Jonathan Siegel is a buddy of mine who lives in Tokyo. I can’t decide whether I’m more floored by the fact that he runs five businesses at once or has eight kids. He recently wrote a book The San Francisco Fallacy, mostly to share his experience with running software businesses for the last two decades with folks who might be getting a wee bit too much of their advice from Techcrunch.

I think this makes an interesting companion interview to the last one we did (~6 months ago) with Thomas Smale, who runs the firm which helped me sell both of my businesses. Jonathan is an operator but he’s also a buyer of businesses, as opposed to me (an operator who recently sold businesses) or Thomas (a broker of them).

[Patrick notes: As always, the below transcript occasionally has my thoughts inserted in this format.]

What you’ll learn in this podcast:

  • Why folks with successful businesses sometimes sell them (and how this creates opportunity for buyers)
  • Why to make good decisions as a businessperson so that you can make “bad” decisions as a coder/artist/etc
  • How to run five businesses at once (spoiler: put people in charge of the day-to-day work)
  • How two entrepreneurs have found their goals changing over the course of their careers

MP3 Download (~50 minutes, ~73MB): right click here and select Save As.

Podcast format: either subscribe to in your podcast reader of choice or you can search for Kalzumeus Podcast in iTunes, Overcast, or another aggregator of your choice.

Running A Business Portfolio with Jonathan Siegel

Patrick McKenzie: Hideho everybody. My name is Patrick McKenzie, better known as patio11 on the Internets, and I’m here today in Tokyo with my friend, Jonathan Siegel, who also lives in Tokyo. Jonathan is a multi-time entrepreneur, but I’ll let him give his self-introduction.

Jonathan Siegel: Thank you, Patrick. It’s a pleasure to be here. I’d say my background is easiest to understand if you really think about me as a techie. I grew up loving anything that had a battery or I could plug it in the wall. I took apart everything, tried to put it all back together, and it rarely worked. I remember when I was 12, got my first computer. It was a 286 12 MHz. Took it apart, put it back together, and it actually worked.

That’s back when you had the big cards in the computer with the hundred little ICs on the green silicon chips. Then after that, I got fascinated, and just did everything else that I possibly could on top of the computer. Ultimately, I learned how to do some software, and then went to school and did more software.

Ever since then I’ve been tinkering around, for fun, on the computer and I’ve been rewarded with tons of opportunity from that, business and otherwise.

Patrick: Yeah, I remember, I think I met you originally because at the time you owned, Earth Class Mail, which is a mail forwarding service that I’ve used to have a virtual mailbox in the United States for sending stuff to Japan for the last couple years. But it turns out – I went down the list – it’s like, wait, I’ve used a lot of companies that you bought at the time and you run five at a time, so how’d this start?

Jonathan: What I do today is really just an evolution of what I’ve been doing before. I’ll say what I do today. Today I buy and operate small businesses. Actually I buy and operate really, really miniscule businesses and I grow them to “tiny.” How I ended up there was I was building my own products and really doing that in the mid-2000s time.

Back then it was really hard to build stuff. You couldn’t just go to Amazon and get a server. You had to go buy a server, or lease one for a long commitment. Even when you had the server, you didn’t get connectivity. You’d have to go rent the connectivity and that meant long-term commitment, really knowing how much you need ahead of time. It was a big effort, so the capital cost to start a business around 2003, ‘04, ‘05, was quite high. [Patrick notes: It’s easy to forget but there was a time not that long ago when selling software over the Internet meant first writing a web server and then paying $250,000 in licenses to be able to charge credit cards. The dot-com days were crazy in all number of ways, and the hangover period after them wasn’t necessarily a huge step forward.]

If you couple that with very few people knowing how to do the building and the infrastructure part of bringing a product to life, it meant there just weren’t a lot of businesses being created. I found myself in a position to have a desire to create products and enough wherewithal and funds to actually do that myself.

What I didn’t realize is that I would have to make about 10 of these products just to have 1 become successful, because my hit rate wasn’t that good. But at least I had a hit rate, and I had a hit in 2005 in the e-commerce space, called RightCart. Then a bunch of things that didn’t work, but in 2006 I had a hit for something called RightScale, in the cloud computing space, and in 2007-2008 was RightSignature.

I thought, “Maybe I’m God’s gift to entrepreneuring, because look at all this great stuff that happens when I build stuff.”

It turns out I was wrong, because 2009 nothing worked, 2010 nothing worked, and I was looking at it saying, “What’s happened? I have more experience and skills and wherewithal than I’ve ever had before, and yet nothing is working.” I did the simple math, and I looked around and I saw that there were about 10 companies graduating from incubators every day.

Y Combinator has a hundred a year. You have Techstars. You have regional incubators. What that meant was what used to be differentiating – being able to create a company or at least a product and bring it to the market – was no longer differentiating. There was just too much noise and there was nothing unique about the signal I was creating. [Patrick notes: I have a slight difference of opinion: I think that being able to actually ship a software product is still a scarce ability in the world, and that even at YC they probably wish they knew more people who could reliably do it. Many high-competence individuals feel CRUD apps are, in 2017, pretty much a solved problem; I (politely) disagree, on basis of how few of them there are in the world. You may think I am joking with this observation. I am not.]

