  Profits roughly tripled from ~$70k to ~$200k (on total sales of ~$275k), exclusive of Appointment Reminder.  2013 looks to be very exciting indeed.

The Year In Brief

Bingo Card Creator was in maintenance mode for approximately 48 weeks of the year again, with two experiments done with a site redesign and incorporation of direct ability to charge credit cards (via Stripe) rather than using Paypal or Google Checkout. The experiments were, taken together, a smashing success.

I once again planned on spending most of my time working on Appointment Reminder, and (once again!) life decided to get in the way. Last year it was losing two months of the calendar to immigration issues. This year’s “distractions” were much happier: I took off approximately three months for my wedding and honeymoon, and my consulting business decided to grow like gangbusters. In any event, I was able to repay a lot of AR’s technical debt, fix the occasional technical issues the service had been experiencing, knock off a few new features, close my first enterprise contracts, and approximately triple the paying customer base on the published plans.

Speaking of consulting: As planned, I spent less time on acquiring new clients and assorted promotional activities (conference speaking, etc), and roughly the same amount of time on the boring mechanics of scheduling and delivering engagements. I also walked my rate up a few times.

There was an interesting outgrowth of the consulting business: over the last two years I’ve delivered engagements regarding email strategies for SaaS businesses several times, and had to turn down many more due to lack of availability, so I tried my hand at productizing consulting via creating a video training course about that subject. This worked out very well, both for myself and my customers.

An opportunity fell into my lap to try angel investing (as angel, not as entrepreneur). It’s a bit of a long story, so I’ll probably cover it some other day.  I also wrote a book, as previously covered on the blog.  It launched very late in the year, so I’ve got no interesting numbers to share about it yet.

Bingo Card Creator

Bingo Card Creator makes bingo cards, mostly for elementary schoolteachers. It had far-and-away its best year ever, despite being in maintenance mode. This was largely driven by organic growth of the business and huge increases in conversion rates following the redesign and Stripe integrations, covered here. The differences are very apparent if you look at conversion rates for any month after May and compare it to the year previous, which is necessary since BCC traffic and sales are very heavily seasonal. Or you could, you know, just take a look at the sales graph.

Stats:

Sales: 2,254 (up 55% from last year’s 1,451)

Refunds: 89 (up massively from 14 — the story is so good you’ll have to read it below)

Sales Net of Refunds: $64,791.81 (up 40% from $46,233.68)

Expenses: $26,193.40 (up from $23,003.19)

Profits: $38,598 (up 66% from $23,230)

Wage per Hour: Approximately $1,000, given that I worked for approximately 15 hours integrating the new design and spend approximately 20 minutes a week doing support.

Web Stats:

(All stats are from bingocardcreator.com unless otherwise specified.)

Visits: 1.08 M (up from 821k)

Unique visitors: 875k (up from 670k)

Page views: 3.4 million (up from 2.9 million)

Traffic sources of note: Google (56%), AdWords (12%), Binghoo (11%)

Trial signups for online version: 87,000 (up from 83,000)

Approximate online trial to purchase conversion rate: 2.4% (up from 1.8%)

Narrative version:

Overwhelmingly the best thing that happened in 2012, or for that matter the last several years for BCC, were the A/B tests where I reskinned the application and marketing site and where I introduced Stripe charging individual credit cards. This breathed quite a bit of life into a business that had previously simply been running on autopilot. I’m incredibly happy with how that worked out, particularly as I was able to get the actual design work done by someone else, and only had to do the Rails integration and a few tweaks to get it working.

What Went Right:

  • I’m almost totally superfluous to the day-to-day operation of the business.
  • The aforementioned A/B tests delivered major wins, on top of a half-dozen more minor ones. (A percent here, two percent there, it adds up when you keep doing it for six years.)

What Didn’t Work So Well:

  • I used the Stripe quick-start code to do my integration and did not build in server-side validation to stop duplicate transactions, trusting the client to only submit once, using Javascript to guarantee that. This is reliable as long as your client is not the IE Javascript engine running on a machine while it is being struck by a bolt of lightning. My poor customer got charged 36 times for Bingo Card Creator. I, of course, refunded the purchases when I caught them. (In case you’re worried: while a lot of electronics got melted, my customer was physically unharmed.)
  • In addition to the above, switching from Paypal to credit card orders increased the number of duplicate orders customers put through by more than an order of magnitude. Previously I just trusted people to not do this. Apparently… it is time to algorithmically suggest to customers that just because they didn’t get an email in 30 seconds doesn’t mean they should try the purchase again.
  • At some point in 2012, I started dreading doing customer support. I’m not sure why — I think I’m just really tired of answering the same questions for six years now. I’m going to try to pass off L1 support to a VA in 2013. I probably should have done this 5 years ago.

Appointment Reminder

Appointment Reminder does appointment reminding phone calls, text messages, and emails to customers of professional services businesses. I launched it in December of 2010, so it is just turning 2 years old right now. I go back and forth on whether I want it to be the Next Big Thing for me. Since I want to keep my options open on that score, I refrain from quoting numbers about it publicly.

My idea was that AR would be my primary business focus at the start of the year. That was the plan last year, too. Once again, my execution on it left a little to be desired: I think I got done about 60% of what I wanted to get done. This was partially due to distraction from the rest of the business, and partially from not understanding the difference between “single”, “engaged”, and “married” as well as I thought I did. (That’s not a complaint so much as it is a reflection about reality — marriage is far and away the best thing that ever happened to me.)

Revenue: Undisclosed.  The monthly revenue run rate on the publicly available plans is approximately quadruple what it was in December 2011. Enterprise sales went from “zero” to “non-zero”.

Expenses: Undisclosed.

What Went Right:

