From Two to Three

In 2020, I founded a company called OpenRegulatory. At that time – the height of the pandemic, with low interest rates and near-unlimited funding – most startups were rocket ships – VC-funded, growth-oriented and, most notably, not profitable. I wanted OpenRegulatory to be different – bootstrapped by me, small, profitable – more like a tuk-tuk. Now, while you’re chuckling, I assure you, this metaphor holds better than you might think. Imagine a rocket ship trying to find its way through the back alleys of a major city like Bangkok. Not possible! It’s way too big and sluggish. The tuk-tuk, on the other hand, is small and agile and has no problem cruising through the maze of sois.

Now, when we look at the people sitting in this tuk-tuk, it’s easy to imagine them having the time of their lives. They’re comfortably seated at the back of the tuk-tuk while it cruises through darkness, honking its cute little horn while blinking its flashy lights. What’s not to like?

Contrast that to the rocket ship. It’s easy to imagine the inhabitants of a rocket ship having a bad time. It’s brightly lit and sterile, and the sheer size of the total population undoubtedly leads to endless political infighting about things like who might be the first person to set foot on Mars.

After OpenRegulatory was founded and underway, the first person, Sven, joined me a few months later. I described how that went in From One to Two. If you haven’t read that yet, I think you should!

And just as in my last post, my weird procrastination habits made me take forever to write this post. While drafting this, the pandemic ended (who would’ve thought?), a war started, and we hired our third person, going even further, from three to four. All the while I’m trying my best to hold on to my memories of going From Two to Three. Ugh!

But, just like good wine, I hope that this lengthy drafting period has resulted in a post which ends up being better than its (countless) drafts. Then again, I don’t drink wine, so I have no clue. Anyway, see for youself!

Going From Two to Three

So, the year was 2021, the month was November. Sven and I were at the company. But soon, OpenRegulatory was about to go from Two to Three people. I expected this to be smooth sailing. Why? There’s a purely mathematical explanation to this – you’ll see. But before we get into that, imagine two people in a two-person company happily chugging along in their company tuk-tuk, signing signables, delivering deliverables and receiving receivables. Or, in human language, we were signing consulting projects, doing work and getting paid.

Now, on to the maths: In a salary-heavy company, going from 1 to 2 doubles your expenses, while going from 2 to 3 only increases your expenses by 50%. Translating these numbers to the real world, this means that from 1 to 2 you’ll have to bring in new clients, but from 2 to 3 you might be able to cover your new expenses with existing revenue if your margins are high enough. In other words, that’s if you’re billing your clients sufficiently ridiculous sums, or working very efficiently, or both. Besides that, you also might have some savings, and those also won’t hurt!

We certainly had good margins, and we had some savings. All of this was very cool because it made us feel a bit like being in a real company. Like, “check it out, we’ve got money left over and can hire another person!”.

Smooth sailing! But, unfortunately, that’s not how it went. Instead, the tuk-tuk (now on floats – imagine a floating tuk-tuk with a big black sail attached to it, with a pirate symbol on it – yes, a pirate tuk-tuk) entered choppy seas. But we all survived and I’m here to tell the story, so put on your life vest and read on!

The first problem was that our applicant was too good, and we didn’t have a lot of savings. Wait, what? Yes. If your company is sufficiently popular, you’ll run into the problem that people still apply even when you’re not hiring. If those people are bad fits, it’s easy to reject them. If they’re good, however, it becomes tricky. And this one was really good.

Sven and I had been working with him already at our past company. We had hired him there, he proved to be really good, we became good friends and already started having a great time. Not quite the time of our lives (remember, our past company was a rocket ship) but a solid, great time. A bit like a small tuk-tuk parked inside a large rocket ship, with three chuckling dudes inside it, ready to undock.

After the two first dudes (Sven and I) ended up jettisoning off the rocket ship via their escape capsules, it was now just so happening that the third dude, who was the sole remaining inhabitant of the tuk-tuk-inside-the-rocket-ship, was transmitting a distress signal. It wasn’t quite a mayday situation, more of a pan-pan. He wasn’t dying, but he was also kindly asking whether a rescue was generally available.

And available it was. Or wait – was it? Now, the problem with having a good applicant while not actually hiring is that you don’t have the money, but you also don’t want to reject them. So there are two solutions: Either stay rational, reject them, and be forever heartbroken when they accept a job elsewhere and only re-enter the job market in two years, once the next rocket ship comes crashing down. Or, scrutinise your bank balance and play it up in your head to make it seem more than it is, and hire the person.

Waiting for another crashing rocket ship was not an option, so we looked at our bank balance, played it up in our heads, and hired him.

So that was the first problem – the applicant was too good, we had too little money, and we hired him. On to the next problem!

One of us got sick – for 7 weeks. Now, being sick for 7 weeks is not a huge deal in an enterprise company because nothing gets done there anyway. But in a two-person startup, this can make or break the business. Besides the obvious effects of someone not being there (duh), I’d like to focus on a few lesser-known second-order consequences.

The first one is about workload. Sure, one person gets sick, and now the other person has to cover for them. I had been leading teams of software developers before and had dealt with those situations. But I noticed that in consulting this is different. Why?