That left me in 2011 thinking, “What am I going to do? I can’t do this product thing and I love making technical products.”

I was lamenting to a friend and I am living in Ireland and I recently moved to San Francisco. An Irish gentleman named Owen McCabe had a desire to create a company called Intercom. He had a side project called Exceptional, a very technical product that captured the exceptions for your Web applications.

He had asked me if I knew anyone that might help that company get acquired – his side project – so that he could focus on this new thing. As I went into the market and tried to find out what were the buyers for a company that was on the really, really small side of things and where the team wouldn’t be going with the company, I found out there was no one that would really be a buyer.

But compared to my own little projects that I had been working on, his project was way farther along. Because he had real customers that were paying him money. He was in production. All of my stuff was these fledgling little products that I was working on that weren’t really getting traction.

It turned out I ended up being the buyer. It wasn’t strategic or thoughtful or in my greater plan for things. It was just something I stumbled into.

During our process of buying the company, we came across a competitor, and the competitor at the time was called Airbrake. We were familiar with all of these – at least these two – companies, and we remembered that Airbrake used to be called HopToad. It was developed by ThoughtBot.

Patrick: I had the Hoptoad gem in two of my Rails projects up until selling them. [Patrick notes: Actually I think it was probably the original plugin, back when Rails didn’t use Bundler and preferred to embed code as plugins rather than managing them as external dependencies.]

Jonathan: In fact, I did too.

Patrick: It was a way to do it back then.

Jonathan: It was bedrock. Part of it was a greater change in the way we were building our applications before. When I started programming and doing Web work, I actually caught the first dot-com. You’d run an application that would run through your logs, take all your log files, and you’d actually get these reports from your log files that would show you where your most buggy code was, just by what result Apache was serving to your end users.

When we started to move into more cloud deployment, one of the benefits of that is your application code can run anywhere. But the drawback is, if it’s running anywhere it’s hard to get the logs back. When they do come back sometimes we’re a little less worried about the logs. In fact I don’t know anyone who really religiously reads their logs anymore. That was a thing we used to do.

Patrick: Theoretically speaking, I did, because it was a legal requirement for HIPAA and I religiously complied with all legal requirements. [laughter]

Jonathan: It’s certainly not something anyone wakes up in the morning – “I can’t wait to look at my logs.” 40,000 clients. Commit.

Patrick: I’ll work through that.

Jonathan: But what did happen is these little error handling utilities, these little lightweight applications were lightweight services, they were making it easier to get that same information, the things that were critical to us, things that were causing end user problems, making it visible to us developers that we could fix them before customers really had a bad time.

This Hoptoad and Airbrake and Exceptional – Hoptoad and Airbrake being the same thing – as we were looking at Exceptional, we found out that Hoptoad had actually reached out to the Exceptional team, to Owen, to find out if there was something strategic to do when Hoptoad had to change its name. They had to change their name because of a trademark claim.

They realized they were going to have to change their name and I think they were just considering what greater future for the product there was and thought, “What’s a very successful consultancy, but not necessarily focused only on that one business of theirs?”

That’s where we enter the picture. Immediately after the close of Exceptional and we got our hands around that, we reached out to ThoughtBot. We said, “Hey, we’re now entering this space and we know everybody. It’s a small community. We just want to make sure that we’re on the radar for you, you know who we are.”

It came up in that first interaction that they had actually wondered what the future of Airbrake would be.

The month or so after acquiring Exceptional, we flew out to Boston, met the team. Wonderful people – Chad, Dan, everybody that we met was just really great people. I think we got along well, we saw a common vision. The services really did do the exact same thing. [laughs]

Patrick: There’s only so many things you can do with exception monitoring. [Patrick notes: I would be remiss if I didn’t give a shout-out to HoneyBadger, which I use and like.]

Jonathan: It really was, and especially at the time. There were little differences, but it was 99% the same product. We figured if we’re getting our hands around one, maybe we could get our hands around both. We ended up working out a deal to do that business as well.

It was amazing how easy…in a period of three months I think I found what I have now done for the next seven years. It’s just stumbled into something that I never saw coming. Love it, super-passionate about what I do now, and I see a long-term fit for it in the ecosystem, so I think I’ll be doing it for some time.

Patrick: Just to give people a little bit of color on what the business model looks like these days, you start with one company that you acquired from presumably cash you had on hand from running other small projects over time, and then you rolled that into two companies that were in the same space. Then, dot-dot-dot.

You’ve basically gone on, acquired a few more companies, run a few in parallel, sell some, buy more, sell some, buy more is the general feeling I get?

Jonathan: Selling is not necessarily part of my strategy in terms of making money. I’ll touch on that in a minute. But buying companies for me means that I don’t have to go through the process of starting a new business and then waiting three or four years before it starts to warm up. I used to love that really early process. Now, maybe it’s because I’ve done it so many times. I’ve probably launched a hundred products personally out of my own passion. [Patrick notes: Not really an exaggeration if you know Jonathan; imagine a very productive engineer grinding out side projects consistently for more than a decade.] I know that 96 of them, they just withered and died. Now, it almost feels maybe like a waste of my time if I do that.