  • Technical issues: Last year AR had multiple customer-visible failures, and when AR broke it broke very badly, with failure modes like “DDOS someone’s home phone line” or “Failure to deliver time-sensitive reminders sent to patients by their doctors.” I spent quite a bit of tightening the system up, and had a much, much more stable year. We still had one major incident (the VPS it runs on became unable to boot after a distribution upgrade) which caused six hours of wall-clock downtime, but thankfully maintenance was timed so that this only resulted in about 15 minutes of downtime relevant to customers, and we only dropped ~6 calls. I’ve figured out a lot of architecture / tech stack problems prior to reaching extreme scale, which is probably for the best.
  • Email marketing: AR sent precisely one marketing mail on January 1st of this year: “Thanks for signing up for the free trial.” I frequently do email marketing for clients, and it is always more sophisticated than that, but I figured AR didn’t have trial numbers to justify extra work. When I was writing my video course on email marketing, though, not taking my own advice felt very disingenuous, so I implemented most of what I was advising. Wham, conversion rates and customer happiness up, just like advertised. (Best single win? A checkup at 3 weeks into the trial which, if the account looks likely to convert, tells them how much money they’re saving. If they’re unlikely to convert, it offers a one-month extension to the free trial if they speak to me about it. That single email has been worth low five figures. Want more suggestions? Buy my course about lifecycle email marketing.)
  • Redoing pricing/plans: Appointment Reminder launched with $9/$29/$79/Call Me Maybe pricing. (Hey I just met you / And this is crazy / But pay me ten thousand dollars / It’s enterprise software, this line won’t even rhyme.) The $9 personal plan was a mistake, and I knew that when I created it, and even despite that I suffered a year and a half of it anyhow. D’oh. That wasn’t the worst mistake, though — it turns out there was a substantial market segment who were at above the quotas that the Small Business ($79) plan addressed, but were unwilling to play the Enterprise pricing game. They do, however, fit in the Office plan ($200). The (new) most expensive plan now accounts for over 1/3rd of revenue from the publicly available plans.
  • Enterprise sales: It’s a long story, but surprisingly it isn’t impossible to win them as a one-man firm calling from Japan… you just have to make the most out of the utterly unfair advantages that gives you.  (A trump card I lay early and often: “I’m the founder.”)  If you’re interested in this topic, I recommend signing up for my mailing list, since I seem to write more about B2B topics than on my blog.

What Didn’t Work So Well:

  • My responsiveness: I have not been doing a great job this year at pursuing enterprise sales (i.e. only successfully get a decisionmaker on the phone a low percentage of the time even for inbound leads), partly because I get a lot of leads via voicemail, which I don’t deal with very well. Many of them are poorly qualified, and as a result I find myself dreading listening to voicemail to call back and talk for 10 minutes (at 2 AM in the morning) only to discover that they’re not good fits for AR. This is something which rationally speaking I should want to do, since it the path forward for the business, but I have been only sporadically successful at forcing myself to do it. Ideally, I will systematize the sales process and then offload it to someone, but this requires consistently executing on it myself first, and at the moment my successful sales have been all one-offs rather than anything resulting from a repeatable process. (n.b. Welcome to sales at any early-stage startup.)
  • Technical issues: Did I mention I had six hours of downtime and nearly gave myself a heart attack resolving it prior to the business day starting for my EST-based customers? That isn’t acceptable going forward. I still have more to learn about this (and likely always will).
  • General level of interest: Even in weeks that I have blocked off to work on AR, I often find myself just lacking any desire to do it. The business isn’t intrinsically more boring that e.g. Bingo Card Creator, but the sort of things that I need to do to move it forward seem to hit my desire to work with a damp towel. On the plus side, not having investors or employees means that I have 100% control over the schedule. On the minus side, not having investors or employees means that I have 100% control over the schedule, and AR has frequently lost out to pressing matters like consulting engagements, League of Legends matches, or wonderful opportunities to clean drains around my apartment.

Consulting

Like 2010 and 2011, I did a bit of consulting in 2012 for software companies. I increase sales of SaaS companies, and that’s all. Under that fairly broad brief, I do everything from writing software to support marketing objectives (Fog Creek has a case study coming out eventually, I believe) to doing lifecycle email campaigns to repricing plan offerings to A/B testing copy tweaks to… you get the general idea.

My guests and I on the podcast ended up talking quite a bit about consulting in the last few months, and I wrote an article about it.

Consulting Sales: ~$140,000  (this includes something like $20k of Accounts Receivable, for delivered engagements whose payments I will not constructively receive in 2012)

Consulting Expenses: $~40,000 (travel, conferences, and catch-all for anything which isn’t obviously for another line-of-business, like e.g. buying a business iPad)

Narrative Version

Where do clients come from?  I primarily source engagements by participating on the Internet (Hacker News, my blog, etc), speaking at/attending conferences (most relevantly to consulting, Business of Software), having word-of-mouth from previous happy clients or other folks who know me, and occasionally from nebulous reputational factors.  A new client and I would typically talk for an hour or two, and if they look like a good fit, I send them a one-to-two page mini-proposal for the engagement.  The prototypical “good fit” for me is an established software as a service company with revenues in the eight figure range, a few dozen employees, and a company culture which focuses more on the product/engineering side of things than on the marketing/sales side of things.

What are engagements structured like?  It depends on the engagement, but a fairly typical proposal for a new client would be for a 1 to 3 week engagement, delivered contiguously and on-site.  (I do remote engagements, too, but largely for existing clients.  Being on-site is a bit higher bandwidth, which is helpful in the getting-to-know-you-and-your-systems/products/people stage of a relationship.  People also generally tend to trust folks they’ve met in the flesh and broken bread with a heck of a lot more than they trust an email address with attached wiring instructions.)  I charge a flat weekly rate, generally in the five figure region.  The beautiful thing about the choose-your-engagement-length structure to proposals is that if the client has budgetary issues then we can address them by moving particular deliverables out-of-scope and shortening the engagement, rather than by compromising on the rate itself.

“What is it you do, exactly?”  It varies extensively depending on the engagement, and the specifics are often NDAed.  Broadly speaking, I make software companies money, primarily by increasing the sales of their SaaS products, usually through either a) applying engineering expertise to solve a particular marketing problem or b) just straight-up marketing expertise.  (If a client were to theoretically ask me to just crank out features for their Ruby on Rails app, I could theoretically do that, but more talented programmers are available for cheaper, so I’d advise them against it.)  Some specific tactical examples might be:

  • Designing and implementing the first-run experience for their SaaS application, with the goal of increasing conversion from free trial signups to paying accounts and increasing lifetime value of paying accounts
  • Implementing a drip campaign, such as allowing potential customers to sign up for a free one-month mini-course on $PICK_A_TOPIC, where the mini-course also duals as a sales channel for the SaaS product the company sells  (One of the rare engagements I can actually talk about was doing this for WPEngine — it meaningfully and permanently increased their sales.)
  • Re-writing marketing site copy or re-doing design (I do wireframes, their designers make PSDs and working code, most of the time) to increase conversions to a SaaS product, generally with the new work getting A/B tested versus the old stuff so we know whether it is working or not
  • Re-doing pricing / packaging options, or presenting them in a more effective light, to increase sales, average order value, and average customer lifetime value.
  • Teaching teams at clients to implement A/B testing, email, better pricing/packaging options, etc etc so that clients can get good at these rather than needing to rely on me.
  • Being a sounding board for product / UX / packaging / etc decisions.  (e.g. “We’re considering moving a very successful desktop application sold on a licensed model to the SaaS model.  That will cost us millions of dollars and, if we commit to it, would be our #1 strategic priority for next year, to the exclusion of all others.  Prior to committing to doing that, we’d like to have external confirmation that this isn’t insane.”)

