Exposed: The Pros and Cons of Freelancing

Freelancers will often tout the benefits of freelancing. Just as much as people working full-time might do the same (It’s true! Some people love their jobs!) Startup entrepreneurs will rant and rave about the benefits of starting companies and working at startups. Assuming we like what we’re doing, we’ll promote it as “the way to go” and happily list numerous reasons to support our argument.

So what are the pros of going freelance?

Freelancers will rattle off a number of them as “accepted truths” - but let’s look at things a bit further.

The Pros of Freelancing

1. You get to be your own boss. This is 100% the case…until you land your first client. Then say a big happy hello to your new boss! Many freelancers do have more control over their work lives than people with day jobs, and this certainly can be a pro to freelancing, but oftentimes this argument is taken a few steps too far. Clients are bosses (regardless of how badly you want to call them “partners”) and they can be as, or more demanding than anyone else.

   If possible, freelancers will gain the ability to set their own work schedule, determine their workload, and have more control over their careers. So there is a certain element of “being your own boss” that’s attainable through freelancing.

2. The money is better. Many people choose to freelance in order to work less hours, in which case it’s very hard to argue that the money is better. For those that are planning to freelance full-time they’ll often cite this as a significant pro to freelancing.

   Your hourly rate should be higher as a freelancer. And if you were doing billable work 100% of the time, you should be making more money. But this is where you

   

   may run into issues. I always think about cab drivers in this circumstance. Cab drivers (in Montreal) make somewhere around $40-$70/hour based on the rate per minute or kilometer. That’s not too shabby…except for the fact that cab drivers aren’t collecting fares 100% of the time.

   As a freelancer, you can’t possibly bill for 100% of your time. You’ll be doing sales (unless it all comes in as referrals, in which case you still have to do a certain amount of negotiation, pre-project legwork), administrative work, etc. Keep that in mind when you’re thinking about the bags of money you envision hauling to the bank vault.

3. You get to work on a variety of projects. This is very often the case. And for many this is an exciting prospect. Even more exciting is the possibility of choosing what projects you get to work on, as opposed to having a boss handing them to you. Just remember: With variety comes uncertainty. Will the new client be reasonable? Will they pay? Will you be stretching yourself too thin? For some, uncertainty is the spice of life (or at least one of them), but it’s important to realize its potential impact.

   If you get to the point where you can pick & choose projects, this can be a huge advantage. But it takes time to get there. When first starting out, you may be accepting projects that are less worthwhile, interesting or rewarding (personally and cashflow-wise.)

4. You get to work from anywhere. For many freelancers, the appeal of working from home (or the cafe nearby) is too hard to resist. And I certainly see the appeal. But working from home is not without its challenges. You need a good office setup. You need to minimize distractions. You may get roped into doing chores around the house which you previously escaped from since you weren’t around! And you might become isolated. Oftentimes when people return to the world of day jobs from their freelance careers they point to a need for more camaraderie, and a greater opportunity to work with, and socialize with others.

   If you are working at a day job and having the freedom to work anywhere (or at least from home) is important to you, I’d suggest you negotiate telecommuting time. More and more employers are amenable to this type of work setup.

My goal isn’t to burst any bubbles, only provide a perspective that may differ from what many freelancers espouse. Let’s take a look at some of the cons of freelancing…

The Cons of Freelancing

1. You do less of what you really like doing. That’s a pretty broad statement, and certainly won’t apply to everyone. In your day job you may be doing very little of what you really enjoy. But, when it comes to freelancing, there’s no doubt that you’ll do a fair amount of work outside of your expertise, in order to maintain and build your business. Think: Business setup, taxes, accounting, bookkeeping, sales, marketing, contract negotiations, project management, etc. Even worse, wait till a client doesn’t pay on time and you have to hound them — collections is miserable.
2. You have to manage yourself. Some might consider this a pro, but freelancers will often talk about the need for a ton of self-discipline. More than that, freelancers have a huge amount of responsibility resting on their shoulders. The buck stops with you. There’s nowhere to hide. You can’t blame office politics, bad bosses or co-workers, or anything else. It’s much more difficult to have a bad day or even take time off (ask freelancers if it’s harder to go on vacation…) because of the responsibility to keep things chugging along.
3. You have a lack of security. This is one of the most common “cons” people will point out about freelancing. There are three issues when it comes to security: job security, income security and.