I split my brain. I say if I’m going to do something where I’m starting a new product, and I need to do it, because it’s a creative act…I still do this today. I do things, but I do it because it’s a passion inside me to creatively do this.

If you’re a technical person, you can appreciate that when you sit down in front of the keyboard, and you start working on an application, the first time you can hit it, you can access the website, and you can show your spouse or your friends, it’s really an amazing feeling. You have it hosted on a domain name, and it starts to feel real.

Patrick: When you just claw something out of the ether. “This thing never existed before. We’re going to release this. It’s because of me. Me.”

Jonathan: Actually, it’s an amazing feeling. It’s really, really amazing. That, I still do to this day. I say that I do that out of passion. I say that I do it out of passion because it allows me to be a bad businessperson. In the other side of my life, I do things for profit.

For those, it’s really about discipline and less about the idea, the technology, or the creative effort that goes into it. I actually think this is really analogous to a lot of people who have a creative outlet in their life.

I have a friend who’s a painter. He would go to Napa for a weekend and do a lot of oil painting, landscape painting. He’s incredible. I don’t have a talent for this, and I can even appreciate how amazing he is when he does this stuff.

He went out to Napa, and he would spend a weekend. When he got back, I said, “Hey, I’d love to see some of the work you did.” He goes, “Yeah, yeah, they’re in my closet. I’m going to finish them off. I’m not done with them yet.”

He wasn’t paid to go out to Napa. He didn’t make any money doing it. In fact, he probably lost money, and he spent money on the time and materials. Weeks went by, and he didn’t continue on with his paintings, or he didn’t finish them.

I never actually to this day have seen the work that he made from those paintings, but he seemed to be fine with it. It was fine for him, just going through the creative act of doing that weekend. He would just energized from it.

I ran into my friend later, and he was actually kind of down. He’s rarely a down person. I said, “What’s happening? Why are you down?” He goes, “Oh, I’m working on this commission.” I said, “What’s this commission?”

If you’re an artist, you can be paid to do work for someone. That’s a “commission”.

He had been commissioned to paint a landscape at someone’s property. That’s where the trouble began, because the people that wanted the commission started getting in his work and saying, “Hey, that building, it actually used to look like this. Can you change it? That car actually needs to be different.”

Next thing he knew, it was no longer enjoyable for him. Yes, he was making money, in a way that he didn’t get from the weekend he spent in Napa doing painting, but he didn’t get any enjoyment from it.

When you have a creative outlet, it’s really important to recognize when you are doing things because you need that creative control, and you want to have the passion from it, versus where you want to create profit and actually make money.

You almost have to turn off part of your brain that brings that creativity and enjoyment in order to make the money.

Patrick: I remember the contrast back when I was juggling my own software with running my consultancy. When working on my own projects, it was (at times) very stimulating and very fun. I’d have to make all the decisions. And then I’d go work for a client for two weeks.

I loved my clients and had some fun working with them, but it’s selling B2B enterprise software. My job for the next two weeks is banging out a drip campaign, which should sound passionate and informative about a product that I haven’t lived in for the last 10 years and don’t consider my life’s work.

[Patrick notes: I definitely got a feeling of actualization from running my software companies that I hadn’t previously gotten from any form of work, but wasn’t excited about the actual content of any of them until Starfighter. This is in marked contrast to how most of my consulting clients perceived their own businesses – most who had been doing it for 10 years saw themselves doing the same thing in another 10.]

I need to sound like [I had their level of passion] for the purposes of writing emails for them. There’s a little bit of a creative tension there.

Jonathan: I end up now halfway between the two worlds. I get to see passion that’s been put into a project that might have become exhausted, and they’re looking for a new home for that project. For me, I actually like to see things now grow and make impact in the people around me.

Doing that from a ball that’s already starting to roll a bit is a lot easier than if you’re pushing something uphill just to get it started, to get that first customer that even says that maybe it’s something they’ll use.

Patrick: I remember it took me about…I can’t discuss the exact numbers anymore. [Patrick notes: I sold Bingo Card Creator in 2015 and Appointment Reminder in 2016. As I no longer own the businesses, I’m legally and ethically constrained from commenting about them in much detail going forward.] I had Appointment Reminder for a period of years. We actually talked about you potentially acquiring that, but it ended up going to someone else.

It took me five years until the business got to X level, where X is some personally meaningful level of success. Five years is a very long time. By the end of five years, I was very, very tired of that business.


Patrick: Your job is basically going to folks who are in a situation quite like me and figuring out, if you [the owner] don’t want it anymore, it’s at a point where it’s meaningful. I [the buyer] do want it, and I can get it from a point where it is meaningful to meaningful-plus-plus.

Jonathan: I’m lucky in that I think there are very few outlets for small projects. You know this, too.

If you want to sell a small business, sometimes it’s more work just to package up that small business and create the business plan, the strategic impact, the competitors list, and all the things that a real buyer is going to want in the business that it almost seems like it’s more work to sell the thing.

It might be easier to sell it easily and quickly to a buyer that understands everything, rather than try and go and build up a book of business, and do all the things that you might have to do for a mature sale.

Patrick: The “grown-up world” – PE firms and whatnot – will probably put more effort into buying and selling a small business than a small business took to get from zero to wherever it is. We did things more or less in the grown-up way when I was selling Bingo Card Creator and Appointment Reminder, but a lot of work goes into writing a prospectus and to getting financial statements ready for five years.

