English author Adam Fletcher founded two start-ups. With one he earned 3000 euros a month, without doing anything. For the other he worked - and made loss. Here he explains what he has learned from it.
The only subject I had been good at at school was economics, so I studied that. In high school, college, and university, I often heard that I was a natural in this subject, and that was me Clear that one day I would start my own business. But despite the many years of teaching, I never had the feeling that my knowledge of how companies actually functioned exceeded the level of a ten-year-old.
The great thing about the digital revolution: It's possible to build companies where we only do one job once, but are paid several times, passively, without us having to be there. Passive income. Once you've experienced that, it's like having a little light bulb on; the darkness disappears and you shout, "That's the way it must be!"
I got to know the difference between a good internet company (passive, scalable) and a bad one (active, not scalable) because I founded one of each kind.
End of the first year monthly 1500 Euro profit
In 2008, I had just stopped working for the German Internet start-up "Spreadshirt", an online platform where anyone can upload and sell their own designs. I worked there in internet marketing and learned a lot about the garment industry this year.
At "Spreadshirt", 100,000 shop partners offered their designs, and there were at least ten competitors where similarly sized armies of designers created products. These were millions of little online T-shirt brands, all with great products and all striving to find customers. I decided to solve this problem in a simple way by providing a central database for T-shirt brands.
Customers could search for specific motives, read reviews from other customers and learn about special offers. The companies would pay me a fee to be preferred in my search engine.
I also knew that many of these brands have their own affiliate programs: they pay a small commission, usually 10 to 20 percent of what a person spends, for forwarding a customer. I named my planned website "The Tee Directory," a short form of "The T-Shirt Directory."
It took me about three months to go online with the site - with more than 500 T-shirt brands, all rated and searchable. At the end of the first year, I made about 1500 euros per month.
I was above my freedom formula and invested only a few hours of my time each week, at the end of the second year, the site generated around 3000 euros a month. She remained my main source of income for about three and a half years. For the last two of those three and a half years, I did not work at all, I did not even log in anymore.
It was the perfect company in many ways. It solved a problem. But more than that, it was fantastic to scale because we only provided information, just text on a page. And it could be operated from everywhere. I spent many of those early years traveling, thinking about how lucky I was and why more people were trying to start such a business. A company that generates passive income.
About a year and a half after launching the "TeaDirectory", when it already brought in more than my monthly freedom formula, I decided to forget everything I had learned to ignore all the reasons that made it such a fantastic business and not one to set up a particularly good second company, which was the exact opposite. I called it "The Hipstery".
I knew from my work on Spreadshirt and TeaDirectory that many small T-shirt companies were producing T-shirts they could not sell. They dusted at the back of any warehouse and blocked money that would have allowed companies to produce new merchandise. Just as the "TeaDirectory" helped them to market their products, my new company was supposed to help them sell some of the surplus goods.
More orders = more work
"The Hipstery" promised a surprising product experience: People should visit the site and answer a funny questionnaire with six questions about themselves. Afterwards, they were asked to buy a surprise T-shirt, which we promised would fit perfectly with their tastes, which we determined from their answers. It seemed like a secret until they opened the package at home.
Initially we had maybe five orders on a normal day. Of course, I bought in advance a certain amount of T-shirts from surplus stocks, but a sudden increase in demand always caused problems to get enough supplies quickly enough. On the days when we were mentioned in the press and instead of five suddenly 250 orders came in, broke out the pure chaos.
I often hoped that we would have a weak sales day because it meant less work. There was nothing passive about "Hipstery". More orders meant more work. It got a little better as we grew, but the individual nature of the business model made outsourcing and optimizing really difficult.
"The Hipstery" was by far the cooler company. Loved by its small, loyal customer base, it never managed to bring in money or generate significant profit. After a few years, I closed it. The "Tea Directory", on the other hand, kept on making money. Only when the site was hacked in 2014 did I turn it off.
Sell digitally and passively
The contrast between "The TeaDirectory" and "The Hipstery" can be observed in many places. A guitar teacher can give individual or group lessons, but this business model does not scale well because he has only two arms. Although he is self-employed, he still exchanges time for money, like a clerk.
But if he wants, he can record his lessons on video, make a complete series of those videos and sell them online at a service like "Sofatutor" or "Udemy" as a guitar course. This is how he gets closer to "TeaDirectory" because he sells his product digitally and passively.
In the same way, stand-up comedians can open a YouTube channel, become travel agents to search engines for air travel, flea markets to Ebay, arts and crafts markets to Etsy, classifieds to Craigslist, record shops to Spotify, real estate agents to Immoscout, agent of apartments to Airbnb.
And people who work hard become people who take more naps.
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