   Personally, I don’t believe in job security. Unless you’re part of a union, you don’t have a lot of job security. And to rely on job security as a means of keeping your job is a good way of finding yourself unemployed in a hurry.

   So I don’t consider the “security” offered at day jobs to be much of a pro versus freelancing except when it comes to the steadiness of the income generated. Freelancers need to plan for uneven income. And this goes beyond having some money saved. Think about when your prospects set their budgets and spend their money. Map out month-to-month your busy and slow times, so in following years you’ll be more prepared.

   Freelancers also have a lack of security when it comes to health benefits. Simply put, freelancers are at a disadvantage when it comes to benefits, pensions, and other rights given to full-time employees. Recently in Quebec (and perhaps in all of Canada), they changed the rules governing maternity and paternity leave, so that freelancers could take paid leaves just as employees can. But in most places around the world, those types of benefits are not given to freelancers.

4. You don’t own your work. This is the biggest con of being a freelancer. You’re doing work for someone else, and when you’re done, it’s handed over and that’s that. You retain the knowledge gained, and you may even be given some rights to reuse work you produce for a client, but ultimately you don’t own it. You will most likely not gain any future value from the work (although there are opportunities to negotiate equity deals for work, etc.) Still, it’s not really yours any longer.

   As a result, you’re not building up any equity or long-term value as a freelancer. Your rates might go up. You might get more work. You might earn more money. But at the end of the day you’re still a mercenary going from contract to contract, hand-to-mouth.

   This is why I’m an entrepreneur more than a freelancer or consultant. By starting a company I’m creating the opportunity to build value in something beyond just myself. I want to own what I do (or at least a piece of it) so that there’s something more tangible to hold onto at the end.

Deciding to go freelance is a major step. It has personal and financial implications that go beyond “simple” benefits like working from home, or setting your own schedule. You need to go into freelancing with your eyes open, aware that it’s not the panacea some claim it to be.

The pros of freelancing are attainable, but they’re goals not givens. If you succeed, then you will be working on projects you’re passionate about, you will be setting your own schedule, you will be making more money. Those opportunities exist, but like starting a new company, the amount of personal, emotional and financial investment can be extremely high and needs serious thought.

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An Introductory Guide to Startup Funding

Getting a startup funded isn’t easy. There’s no shortage of hype, and multiple announcements daily of new companies getting money. And there’s an equal (and growing) amount of chatter about a “new bubble” that we’re entering. Still, raising money is far from a cakewalk.

Most people I’ve spoken to say it takes a solid 4-6 months to raise money. Mark MacLeod, CFO at Mobivox, echoes those thoughts (Mobivox recently raised $11 million dollars.)

Sure, it can happen faster than that. In the hottest startup hubs it might seem like everyone and their brother is getting funded for something. Don’t let that fool you.

You might also think that everyone knows everything about startup funding, but that’s not the case. Recently someone sent in a question asking about the differences between angel and venture financing. With that in mind, I’ve put together a brief, introductory guide to startup funding.

1. Can You Boostrap It? Should You?

Boostrapping means you fund your startup on your own. Scrimp, save and squeeze by on the minimum you can. Guy Kawasaki does a good job of explaining how to bootstrap, and in most cases, every business starts out this way.

The principles behind bootstrapping - watching every penny, weighing spending options versus return on investment, doing more with less - have merit regardless of your funding situation. Companies that raise lots of money tend to overspend (and spend poorly); they forget about running lean & mean.