How Do You Know If Your Business Is Saleable?

Jonathan: Often, those things are not passion areas. If you are a great innovator, you’ve figured out really cool user interfaces, you understood your customers well, and you really satisfied their needs, recreating financials and financial projections might be so onerous that you just don’t even want to do it.

In that case, if you are unwilling to formalize the business at the point that you have lost some of that momentum to push forward, it leaves you in a bad place. Just taking 10 steps back, if you have a business…Maybe if you are in a position where you have a business, and you think, “Hey, what’s the next step? I have a business. Now, what do I with it? What are the options?”

Generally speaking, you can always shut down your business, but that’s probably not going to do you very good financially. You might look at maybe you can get someone else to come in and operate your business.

You have to have a pretty big base of revenue in order to attract someone to come in and run it, and be able to afford them. Then you look at what the other options are. If you read the tech press, you see that people are acquired all the time and might wonder, what are the economics that go in there? I can share a little bit of that.

If you have hyper-growth, which means your business is growing somewhere around 11 percent plus every month, then you have something really exceptional.

That’s something that does not happen very often. It has to do it for a little bit of time, because if you’re going from 10 users to 12 users, that is hyper-growth, but it’s not very interesting. If you can do that when you have a thousand users for a few months, then that becomes really a fascinating business.

If you can do that and you’re in some mainstream area, it’s going to be pretty easy for a real buyer to look at that and say, “Hey, I can extrapolate out. Even if you’re at a few hundred thousand dollars a year, I can see where that’s going to be a million dollar business or a tens of millions of dollars business.”

“That’s going to eventually be really impactful for my really, really big business. I’ve got deep pockets, as a really big business, so I can acquire your company.” Those are phenomenal outcomes, when they can happen, but they are also really rare.

They’re rare, because it’s hard to fit that business and it’s hard to have all the other things that you need to check-box, when you go through that process, like you need a thoughtleading team. You need all these key pieces together. Know your funnel. Understand how you’re going to acquire people, show your competitive positioning over time.

Patrick: You also might need willingness to join the new business for, say, a two- or three-year lock-up period. [Patrick notes: A funny thing about getting older, but when I was 25 I felt like I had all the time in the world and very few high-leverage opportunities, but at 35 I feel like I have lots of high-leverage opportunities but that spending two years doing something is now a decision to be pondered carefully.]

Jonathan: You’re going to get locked up. Yeah. So that is the top way to monetize the business that you’ve had, if you can find the right fit and you have those growth properties. Then what happens is, as you can’t check as many checkboxes, then your valuation goes lower, as it should, because it’s considered to be less of a return on a business. Your buying pool starts to dry up.

For instance, if none of your team wants to go with the business and you’re just selling the customers and the intellectual property that exists, you cut out immediately a huge part of the buying pool. Most buyers want to see that team in place.

Conversely, if you don’t have the revenue growth, but you’re willing to go with the sale, well, again, you cut out a portion of buyers who want to see revenue and see those returns.

Describing all these opportunities to monetize your business, you say, “Well, how do people end up in a position where they have a business but they haven’t really thought through the monetization or what they’re going to do into the future?” I’d say getting it into a place where you are sitting on a fledgling business is easy to have happen today.

As you’ve seen and I’ve seen, sometimes we just start with a weekend hack. We develop that on our off-time. Then, the next thing we know, we’re sitting on something, which feels like it could be something. But maybe it’s not yet big enough to afford all of our attention or it has some of those other issues.

Patrick: I don’t even know how many friends of mine in the online software community had a weekend thing and just plugged away at it consistently for four or five years. Suddenly, “Wait, I woke up in the morning. I’ve got this thing. I loved it three years ago. I don’t love it anymore. But I think it’s probably worth more than my house.”

“So I don’t want to shut it down. I do like my customers and I don’t want to have them have a negative outcome. I don’t want to burn it down, because I wouldn’t burn my house down either, if I was tired of living in my house.” Then they start talking around and asking about options.

Jonathan: Options. It’s interesting. I can speak to both sides. One side is being that today, I can talk as the person who wants to buy these businesses, because it’s accelerating my opportunity to be impactful. But I can also clearly see the other side of getting to the point where I’ve created a business and I no longer want it on my plate.

You had asked, before, what allowed me to go out and buy Exceptional, the first business that I did. It wasn’t because I had a lot of money. I bought Exceptional with, primarily, seller financing. To the person who had the business, if I didn’t make a payment, let’s say, they could always take back the business. They knew the value of it more than anybody else.

Patrick: Just for color commentary for the folks at home, seller financing is basically if, hypothetically, you have a business that is worth $500,000. Rather than the buyer writing you a check for $500,000 and taking possession of the business on day one, the buyer says, “I’m going to pay you $20,000 a month for the next 25 months, 26 months, 27 months,” whatever it is.

They take possession but not ownership of the business immediately. There’s a contract drawn up that says, if you miss your payment, then negative things happen. Negative things typically mean taking back possession of the business. That’s the long and the short of it.

