Too small to fail: How startups can grow in recessions

A little product called Bingo Card Creator just had its biggest month ever. Patrick McKenzie runs this one-man software company.


In fact, February, March and April were its three biggest months since its inception in 2006. What recession?

Yes, you read that right. The Bingo-card-generation-software industry is growing while every sector of the economy is simultaneously in the toilet.

Patrick McKensie is too small to fail.

Think Patrick is alone? Balsamiq Studios is growing even faster. After their user interface mock-up design product netted $162k in their first year of business, today they’re making so much money they’re embarassed about it. They pulled in $35k during the first week of April alone.

Balsamiq Studios is too small to fail.

How?

If your niche is small enough, the customer need strong enough, your marketing targeted enough, your product good enough, your customers happy enough, they are going to buy, recession or not.

That sounds like a lot of “if”s, but let me show you that it can work.

If your goal is to have a huge company and sell $100,000,000 of software per year, you’re going to have a tough time. You’ll almost certainly fail, it will take years, it will take cooperation among many people you haven’t yet met or hired, it will take a massive market, it will take beatable competitors, and it will probably take debt and/or investors. And yeah, a down economy could be your undoing.

But if your goal is to run a smaller sucessful business and be independently wealthy, it’s different. If you’d be happy making $1,000,000/year or even $200,000/year many potential problems fall away. A small, focused market changes the rules.

In a small, focused market, you don’t need a big marketing budget to get noticed. You know where your customers hang out — the forums, blogs, community sites, influencers, local groups. You even know the keywords for AdWords and it’s easy to optimize, like Patrick did. It takes time — but not a lot of money — to participate and get noticed.

In a small, focused market, you can become the world expert of your niche. You can build the most popular blog, the most frequented forum, the best collection of how-tos, the most comprehensive eBook, the simplest, yet most complete software. Or, in my case, the most popular paperback book on a subject (37,000 copies and counting).

In a small, focused market, you can deal with competitors. The competition might be weak or there might be plenty of room for several winners. Competitors are easy to find and track and analyze. It’s possible that you’ll never see an 800-lb gorilla because the addressable market is too small for them to ever be profitable (Microsoft isn’t going to make a Bingo-card creator). Any other competitor starting now will be way behind; if you keep moving they won’t catch up.

In a small, focussed market, you can delight customers one by one. You can develop fans and cheerleaders who will buy anything and everything you make and spread the word to everyone else in the community. You can quickly amass testimonials for your website that sell your services and products better than any brochure possibly could. It’s easier than you think; just be yourself.

In a small, focused market, recessions don’t hit as hard. Your potential customers have a strong need, not a passing interest. Your existing customers have a personal relationship with you and will go out of their way to help you succeed, even in tough times. Because of your small size, 99.99% of your customers are still in your future, so there’s always new customers to discover.

Prevailing wisdom is that “small is risky.” It’s just the opposite. When you just need to be Ramen-profitable, you can do so even in a recession.

Care to wager? In one year, who’s more likely to survive: Balsamiq Studios, or a company with $30m paid-in capital that wasn’t profitable even before the recession but has “amazing growth potential in a hot market?” Whose founders are more likely to put $1m cash in their pocket over the next few years?

Remind me again — what’s wrong with small?

Am I glossing over the down-sides of small business, or is this truly the best chance a founder has at becoming a millionaire?
Leave a comment and join the conversation!

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  • http://www.seotrafficspider.com Edwards

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  • http://www.ppcsoft.com/blog Atle Iversen

    Thank you for an inspiring article !

    As the founder of a small software company that has just released a new product, the timing of this article was perfect.

    Yes, the recession is scary for most of us, but being able to survive the recession is often easier when you’re small and agile.

    Both Balsamiq and Bingo Card Creator seem to have made products that many people love, and then it is "only" a matter of finding these people in order to grow and become successful.

    My biggest tip for startups/small companies is to watch the cash flow; adjust your costs so that you’ll be able to "survive" the rest of this year, and then I’m quite optimistic that times will get better. Meanwhile, improve your web site, your product(s), your marketing and support, and hopefully you’ll get much stronger and successful in the future.

  • http://www.balsamiq.com Peldi

    Wow thanks so much for the mention and the kind words Jason!

  • http://thedreaminaction.com Ryan Graves

    Jason –

    You continue to push me towards making the "leap". Keep it up.

    Cheers,
    Ryan

  • http://virtualimpax.com Kathy|Virtual Impax

    I recently gave an interview in which I waxed rhapsodic on the advantages of being a small business owner.

    I fear I became WAY to "enthused" over the biggest advantage a small business has over the BIG guys. When you’re a little guy – you don’t have to GUESS what your customers want – YOU KNOW WHAT THEY WANT!

    You can look them in the eye – you can watch their reactions – and you can change your course accordingly!

    You don’t have to rely on "market research" to see what works and what doesn’t!!!

    In a small, focused market, you can delight customers one by one.

    AMEN -AMEN- AMEN!!

  • http://bwasearch.blogspot.com Donna Brewington White

    Compelling thoughts in favor of the smaller small business and particularly apt in our current state of economic turmoil. I’m banking on the truth of your words for the success of my own business, even though as a consultant, I depend on (and promote) the success of larger businesses for livelihood.