Sramana Mitra says bootstrapping is becoming sexy again. Certainly, second and third-time entrepreneurs are bootstrapping more; in many cases they can afford it. I think the bigger trend is in small angel/seed financing rounds to help kickstart companies.

The advantage of bootstrapping is simple: you retain control. You’re not diluted (by investors), there are no additional chiefs (read: board of directors, influencers, etc.), you can go at whatever pace you see fit and retain your vision. Bootstrapping gives you control.

But the disadvantage of bootstrapping is a lack of capital (unless you’re rich.) That lack of capital can be a significant constraint. Of course creativity loves constraints but there’s a limit on that. If you can’t afford to keep the business moving forward, you’re in trouble. And first-time bootstrappers frequently under-estimate what things will cost.

A final note on bootstrapping: You might think it’s an “either or” option — bootstrapping vs. raising money — but it’s not. Venture capitalist, Matt Winn makes this point clear in his VC view of bootstrapping.

2. Love Money

I love money, too, but that’s not what I mean. “Love money” is money you get from friends and family.

This is an extremely common way of raising money. From Connecting People I found out that:

“…$100 billion ‘friends and family’ money is used annually to fund 3 million start ups. This compares to only $25 billion through venture capitalists. The average amount invested by friends and family is between $20,000 and $25,000, and further, 58% of the fastest-growing companies in the U.S. started with $20,000 or less.”

If you can get, go for it. The benefit is that it should be easier to get the money (vs. raising from outside sources), and you’ll gain some experience pitching in a friendly environment. The disadvantage is that you run the risk of ruining personal relationships. And, unless your friends and family are wealthy, $20-$25k won’t get you that far.

3. Angel Financing

This is where the real action and opportunity lies for entrepreneurs. We’re seeing the most movement in the angel & seed financing space.

Venture capital firms are moving into the space, developing early stage programs (some already exist like Charles River Venture’s QuickStart Program). And of course, we have the now-famous, Y Combinator which turned the entire early stage funding market on its head. It was followed by a similar program called TechStars (and others.)

And in-between Y Combinator and VCs we’re seeing angel funds pop up like Montreal Startup which attempt to blend the VC and angel worlds into one. Jeff Clavier’s new SoftTech VC II fund is another good example of this — a $12 million dollar fund dedicated to seed funding between $100k-$500k.

VCs are moving into early stage financing to get access to the freshest deals and brightest, new entrepreneurs. It makes complete sense, although they still have to change the way they invest and their mentality towards investment. Bernard Lunn makes the point clearly in his article: New VC Model For Small Scale Financing:

• Early stage Web 2.0 companies need way less money to get started.
• The pace that companies get to market and develop is much faster.
• There’s less risk putting $250k at work versus $2.5 million.

Be wary of the VC that claims they’re interested in early stage financing but has yet to complete a deal. Or the VC that still wants to overload you with paperwork, complex terms and endless amounts of due diligence.

Carl Showalter does a good job of explaining why you don’t need big money from VCs to get started.

Angel and seed financing comes into play before a business has launched its product, or shortly thereafter. It’s the money you need to make it happen out of the gate. Generally, there are a few sources of angel money:

1. Venture Capitalists. I’ve already mentioned this group. You can expect “heavier” deals by involving VCs, but they’re more accessible than other investors.
2. Strategic Angels. A strategic angel is someone with industry or domain expertise in what you’re doing. For example, if you’re starting an e-commerce business, Pierre Omidyar would be a very, very strategy investor. In the Web 2.0 world another strategic investor would be Reid Hoffman. Having strategic angels is great, because not only will they provide some cash, they’ll provide expertise, contacts and legitimacy to your fledgling startup.
3. Non-Strategic Angels. When most people think about angel financing, this is who they think about — wealthy people looking to diversify their portfolios (and perhaps have some fun) by investing in startups. Lots of people fit into this category: businesspeople, doctors, entrepreneurs, etc. If they have money and want to part ways with it for a “piece of the action” they’re potential angel investors. Often, these angels work together in groups - angel networks - to share opportunities. The problem is that it might be hard to find non-strategic angels, even if they might be the easiest to raise money from (since they’re typically the least scrutinizing.) But they don’t often publicize their interest in angel investing, so finding them can be tricky.