Jonathan: Yeah. That’s absolutely right. The dynamics for the seller mean…Let’s say we take this example. Let’s say the business is already doing…Let’s say it’s a dollar-for-dollar purchase, to keep the math easy. Let’s say it’s doing $240,000 a year.

That’s going to make my math easier. Let’s say we’re buying this $240,000 business for $240,000. Each month, the business would be earning $20,000. But that’s $20,000 of revenue, meaning that’s the sum of the receipts that have been earned during that month. Some businesses require more effort. Some require less. All businesses require some effort [and level of expense].

That $20,000 that comes in is going to start getting smaller. Maybe you have some servers on Amazon that are running. That might take away a couple of hundred dollars or it could take up thousands of dollars of that money. [Patrick notes: Get a quote for HIPAA-compatible services some time. winces] You may not be a programmer yourself. You might have a part-time or a full-time team working on the programming side.

That might cut away another 5, maybe another 15 thousand, depending on how your business is structured.

You might have support requirements. You might be paying to acquire customers to a marketing or a sales channel. You might have rent. All these things start deducting what, at the end of the day, you’re left with as the owner. As that amount keeps getting smaller, the keeping of the business starts to look more and more unattractive.

Even if you could take this business that was earning $20,000 of revenue a month, but you might only be extracting a small amount of that revenue for your own personal profit, you might very well be willing to sell that for the $240,000 that you would have had in revenue for a year to know that you got every dollar of that in profit instead. That might come back to you almost in the same way.

In this example, it could be this $20,000 a month, but then that’s all your money. You don’t deduct a penny from it. As you said, that’s a house. That’s a lot of things, but for a business that, as you keep it, might not actually put that money into your pocket.

Patrick: Right. Both my businesses sold at roughly market rate. Roughly market rate, in SaaS businesses right now depends on a lot of factors. But let’s say three times the profit of the business a year. When you say profit, it equals the economic profit plus whatever the owner paid themselves.

I am often asked, “Well, why would you ever sell a business if you could just run it on autopilot, then take out the money for the next three years and then you still have a business running?” There are all sorts of reasons. Running a business actually takes time. You have no guarantee that the Google gods won’t smite you next year.

If I had a stroke or something, I would not be the world’s most effective operator of that business. And, oh yeah, between now and three years from now, I was hoping to do some things that are anything other than run that business. I want to be done with it. I was very happy to get the valuation I got and hand it to someone else.

After handover day, it’s like, “OK. I don’t have to worry about this anymore.”

Jonathan: Yeah. In as much as I’m a buyer today of businesses, I have always been a seller. I’m the first person. Because I love the creative part of building or I guess I used to love that, if someone wanted to pay me for any of my businesses, my hand’s up in the air. I’m ready to sell. I remember even when I sold my very first business, it was for pennies compared to what maybe what even your smallest side-project that would have sold, which was probably 10 times what my first business was. [laughs] But, when that sold, I was delighted. I was out of my mind with happiness, because someone had validated that I could build something.

Patrick: Yeah. It’s crazy. Maybe it’s part of the…I spend too much time orbiting the Silicon Valley culture. Everybody’s aiming for an exit. Get an exit! Get an exit! I don’t necessarily know if I connect with that. But it’s not just my little fun hobby that happens to kick off money. But I created some free-standing thing in the world that has value and it’s validated by someone who’s actually willing to pay money without me attached to that. Wow. It did blow my mind both times.

Jonathan: There’s really nothing like it. Especially when you…I never would have considered myself a business person. That is not an identity that I resonate with or at least never did before. [Patrick notes: I think I ran a business for about eight years before I became comfortable introducing myself as the owner of a business, and – ironically – that self-conception has survived becoming an employee for the time being.] This idea that I could just tinker around on my computer with this mind stuff and then someone else sees it, gets interested enough in it to want to give me a real…to become the owner of it, is very defining.

After that, after that first sale, I became a business person. Even if I didn’t know it, de facto everybody else knew it. [laughs] So I see the seller’s side of what I do now. Ironically, I’m also a seller for all my businesses. It’s not part of my model. I don’t require it to do what I do.

But I have that mandate, because, if a business is successful, it almost starts leaving my comfort area. Every business is born, grows old and it perishes.

It happens to every business. You can see, from the age of the business, how it acts. A very young business can be anything. It’s like a baby. A baby is very flexible. A baby can do anything. It can be a violinist. It can be a gymnast. All potential is ahead. As we get older…oh, but that baby can’t really do anything. It’s things in the future that they can do. A baby can’t do back-flips today. But it’s not limited.

If you fast-forward, you can look at someone like myself or you. We’re actually laser focused on some of the things we can do. We can do it with just amazing skill. But we’ve lost our flexibility. I’m not going to be a gymnast. It’s just not in the cards for me.

A company grows very much like a human. At the very beginning, a company really can be anything. It’s not yet defined what the company has to do. [Patrick notes: I might describe this as “We don’t yet know where, out of the probability distribution of possible company outcomes, where we’d bound this company at. It might be a lemonade stand and it might be Google. We’re going to start collecting data and tightening the bound on it pretty quickly, though.”]

As it gets older and more mature, it becomes very rigid in what it’s able to achieve. The dynamics change. When I first started building products, I loved the creative energy of just building something out of that day zero. Now I’ve become a little bit more mature and I like to see something go from usable to really impacting in the community and the users and seeing it grow.