What Went Right:

  • Leveling up: The advice I gave in the podcasts and the above article is largely distilled from my own experience. In general, as compared to earlier in my consulting career, I’m a bit smarter with regards to client selection and to the kind of projects I work on, and I charge to match. The increase in sales is totally driven by an increase in average bill rate — I actually cut down weeks worked. (There are broadly speaking three ways to increase consulting revenue: increase utilization rate (percentage of time you spend doing billable work), increase your bill rate, or hire people. I could schedule as many weeks of work as I wanted, but don’t really feel the urge to do so since it would conflict with my software businesses and life in general, and don’t really see myself managing other consultants… at the moment, anyhow.)
  • Working with great clients: I’m privileged to have had the opportunity to continue working with smart companies, with excellent products, which had good opportunities for applying my skills to our mutual benefit. A lot of the stress of consulting is dealing with client relationships which you shouldn’t be in in the first place. Being picky and choosy has been a major win for me, and as time goes on I’m getting better at it.
  • Delivering for clients: I have my own personal Nagging Doubt Monster. NDM often wonders whether e.g. I’m worth what I charge to clients. On balance, I’ve always thought the answer was Yes, but I have had troubled sleep about it, particularly as my bill rate hit arbitrary threshholds that flipped my “comfortable” bit. Earlier this year, a particular engagement, whose results I’m unfortunately not at liberty to disclose, sent the Nagging Doubt Monster into indefinite hibernation. In addition to that particular engagement, it has in general been a very good year. Clients are generally thrilled with what they got out of working with me, and I feel likewise.

What Didn’t Work So Well:

  • Legal Stuff: You know how every consultant ever tells you “Hire a lawyer to do contract review”? You should hire a lawyer to do contract review. Some clients and I had differences of opinions with regards to the meaning of some boilerplate, which (while they eventually were resolved amicably) caused me way, way more stress than necessary.
  • Scheduling Issues (Client-side): I had about three-ish weeks of availability this year where I intended to be doing consulting work, but didn’t end up billing anybody, because I didn’t move engagements through the pipeline fast enough. (That would be a decent-sized hit if I were a traditional consultant, who generally aim for about 35 weeks of work in the year, but since I generally shoot for about ten-ish…) In the future, I’m going to revise the proposal-and-present-contract dance to decouple it from engagement delivery dates. Previously, I’ve generally gotten the final greenlight within 2 weeks of an engagement starting, and if I blow that date that generally means I blow that week of availability. Random events can delay both contract signing and delivery, so I think decoupling them in the future will result in not having to spin my wheels.
  • Scheduling Issues (My side): Relatedly, I occasionally have anticipated availability evaporate. I took three months off for my wedding, but that was planned. I also had August marked off on the calendar for working on my course, but that ended up swallowing a lot of September, and that delayed contract negotiations scheduled for September and thus cost a week or two of my fall consulting season when that bubbled down the line.

Productized Consulting

I created and sold a video course which teaches SaaS businesses how to use lifecycle emails.

I have, historically, intentionally avoided selling anything to software developers. Partly this was out of wondering whether I had anything of value, partly this was thinking the market was terrible (penny-pinchers with not-invented-here syndrome), and partly this was out of lingering distaste regarding “selling shovels.”

There’s a persistent meme among software developers which says “The way to get rich in a gold rush isn’t to mine for gold, it is to sell shovels to gold miners.”  This meme is often deployed to suggest that shovel-sellers are exploiting naive gold miners.  I want to eventually write an anthropology paper on the gold rush narrative as applied to startups, because it is fascinating, but my brief sketch is that people often use an incorrect syllogism along the lines of “If you sell shovels, then your customer must be a miner, then there must be a gold rush, but gold rushes are either intrinsically bad or there is in fact no gold rush, so your business is either doomed, distasteful, or distastefully doomed.”

After seeing 37signals, Fog Creek, Ramit Sethi, Amy Hoy, and others all produce information products which actually seemed to create customer value (in many of those cases directly to technologists), I started to feel a little more open to the idea of doing it. So early in the year, I created an email list for folks running software businesses, with the idea being that I’d continue cultivating an audience by producing free things that they’d enjoy, and eventually offer them an opportunity to buy something a little more in-depth than my typical writing.

Concurrently with this, I was doing consulting engagements, and I kept my eyes open for recurring customer needs. One major one was that most SaaS companies don’t make effective use of email marketing. In particularly, they send next-to-no lifecycle emails (emails triggered off of customer actions in the software), and those are an incredible opportunity if you execute well on them. I implemented lifecycle campaigns for fivish consulting clients, in some cases making hundreds of thousands of dollars in sales off of individual emails, and thought that rather than hiring out that expertise by the week I could probably package some of it as a training product, so other companies could implement the campaigns without needing to hire a consultant to do it for them.

(Here’s a replicatable strategy for making several hundred thousand dollars with a single email: start with a revenue base of $X million a year.  Email all customers asking them to switch from monthly billing to annual billing, in return for some incentive you can offer, which can range from “a month free” to “15% discount” to “Hey, you can book the expense this calendar year, so that will save you money on taxes.”  Feel free to try this with any client or day-job of yours if they’re already at scale — “We made so much money the accountant/bank called us to complain” will make for a great bullet point at your next contract/salary review.)

Why bother doing a productized consulting offering when I have software businesses and standard consulting to keep me busy? Partially, I love trying new things and just wanted an excuse to experiment. Also, consulting is working out fantastically well, but it routinely requires me to spend multiple weeks abroad on business, and that is less and less attractive to me as I get more and more married. So if I could replace on-site consulting with a consulting-like offering that I could execute on here from Ogaki, that would be a bit of a win.

I eventually decided on making a study-at-your-own-pace video course as opposed to e.g. an ebook or a series of webinars, and then wrote out lesson plans and started recording. I anticipated about two weeks to do the recording (I was shooting for about 5 hours of video after editing, so perhaps six or seven hours of raw video) and two weeks for a freelance video editor to get things ready for me. (I wrote all the courseware and payment processing code myself — rationally speaking that should have been hired out, too, but I was really looking for a programming project at the time.)

The course was eventually delayed a few times (my original estimate was two weeks of work and a three week shipping schedule, but it ended up closer to four weeks of work and an eight week shipping schedule).  Nonetheless, it did successfully ship, and seems to have worked out pretty well for customers.  (Amy Hoy interviewed me about the process in detail, in case you want tactical advice.  I expect that interview to be up in a week or two.)

(You can find the course here.)

Course sales: ~$60,000  (My mental target was $20k, so this was a pleasant surprise.)