A few more points about angel and seed financing:

• Amounts range from $25,000-$1,000,000. Venture capitalists that play in this area will often look at the $250,000+ range, whereas individual investors will be (typically) less. The higher you go, the closer it gets to a Series A (described below), which means more effort and paperwork to close.
• The most popular structure for angel and seed financing deals is convertible debt. At least that’s the current trend. I’ll let others (more knowledgeable in this stuff) explain convertible debt.
• If you’re raising a seed or angel round, keep it as simple as possible. You can’t afford to get buried in process and paperwork at this stage. But please, please, please make sure you understand it fully and you’re comfortable with it. This could very well be the most important money you raise.
• Just because you’re keeping it simple and only raising a seed round doesn’t mean it won’t take 4-6 months to complete. Craig Hayashi has a nice angel investment timeline you should take a look at.

4. Series A Financing

Series A investments can happen at a fairly early stage - just after launch, for example - depending on how long the company has existed beforehand. A company with lots of technology and heavy intellectual property (IP) might have taken a couple years to get off the ground and already need a Series A when it launches.

But in most cases, a Series A is used once the company has shown some traction and needs more money to expand. It’s the money that will take you to new heights, massive revenues, cash flow positivity and a huge payday via acquisition (or some other exit.) At least, we hope that’s the case!

Series A financing ranges a great deal: think $2 million to $10 million or more. Depends on how much money you need, the valuation you can get for your company and what investors are willing to put in.

Series A financing typically comes from venture capitalists. And at this stage, you’ll want to bring in the strongest partner possible; the VC firm with the most experience in your space, the highest pedigree and the most success stories.

Final Funding Tips

Here are some final thoughts I can leave you with:

• Be prepared to pitch a lot. Don’t get discouraged. Refine your pitch. You will get better at it.
• Get organized. This sounds silly, perhaps, but the more organized and professional you look, the more comfortable investors will feel. This is especially true when it comes to presenting financials. Use a real financial model (not the back of a napkin!)
• Get help. Seek out the advice of mentors, advisers and lawyers. A good lawyer can really help with more complicated deals.
• Do your own due diligence. You’re about to get into bed with someone, you might want to check what they have under the covers. Don’t be afraid to ask for references. Go ahead and contact other companies your potential investors have put money into. Make sure you’re comfortable; because your investors are going to be major influencers on your company’s success.
• Never stop fundraising. I’m definitely not in love with the fundraising process, but there’s no point stopping. Keep building relationships with investors, keep nosing around for opportunities. When the time is right to raise more money you don’t want to be starting at zero.

Great Resources on Financing

The best way to get a good deal is to be informed. Here are some necessary resources for anyone looking to raise startup financing:

• Get Venture
• Venture Hacks
• Wil Schroter’s Bigger Blog
• Don Doge on The Next Big Thing
• Ask the VC
• Ask the Wizard
• Fred Wilson’s A VC
• Paul Graham

created by Ben Yoskovitz from instigator

Secret Making Money

Data: A Startup's Secret Money-Making Asset

The pervading approach to launching a startup is to do it quickly, iterate constantly and make as much noise as possible throughout the process. It’s not a bad way of doing things, and given the lower cost of startup operations, and the nature of consumer web startups in particular, and it’s completely doable. But be careful if you’re not a data hog.

Getting your startup launched as quickly as possible is fine - you need to get it in front of people to understand what’s working (and not), and get as much feedback as possible - but you should also spend a good chunk of time preparing to collect data. That means building the necessary infrastructure into your system to collect, review and analyze the data generated by users.