    I believe that some of the principles that you mention are excellent advice for larger businesses as well: becoming the world expert of your niche; delighting customers one by one; personal relationships with existing customers, etc. However, it takes highly intentional effort and a dedicated team to accomplish this as a larger entity.

    I also want to speak to the idea that there are niche markets that larger companies aren’t as likely to enter. If a market is profitable enough, the big guys will creatively find a way to enter, using the smaller business’ success as a form of "market research." I believe that one way to combat this is to focus on building a strong brand. I say this from watching a small innovative toy company neglect its brand development and eventually lose its impressive lead in a new market. A company is never too small to focus on its brand and the smaller company has so much more control over its brand.

    I appreciate the thoughts here and will be sharing this post on Twitter!

  • Jason

    @Atle — You’re right, "cash is king" is always good advice. It’s true, if you can survive in bad times you’ll be lean and mean when things recover. In fact that’s exactly what happened to me at Smart Bear.

    @Peldi — You’re welcome! Coincedentally I just saw Balsamiq Mockups being used at a customer’s site. My favorite aspect: That because it looks "hand-drawn" you don’t obsess over the details.

    @Ryan — You’re saying that so often recently, I think maybe you mean it. :-)

    @Kathy — I like that you’re obsessed with how small companies can beat larger ones, and it’s so true. Perhaps now more than ever before. Although surely most of these principals have always been true, technology and current gestalt makes it more so.

    @Donna — I completely agree that larger businesses should value the same things, although sometimes it’s also true that the big money requires different thinking in some areas. Nice point about small companies having more control over their brand, but isn’t it also true that today companies have less and less control over their brand as social media expands? Or are people like me so steeped in "social media" that we forget that 90% of the population still aren’t influenced by Twitter?

    Great points, thanks!

  • http://bwasearch.blogspot.com Donna Brewington White

    Jason — Yes it’s shocking, but the vast majority out there is oblivious to the thrilling Twitterverse — and some of my friends even pride themselves on this. (I’ll gloat when they finally catch on.) Your comment about social media and brand ties into an area of intense interest for me — I’ve even blogged along these lines with more focus on the "employer brand." Social media both provides a powerful tool for branding efforts and at the same time exposes discrepancies between the brand "image" being presented and the reality. I came across an excellent post today that relates to your question — with the bottom line being that if a brand has integrity — social media will be its friend. In case you are interested >> "Looking For the Brand Among All the Branding" by Rich Bruer http://tinyurl.com/oavgoj

    Appreciate your thinking — and sharing.

    All the best,
    Donna

  • Camille

    I totally agree with you! Thanks for this post.
    We’ve come from one of those companies who wasted tons of money with the hope of being a billion dollar company and three months later, we’re (two-person company) already making (alot) more money than there are.
    Kinda sad actually.

  • http://chrisashworth.org Chris Ashworth

    Wow, wonderful post; you’ve really summed it up nicely.

    I started working for myself full time just over a year ago. At the time it felt risky. It took a while for me to realize it had been one of the least risky things I’ve ever done. (Granted, I didn’t go about it in a stupid, unprepared way–it’s not that small companies are inherently going to be successful, which you touch on with your list of "ifs".)

    Anyway, just over one year in I’ve hired a second guy for the team. (Take, that recession.) A few weeks ago I also jotted down a few thoughts about some things I’ve learned in the process.

  • Jason

    @Camille — It is sad… for them. It’s awesome for anyone else thinking of jumping in; it’s awesome for you. Also your story is frighteningly common.

    @Chris — Yeah you realize quickly that "risk" can mean a lot of things, and that having a job you can’t control is more risk than you realized. Certainly it’s still risk, but of a different sort. Congrats on the new hire by the way.

  • Andrew

    Great Article – I know of Balsamiq Mockups through it being an Add-On to Confluence from Atlassian.

    I am wondering how much of their recent success has been built on using Confluence as a channel and a way for people getting to know about the product, vs. people taking up Balsamiq outside of that connection?

    Would be great to know, as this could identify how important (or not important) it is to have a channel other than using things like SEO, Blogs, Twitter etc?

  • http://www.drexplain.com Dennis Crane

    Balsamiq and Bingo Card Creators made big noise in the recent months. I’ve also being watched their progress all those days.
    I think soon we’ll see many new startups inspired by these two projects. How many of them will be successful like e.g. Balsamiq – that’s the question…

  • Jason

    @Andrew — Good point about being affiliated with something that is (a) successful both monetarily and in (b) having a following and a marketplace for that following.

    @Dennis — I have to respectfully disagree that "the question" is how many new startups will be as successful as Balsamiq. They are really crazily successful and many people would be thrilled with the success of, say, Bingo Card Creator.

    So I propose that the question is: How many of them will be successful enough to bring their creators joy, or even freedom from their day jobs?

  • Wilfred

    These are some great encouragements – I definitely agree that there really are so many advantages to having a small business. Another one of these is the fact that there are so many support systems for small businesses, like small business associations and technology that is built specifically to aid small businesses (http://www.digitallizard.com/small-medium-business.php for example provides you with a customized online print store) which all make it so much easier to succeed.

  • http://www.3gpower2.com Bill McNeely

    The boys over at 37signals have been preaching this message for several years. Here is David’s talk on making money on online selling to the Fortune 5M at Startup School 2008

    http://37signals.com/svn/posts/981-the-secret-to-making-money-online

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