Course expenses: ~$6,000 (freelance video editing, payment processing, video hosting, etc)

What Worked Well:

  • Building an email list: About 5,000 folks asked to receive email from me. They mostly get free advice along the lines of what I’ve often blogged, except in a bit more detail. For example, I wrote about SaaS pricing and consulting, and subscribers have told me that they’ve used advice in those emails to substantial effect in their business. My basic brief is “Don’t ever waste their time”, mostly because I respect that people have invited me into their inboxes. (Also, I pay MailChimp about $100 every time I hit the Send button. That would probably change the character of my blog posts a bit…) In any event, when you have a “warmed” email list of people who have pre-existing reasons to like what you have to say, since you’ve been creating value for them for months/years/etc, doing product launches is a lot easier than “Build it and pray that they’ll come.”
  • Value for customers: One of the reasons I avoided doing this for so long was that I was concerned whether customers would actually get value from it or not.  For both genuinely compelling ethical reasons and not-nearly-so-compelling Nagging Doubt Monster reasons, I greatly prefer doing things which have highly obvious ROI for customers over things that don’t.  Feedback about individual companies’ results with lifecycle email has been tremendously positive, ranging from “We had this on the list for 2 years but never knew where to got started, but then we bought your course, gave it to an engineer, and shipped within 3 weeks” to “This made us six figures.”  (Seriously mindblowing: the sales copy made one customer six figures.  An engineer reading it thought one point I mentioned in passing was worth repeating and forwarded the mail to their bizdev guy.  The bizdev guy used it the next day to close a 500 seat license.)
  • Stripe: Despite some issues with, primarily, corporate American Express cards thinking that $2k charges for training materials were a little suspicious, Stripe was extraordinarily easy to integrate and reasonably priced, like usual.  In addition, unlike one might reasonably expect for a merchant account or Paypal, Stripe didn’t require either advance warning or an after-the-fact investigation when I suddenly had a considerable volume spike.  (I was expecting plus-or-minus $20k in sales in a short period of time and, if one goes from $3k a month of sales to $20k a month, Paypal will have words with you, sometimes freezing your account in the process.  This is, I rush to add, totally rational and solvable by e.g. submitting them a bit of documentation and waiting, but I had a lot on my plate, and not worrying about that was a boon.)

What Didn’t Work So Well:

  • Workflow issues with video: I’m a good writer and a fairly decent conference speaker / classroom lecturer.  It turns out that lecturing to a camera is another skillset entirely, both in terms of maintaining pacing / energy / interest / etc and in terms of stupid technical issues like “You need to worry about having scads of hard drive space and, by the way, good lighting for taking the video.”  I’d give the content quality (in terms of advice) an A- or an A, but the presentation was often a B-.  This will probably improve as I get more experience with projects in this form-factor.  For example, while I like my decision to avoid word-for-word scripting the videos, the next time I’ll probably create e.g. Powerpoint slides or something to give people something more meaningful to look at during the lessons than me talking at them.
  • Outsourced video editing: I hired somebody to do all the editing for these videos, which was a tremendous time-saving measure over doing it myself, considering that teaching myself the Adobe toolchain would have been a terrible decision.  Unfortunately, my freelancer (a good friend of mine from high school — and yeah, I hear you and you’re probably right) had a run of “bad luck” with regards to e.g. hardware failures and scheduling issues, which resulted in the work getting delayed quite a bit and only about 90% of the way finished.  (There are, e.g., videos which I shipped with known editing bugs in them, on the theory that shipping today was better than delaying launch by a non-deterministic amount.)
  • Writing my own courseware: The site (which handles both sales and fulfillment) is a built-from-scratch Rails application which probably took a week or two to write (I was doing it concurrently with filming videos so I don’t have a great breakdown of hours used).  It is, basically, the best possible project to ask an intermediate Rails consultant to bang out, since the behavior is very well-specified and there are no surprises.  While I was quite pleased to have the opportunity to write it — you know, it’s like a new car, a new programming project has that smell of fun to it — rationally speaking that was a poor decision which probably cost me time and aggravation versus a) hiring it out and b) doing a totally-for-jollies programming project which wouldn’t need boring-but-important-to-get-correct glue code like user management or Stripe integration.  (Relatedly: what the heck possessed me to put it on a VPS again versus doing Heroku.)

Goals for 2013

Bingo Card Creator

  • Given that I haven’t had a full year at the new-and-improved conversion rates yet, I reasonably expect BCC to coast to approximately $80k in sales on flat costs, for something like $55k in profit.
  • I want to outsource 90% of the customer service load for Bingo Card Creator, because I add zero value to most interactions these days (there’s no reason other than ego to have “Thanks for your email.  Bingo Card Creator doesn’t support pictures and we do not anticipate supporting pictures in the future.” come from me rather than from a freelancer), my response times are getting longer and my patience are getting shorter with each passing year, and the cognitive load of dealing with even trivial amounts of BCC CS email makes me procrastinate about opening my inbox and dealing with (much higher priority) email for my other lines of business.

Appointment Reminder

  • This goal worked out pretty well for me this year, so let’s try it again: 10X sales from 2012.
  • I want to explore flying to an industry conference as a sales channel for AR.  My back of the envelope math suggests that it’s probably straight-up worth it to just show up with an iPad in a target rich environment and take orders for the $200 a month plan on the spot.  (My expected LTV is over $2k and I can demonstrate the product in about seven minutes while standing on my head, so any decent close rate makes that a very good use of a day, right?)  Plus if I successfully execute on that plan two times then I can take the best-converting demo script, write supporting software, and then hire somebody with good interpersonal skills and a desire to spend time on the road to deliver it for me.
  • Now that I have a few marquis clients on enterprise pricing, I’d like to start closing more enterprise deals at true enterprise rates, rather than discounted-heavily-to-win-this-proposal rates.
  • In addition to walking up enterprise rates, I’d like to systematize the enterprise sales process, with the eventual goal of being able to have large parts of it executed by people who are not me.
  • I’ve neglected AR’s systematized marketing (e.g. content creation for the website, A/B testing, etc) horribly.  Need to rectify that.
  • Deliver more features which are needed for higher-end customers, like “upload CSV of appointment data” rather than requiring manual entry, group appointments, etc etc.
  • Continue improving service reliability.
  • Strongly consider whether Appointment Reminder needs to eat more of my business attention pie, given current results and growth prospects.  (e.g. At AR’s 2012 revenue rates, an opportunity which would generate $50k in revenue for a few weeks of work elsewhere made sense.  There are plausible scenarios for AR under which that would be economically irrational after some point in 2013, versus just continuing to execute on AR.)
  • Also, strongly consider gulp hiring.  Which I’ve been saying for two years now, but one of these years it will probably happen.
  • Continue to wrestle with the questions of whether “I devote 100% of my work efforts to AR, take investment, and  take a shot at an eight or nine figure exit five years from now.” sounds like an attractive option and, if so, whether now is the time to pull the trigger on it or not.  I go back and forth on this.

