Lemonade Stand Startups

I’m sitting in an airport right now on my way back from Silicon Valley / San Fran / Los Angeles (WiFi is terrible, so this likely won’t get posted until later). It’s been a nice mix of seeing some older friends, attending events and meetings. I’ve not been here for a few years, and am amazed (and happy) to see the volume of Lemonade Stand Startups around.

To me, Lemonade Stand Startups are practice runs, proof of concepts or smaller companies that never grow big, but serve as a basis for future startups. To me, my Lemonade startups taught me more than any other experience I’ve been through, including University.

I wanted to post my story, in the hope that we can begin encouraging more of this behavior. I credit this experience with getting me a start in entrepreneurship, and for giving me the nose, guts and mind to keep at it.

In my world, this Lemonade Stand Startup was a Shared Web Host (yawn! It was saturated then, and it is saturated now) that I began in high school and eventually sold (more on that part later). Barriers to entry were low, so I jumped in perhaps a little faster than I should have (lesson: always know barriers).

It took me a few days to lease and configure some servers (Redhat / Apache / Cpanel, like everybody), build a website and an automated signup form. The original web designs were as nasty as one can find (see http://web.archive.org/web/20040519192641/http://www.exize.com/ for v1 and http://web.archive.org/web/20040615195942/http://exize.com/ for v2), but they did the job. We launched, and got no customers.

The natural instinct is to change pricing (a bad idea!). After running spreadsheets , I realized that our calculations would leave us far less undersold than competitors. Instead of playing smart and using this as an advantage, I shaved our prices and posted on every forum we could find. It worked, and within a few hours we had $300/month of paying clients (generally who stayed until the end) and the client base continued to grow throughout the day. It was a band-aid solution to the problem (no clients = lower prices and pump). Eventually, it taught me that immediate (and even intermediate) positive feedback does not mean a core issues is resolved; it can in-fact be more detrimental.

The next months were smooth sailing. We were getting new clients every time we posted to some core forums (Web Hosting Talk, Namepros, DN Forums, etc.) and I was spending most of my high school lunch hours answering support tickets. I began expanding our server base via leases, and was returning 4-6x the lease. As was the craze at the time, I began onboarding dedicated offshore resources to support with low-level systems admin and customer support.

Then the signups stopped. Not to lose, I turned my attention to my local town. All of my clients were American, so I thought calling up local businesses in regional Australia would work. It did, and our signups kept flowing. The positive here was the lesson that an software business can compete, evade and potentially beat larger competitors without a core online presence, but a strong offline game (something I feel has changed a little since). The negative was it was another band-aid solution to our core problem – the product offering was cheap, competed on price and had no differentiation.

As more sophisticated buyers started switching to VPS / Dedicated Boxes, Shared Hosting rates plummeted (our most popular plan was $20/month). This is when the reputation for competing on price, being no frills, leveraging offshore resources and generally being an office-less company began to hurt us. Customers expected a price drop, and we experienced the company’s single biggest customer purge in the following week. Unable to differentiate (looking back, moreso unwilling than unable) we dropped our prices and kept the signups flowing.

At this point you should be seeing a few of the core lessons I learned:

  • Price competition as a core value proposition can be scary. Our customers were only with us for prices. This was bad;

  • Getting immediate positive feedback led to a false conclusion – that the problem was solved;

  • Barriers to entry were low and our technology was old; every day somebody was overtaking us;

  • We did not have a repeatable customer acquisition model (forum posts and cold calling local businesses); and

  • We were able to stay alive in down periods by competing offline. Though, web presence was never strong or highly automated in the best of times. Googling the company today shows not much more than our cheap forum posts.

After 1.5(ish) years of moderate growth, and now being in the double digit range of servers, I finally realized this. For a kid in high school the business was strong, but I felt there was no way out of the bind the company was in. We were also getting to the point of requiring a more serious registration of the business but I was not seeing the margins or continuity to justify this.

There was enough cash to try something new.

One evening I was invited to a private Counter Strike server. For those unaware, serious PC gamers used to buy private servers ($8-$16 per player slot) each month to practice with their guild on, or to play with friends. A lightbulb moment went off, and I realized we had the skills and access to servers to make a run in this business.

This time it was a little slower to launch. Time was spent to validate the market. I had the first $7,200 (600/month) of clients lined up before the product ever launched. It was small, but it was something. The margins went from 4-6x to 10-14x on this new product line. Average customer buys went from $240/year to $600-$800 / year.

Because each sale was now worth more, it was easier to justify extra resources to pursuing them. For the first time, we bought ads. The ads failed miserably. We learned how complex and time consuming that game was, and stayed away. The good news is our forum posts would nearly sell out each time. Following my prior cold calling model, I began reaching out to guilds asking them to switch, and we offered big incentives to our existing clients to refer their sister guilds. Both worked, and I began to learn how to hunt for clients without dropping a dime. We had the first markings of a serious brand.

It took less than 3 months for the gaming server revenues to overtake the web host. While I waited too long, it was a nice lesson in pivoting. It was also a lesson that opportunities can come from anywhere.

Unable to support both businesses(I was still in high school, and unwilling to let offshore labor have core access to the servers) I began reaching out to competitors in an attempt to sell the web hosting business. At the time, some larger players were growing through acquisition to stay competitive. The general pattern was buy the customer set and delete the old brand immediately, and in turn boost internal subscriber numbers. It was a nice path for smaller players to exit, bidding wars would often result and forums dedicated to buying web hosts were created. I felt that this market couldn’t remain so rabid forever. After posting our financials (privately) we got some offers. Once I met somebody I liked (and had the offer), I explained the pivot to Game Server hosting. After explaining our models, I was asked to sell that too.

It took around two weeks to close the negotiations. Both businesses were small, and had medium-ish offshore headcounts. Both were acquired for the customer lists, and our pages were taken down immediately. Everything was redirected to the buyer, and customers were given an option to leave the host without any penalty due to the acquisition, as well as refunds and free time if they felt it was unfair. Sadly, the company domains were left to expire after a few years. It’s tempting to buy the back for nostalgia’s sake.

In terms of lessons, this pivot and exit taught me how to discover new opportunities, keep customers happy (through entry and exit), find exit opportunities and how to generate repeatable acquisition models. Naturally I’ve spent years refining these skills since, but they’ve stuck with me. More importantly, it game me a nose and a taste of blood that stuck with me through University, and to this day.

Quite often, when I think back to the startups we are now working on, I’m relying on advanced versions of skills I prototyped back then. I never had a real job through high school, and grew comfortable with the risk sand managing my own financial expectations that every startup requires