Monday, Oct. 24, 2011

Entrepreneurs Who Go It Alone — By Choice

In the fall of 2007, Marco Arment was working as lead developer at Tumblr, the social network and blogging platform, when he noticed that he kept losing the links to interesting stories that he didn't immediately have time to read.

So one evening at home, after a frustrating search for an article he vaguely recalled, Arment spent five hours creating a simple web application that would allow him to quickly and easily save links and follow up on them later. "It didn't need to do that much and there was so much value right there," says Arment. "I put in about an hour a week on it and it took almost no effort because it was so simple."

Arment showed the website to a couple of friends and they loved it. Six months later, when Apple announced it was creating an app store for the iPhone, Arment thought he could expand his idea. He liked reading articles on his subway commute home, but the Manhattan trains lacked an Internet connection. What if he could create an iPhone app that would let people read saved links offline? Arment spent his evenings developing Instapaper to do just that.

Three years later, Instapaper had grown to a million users and, despite the tanking economy, was making Arment enough money to live on — even as he maintained his job at Tumblr. Revenue came from sales of the $4.99 app, ads on the website, and a purely optional website subscription fee of $1 a month. "The iPad was a huge boon to the service because it's designed for reading," he says. Instapaper was taking off but at the same time was demanding more of his time, so in September 2010 Arment left his job to run Instapaper full time.

Today, Instapaper is a profitable one-man operation, having garnered 1.8 million users. They include Jared Keller, an associate editor for, who uses the service on his Droid Incredible during his 40-minute commute. "It's as close as I can get to print without lugging around a stack of magazines," says Keller. "It is one of those things I can't live without." And Instapaper is the perfect recession-proof business because the overhead is low and Arment, 29, has no employees to pay or investors to please. "Investors want to see growth and a return on the investment," he said. "It would lead to the kind of job that I don't want right now."

It's a sentiment felt by a growing number of solo entrepreneurs. The notion that companies must solicit investments and keep expanding in order to survive isn't always the goal anymore, especially during tough economic times. Web-based tools have helped level the playing field by lowering overhead costs so that a one-man operation can compete against million dollar corporations and thrive.

A few years back something like Instapaper would have been dismissed by venture capitalists as a mere "feature," not a stand-alone product — let alone a profitable business. "But it turns out people will pay for features," says Paul Kedrosky, senior fellow at the Kansas City, Missouri-based Kauffman Foundation, which fosters entrepreneurship. "The tools required to run a company, and how expensive it is to market it, have all declined so dramatically in the last decade that there is a real hope for people who declare themselves one-man organizations to stay this way."

In fact, during the recent economic slump, more Americans have started businesses than at any time in the past 15 years, according to the Kauffman Foundation. The Kauffman Index of Entrepreneurial Activity, an indicator of new business creation in the U.S.,shows that .34 percent of American adults created a business per month (or 565,000 new businesses) in 2010. That's not entirely surprising given the state of the economy: Entrepreneurship is often a choice for people who were laid off and can't find work.

And, like Arment, a good portion of these new business owners are choosing to go it alone, creating sole proprietorships rather than rushing to hire employees. Using Bureau of Labor Statistics data, the Kauffman Foundation calculated that the quarterly rate at which new business establishments that hire employees opened doors dropped from .13 percent in 2007 to .10 percent in 2010. The recession saw an increase in the number of new businesses started, but a decrease in the number of those that hire employees. "The data show a rise of sole proprietorships," says Kedrosky. "But the data also show that the cost of running a small business has never been lower so more can operate profitably without taking investment or without hiring employees."

Just ask Maciej Ceglowski, 36, founder of the website Pinboard, a paid social-bookmarking service that lets subscribers archive web links with annotations and share them with friends. ("If Instapaper is the beautiful reading room, I'm the dusty attic," he says.)

Ceglowski started Pinboard in response to the demise of Delicious, a social website that preceded both Facebook and Twitter. Yahoo bought Delicious in 2005 and removed many of the features users liked. "I thought it was becoming less useful," says Ceglowski, who worked at Yahoo in 2007 on a different venture. But instead of complaining, Ceglowski got to work. He started Pinboard in July 2009, working in his spare time. On December 16, 2010, Yahoo had an all-staff meeting where it listed Delicious on a slide in the "sunset" category — meaning the site would probably die a slow death. (Eventually, Delicious was sold off to the founders of YouTube.) When the slide was leaked on Twitter, Delicious fans began to search for a substitute and Ceglowski's Pinboard was there waiting. A few mentions in the tech press helped Pinboard take off. Thousands of new paying customers came on board that first day. In three days he had amassed $100,000 in revenue.

Today, Pinboard is Ceglowski's fulltime job, pulling in $250,000 in revenue over the past two years. He says the site has 25,000 registered users with about 18,000 active ones each month. Ceglowski's only costs are paying for server space, and Pinboard makes money by charging customers a one-time fee of $9.50. (The fee started at $2 and goes up a penny with every 400 people who sign up.) There's also a $25 a year archiving fee for people who want personal copies of links. "My dream is to keep this a one-person project," says Ceglowski. "I am competing against billionaires like the YouTube guys running Delicious and I can hold my own. The tools I use have gotten so good and they are the same ones that Yahoo and Google use."

Still, there are downsides to striking out on your own. Landlords don't like self-employed businesspeople and getting a mortgage or a small business loan can be tough. Plus, being a solo practitioner is time consuming. "Sometimes months go by and all I did was work," he says.

Suze Parker, 52, of Overland Park, Kansas, knows the feeling. "I do work more than when I was at an agency," says Parker, who opened her PR firm in 2005 after having been employed in the field for 20 years. "But I don't mind it."

The impetus for striking out on her own was a desire to return to the hands-on client work she loved but didn't have time for because she was spending most of her time managing other people. She beat the pavement, letting old colleagues and friends know she was open for business. Pretty quickly the phone started ringing with referrals. The company she was leaving let her continue handling two clients on a contract basis, which helped kick-start revenue.

Between 2006 and 2008, business took off, with annual revenues reaching nearly $300,000 in 2008. But then the economic downturn hit and her income plummeted 40% in 2009. Along the way she learned to outsource the financials to a CPA and use researchers for projects outside her comfort zone. "I don't say that I would never want employees but I don't foresee it," she says. "It creates the situation I was in before." This year Parker anticipates her revenue will be around $230,000, slowly climbing back to her 2008 high.

Successful sole proprietorships tend to have a few similarities. "They are scratching their own itch," says Kedrosky of the Kauffman Foundation, noting the achievements of Arment and Ceglowski. "Something in the world is currently pissing them off so they have to go out and solve it." What's more, the ideas behind the companies are often painfully simple. "You can't go wrong doing less," says Kedrosky, "but you can go hugely wrong doing more." And many have a special expertise like Parker and have time to spend on it, says Paul Bernard, owner of Paul Bernard & Associates, which consults for small businesses.

One way to minimize the risks of going solo is to begin while working somewhere else, as Arment and Ceglowski did — or at least line up a few accounts in advance as Parker did. "The solution to 'I can't find my own job' isn't always to start your own business," says Bernard. "You are raising a child when you are an entrepreneur with all the joys and the risks."