Teams of software developers are commonly doing one of two things: They’re building new software or maintaining existing software. If someone gets sick in the “new software” scenario, you simply reduce its scope or push back the deadline. Businesspeople like to argue that this is the end of the world, but in 100% of the cases I’ve seen so far this was not a problem – software projects fail for other reasons, not due to sick people. And in the “existing software” scenario, the truth is that a lot of maintenance can often be postponed, often to the protest of software developers. Sure, stuff will break and so on, but I mean, dude, the system has been running, it still is running, things were mostly okay in the past, so the software will probably survive a few days longer. This doesn’t apply to all cases, but to most.

So, software development work feels rather elastic – you can stare at it and bend it according to your circumstances, like Neo staring at the spoon in The Matrix. But what about consulting work?

Consulting work is more rigid. That’s because most of the work consists of answering emails, reviewing documents and talking to clients – you know, those things for which you don’t need any hard skills. The problem is that all of these things are very hard to bend – you either get them done or you don’t. If you’ve scheduled a call with your client, you’re either there or you’re not. You can’t be “half-present”. Very similar to cooking food, cutting people’s hair and driving garbage trucks. Wait, thinking about those jobs, why the hell is consulting work so highly paid? No clue.

Anyway, onwards and back to our situation – one of us got sick for 7 weeks. So, with the rigid nature of consulting work, the other person got hit with a significant increase in their workload.

So far, so “good”. But this is probably fine because that person will cover for the other person. That means the total revenue will stay the same, right?

Wrong. Total revenue will actually decline. Why?

The problem lies within the business model of the consulting company. You see, most consulting companies are normal consulting companies which bill by the hour. And, unfortunately, in 2021, our company was a normal consulting company which billed by the hour. So even if the other person takes over the entire workload of the sick person, chances are that that person is not going to work for 16 billable hours per day. Instead, they’ll prioritize projects and end up with something like 10 hours instead of 8 or so.

So consulting revenue will decline even though the billable work is the same. Crazy, right? All the while the sick person is still on the payroll.

(Contrast that with a software company again: If everyone gets sick, revenue remains unchanged as people still purchase the software. Revenue might only go down only if software quality deteriorates over the course of months.)

And then there are even more second-order consequences:

There’s the real risk of the remaining person getting demotivated due to an increased workload and no end in sight, creating conditions for a cascading-failure-type-situation in which that employee burns out and also gets sick. This is very dangerous for the company because that would reduce its work capacity to zero. Luckily, that didn’t happen.

What did happen though is the next second-order consequence: With the company being at half its capacity for an undefined time span, it’s very hard to give future clients a definitive timeline for when their project can start – obviously, because it’s hard to predict when the sick person will return. Therefore new projects get put on the backlog. That also makes all of them less likely to happen, because they might go looking for other consultants in the meantime.

Next, the current workload gets reduced to fit one full-time employee – after all, it’s a one-person company now. Some projects get paused.

Also, all optional internal projects are put on hold – those shiny things which Peter Drucker (a.k.a the Master Yoda of business studies) would classify as opportunities. In our case, those were adding more content to our website and developing Formwork, our SaaS. All of those would have a solid chance of increasing our revenue long-term, but we didn’t have any time to work on them. Ugh.

Okay, so the company is currently set up to only provide work and revenue for one person, further projects have been put on hold, and no effort is being made to increase revenue long-term. That was our starting point.

All of this happened just before the third person was about to join. Great timing?

The Third Person Joins

So the new (third) person joins, raising the healthy headcount from one to two. The company currently generates revenue for one. Okay, no big deal – it was clear when the person was going to join, so some clients on the backlog were contacted and, with some effort, one or two small projects are able to start within one or two weeks.

The problem of course is that a new employee is never fully productive from day one, but in consulting, this is often not the end of the world – most consulting companies don’t deliver much value anyway. Still, the goal of our company was to deliver value, and the third person was reasonable productive thanks to prior experience.

Putting that into numbers, we’re generating revenue for around 1.2 people while paying salaries for two. This no longer feels like driving a tuk-tuk, but rather a muscle-powered rickshaw instead. Ugh. But it’s still survivable.

But just right then – and you can’t make this up – the sick person gets healthy again and comes back to work.

Well, now we’re still generating revenue for around 1.2 people while paying salaries three. You’ve got to be kidding me, right?

Now all hell breaks loose, at least for the one person who has been working full-time – that person has to drop some of their billable work to acquire projects for the other two people of the company. And that reduces revenue even further, temporarily. Crazy!

But – we survived, and I’m glad we did. We managed to find a tailwind of projects, so to speak, to turn the ship tuk-tuk-on-floats around. A few months later we were profitable again, and at the end of the year we were so profitable that we paid out huge bonuses.

So, I suppose, the lesson to be learned here is this: If you’re two people in a tuk-tuk and a third person wants to get in, you can definitely hire him against all odds if that person has proven himself a worthy tuk-tuk companion in the past. And proven himself worthy he has indeed – Sören boarded the tuk-tuk in November 2021 and we’ve been cruising along ever since.


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