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Step 6Bring in Revenue; Pay Yourself
When we started, roughly two-thirds of our revenue came from consulting projects and one-third from an SBIR grant from the NIH. As time went on, the consulting projects came to provide nearly all of the money. When Instructables was spinning-off and first had cash, we went through a weird transitional period where it was paying Squid Labs for my services as CEO. This lasted until some of the other companies spun-off, at which point everyone had transitioned out and no one was officially working at Squid Labs.
Unlike our relative ownership of the company, which changed over time (see Step 10 Bring On New People), the amount we paid ourselves was always equal. Paychecks were erratic and were often predicated on when a client paid. None of us are particularly motivated by money, and this system was the easiest to implement because it required very little discussion or thinking. Besides, we were all used to living cheaply on graduate student stipends.
Dan did all the bookkeeping and found a service to do payroll and keep track of taxes. We were all grateful that he managed the finances because it seemed like a crappy job; but in the end, it would have been worth paying $1-2 K per month to get a bookkeeper or consulting-CFO involved. As an aside, if you are located in one of the intellectual hubs, local contractors and consultants (lawyers, bookkeepers, etc.) will be expensive; consider finding a firm not on a coast/not in a major city, as they'll be just as good for most of your work and much cheaper.
Once we got our NIH SBIR grant, the money was consistent and allowed us to explore technologies around an interesting area; but it took a full year from writing the application to actually getting the first check, and in the interim we had little insight as to whether we would get it at all. For us, this delay was ok because we had already filed provisional patents around the technology and needed to actually work on graduating from school. If you have an idea that can be fleshed out into "yes, this can be a company" or "no, this won't work" for less than $100 K (approximate average you might expect from a phase-1 SBIR), I'd recommend consulting by day, and working on your own idea at night -- you'll have a year head-start, and won't be tempted to write more grant applications hoping to up your hit percentage just because the topics sound kind of interesting. Within Squid, we wrote, or jointly wrote with other companies, around 10 additional governmental grant applications on a variety of things ranging from highly interesting problems to "let's repurpose this old idea and see what happens." While none were granted and I would be hesitant to recommend the SBIR process, I am specifically not putting SBIR grants into Step 11 Dumb Ideas. If their timing works for your business, and it won't cause you to miss out on other opportunities, SBIR grants are risk and equity-free sources of capital.
Consulting made much more sense. After just a few months, we were getting inbound interest in our research/design/build consulting services. For $1-5 K we'd do a "Feasibility Study," which included evaluating a client's technology or brainstorming with them about ideas, determining milestones for research or prototyping, and establishing a budget and timeline for a larger project. Projects were often several months long and ranged in cost from $20 K to several hundred thousand dollars. The client owned all deliverables, which might be physical prototypes, code, schematics, or circuit-board layouts, and could patent or protect as they saw fit. Normally, one partner was the lead on a project, and on a typical day in the first year of Squid Labs, everyone would be focused on their project doing design, CAD, simulations, layout, or prototyping in the shop, and pulling other partners in as needed. Most of the work we did for clients was confidential, so I won't include many specific details here.
The Feasibility Studies were lots of fun to do, and were probably an amazing value for the clients. Since all the Squids love thinking about new problems and brainstorming solutions, a nominal one-day one-partner study costing $1 K would often get everyone in the company thinking about the subject for the whole day. Further, telling potential clients we had a process involving a paid feasibility study was a great way to determine who was serious about working with us. For example, at least once a week, we'd get an email or phone call similar to this classic one:
I have heard that there is a tremendous amount of energy in each bolt of lightning. Imagine building power plants powered by thunder storms! ... I ask you to help me develop the underlying technology to enable these power plants. Because I have done the hard thinking to come up with this idea, we will split ownership of the patents, and both be rich!!!
So yes, I highly recommend feasibility studies.
Unlike our relative ownership of the company, which changed over time (see Step 10 Bring On New People), the amount we paid ourselves was always equal. Paychecks were erratic and were often predicated on when a client paid. None of us are particularly motivated by money, and this system was the easiest to implement because it required very little discussion or thinking. Besides, we were all used to living cheaply on graduate student stipends.
Dan did all the bookkeeping and found a service to do payroll and keep track of taxes. We were all grateful that he managed the finances because it seemed like a crappy job; but in the end, it would have been worth paying $1-2 K per month to get a bookkeeper or consulting-CFO involved. As an aside, if you are located in one of the intellectual hubs, local contractors and consultants (lawyers, bookkeepers, etc.) will be expensive; consider finding a firm not on a coast/not in a major city, as they'll be just as good for most of your work and much cheaper.
Once we got our NIH SBIR grant, the money was consistent and allowed us to explore technologies around an interesting area; but it took a full year from writing the application to actually getting the first check, and in the interim we had little insight as to whether we would get it at all. For us, this delay was ok because we had already filed provisional patents around the technology and needed to actually work on graduating from school. If you have an idea that can be fleshed out into "yes, this can be a company" or "no, this won't work" for less than $100 K (approximate average you might expect from a phase-1 SBIR), I'd recommend consulting by day, and working on your own idea at night -- you'll have a year head-start, and won't be tempted to write more grant applications hoping to up your hit percentage just because the topics sound kind of interesting. Within Squid, we wrote, or jointly wrote with other companies, around 10 additional governmental grant applications on a variety of things ranging from highly interesting problems to "let's repurpose this old idea and see what happens." While none were granted and I would be hesitant to recommend the SBIR process, I am specifically not putting SBIR grants into Step 11 Dumb Ideas. If their timing works for your business, and it won't cause you to miss out on other opportunities, SBIR grants are risk and equity-free sources of capital.
Consulting made much more sense. After just a few months, we were getting inbound interest in our research/design/build consulting services. For $1-5 K we'd do a "Feasibility Study," which included evaluating a client's technology or brainstorming with them about ideas, determining milestones for research or prototyping, and establishing a budget and timeline for a larger project. Projects were often several months long and ranged in cost from $20 K to several hundred thousand dollars. The client owned all deliverables, which might be physical prototypes, code, schematics, or circuit-board layouts, and could patent or protect as they saw fit. Normally, one partner was the lead on a project, and on a typical day in the first year of Squid Labs, everyone would be focused on their project doing design, CAD, simulations, layout, or prototyping in the shop, and pulling other partners in as needed. Most of the work we did for clients was confidential, so I won't include many specific details here.
The Feasibility Studies were lots of fun to do, and were probably an amazing value for the clients. Since all the Squids love thinking about new problems and brainstorming solutions, a nominal one-day one-partner study costing $1 K would often get everyone in the company thinking about the subject for the whole day. Further, telling potential clients we had a process involving a paid feasibility study was a great way to determine who was serious about working with us. For example, at least once a week, we'd get an email or phone call similar to this classic one:
I have heard that there is a tremendous amount of energy in each bolt of lightning. Imagine building power plants powered by thunder storms! ... I ask you to help me develop the underlying technology to enable these power plants. Because I have done the hard thinking to come up with this idea, we will split ownership of the patents, and both be rich!!!
So yes, I highly recommend feasibility studies.
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On a different note where did you start when looking for grant?