What I don’t like is that next stage. That next stage usually means your business is starting to grow in headcount, in employees. Maybe you’ve got 20, 30, 50 people. That type of a business, versus one with 2, 3 or 10 people, has an entirely different feel. I know what my strengths are. It is not leading teams of even smallish…

Teams that are of that size, 30, 40, 50 people, I start not knowing how to help and grow the people around me.

Patrick: Folks who haven’t done this before, the biggest step change in running any of my businesses was bringing on that first person. It radically changes the character of what you’re doing on a day-to-day basis, changes to the economics of the business substantially. People wear the most expensive thing.

It’s funny how software people look at SaaS that cost like $80 a month. It’s like, “$80? I’m not going to give it all that money.”

White collar employees. The cheapest white collar employee that you could employ in a company, even if they’re doing something like customer support, will cost you at least $4,000 a month. [Patrick notes: If you’re not familiar with the math of employment, this is the approximate all-in cost of someone whose salary is quoted at $30k a year. You have to pay various taxes, benefits, etc, one of many reasons why employees are much more expensive than employees believe themselves to be.]

Jonathan: It’s more than all your SaaS services put together.

Patrick: Yeah.

Jonathan: It’s true. I would say then the nourishing of that team becomes immediately the next concern. I know you, like me, you like to see people thrive around us. That means if it’s our business, we have to be instrumental in that.

I love it in a small team, but if the team gets too big, it starts to feel like a burden, so rather than coming to it from strength, I come to it from obligation. The minute that happens, I’m the seller.

It’s not because it’s part of my model or plan to monetize. I love cash flow. I love seeing businesses grow with their cash flow, but when a team needs more than I can give it, I’m giving a disservice to myself and a disservice to the team.

You’ll see even with, for instance, FastMail. I say it graduated. I still get to participate in the ownership, but I’m no longer the leadership. That’s fantastic. It’s allowed me to play my role in that company’s story, but I’m now out of the way because I had nothing more to give.

Juggling All The Things

Patrick: Switching gears for a second, at one time I had four businesses that I was running at once. I felt pulled every which way. Two of them were being actively neglected. One of them was being passively neglected at any given time.

The one that was actually my focus on any given time was generally, just because the weight of the cognitive tax of owning things, I felt like I was not giving it anywhere close to 100 percent.

You run substantially more businesses than me for substantially longer, and more complicated. How do you actually do that?

Jonathan: It’s funny. My wife, who happens to…She’s amazing. She’s a physician, speaks a lot of languages, has eight children.

Patrick: This is the other thing that blew me away about Jonathan when I met him. It was like, “Wait, five businesses, eight kids. When do you sleep?”

Jonathan: [laughs] She gives me, rightly, a hard time. She’ll say, “Hey, you start a lot of things but you don’t finish them.” The book, which eventually we’ll talk about, is one of them. She says that, and it hurts because I like to finish things, and I realize I start so many things. I might have a low completion percentage rate, but it still means I get so much done. [laughs]

In one way, maybe your having many, many projects and feeling like you’re neglecting some, I know you produce so much on many levels – inspiring the community, your writing, the businesses, and all the work you do is really fantastic.

Maybe we’re just a little bit harsh critics on ourselves to start with.

Patrick: There’s a little bit of that going on, but yeah.

Jonathan: The other thing I realized is I like context switching. The idea of plugging away at one thing all day, every day into the duration is suffocating for me, and giving a wide-ish range of things to do starts to make me feel really engaged.

Where you’re headed was today I have a portfolio of businesses that I get to work with. It seems like the magic number is five. That magic number, five, maybe it’s the days of the week. I do see that I start to get a weekly meeting with my teams, and it mentally fits to do that weekly on the same day. It tends to be the right amount that fits in my mind.

Occasionally, I’ll have a little bit more than that, occasionally, I’ll have a lot less, but it seems to trend towards getting back to those five things.

I’m also at a stage of my life and career where I try and not make myself critical. Not that I’m not important and want to participate. It’s that, as you know, running a really young business, you have to be available for random things that happen. You don’t have the luxury of having people to cover for you.

Patrick: Yeah, there’s a lot of interruptive stuff. Customers’ support emails coming in. “Oh God, the server just went down.”” Random tax agency has sent you a bill.

Jonathan: Keep going. Keep going. [laughs] They’re limitless, in the number of things that will show up at 3:00 AM on a Sunday morning. Before, I really thrived in that sense of chaos that happened all the time and that I could problem solve non-stop.

Now I’m a little bit more aware of the dangers that come with getting put into that position. I’m able to stay in my strength, which is to have a number of different things to work on, very much because I have great teammates, and those teammates give you cover – all those emergencies and critical needs.

This lets me drop in and be contributive in the best way for me at this stage of my life.

Patrick: What do you usually do for your businesses? Is it more of a product role, or do you work on sales and marketing. I suppose it probably depends on which one, and what stage it’s at.

Jonathan: Mentally, I like participating on a lot of the product and go-to-market side of things. It would be usual for me to do things like run through the funnel from first becoming aware of a product that we have, all the way through monetization and to nurturing of a customer.

