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Day 69. Nice.
We're still going strong and getting pretty close to the next step in the process.
In case you didn't know:
I'm building a $10M Company using AI
Current value: $0. Right on track. Kind of.
This is exactly how I'm planning to build it (together with my much appreciated business partner Thierry):
You might have noticed some of the biggest creators like Iman Ghadzi and Jordan Welch have moved to software businesses.
And there’s good reason for it.
To get to the $10M, we’ll be building a software company too, and here’s why:
First of all, to build a company of such scale, we need as much leverage over our time and resources as possible.
What do I mean by this?
Leverage is something Alex Hormozi talks about a lot, and he defines it as the difference between what you put in and what you get out.
- Cutting hair is something you have to do over and over again to get paid for, and you don’t grow any value on the side. So that’s low leverage on your time and resources.
- Owning a hair salon will already give more output per unit of input, since you don’t do all the labor yourself and you can scale it. So that’s higher leverage on your time and resources.
- Building software is something you do once, and can then sell an infinite amount of times, theoretically of course, which is super high leverage on both your time and resources.
But not only that. There’s three more reasons why software is such a high-leverage business model.
1) You can build a recurring business model around it, where people pay monthly fees to use the software.
This makes the business more predictable and thus more interesting for investors to buy.
That’s one of the reasons why software companies are valued at on of the highest profit multiples compared to other businesses. And while these multiples are dependent on loads of factors, they can range from 5-10x (some even higher).
2) Once built, the massive scalability that we talked about also means that your profit margins can become 90-100%
There’s barely any extra cost to fulfill. Marketing will probably be the biggest expense, but there are strategies to minimize this of course...😏
3) If we combine this, we do not only have high profit multiples in valuing the company, we also have very high profit margins (at scale).
This means great opportunity for sky-high leverage. And that’s what we need for this challenge. Calculations coming in a minute.
The big problems:
“To build a software company I should know how to code, it’s expensive, difficult, I need a big audience to sell to… This is the hardest business model of all!”
Fist of all, all businesses are hard, let’s be happy it’s not easy. That would be boring, everybody would be doing it, and society would collapse. Not good.
Secondly. With the rise of low & no coding tools like Bubble & Make, you don’t need to be able to code.
Also, the rise of AI opens a whole new world of possibilities.
You can build it yourself if you invest some time into learning these tools, which would mean you could build your software for a couple of hundred $, or you can pay someone to build your idea for you for $5k-10k.
This isn’t cheap, but it’s not as crazy as you might have thought, especially given the potential.
The big audience part is something I’ll cover in a later mail, but all in all, it comes down to this:
You just need to build a great product
But how do we build a great product?
There’s 4 stages to that:
- Ideation - coming up with the idea
- Validation - testing whether people would want it and pay for it
- MVP - minimum viable product
- Improve - build on the MVP
I’ll dig deeper into all of these stages in later mails, but these are the stages we are cycling through right now.
We first came up with an idea, we have shared it with friends and people who might be interested in it, we’ve started building a minimum viable product and based on the feedback we get, we improve it piece by piece.
Note: Right now we have the overall idea of what the ready-to-launch version must contain. But it'll still take a couple of months to get there.
Cool. So it’s a high-leverage business model, which is becoming pretty accessible, there’s 4 stages to building a great product... Now the $10M part.
Let’s break down this challenge in 5 simple numbers to see how far fetched this really is.
1) It’s very important to note that I’m talking about a $10M company, not earning $10M from a company. It’s a valuation, in this case an estimate of the enterprise value. And the goal of the enterprise value is $10M (or €9,14M)
2) But how do we estimate this value, you might ask. Good question, there’s many methods to estimate this. Since we’re building a software company, I’m keeping it simple by using a method that multiplies the Annual Recurring Revenue with a certain factor.
On average for private software companies, this factor sits around 6.5. Meaning a rough estimate of the value of the company can be made by the ARR x 6.5.
Note that in reality it could also be 3 or 10 or 20x, we never know until it’s sold, so we go by an average.
3) This means that we can calculate the ARR that we need in order to hit the $10M, we just divide 10,000,000 by 6.5, leaving us with an ARR of approx. $1,540,000.
4) Dividing this by 12 gives us $128,200 of MRR. Which stands for monthly recurring revenue.
5) With an average gross profit per monthly subscription per user of around $40 (guesstimate) and a churn (= percentage of people quitting their subscription per month) of 5%, we would need on average 3,374 paying users per month.
Does that sound a lot more doable? I guess so!
But:
Is this using a lot of assumptions? Yes.
Is this an accurate estimate of the enterprise value? We don’t know.
Does this give us rough insights in the scope of the project. Definitely.
And that’s why it’s awesome.
In the end it’s not about the money, it’s about the journey.
Please let me know what parts of the journey you want to see more of.
Be great,
Bart Gommers
The Road to 10 Mil
PS: Almost forgot to share the result of the sleeping on the floor experiment (see mail from last week). The best Oura stats were actually from...
Sleeping on the floor
Pretty crazy, right?
Am I still sleeping on the floor right now? Sometimes. Not every night.
Difference is quite small and the experiment might need to be done for a longer period of time to have a convincing conclusion.
You can always test it yourself. And if you do, please let me know how it went 🫡
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