Consulting

  • $300k in sales looks like a decent number to shoot for, assuming I’m actively available for consulting all of 2013, which is not a given.  (That means that I have availability throughout the year, rather than meaning that I have 52 weeks of availability — consulting is a very part-time thing for me.)
  • Continue to adjust rates such that clients and I are mutually happy with engagement outcomes.
  • Schedule things better to pack work more densely into fewer, shorter trips abroad.  (Delta really enjoys me flying 100k miles a year but Mrs. McKenzie doesn’t, particularly when it means six weeks away.)  If this results in less availability, that isn’t an unhappy outcome.

Productized Consulting

  • Do more stuff along these lines, since it worked out pretty well in the experiment, I can only see it working better with improved execution, and the project ended up being a lot of fun.
  • Let’s pluck a number out of thin air for a numeric target: $200k in sales.
  • Offer better packaging options for later products, including some sort of scheduled, scalable live component like webinars, which would provide a lot of value for customers, justify higher price points, and not disrupt family life or the other businesses’ schedules too much.
  • Outsource more of the execution of collateral tasks in the future, like video editing and programming for the sales site.

A Brief Personal Note: Ruriko and I got married on June 23rd.  Words can’t express how wonderful she is, including tolerating my weird little hobbies, like entrepreneurship.

I think that, aspirationally, career/job/business/etc was never supposed to be my #1 priority, but be that as it may it sucked up a disproportionate amount of my twenties.  I have no immediate plans for retiring, but will work on having my stated priorities more closely match my allocation of time and attention in the future.

Bingo Card Creator (and etcetera) Year In Review 2011

I’m Patrick McKenzie (patio11 on the Internets) and for the last several years I’ve run a small software company.  My first product was Bingo Card Creator, my current product focus is Appointment Reminder, and I do occasional consulting for a variety of clients, mostly on helping them sell more of their software over the Internet.

Traditionally, right before Christmas every year I release an annual report.  See, for example, 2006, 2007, 2008, 2009, and 2010.  (Crikey, have I really been doing this for that long?)  I’ve also traditionally published live stats for Bingo Card Creator, but not my other lines of business.

Writing the annual report is partially to keep me grounded, partially to talk through my thoughts on the year and goals for next year, and partially to (hopefully) give other folks ideas that they can use in their own businesses.  I hope you find it interesting or, at the very least, mildly amusing.

Obligatory disclaimers: Assume any statistics that I give are “roughly accurate, to the best of my knowledge, at the time this report was written.”  There are still a few weeks left in the year.  Sales are typically low in the last two weeks, but the exact timing of credit card charges can cause a bit of jitter in the December stats.  From past experience, I have a high degree of certainty that there are about $1,000 or $2,000 of expenses (across all lines of business) which aren’t in the bookkeeping  system yet and won’t be until I sit down in March and check things for taxes.

Capsule summary: Best year ever, by a lot.  Broke $100,000 in sales for the first time and increased total profits to ~$70k.  2012 has inflection points coming for life and the business.

The Year In Brief

I put Bingo Card Creator into maintenance mode for approximately 48 weeks out of 2011: I only answered emails and kept systems running, but took no action to improve the product or marketing.  (The other four weeks I tried a few minor things out.)  This was, theoretically, supposed to free me to spend most of my efforts on Appointment Reminder…

… but that didn’t end up happening.  For a variety of reasons, most of my focus business-wise went into consulting.  Although I technically only did about 10 weeks of consulting during the year, I spent quite a bit of overhead time on e.g. arranging deals which ended up falling through, arranging the deals which did actually go through, and doing general promotion activities like speaking at conferences.  (I had the opportunity to speak at about a half dozen conferences this year, and assorted other events.  It is great fun, but since I generally have to fly to America for them, they tend to munch a full week out of my schedule each.  I spent almost three months of the year in the US, doing a combination of family events, consulting, prospecting, speaking, and meeting some Internet buddies to discuss plans for later.)

I also lost two solid months due to dealing with legal issues, mostly centering around Immigration.  I’d love to fill you in on the nitty-gritty, but have been asked not to by people close to the situation.  Suffice it to say that I was a shoe-in for a Japanese visa back when I worked at a large megacorp, was not a shoe-in for a visa when doing my own thing, and had a very hairy experience with getting them to approve me as a “self-employed engineering consultant.”  Tips of the hat to my Japanese clients, particularly Makeleaps / Webnet IT and myGengo, whose support was instrumental in getting Immigration to approve my renewal.

Despite not having nearly as much time to work on Appointment Reminder as I would have liked, I did manage to firm up its technical underpinnings, add new features requested by clients, and do a small amount of work marketing it.  I hope to make that more of my focus in 2012.

Bingo Card Creator

Despite being in maintenance mode, BCC continued performing like a trooper.  People always ask “Could you afford to live on it only?” and the answer is “Yes, but barely, and it would require a lifestyle adjustment, mostly in the don’t-fly-across-the-Pacific-so-often department.”  BCC did not meet the numeric goals that I had for the year.

Stats:

Sales: 1,539 (up 6% from last year’s 1,451)

Refunds: 14 (down from 22 last year, to .9% of sales from 1.5%)

Sales Net Of Refunds: $45,479.93 (up 5% from $43,398.55)

Expenses: $22,560.00 (up from $18,287.93, but largely just due to an accounting issue — I can’t split costs in my homegrown bookkeeping software, so the ~$3,000 I paid for servers for AR is hiding in that number)

Profits: $22,919.93 (see above accounting issue, essentially flat from last year’s $25,904.66)

Wage per hour: Let’s see, ~15 hours of programming, 20 minutes a week on customer support…  about $700 an hour.  Not too bad.

 

Web Stats:

(All stats are from bingocardcreator.com unless otherwise specified.)

Visits: 821k (up from 777k)

Unique visitors: 670k (up from 655k)

Page views: 2.9 million (up from 2.7 million)

Traffic sources of note: Google (46%), AdWords (18%), Binghoo (13%)

Trial signups for online version: 82,000 (up from 72,000)

Approximate online trial to purchase conversion rate: 1.8%

 

Narrative Version:

Aside from kicking up AdWords spend modestly (to no good effect) and running a few A/B tests, nothing really substantial happened with Bingo Card Creator this year.  I lost probably $1,000 to $2,000 of sales when the site crashed right during the middle of the Halloween rush for ~9 hours while I was on an airplane.  That was a little disappointing, but while it broke my candy budget it won’t exactly put me in the poorhouse.

Projections that BCC would continue to grow despite not being actively worked on turned out to be totally wrong.  I forecast 50% growth, reasoning “Hey, most of the systems work pretty much without my intervention, so I think the overall growth of the Internet plus a few A/B test means, oh, 50% or so.”  It mostly tread water.  I’m not hugely disappointed.

 

What Went Right:

  • Not having to work hardly at all for it.
  • Aside from the Halloween crash, the system was largely stable for the year.  I think I got woken up by the automated alarm maybe once.
  • SEO, AdWords, email marketing, and the usual scalable marketing stuff continued to be my bread and butter even when I was too lazy to actually cut and butter bread.

