From One to Two

In his book Zero to One, Peter Thiel writes:

It’s easier to copy a model than to make something new: doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is the moment of creation, and the result is something fresh and strange.

Yeah right, thank you for your input (slams door in face). Now, maybe go back to your silicon valley to play some chess against yourself? Because in the real world, businesses don’t go from Zero to One – they go from One to Two.

But first, let’s have a look at how the typical Zero to One business looks like. It’s an entirely new solution to an existing problem. It’s typically product-based, it addresses a huge market and it requires millions in venture capital funding to build. I call it the unprofitable product business. Wait.. yep, this sounds like your typical silicon valley startup – like a Unicorn.

But – it seems that, in our quest to give birth to Unicorns, we got sidetracked and created Zombie Unicorns instead. Like, you know, half-dead Unicorns with red, glowing eyes (credit: DHH). Why half-dead? Because they’re not profitable and never will be. They require external resources to stay alive.

Like Uber and Lyft. A truly new way to call a cab. Except that they’re burning cash like crazy and have no clear path towards profitability. The whole “self-driving cab” thing didn’t pan out after all.

Or Asana. A truly new way to.. um, to do what? Create todo lists which your coworkers can observe in real time while you check them off? Once you mark a few todos as “done”, a Unicorn appears and flies across your screen. No joke! They didn’t get that entirely right though, it should have been a Zombie Unicorn instead. The Asana Zombie Unicorn is also burning tremendous amounts of cash to stay alive.

In Peter Thiel’s words, those Zombie Unicorns truly are “fresh and strange”, though I think he didn’t mean to describe Zombie Unicorns with those words.

Going back in history, a few hundred years ago, when humans invented money, bank accounts and capitalism, they implicitly created a rule that a business is only successful if it makes money and is profitable. This had some useful side effects, like, if a business provided crappy service, it would lose its customers, which would lead to making less money, which would lead to becoming unprofitable, which would lead to closing the business. An effective mechanism to only keep businesses around which provide value to customers.

So, for the past few centuries, we already had a blueprint for building successful businesses! It’s just that we recently forgot about it in a venture capital – fueled quest to build disruptive stuff that scales.

A bit like when archeologists recently dug up an ancient keyboard in Egypt and it turned out that the old Egyptians built better keyboards than Apple in its 2015 Macbooks.

Thinking about the successful business blueprint, how would a modern implementation of this look like? Let’s see. The business wouldn’t take outside investment because it would focus on earning money from customers from the start. Making money from the start would also mean that building a product would cost too much, so that’s out of the question. Instead, the business would need to be service-based to make revenue. Needless to say, it would start out small, because paying salaries is expensive and there isn’t much money around to pay them.

While there may be multiple solutions to this, but one sticks out: The profitable consulting business. The profitable consulting business has many cool properties. Consulting is a service which doesn’t require up-front development costs. The business just needs customers. Working with customers every day provides a tight feedback look because customers need to be happy, otherwise they stop paying.

And then there’s the fascinating side effect that the profitable consulting business is in a great position to become a profitable product business. Because it’s already working with customers every day, it can easily develop and sell a product which solves their day-to-day problems. By the way, could you imagine a venture capital fund investing in a profitable consulting business? Nope, it doesn’t scale. But instead, they go off and invest in unprofitable product businesses. Ironic!

So, unfortunately, with the advent of venture capital, Zombie Unicorns, and everyone wanting to go from Zero to One, we seem to have forgotten history’s precious lessons about building businesses that work. Instead, everyone is out there building unprofitable product businesses.

Alright. Now what the hell has this to do with going from One to Two?

In the beginning of 2020, I started a profitable consulting business. I was going great because, well, it was profitable, and it became clear that it might be ready to go from One to Two.

Going from One to Two is probably the biggest step a profitable consulting business ever takes. It means going from a “solo freelancer dude” situation to a “founder dude and employee dude” situation. While this may sound harmless, this transition includes many carefully orchestrated steps, each of which having the potential to make the company go up in flames if executed suboptimally.

The founder dude has to found a company (25k€ initial investment) and, by doing so, commits to company overhead costs of at least 4k€ per year. Not much money for any unprofitable product business, but lots of money for the profitable consulting business. Because it’s paid from personal savings, not monopoly money minted by venture capitalists.

Next, the employee dude must be willing to take a risk. This is big because joining the early-stage profitable consulting business provides no objective benefits: The salary is similar while the risk is significantly higher. For most employment-seeking humans on this planet, this is a bad proposition.

Next, if the employee dude accepts this risky proposition (why would he?), what happens next is that the founder dude gets flooded with bureaucracy. As a solo freelancer, handling bookkeeping and taxes is quite doable (= you spend 50 years in a monastery studying the German tax system, or you hire a bookkeeper). But now, as a company, handling bookkeeping and taxes becomes hard because he must hire a more expensive bookkeeper, while, in parallel, still getting flooded with bureaucracy.

Now comes the most tricky part. The profitable consulting business is based on consulting, which itself is based on regularly acquiring new client projects. As a solo freelancer, the freelancer dude had a steady stream of projects coming in, just enough to sustain himself. But now, as a founder dude going from One to Two, he needs to bring in double the amount of normal projects in preparation for the employee dude joining. But, to make things even more tricky, many of those new customers must be stalled so that their projects may only begin once the employee dude joins.

This gets significantly harder if one of the main customers decides to cancel their project a few weeks before the employee dude joins (this may have happened to “a good friend” of the founder dude, not himself).

Some customers might not want to wait for the employee dude to join, they want to start earlier. Also, the founder dude might want to rack up some company savings because the employee dude won’t be productive from day one. That leads to the founder dude having to work overtime before the employee dude joins, while lining up double the amount of projectsjuggling the bureaucracy and questioning his life choices while he observes his savings in the company account being transferred to the more expensive bookkeeper.

And if all of this works out, the business goes from One to Two.

This leads us to the question: How does the founder dude find the employee dude?

Before pondering that question, let’s quote a woman from Facebook:

If you’re offered a seat on a rocket ship, don’t ask what seat. Just get on.

(Sheryl Sandberg)

Dear woman from Facebook: I understand that the profitable consulting business must be a disappointment to you. Because it’s not a rocket ship. I’d say it’s more like a tuk-tuk.

The tuk-tuk consulting business doesn’t fly to new planets like the rocket ship. Instead, it stealthily travels through back alleys, taking its occupants to places nobody has seen yet on planet Earth. And while doing so, everyone has the time of their lives!

The tuk-tuk doesn’t actively recruit people. Instead, it leaves its secret phone number with a few select potential co-riders who are still trapped on rocket ships. As soon as their rocket ship crashes (not a question of if, but when), they dial the secret number. A few nanoseconds later, the tuk-tuk appears in front of their doorstep, happily tooting its horn and flashing its colorful LED lights.

The co-rider enters the tuk-tuk, and with that, the tuk-tuk disappears back into the fog of war, off to its next adventure.

Thanks for trusting meSven, and happy one-year anniversary!


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