Freelance Profits, Pains, And The Path Forward
In these periodical posts, I opine on prose, products, and profits. I do this for your entertainment and education (and, of course, to shamelessly promote myself and my team, as that’s what you do these days.)
At a moment’s notice during the summer of 2013, I fled a well-paying job at an enterprise software start-up in Toronto to join another in San Francisco.
As a young kid who attended the University of Waterloo for Computer Science, I was from Frosh Week forward conditioned to believe that the clearest marker for success was making it down to, and in, the Valley.
That conditioning heavily coloured the early part of my career. From the moment I began working professionally, I measured the success of my employers by their alignment to the Valley’s ideals.
I became obsessed with the Valley’s titanic tech culture, its VCs, and its heroic figures and founders. I became a fervent fan of a new type of player and a different type of hockey sticks. I envied friends who’d made the move and envied further the fortunes that followed them.
But above all, I longed desperately for the sticker-clad MacBook, the vested and still vesting options, the 415-toting Union Square first edition smartphone, the hipster Malaysian vanilla microbrew and the $10 half-caf soy sugar-free latté and the soft-top candy orange S2000 I could drive year-round and the TwilioCon VIP badge with the neat tongue-in-cheek buttons etched with JSON payloads—and to be able to say I was “killing it”.
It should hardly seem surprising, then, that I finally succumbed to the silicon Siren’s song that fateful summer.
But as with anything you put on a pedestal, its reality was far less fulfilling than its fantasy, and in spite of ample opportunity, I left, knowing then as I do now that the place, its people, and its purpose are not for me.
Yet, I needed to try it to know that. I needed to try it to get its distraction out of my system once and for all.
And so, too, can I now likewise dismiss freelancing for a living.
What I Planned
I haven’t posted in a while as I’ve been working through my quarter-end results, and after reflecting on the fiscal year past, I’ve made the decision to close up shop.
At the outset of this year, I published my plans to head towards full-time freelance. I set a public goal for myself: within the calendar year, I would 10X my revenue from the previous year.
(Of course, the truth was that I had already begun the transition in earnest almost 6 months prior and had been building a pipeline and a client base for 6 years prior to that. But everyone needs a good launch story to generate awareness and leads, and “Year One” did just that.)
I accomplished the 10X goal at the end of March to close my Q1. Here’s a look at my profit and loss tracking from my FreshBooks account:
And, in the interest of transparency, here’s what I spent over the same period of time in raw operating costs:
With the revenues generated thus far, and based on warm opps in the pipeline, I would have been able to safely quit my day job, covered my expenses, and enjoyed a reasonably similar (albeit more carefully managed) lifestyle as of today.
What I Learned
But I’m not doing that. I’m instead closing up shop. Why? Well, while the business would be by-definition sustainable, the economics and logistics involved just aren’t attractive. That said, I did learn some valuable lessons worth sharing which help explain my perspective a bit more.
Making Steady Money Isn’t An Issue, If…
In spite of my conclusion, I do want to say firstly that any discomfort around giving up a steady salary is far more surmountable than I had assumed and than most around me had suggested it would be.
(Mind you, it’s worth noting that I am extremely fortunate to know great people like Tiffany daSilva, Loren Maisels, and Anthony Zanfini — entrepreneurs who have each built an admirable service-based small business and provided me with ample direct and indirect reassurance, inspiration, and confidence).
Make no mistake: as a product manager in Toronto, I’m certainly used to a comfortable salary. But while the prospect of dropping that regular income was initially concerning, the eventuality of doing so wasn’t what killed the dream.
That’s because I’ve learned that surviving as a freelancer isn’t an issue if…
- You have a marketable skill that you’re really good at.
- You have a strong network from which to create opportunities.
- You are comfortable giving up excess spending like eating out, drinking, or buying the latest and greatest of everything.
- You are confident enough in your abilities to sell yourself.
Sure, that may sound like a high bar, but after making it work for myself and being exposed to some of the amazing customers of FreshBooks who do the same every day, there’s no question that, with a marketable skill and a network, anyone can survive as a freelancer with the right amount of self-confidence.
If you’re not there yet, give yourself a few more years of practice and network-building. Then, ask for introductions, find opportunities, lock down written commitments, and get to work. It’s easier than you think.
That said, selling your skills and getting paid for them are two wildly different things.