What Didn’t Work So Well:

  • Crashing on the third busiest day of the year, in such a way that it depresses my AdWords campaigns for the first and second busiest days of the year.
  • I integrated Stripe and expected a huge lift in conversions for going from Paypal to a simple CC-based payment system.  I tested this extensively in A/B tests.  I love everything about the Stripe system, but I have no evidence for “Stripe is better than Paypal/Google Checkout”, “Stripe/Paypal/Google Checkout is better than Paypal / Google Checkout”, etc etc.  That said, it might be something as simple as my buttons being ugly.  I’ll probably take a whack at it in the future, or better yet, have my designer take a whack at it.

Consulting

I did a few weeks of consulting this year, for several different clients.  Mostly, I do my engineering / marketing shtick for software companies, although some of my clients have been a wee bit farther afield.  I wrote up a fairly typical engagement with Fog Creek.  That one was a mutual success and we’ll continue to work together in the future.  (To the best of my knowledge, all of my consulting clients are happy with my work.)

One thing I’m going to do differently in the future is to work for less clients.  Don’t get me wrong: I love all my clients.  I was privileged to work with them.  However, it takes approximately X units of work to set up an engagement with a previous satisfied customer, 5X units of work to get a new prospect to the go/don’t-go decision on a new engagement, and I generally have to get three to four prospects to that point to actually wind up with a signed contract.  As my buddy Thomas at Matasano says, “That is life in the big leagues.”  However, since I’m not in a position where 100% utilization is a huge overriding goal of mine, I don’t need to keep the new prospect pipeline totally full… so I’m probably going to cut back on it quite a bit in 2012.  I’ll continue doing follow-up engagements for established clients where it makes mutual sense to do so, and I’m still of course available for interesting projects, but I’m not going to be doing six-week fly-across-America-four-times tours to drum up new business.

The following numbers are approximations only.  NDAs and having the sense God gave a tadpole constrain me from revealing my “going rate.”

Consulting sales: $55,000

Consulting expenses: $13,000  (mostly hotels and airfare for prospecting, which I pay for out of pocket.)

What Went Right:

  • Client selection.  I was, again, privileged to work for people who have interesting businesses, problems that I could make substantial contributions on, and the willingness and ability to pay all invoices in a timely fashion.
  • Raising rates.  My first guesstimate at my rate, back in 2010, was $X.  It turns out that I could do just about as much work as I wanted regardless of whether I charged $X, $2X, or $5X.  As a result, I typically quote fairly high rates and mostly stick with them, unless there is another reason I really, really want an engagement to happen.

What Didn’t Work So Well:

  • Disorganization.  At one point I was juggling something like five simultaneous proposals out while preparing for three conferences, two engagements, and six weeks of travel.  It got so bad that I showed up at a city once and checked at the airport for where I was staying, quickly seeing that I mistimed a conference by three days and thus had no hotel booked, booking a hotel from the taxi, and then arriving at the hotel to recheck my schedule and discover that I had used the previous year’s schedule and was actually simultaneously at a different hotel across Brooklyn.  (Shoutout to the Brooklyn Beta guys for saving me from my own stupidity that week.)  There were multiple points in the year where I found myself wishing for either a boss or a secretary or somebody to just say “Show up to X on Monday and Do Stuff and all the stuff that is not Stuff will be taken care of.”  My occasional slipups in dealing with the demands of a growing business caused me to drop balls in ways that were sometimes client-visible, too.  This is a major part of the motivation for cutting back next year.  (There is Plan B, of course: hire folks to do either the execution or the admin and take whichever part they’re not doing, but I don’t think I’m moving in that direction.)
  • Too much work!  Largely due to overhead and travel, plus the outsize distraction generated by the same, consulting munched a heck of a lot more time than I thought it was going to.  I wanted to have a solid eight months of the year to work on AR.  I think I probably got maybe two.

 

Appointment Reminder

I launched Appointment Reminder last December, with the goal of having approximately 200 customers and $10k in monthly recurring revenue by now.  I had planned on focusing for most of 2011 on marketing and selling it to more businesses.  That largely didn’t happen, but since I got the fundamentals of my SEO strategy in place (while largely ignoring the modestly more advanced content creation / etc that runs BCC and that I usually help clients with), the business grew despite my best efforts at totally neglecting it to focus on consulting and not getting deported.

AR has been hanging around at a crossroads for a while now.  There are two very different trajectories it could go down.  In one, I grow it organically, and it grows into a modestly profitable software business which will provide handsomely for my family and (in the fairly near future) employees.  In two, I take outside investment, and attempt to grow as quickly as possible to $N million a year in revenue, at which point options would include either a) selling to one of the larger players in the small business software space or b) continued operations at scale with a focus on growth.  Luckily, I have  the luxury of waiting on making that decision: my runway is infinite, the market opportunity is only getting bigger, and the perceived value of my involvement with a startup among investors does not appear to be depreciating.

This is one of the reasons I can’t be as open as I would like to be about the current status of the business.  BCC has essentially no secrets, and would not really benefit from having them, as — aside from elementary school English teachers — there is nobody out there who has something I want for BCC.  However, if I hypothetically wanted to take investment, then accredited investors suddenly have something I want very much and having secrets about AR gives me something with which to trade to get it.  (It is similar to not putting prices on an Enterprise Software website.  You can trivially get them, but the price of getting them is giving a salesman permission to give you the spiel.  Similarly, folks who ask about AR’s numbers these days are generally asking in the hopes that they eventually receive a phone call asking them for a check.)

The other reason I can’t talk about AR numbers so much is that I radically underestimated how important the enterprise market would be to the business, and you can’t spell enterprise without NDA.

So: I wanted to have two hundred customers by now.  For the publicly available plans, I currently have a few dozen paying customers.  There are ways to get things from me that don’t involve paying the numbers on the Pricing page.

AR is modestly profitable — it covers all of its own costs.  I plow most of the money it generates back into the business, though, rather than taking distributions.  For example, I’m now about 95% certain that I will have significant contractor or employee involvement on it in 2012.

Revenue: Undisclosed

Expenses: Undisclosed (very modest ongoing expenses, reinvested most profits)

Profits: I took about $5k just to have a number that would minimize disbelief at the tax office.

