Part one of the ServiceMonster story. This introduction focuses on the company’s SaaS origins and the formation of the cap table. It’s a brilliant case study on a bootstrapped model. We put in $500K over five years. We would have gone much faster with an angel investor who knew SaaS.
From Corporate Life to Entrepreneurship
After a bout with cancer, I wondered why I was making so much money for other people. I had no idea that thought would lead me directly to my SaaS company. I didn’t think I was ready to jump into owning a business and I had no cash, so I took a junior partner position with a tech consulting startup. It was awful. For eighteen months, I would wake up on Sunday and have a quiet morning with my wife and young children, then they would drop me off at the airport and cry as I grabbed my laptop. I didn’t need luggage; my second home in Denver was the Summerfield Suites. That small hotel room had everything I needed. Everything except my family.
I was hoping to learn what I needed to feel comfortable with starting my own company, but the only thing I learned was how NOT to run a startup. It turns out that those lessons are sometimes more valuable than the ones that teach you to win.
Birth of a SaaS Model
So, in the summer of 2003, I made a scary decision. I spent three days looking for a domain name for a brand-new business model I was working on. I would offer Fortune 500 level software to small businesses at a monthly price they could afford. The data wouldn’t be on their desktops or office servers. We would host their data! I became obsessed with the implications.
- Version control – The entire client base would be on the same version of the product, which made support much easier.
- Access Control – Software for small businesses didn’t have to be a commodity. It could be a service. A service we could charge monthly for.
- Cash Flow – I didn’t have to make a single sale this month to make the same amount of cash as last month. That meant I could do sales one-third of the quarter and write code two-thirds of the quarter.
I started working on a prototype. The tech community would come to call that little Visual Basic app, which pulled data over https using a condensed data format, a Rich Internet Application. I accidentally created a pre-production RIA app using a format very similar to JSON in July of 2003.
Building the Team
As it turns out, the consulting company I was with was being absorbed by our largest client. I had thirty days to decide to take the job and move my family to Denver. That was the trigger I needed. I was finally ready, but the clock was ticking. With my new idea, crude website, and half-baked prototype, I started reaching out to friends and family. Two weeks later, I had two new business partners and a check for $56,000. Chris was happy to write the check and take 25%, as long as Eric was working with me. I agreed to take a reduced salary and Eric took no salary. That gave us six months of runway.
We also picked up David, a developer I had hired at a previous position. David and I would do the engineering, Eric would make sure everything was accounted for and help us stay focused. Eric offered David a free room in his house, so we didn’t have to pay him very much. As a result, he ended up with 10% of the company.
Software as a Service (SaaS) wasn’t a thing in 2003. SalesForce had been selling an internet version of an intranet vision, but they were focused on enterprise licenses. They had big money behind them quickly and offered an IPO in 2004. Outside of SalesForce, there were no other SaaS companies that we could learn from. No blogs or social content. No industry experts or special bank privileges. Those would come much later. CHURN wasn’t a nice KPI to share with VCs, it was a means of survival. This also meant there was no infrastructure to build off of.
Building a SaaS Platform
Today, I can establish a SaaS company in three days and for less than $500 a month (check out the software stack we made for you). After that, all development time can be focused on the product. Not in 2003. We had to build everything. While the two of us built the product we would sell, we also built our CRM, subscription charge engine, security platform, database maintenance tools, cron jobs, brochure site, lead capture pipeline, project management, and hardware management. Yes, hardware management. The cloud and virtual servers did not exist. It took three days to provision a new server and it was only made available when they plugged it into the network.
Six months into our project, Eric made an agreement with Chris to secure his 25% of ownership with a $28,000 check but that would only last a few more months and we had a big problem. The RIA was starting to show signs of instability. Installations were going to be a problem and supporting a blue-collar client base, at scale, was not looking good. So we made the hard call and scrapped the RIA project. We opened a new Visual Studio ASP 1.1 project and started coding, but soon we were out of cash. David had a childhood friend who heard about ServiceMonster and purchased 15% for $100,000. We spent the next four years taking turns putting money into the company as loans, until we hit profitability. Altogether it took us five years and $500,000 to get off the ground and we wouldn’t start seeing dividends until our tenth year.
We should have shut it down but I was too pig-headed to admit defeat and eventually we broke through. That’s the thing. Until you fail, you don’t. That’s a quality I look for in other founders I work with.
A Rewarding Journey
I made a lot of mistakes over the last twenty years but selling ServiceMonster for a fantastic exit washed them all away. Now I have a fresh start, a bag full of cash, and twenty years of SaaS experience. I’m excited to see what comes next.