What Data Should You Collect?

Anything and everything. Collect as much as you possibly can, even if you’re not sure of its value upfront. Data has a sneaky way of revealing things over time - things you might not have thought of immediately. Data has a way of helping you figure out what questions to ask, because it exposes trends, and allows you to look at things with different perspectives.

Ask Basic Questions to Start

Start by asking yourself some basic questions on how you expect your application (or hope your application) will be used. There are some fairly common questions and data points that will be of value regardless of what type of application you’re building (be it B2B, B2C, etc.) For example:

• how often do people log in?
• how long do they use the system?
• what features are people using?
• when are people using the system?
• where are the users located geographically?

If you’re out of the gate with a business model and charging customers, there are a whole bunch of additional questions you can ask:

• how many people are paying?
• what are they paying for?
• what payment plan are they using (if you offer monthly, yearly, etc.)?
• how much are they spending?

Questions Beget Questions

As you start to ask questions and answer them with the data you’re collecting, it will lead to more questions. Getting into an analytical mindset of evaluating trends through data will help you uncover all sorts of interesting things. Here’s a good example from Standout Jobs

We currently distribute job postings to a variety of job boards and job aggregators, including SimplyHired and Indeed. We also sponsor jobs on both SimplyHired and Indeed (through a pay per click model) to see how well those jobs perform in terms of generating clickthroughs and applications. And we want to compare the two of them.

A few simple and obvious questions we ask (and collect the data for) include:

• how many clickthroughs are generated from these job aggregator sites?
• how many applications are generated?
• how much is it costing us per click and per application?

What’s interesting is that we notice a higher clickthrough and application rate for new jobs that get submitted through our feeds into SimplyHired and Indeed. That makes sense, of course, because people are always looking for the freshest jobs. So that leads to the next question, “How many clickthroughs and applications do we receive for jobs over time?”

This is interesting because it can affect how we spend money on sponsoring jobs. If we see that a job receives almost no applications after it’s been in an aggregator for 2 weeks, why bother paying for it show up anymore? So that leads us to think about optimizing our spending based on the age of jobs…

That leads to a whole bunch of other questions, all of which are answered through the data we collect.

Data = Money

You can make money from data in a few ways:

1. The data itself can be valuable. People will pay for data if it helps them answer questions they need resolved. It’s really as simple as that. And entire businesses have been built on collecting data and reselling it, or selling the knowledge gained from the data.
2. The data can optimize your business. You can use the knowledge gained from data to become more efficient and innovate, which will save you money. And saving money means making money.
3. The data can lead to new business opportunities. Simply understanding what parts of your product people use can help you find ways of staying focused and making more money from it.
4. The data can drive product development. You may even discover new products worth building based on the data you’re collecting.
5. The data can drive sales. For example, we track “last login” for customers that haven’t yet published their career web sites. When we see a prospect that’s recently logged in, we get in touch to see how things are going, and very often can convert them on the spot.
6. The data can improve customer support. Fixing bugs is always frustrating when you don’t really know what a user was doing. And as much as you’d like them to tell you, they can’t always do a good job of it. If the data can help you figure out how somebody was doing something when they ran into trouble, you’ll be able to fix it faster. That’ll make your customer happy. Happy customers spend more money.

Startups need to collect data.

Incidentally, VCs love data. They understand the value behind it, and how entire businesses can be discovered, created and evolved off of collecting lots and lots of data.

Data Doesn’t Always Tell You Why

Data can tell you a lot of things, but it doesn’t always answer the question “why?” Answering “why” typically requires more analysis of what’s going on, a deeper understanding of user behaviors, some guesswork and investigation. Don’t be afraid to go to your customers and ask them “why” — often they’ll be happy to tell you. And then you can correlate user answers to what you see in the data, and make the best decisions from there.

created by Ben Yoskovitz from instigatorblog