Looking at that, you often touch everything, from marketing with the way the brand is positioned, to how do we do sales if we do sales, and how do we ensure that a customer gets onboarded well, what does the product have to do to reflect that.

Sometimes, it gets into the technology because I am still very technical. Then hearing from customers, where they want product to go, and then trying to wrap that back into the product in these different ways that we can make smart decisions.

That part of the business is my passion. Efficiency, optimization, accounting, all that backend stuff is not my strength.

Patrick: That was actually some of the stuff that I loved most in the business. I think I’m kind of broken.

Jonathan: Really?

Patrick: Part of me really does, like digging into leads about random IRS circulars and saying, “Oh, wait, here’s an optimization gimmick here.” That made me pretty good for my current job. [Patrick notes: Here’s a funny anecdote from working at Stripe. I’ll write more about the experience in the near future.]

Jonathan: We would have been beautiful cofounders then. [laughter]

Patrick: Maybe someday. Switching gears for a second, you wrote a book recently.

Jonathan: I did.

Patrick: You want to tell us a little bit about it?

Jonathan: Yeah. I’m very lucky that I get to do something that I enjoy. I’ve been able to do things that I’ve enjoyed for my entire career. In case anyone doesn’t know, I turned 40 recently. If I started when I was 12, that means I’ve got 28 years of playing around in technology.

That’s what it feels like. It feels like playing around. I happen to have been rewarded financially for that playing around, but even if I weren’t rewarded for it, I would have done the same thing. I actually deeply enjoy it.

Along the way, I think I’ve taken many traditional paths. I’ve tried to work. I went down the fundraising path at one point in my life. I’ve seen a lot of things that people in our field probably will see, or have seen, or are in the midst of seeing.

I’ve also got a lot of variety in that I’ve done a lot of these things. Most people are never the operator of a business. That’s a rare thing to be. If it does happen to you once, that’s amazing. That’s really fantastic, but you might not see a pattern if you only do it once.

I’ve had this luxury of doing it again, and again, and again, and again, and again. Because of that, I really do think that there are patterns. As I’ve seen those patterns, I’ve gotten the desire to package them up and share them with other folks.

The book that I have is called The San Francisco Fallacy. What it focuses on is that from the outside, the way that you build a business and success may not be the same as what actually drives businesses to be successful.

A great example is “I have to be in San Francisco.”” In our field, that’s a pretty strong assumption, to build a successful tech business, you have to be in San Francisco.

Looking back in my career, I created a company called RightCart. I created it in Santa Barbara, California., which is about 300 miles south of San Francisco. It’s not a tech center. I sold that business.

I created another company called RightScale, also in Santa Barbara. That company raised $75 million. It was not in San Francisco. I created another company called RightSignature, in Santa Barbara. The theme here is that I wasn’t in San Francisco, and yet I was able to really find successes for myself.

Even when I happened to be in San Francisco, the team I was working with was not. My entire team at Airbrake/Exceptional came from Ireland because that’s where I had been, and we working together and we’ve been working together for years.

The purpose and reason that I think I enjoyed reading the book is that it tells a real story about how to build a business. Hopefully, it dispels some of the assumptions that we make that really are unnecessary and untrue.

It will make trading a business that has an opportunity to thrive much more achievable because you can see where the reality is from the fiction.

Patrick: I like there have been a couple a couple of narratives and a couple of scripts for building businesses because the ones that are most covered in the tech press are the “raise an investment, get on the rocket ship, do pass go , do go straight to Uber/whatever the latest huge success is.”

There’s much less of a narrative or an established body of work for how do you start running business from the middle of nowhere? How do you acquire a business which is not a unicorn, but a pixie? Pixies are nice, too. How does one run pixies?

I think you’re right. After doing this four or five times, or you’ve done it close to a hundred times, you definitely stop making the same old mistakes, and you get to make fun new ones.

I love the idea of capturing some of the old mistakes in a physical form somewhere so that other folks starting out can make their own mistakes – new, better mistakes, faster.

Jonathan: There’s also this idea anyone thinking about having a business should think about. What does success mean? Write down what success is now, because when you happen to be at that point later, you’ll have forgotten what your definition of success was.

An example would be if we are just talking now, and neither of us has a business yet, but we have a bunch of ideas. We think, “Gosh, wouldn’t it be great if…” and we finish that sentence.

The “Wouldn’t it be great if…” might be, “Wouldn’t it be great if we had a hundred people that were using our new product?” No concept of money, just this self-satisfaction of having those people using our product.

Fast-forward six months, if we happen to have built it and gotten a hundred people to be using the product, we probably wouldn’t think it’s successful. We’re probably thinking, “Wouldn’t it be great if a hundred people were paying us to use the product?”

Fast-forward another six months, and we might find ourselves in a position where we’re getting those a hundred people paying. Every time we exceed that previous desire, it loses some of that ability to make us feel successful. [Patrick notes: Does anyone remember Ducktales? Scrooge McDuck had a lucky dime, the first one he ever earned. I remember my first sale more than any thousand subsequent ones. $24.95 and he got his money back three weeks later… and I still remember that.]

If you don’t take that time to write down what success is, then I think you start to become susceptible to other people’s idea of success, rather than your own. If you read the tech press, the things that I believe get the noise around success are how big of an exit you got.