What Worked Right:

  • Twilio.  The Twilio API and service have been unalloyed epic wins for Appointment Reminder.  I had zero disruptions in service attributable to them, their customer support has been fast, responsive, and technically savvy (even helping me debug my own code at points), and they’ve been very supportive of me.  Plus they have these awesome red track jackets that they keep sending me, which you’ve probably seen if you’ve seen a picture of me doing any talk this year.  (I actually wear them mostly because I love the color red, but apparently I wear them so often that folks at the Fog Creek office thought the Twilio logo was my logo.)
  • Sendgrid: It’s like Twilio, except for email.  Great service.  No red jackets.
  • Unit testing & staging servers.  I am gradually getting more sophisticated in my engineering practices, and have been ramping up my testing activities since starting to code AR.  It has transformed the way that I do development, for the better, and made it easier to respond to customer requests to change things while decreasing the number of problems I have caused.  Total win.  See my presentation at TwilioConf for examples of the specific ways I use it for AR.
  • Exact match domain names.  ”Hey Patrick, how is it that with no marketing budget and nearly no marketing work you rank #1 for [appointment reminder]?”  I told everybody that I was buying the .org specifically because that would happen but apparently folks didn’t believe me.
  • Using the self-service site as lead generation for enterprise sales.  Fairly self explanatory.
  • The service itself: AR solves a clear customer need, and my customers are raving fans of it.  There exist many services businesses which incur hundreds in direct costs and thousands in forgone revenue for a single missed appointment.  (Think, say, an HVAC company which sends a three-man team of tradesmen out to your house to replace your heater, which is a $2,000+ job, only to discover that you aren’t home to let them in.)  One of my customers reports that just the delta in no-shows since starting to use AR would pay for his mortgage and his daughter’s college education.  Many of my other customers report that their office managers, who previously did telephone reminder calls manually, are ecstatic to not have to do them any more.  Customer retention among folks who actually use the system (as opposed to signing up, doing a test call, and forgetting about it) is virtually 100%.
  • Talking to smart people for advice: Since I’ve been going back and forth on the investment question, I talked to a lot of entrepreneurs and investors whose opinions I respect.  I really appreciate their feedback, which ranged from “Are you kidding?  You’d hate it.” to “I want to invest in you, but realistically, you would lose nothing by waiting until you are sure.” to “Best decision I ever made.” and helpfully included a lot of actionable advice on how to do things in the meanwhile such that options remain open.

What Didn’t Work So Well:

  • Catastrophic engineering failures.  I had one combination outage/catastrophic failure in February (the details are recounted in that TwilioConf presentation) and a ~3 day period of sporadically degraded operations after my move to Rackspace, which I finalized over the Thanksgiving holiday.  Both of those were my fault, for architecting the system in a way which did not gracefully handle its multiple moving parts getting out-of-sync with each other.  I’ve since done significant work on making it more stable.  (Overall reliability for the year has been excellent, but those periods were easily the most stressed I’ve ever been about any business issue.)
  • Lack of focus: I’ve been commenting above on this, so I won’t belabor the issue, but I really didn’t get to work on AR as much as I wanted.
  • Enterprise sales: I’m actually fairly decent at Enterprise Sales, and am working with someone in the industry who has a deep Rolodex among folks who would be great candidates for AR, but (partly due to the focus issue and partly due to my own comfort level) I didn’t put nearly enough effort towards it this year.  What I should honestly do is go to a conference some time, prospect like a madman, and then make following up on those leads my only job until I’ve got contracts signed.  (The prices for enterprise SaaS make this very economically viable.)

Goals For 2012

Bingo Card Creator

  • I’d be happy with continued flatness ($~30k profits on $50k sales), maybe.  It isn’t the source of growth for my business anymore.
  • Continue using it as a laboratory for weird ideas I have on conversion optimization.
  • Don’t break it during Halloween.

Consulting

  • Do less work prospecting for new clients.
  • Do more work for existing clients.
  • Modestly increase billings, if that makes sense for where my overall business is.  (If I take external investment in AR, that will likely require shuttering the consulting business.)

Appointment Reminder

  • Figure out whether I want to take investment or not.  If so, do so.
  • Convince Keith (who I do my podcast with) to work with me, if possible.  (Don’t worry, he knows this is on the agenda.  We’re best friends.)
  • See about transferring responsibility for the engineering (particularly front-end) side of things so I can focus on marketing/sales.
  • 10x current sales numbers.  That seems to be a fairly safe bet regardless of whether I shoot for a small business or for a high-growth business.  (1,000x-ing would be another story.)

A personal note: The last 3,300 words ultimately matter much, much less than the next 3: she said yes.  We’re announcing to our family on Christmas, as per our family tradition.

New Trends In Startup Financing Explained For Laymen

Noted American technology investor and all-around smart guy Paul Graham wrote recently about emerging trends in startup funding, specifically that convertible notes and rolling closes are displacing the traditional equity rounds done at a fixed valuation done with angel syndicates.

Did that sound like Greek to you?

Great, you might benefit from this translation of Financier into Geek.  (P.S. If you haven’t figured out the significance of it originally being written in Financier instead of in Geek, please, think it through.)  I originally wrote it as a comment on Hacker News but somebody asked me to put it somewhere easily findable.  I have elaborated with standard blog post formating and graphs where I thought they helped the explanation:

Why We Care About Angel Investing

Startups raise money from investors to accelerate their growth into, hopefully, massively profitable businesses and/or massively large acquisitions from big companies.

One particular type of investor that invests in startups is called an angel investor. An angel investor is often an individual human being who is wealthy, frequently as a consequence of successful entrepreneurship. They invest anywhere from $25,000 to $250,000 or so.

Fundraising is painful, and requires a lot of time and focus from startup founders. To mitigate the pain, it is often structured in terms of “rounds”, where the startup goes out to raise a particular large sum of money all at once. For an angel round, let’s say that could be a million dollars. (n.b. It is trending down, as companies can now be founded for sums of money which would have been laughable a few years ago.)  Clearly we’re going to need to piece together contributions from a few angels here.

Why Angel Investing Frustrates Founders

Traditionally, one angel has been the “lead” angel, who handles the bulk of the organizational issues for the investors. The rest just sit by their phone and write checks when required. (Slight exaggeration.) Investors are often skittish, and they require social proof to invest in companies, so you often hear them say something like a) they’re not willing to invest in you but b) they are willing to invest in you if everybody else does. This leads to deadlocks as a group of investors, who all would invest in the company if they company were able to raise investment, fail to invest in the company because it cannot raise investment.

Startup founders are, understandably, frustrated by this.

What “Valuation” Means

All numbers below this point were chosen for ease of illustration only.  They do not represent typical valuations, round sizes, or percentages of companies purchased by angels.

One item of particular interest in investing is the valuation of the company. This gets into heady math, but the core idea is simple: if we agree that the company is worth $100 at this instant in time (the “pre-money valuation”), and you want to invest $100, then right after the company receives your investment, the company is worth $200 (the “post-money valuation”). Since you paid $100, you should own half the company.

Traditionally, the company has exactly one pre-money valuation (which is decided solely by negotiation, and bears little if any relation to what disinterested outside observers could perceive about the company). All investors receive slices in the company awarded in direct proportion to the amount of money they invest. Two investors investing the same amount of money receive the same sized slice of the company. This can be written as “they invested at the same valuation.”

