Does your startup pass The Sleep Test

Having coffee at 4am after an all-nighter with my co-founder and wife a few days ago we came up with a rather obvious but interesting concept. I’ll call it The Sleep Test.

Unless your business earns revenue while you are sleeping, it won’t scale.

If you’re an I.T. consultant or lawyer selling your own time, you can’t scale.

If you’re a brick-layer who employs other brick layers and also employs a sales person, driver, accountant and all the other business components so that your business runs while you’re not there, you CAN scale.

If you’re a web developer who writes an application that earns ad revenue or that earns subscription money while you sleep, you CAN scale.

Most businesses start off with a founder selling their time and with the maximum earnable revenue being tightly limited by the founders available time. The founder works themselves into a stupor and at some point they go through what is often a difficult transition where they “step back” from the business and employ others to take over their various jobs. Many businesses don’t make this transition and it is the subject of much discussion in MBA programs world-wide. The birth of Kinko’s is a great example of this evolution. Paul Orfalea is dyslexic and in the story of Kinko’s he mentions how this forced him to step back from the business and employ others.

Many “Web businesess” or “Software businesses” need to employ a sales team or have components like fulfillment that don’t scale easily or cheaply. But if your business is a “Web App” that earns you money through advertising or through subscriptions and where the application is the business, it scales incredibly well.

Web App businesses scale so well that if you “get it right”, they automatically pass the sleep test from day one and they pass the test without you having to employ additional staff.

Two types of Web App that often pass the sleep test are:

  1. A service that attracts huge numbers of an attractive demographic that can earn you ad revenue or
  2. A service that is so valuable to a group of people that they will pay you for it, preferably on a recurring basis

Your web app business must also:

  1. Not require additional staff time per customer
  2. Not require additional staff time per dollar earned
  3. Market itself. If it’s marketing is limited by your time, you wont’ scale.
  4. Earn you substantially more money than your business costs to run.

And that’s it. You need to build a web application that markets itself, earns more money than it burns and that is either wildly popular or wildly valuable.

If you have a Web App that passes The Sleep Test, congratulations because you have just bypassed one of the most difficult stages of small business evolution and one of the most common points of failure that just about every other business type is forced to navigate.

Final caveat: I’ve written this post discussing this concept in absolutes i.e. you either do or do not pass the sleep test. Of course in reality there is not a single web app business that does not need to employ more staff as their revenue and customer base grows. Google is a fine example of a business that is designed to avoid having to employ more people as revenue or customers grow and they employ over 20,000 people today. But this test is a useful way to measure and think about how efficiently your business will scale.

9 thoughts on “Does your startup pass The Sleep Test

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  4. Two types of Web App that often pass the sleep test are:

    1. A service that attracts huge numbers of an attractive demographic that can earn you ad revenue or
    2. A service that is so valuable to a group of people that they will pay you for it, preferably on a recurring basis

    Your web app business must also:

    1. Not require additional staff time per customer
    2. Not require additional staff time per dollar earned
    3. Market itself. If it’s marketing is limited by your time, you wont’ scale.
    4. Earn you substantially more money than your business costs to run.

    This type of “Web App” just seems idealistic but the value add must be sooooo compelling, and I question the sustainability, especially with the thought that it will surely attract competitors and well established players

    An example is FourSquare, simple location based blogging that’s currently one of the hottest startups, next to Twitter, but as more hype revolves around this company, the competitors get even more fierce – Gowalla is expanding internationally, and Yelp just released a check in system. With Gowalla silently scaling and raising more money than FourSquare, and with Yelp, with an already established user base and brand, releasing the checkin feature, copying FourSquare, may blow them out of the water.

    Then comes the monetization because if the service does make money while you sleep, new competitors will swoop in with less margin and take your customers, which is why in internet startups, it’s best to earn enough money to breakeven – hence facebook decreased their ad inventory to prevent clutter, even though its less revenue, but to look less spammy, and why twitter has yet to turn a profit, because it will deter their customers.

    Monetization is very difficult business and with web apps, the barriers to entry are so low that a new service that takes your idea and adds incremental improvement may have a serious impact on your business (xanga -> myspace -> facebook)

    Since the internet is still so new and with the development of new platforms (smartphones, iPad, iphone, facebook, twitter), new business can be created on top of new technology because of all the new capabilities these machines have, and hence can provide new services that currently doesn’t exist. this creates room for the next facebook, amazon, microsoft of the new decade

    Ultimately, I think if your web app does pass the sleep test and is sustainable (i.e. you have a competitive advantage that can’t be imitated), you will either be acquired or scaling globally to become an internet juggernaut, alongside facebook and google

  5. Pingback: The Sleep Test | Adii Rockstar

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