It’s a horrible outcome because first, money does not equal happiness. Period. Secondly, I believe that that press starts to become infectious and it changes the outcome for people who have opportunities.

Not only do I buy companies, but I’m also an investor. I’m an investor in a lot of businesses, so I get to see these early-stage companies get acquisition offers.

This is one of the most frustrating things for me as an entrepreneur, and I’ve supported these entrepreneurs, is to see an early-stage business get an offer that would put, let’s say, hundreds of thousands of dollars, if not millions of dollars into the founders’ hands.

If a business is starting to take investment from venture capital, the venture capital is usually aligned to get a billion dollar outcome for that business. A smaller outcome early on is really not good for the venture capital thesis because it doesn’t return massive amounts of money to their billion dollar need because they often raise a lot of money. [Patrick notes: Some commentators on HN operate under the misapprehension that VCs like acquhires. This is contrary to the case.]

You look at these two competing interests. You have the entrepreneurs who’ve created the business, and they’re having an opportunity to very quickly put real, life-changing money into their bank accounts, versus the investors who are no longer aligned.

I’m the first one in their investment pool to say, “No, guys, go for this.” In my aims of investing, I invest in the people. I want to see the people have success. I don’t have an investment return for other people for my money.

Patrick: There’s no limited partners hanging around your neck.

Jonathan: There’s no LPs, that’s what I’m saying. There’s no pressure on me. I love the idea that I helped to be instrumental in the change in these young founders’ lives.

I’m typically outvoted. Other members of the investor pool will either reach out and demotivate these founders from taking an early exit or the founders will demotivate themselves. They’ll just look around, and they’ll just get the sense that they’re worth more.

Or they’re going to be embarrassed. This is a common thing. They actually feel like, “If I only take a few hundred thousand dollars off the table, it was just an acqui-hire.” I feel horrid saying this because I know, like you say, being in San Francisco, it warps your mind at times.

Patrick: Everyone is in a red queen’s race against everybody else where it’s like, “Man, if I only sold a company for $20 million, I’m such a failure.”

Jonathan: Are you mad? I’m trying not to say that. It sounds so horrific to say those words, but that’s what you hear.

Patrick: I had coffee with this guy three years ago, and his company is worth $300 million. He’s been so successful. Meanwhile, that guy, if you saw his internal monologue, is probably like, “My company is only worth $300 million. What am I doing?”

Jonathan: “Why couldn’t I break a billion? I was so close.”

Patrick: “One of my seed batch-mates, his company is worth like two billion dollars.” That guy is going, “I’m not Uber. Life sucks.” Travis is probably going, “I am Uber. Life sucks.” [Patrick: Not on first-name basis with him but I couldn’t recall his last name.]


Jonathan: I know we’re laughing, but these types of thoughts go through entrepreneurs heads, and it keeps them from taking money off the table, and then you fast-forward another 18 months, their window of opportunity disappears. They didn’t hit their metrics over the coming months, and all of it just evaporates.

It’s egregious. It’s harmful to the ecosystem because these incentives are not being aligned. I shared in my book one of the stories which I just make it clear as day that you can be proud.

It’s funny because everyone in San Francisco will hear me say this and might say, “How can you be proud of taking a few hundred thousand dollars in an acqui-hire?”

When everybody outside of San Francisco is like, “Oh my God, this is a lottery ticket. I just got a ticket to this kind of wealth creation in such a short amount of time and all I have to do is go work for a great company afterwards?”

I’m really at the camp of Yeah. It is great that you can take down any amount of money. You sell your site for $5,000, that’s $5,000 that you probably had a great time building. You did it for fun. Maybe you didn’t even realize that the money was there.

That’s a typical fallacy that I’m enjoying trying to dispel.

Patrick: Those interested in the book, [Patrick notes: It’s crazy to me how few authors just buy a domain name to redirect to Amazon. Obviously if the book were an actual business it would probably rate a website with e.g. email capture, but having a $8.95 domain name beats the heck out of a link for the purpose of saying it in a conversation, and a link works better than nothing.]

Jonathan: You’ve got it.

Patrick: Also, I recommend everyone go and read it if all this stuff sounds interesting to you.

Patrick: Are you in the market for any new businesses? If something interesting were to cross your desk?

Jonathan: My door is always open. We love to talk to entrepreneurs. I can give clear guidance for what a company might be worth, or what areas can be improved, or who buyers might be.

Anybody who has a business or is thinking about a structure of a business and wants to know what their outcome might look like, please reach out to me. I’m happy to do that.

Patrick: How would folks get in touch with you?

Jonathan: I am jonathan at and I am happy to take inbound conversations.

I do have very specific buying desires. If you’re hearing this and you have a SaaS business with recurring revenue, you have 80 percent attainable gross margins, your revenues are not declining, and you want to talk about what you might have as next step to the business, definitely give me a ring.

Regardless, I’m always happy to talk to people and share my thoughts.

Patrick: I’m always happy to talk about anything as always. I’m patrick at If you have Stripe-related things, patio11 at Thanks very much for coming on today.

Jonathan: Thank you so much for having me here. I’m a huge fan of all your work. This is really nice to be part of it now. Thank you so much.

Patrick: Thanks much.