Making Money Is Easy; Getting Paid Isn’t
If you’re good at what you do, getting someone to agree to pay you is easier than you think it is. Actually getting someone to pay you, though, is another matter entirely—even after you deliver on your promises.
In spite of using software like FreshBooks with all of its automated reminders and late fees and nagging tools baked in, I still had to chase people and big businesses down to get paid.
I won’t go into too much of the gory details, because this is one of the aspects of freelancing that everyone out there will warn you about, but suffice to say, it took a great deal of time to find the right blend of deposits or retainers, remittance windows, and late fees to get paid at all.
If I’m being honest, I still haven’t found the magic formula— and I don’t think anyone really has. Every client is different, and unless you’re a big business selling to smaller ones who desperately need what you’re selling, you’re likely going to get paid on your clients’ terms and timing, not yours.
This reality requires you to carefully manage your cash flow, but if you’re doing the smart thing, and starting your freelance business as a side hustle, you can easily mitigate this problem. It’s only really an issue during the first few quarters of operation, when you’re eating away savings or accruing debt.
All told, you’re at your clients mercy on this one, and I was, too. Hence why I had high hopes that I could succeed by controlling what I could: my operating costs.
Survival Comes At A Great Cost
I’ll give you one guess as to how those hopes panned out.
If I were to use what I’ve learned in the start-up game, and I was to model out my overall economics (which I did), you can rest assured that no one in the world would invest in my business if asked, let alone begged. Family included.
Let’s start with the basics. When it comes to finance and accounting, there are four big numbers that can clearly describe your business’ long-term viability:
- MRR or ARR (monthly or annual recurring revenue)
- CAC (customer acquisition cost)
- LTV (lifetime value)
- and your operating cash flow (OCF) or another similar liquidity ratio
Great small businesses are those that have a predictable revenue stream (represented by MRR or ARR), can repeatably attract and acquire new profitable business (represented by the LTV less the CAC), and can do so without risking insolvency (represented by a positive OCF and liquidity ratio).
Now, when it comes to freelancing, there are some pretty big challenges around economics. This is a moot point if you are simply trying to do what you love, but the reality is that doing what you love will actually cost you a lot of money (in time) if you can’t or don’t scale up beyond a company of one.
Consider my business.
Based on my tracking, the average elapsed time to close a new deal was 3 weeks. In practical terms, I calculated that I’d spend roughly 10–15 hours in meetings and writing proposals to win the business.
Given that my billable rate for non-project hourly work is $95, I can roughly approximate, then, that I spend about $1,425 in time to close a deal.
To generate qualified leads, back-of-the-napkin approximations of the additional costs of variable travel, entertaining, and advertising amount to about $250 per customer.
Importantly, my costs for generating recurring business are actually lower than that in reality because of how I account for life-time value (LTV) of a client. LTV for me represents the full amount of contract work across repeat engagements.
As subsequent projects and work from my clients don’t require spending as much again on winning them over, I generally don’t see that additional $1,425 per contract opp won.
Ergo, the average LTV for one of my clients is about $10K to date, and that number continues to rise as the business goes on given that only 2 clients have capped on LTV (read: churned) in the last year.
Once I win a deal, the elapsed time of researching, producing the content, and going through revisions was, on average, 1 week or 40 hours (though this varies widely project by project). To power those 40 hours, I need to spend roughly $325 in additional costs (e.g., internet, software, etc.).
This amounts to an all-in cost per contract of about $2,000, which against my average contract size ($6,000, exclusive of tax) leaves me with about $4,000.
Assets and Liabilities
When I started the business in earnest, I took on a personal loan from myself of $10,000. With that, I purchased only a single fixed asset — an iPad Pro.
To start, my business had a liquidity ratio of 1:10— which is bad. If it went under, I’d be out the $10k, but I could sell the iPad Pro to recover some of the losses (e.g, $1000).
As my profit and loss chart indicates, I’ve been paying that debt financing down as I’ve earned revenue until I became fully solvent and profitable. My liquidity ratio now sits around ~2:1 — a much better ratio.
My business’ fixed assets (banked profits plus my iPad Pro) are now greater than my outstanding liabilities (as I already paid off the lion’s share of my loan from myself).
Better yet, my business’ on-hand cash is growing month over month (if only slightly), so short of paying myself dividends, I am cash-flow positive.
Based on the above, I make on average about $4,000 in EBITDA (earnings before interest, taxes, depreciation, and amortization) per client per year.