The thesis of PG’s essay is that allowing investors to invest at the same valuation is not advantageous to the startup. Instead, by offering a discount to valuation for moving quickly, you can convince investors to commit to the deal early, thus starting the stampede from the hesitant investors who were waiting to see social proof.

For example, take the company from earlier. We said it was worth $100 prior to receiving investing, but that is not tied to objective reality. Say instead we’ll agree that it is worth $80… but only with respect to the 1st investor. He commits $20. $80 + $20 = $100, so he gets $20 / $100 = 20% of the company for $20, or $1 = 1%. This convinces a second investor to invest. He says “Can I get 20% for $20, too?” Not so fast, buddy, where were you yesterday? The company isn’t worth $80 any more. We think it is worth $105 now. (Did we just get through saying $100? Yes. But valuations are not connected to objective reality.) So you get $20 / ($105 + $20) = 16% of the company for your $20. Think that is fair? You do? OK, done.

This continues a few times. The startup raises money — possibly more money, depending on how much the angels want in — with less hassle for the founders.

What Is A Convertible Note?  Why Do Founders Like Them?

We’ve been talking about just dollars so far, and alluding to control of the company as if it were equity like stocks, but there is a mechanism called “convertible notes” at play here. A convertible note is the result of a torrid affair between a loan and an equity instrument. It looks a bit like Mom and a bit like Dad. Like a loan, it charges interest: typically something fairly modest like 6 to 8%, much less than a credit card.

The tricky thing about convertible notes is that they convert into partial ownership of the company at a defined event, most typically at the next round of VC funding or at the sale of the company. So, instead of the first investor getting $20 = 20% of the company, he loans the company $20 in exchange for a promise like this: “You owe me $20, with interest. Don’t worry about paying me back right now. Instead, next time you raise money or sell the company, we’re going to pretend that I’m either investing with the other guy or selling with you. The portion of the company which I buy or sell will be based on complicated magic to protect both your interests and my interests. If you want to sweeten the deal for me, sweeten the magic.”

Do we understand why this arrangement works for both parties? It incentivizes investors to commit early, which lets startups raise more money with less pain. Because startups are in the driver’s seat, it also lets them avoid collusion among investors (“We decided we’d all invest in you, but we don’t think the company is worth $100. We think it is worth $50. Yeah, that has no basis in objective reality, but objective reality is that your company is worth $0 without the $100 in our collective pockets. What is it going to be? Give up 2/3 of the company, or go broke and get nothing.”)

How Do You Calculate The Equity Value of A Convertible Note?

OK, back to complicated magic. When the company takes outside investment, the convertible notes magically convert into stock, based on:

  • a) the valuation the company receives for the investment round  (higher numbers are better for both founders and angels)
  • b) a negotiated discount to the valuation, to reward the angel investor for his early faith in the company (higher numbers are better for angels)
  • c) possibly, a valuation cap (higher numbers, or no cap,  are better for founders)

For example, continuing with our “low numbers make math comprehensible” startup, let’s say it goes on a few months and is then raising a series A round, which basically means “the first time we got money from VCs”. We’ll say the VC and startup negotiate and agree that the company is worth $500 today, the VC is investing $250, ergo the VC gets a third of the company.

How much does our first $20 angel investor get? Well, he gets to participate like he was investing $20 today, plus he gets a discount to the valuation. So instead of getting $20 / $750 = 2.67% of the company, maybe he got a 20% discount to the valuation, so he gets $20 / (.8 * $750) = 3.33% of the company. (We’re ignoring the effect of interest here for simplicity, but he probably effectively has $21 and change invested by now in real life.)

After this is over, the convertible note is gone, and our angel investors are left with just shares (partial ownership of the company), which they probably hold until the company either goes IPO or gets bought by someone. So if the company later gets bought for $2,000 by Google, our intrepid angel investor makes $66 on his $20 investment.

How Does A Valuation Cap Work?

We haven’t discussed valuation caps yet. Valuation caps are intended to prevent the startup dragging its feet on raising money, thus building up lots of worth in the company, and then the angel investor getting cheesed. For example, if they had just grown through revenues for a year or two, they might be raising money at a valuation of $1,250. In that case, $20 only buys you 2% of the company (remember, he gets a 20% discount : $20 / (.8 * $1250) = 2%), which the angel investor might think doesn’t adequately compensate him for the risk he took on betting on a small, unproven thing several years before. So we make him a deal: he gets to invest his $20 at the same terms as the VCs do if, and only if, the valuation is less than $750. If it is more than $750, for him and only him, we pretend it was $750 instead. This means that under no circumstances will he walk away with less than $20 / (.8 * $750) = 3.33% of the company, as long as the company goes on to raise further investment. (Obviously, if they fold, he walks away with nothing. Well, technically speaking, with debt owed to him by a company which is bankrupt and likely has no assets to speak of, so essentially nothing.)

Perhaps This Will Be Clearer With A Picture

Angels ultimately benefit from higher discounts to the valuation of the Series A round, and lower valuation caps.  Higher discounts, and higher effective discounts, mean you get more of the company for less money.  That is an unambiguous good, as long as you keep the quality of the company constant.

Let’s see how valuation caps affect how much of the company you end up with.  The better the company is doing by Series A time, the less of the company the angel ends up with.  This shows the incentive for the founders: do as well as you can prior to raising money, which is the same incentive founders always have.

As you can see from the below graph, a valuation cap essentially gives the angel an artificially higher discount for if the Series A valuation exceeds the valuation cap.  Obviously then, it is in the interest of angels to negotiate as low a cap as possible, and in the interests of founders to negotiate a high cap or no cap at all. According to Paul Graham, this becomes the primary “pricing” mechanism in the new seed financing economy: if a founder wants to reward an angel, they award them with a lower cap.  If they don’t, the angels get a higher cap, or no cap at all.  This kicks discussions of valuations down the road a little bit, and allows you to simultaneously offer the company to multiple angels at multiple “price points”.  That allows you to reward them for non-monetary compensation (mentoring, having a big name, etc) or for early action on the deal.

This Is Not My Business. Take With A Grain Of Salt.

Lest anyone get the wrong impression, my familiarity with angel investing is very limited and, to the extent that it exists, it is mostly about angel investing in small town Japan.  (Oh, the stories I can’t tell.)  The above explanation is based on me processing what I’ve read and trying to prove that I understand it by explaining it to other people.  If I have made material errors, please correct me in the comments.

My current business is not seeking funding (and would be an extraordinarily poor candidate for it).  I’ll never say never for the future, but for the present, I rather like getting 100% of the returns.

[Edit: Want to use some or all of this, including the graphs, for your own purposes?  Go ahead.]

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