After tax and a few other deductions, I’ll see about $3,000. $3,000 in profit for about 60 hours of work roughly comes down to about $50/hr in practical terms.
For a writer, that’s actually… not bad! Given the CAC, LTV, and my liquidity ratios, I’m in pretty good shape.
Well, except for one thing.
The Hidden Opportunity Costs
All of these metrics are great indicators of success for a small business. However, there are a few fundamental flaws in my operating model above:
1) My framing of LTV? Total bullshit. There is no guarantee that my clients come back, and attempts to monetize via retainers (which would allow me to ensure a more consistent flow of capital in) have largely failed.
2) Because I am only one person, I only have two levers to improve my $50/hr rate:
- I take bigger contracts that last longer to spend less on acquisition, which is itself a gamble as it may actually cost more to win those contracts; or
- I raise my prices, which will also likely raise my cost of acquisition as I will price myself out of certain deals.
3) Because I am only one person, each contract I take comes at the cost of some other contract I cannot take because I cannot effectively execute on it in parallel.
The time sensitivity around service-based work creates an almost impossible game to win if you want to grow. Inevitably, you need to hire help.
You’re A Businessman — Not A Business, Man.
And therein lies the rub.
If you want to really profit from your small business, there is an upper bound on what is possible by yourself.
Unless you can automate large swaths of your job, or the service you provide is reliant on infrastructure that you’re largely just reselling for a profit (e.g., web hosting), a freelance service-based business isn’t scalable without hiring staff.
There really are no great solutions out there to solve this problem, either; trust me, I looked.
I see the business development portion of the job as a large untapped market for some SMB software company out there. If I could eliminate or at least subsidize the cost of acquisition from a time investment perspective, then I could theoretically continue to flourish in this freelance business.
Given my skillset, though, if I’m going to run a business, I’d rather run a software business — the margins are way better, for starters, and there’s far more opportunity to scale.
And so, I have arrived at my conslusion after ample real-world testing and economic arithmetic: freelancing full time just isn’t for me.
Where I Stand Now
I can already hear two groups of voices shouting opinions at me through the screen: the “I Told You So’s” and the “You Don’t Do It For The Money, You Do It For The Lifestyle’rs”.
You’re both right, and you’re both wrong.
Ultimately, this experiment, like my trip to San Francisco, was necessary for me. I had to feel it for myself.
I had to wake up at 3 a.m. excited to work on a writing project and I had to stare in the face the ugly facts at month-end that my time was simply not being profitably spent.
I did both, and what I realized in the process is that while I love writing, I have an aptitude for product and for business that like all-too-many things I only came to appreciate after it was cast aside.
Perhaps I have succumbed to a sort of Stockholm syndrome of sorts to product management and product marketing after so many years of being their captive meal after meal. And perhaps not.
Either way, I will always love writing and will always reflect warmly on the days past when it consumed more of my time, but service-based freelance just isn’t a productive way forward for me. So end my plans to go full freelance and my time working with FreshBooks.
So, what’s the long and the short of it?
Freelancing is far more about running a business than it is about doing something you love —and that becomes clear if you do the math as I have above for yourself.
If you have the aptitude and appetite to run a business, you should be starting it with the express intent to build a business (and not a labour of love). And if you do, it’s in your best interest to plan to replace yourself as soon as reasonably possible. Otherwise, you risk doing what you love for yourself at a greater personal cost than you could do what you love for another company.
Over the last year, I’ve learned for myself that I’m not interested in running a writing business — or a service-based business at all.
Can you profit from doing so? Absolutely, if you enjoy managing writers and you have the network to back up your machinations to do so. However, no amount of passion will make your effort profitable lest you can scale it beyond yourself, and at that point, you’re not doing what you love anymore — you’re running a business staffed with other people doing what you love.
For me, if I’m to spend my days managing a business, my efforts will be better served managing the type of business I’ve been trained to run for the last 10 years: a software product one.
I love writing, and I always will. Should the day arise that I can land that perfect job writing about products for a company that I love, I will pursue that.
For now, I will continue to mindfully bet on what I’ve learned about how to build profitable software companies with great products, and what I’ve learned about leading people, for the next adventure ahead.
What adventure, you ask? More on that soon.
What about you? Have any experience freelancing? Have you tried your own thing and then gone back to working on something else? I want to hear your stories. Comment here, or reach me at http://www.frankcaron.com.