Randy Schmidt sold his product and paid off his college loans [Q&A]

Since he graduated from Drexel in 2005, Randy Schmidt had been paying $421 every month to pay off his college loans, or “the worst kind of debt,” as he calls it.

Then he found an answer. Sell his product, Dead Man’s Snitch, and pay it all off in one go.

Schmidt, 32, sold the product to Michigan-based software development company Collective Idea in the summer of 2013. The whole process — from the day he started building to the day he got his final payment — took a little over a year, said Schmidt, who was a structural engineer before he became a web developer who ran his own consultancy. He’s also part of the team that built transit app iSEPTA.

Schmidt wouldn’t disclose how much he sold it for but said it was about what he’d make in a year as a structural engineer.

As for the product itself, “it’s really nerdy,” Schmidt said.

Dead Man’s Snitch is a subscription-based service that alerts companies when their websites aren’t working. Not the visible website itself, but the stuff that goes on in the background, Schmidt said.

“The things that fail silently,” he said, like nightly data backups.

Those are things that could fail in the background and weeks might go by and you wouldn’t know about it.

At its height, Dead Man’s Snitch had more than 50 users, he said.

We spoke to Schmidt, who lives in Lansdale and works out of a collective in West Chester, about how he came to sell Dead Man’s Snitch and what kinds of choices he made along the way.

How did it all start?

I built Dead Man’s Snitch because it was something that one of my clients needed. I had about a dozen customers (that were previous clients), then a couple months later, I opened it to the public. Some other consulting companies used it. They were helping me work out the bugs.

Before Dead Man’s Snitch, had you ever sold a business before? 

I worked on an app called Lose It or Lose It, which had users that gave us money. We ran it for three and a half years, then I realized I wasn’t into it anymore. I tried selling it but never did.

Did you try selling Dead Man’s Snitch?

I wasn’t actively trying to sell it. There were a couple people who knew about it and were interested in it. At one point I kind of got sick of having student loans — it’s the worst kind of debt. I ended up selling it for a little more than my student loans, my loans and the taxes I owed on them.

Tell us about the new owners.

The people who are running it now are doing a much better job than I was doing running it. They’re a bigger consulting company with more resources to put in. I think they understand what developers want more. It’s growing, too. They’ve built an iOS app for the service. I don’t really have a hand in it anymore. I talk to them every now and then.

I was friends with [the team at Collective Idea]. They knew about it pretty early and they were thinking about buying it. They thought about hiring me so I could work on it with them, but I thought it’d be cleaner to sell it to them. I wasn’t ready to go work for someone else.

You first launched it with your clients, the people you were already doing work for. Then you opened it up to the public. When did you decide to open it up to the public?

After I worked out a few backend problems, like how do you let people know when things are down, how often do you send people emails? How do you notify people as much as possible without annoying them?

I also had to figure out billing stuff. We used Stripe, a service that automatically bills customers.

Once that was working well, we launched to the public.

You charged $19/month for unlimited service. How did you get to that price?

I just took a guess. I sold the company before I had a chance to change that guess.

I wanted to make it a little more expensive than some people would think. I originally wanted to price it at $29/month, but I thought that was too expensive, so right before I launched, I lowered the price.

I thought maybe I could charge $9/month for the product to support five different things, so that the $19/month for unlimited service looked better. But I sold it before I could try that.

When it came to pricing, I felt like I could charge [$19/month] because having that background stuff fail could be expensive. My one client had a site that was pretty valuable to them. If we had lost two weeks worth of backups, it would’ve been worth a lot of money. So if you had something that would keep that from happening it’d probably be worth a lot per month.

In general, if it’s going to be sold to a business then you can charge more.

Collective Idea sells the product at four different levels now.

How did you decide how much to sell the business for?

I did some research. I found out that when selling a business that isn’t subscription-based, the average price is 3x the annual revenue. If you had subscription-based revenue, then it was 6-8x your yearly revenue. So those were the upper and lower bound.

Collective Idea said 6-8x the yearly revenue was too expensive. In the end, I told them I just really wanted to pay off my student loans. It ended up being 4.5x my yearly revenue.

What were your startup costs like?

My development time was free, and I paid a designer $4,000 out of pocket to do the graphic design. I had monthly costs for hosting and sending out emails [to customers, when their stuff went down]. The costs I had were in line with the monthly revenue I made so I didn’t have to worry about how I was gonna pay myself.

This is why it was better for me to do a subscription model rather than a one-time fee, because I had monthly hosting costs (these hosting costs don’t go up with the amount of customers you have). If I charged a one-time fee, I’d have to keep acquiring customers to pay for those costs.

Did you do any marketing or advertising?

I used promo codes. The landing site offered a free trial and a 50 percent off code for the first month. I also used reddit. It’s a really nerdy crowd. It’s good because people can comment on it and you can get a feel for how people react to the product. There are trolls, buy you can get good feedback.

But reddit didn’t really help that much [in terms of customer acquisition]. In the end, it was word of mouth.

Anything else you learned?

I like the subscription model. I don’t like building services for other developers. They drove me a little bit crazy.

I learned that depending on the person you’re talking to, that changes the conversation. When you end up making things more expensive, you end up talking to the business owners rather than the developers. When you’re talking to the business owners, you’re talking to someone who’s seeing a cost-benefit situation, whereas a developer is like, “I could build this myself. Why should I pay for it?”

What are you working on now?

I’m working on two projects that aren’t public, they’re things that I wanted to exist in the world. I’m not sure how I’m going to make money off them, but I’m using them everyday.

One is a tool that turns email threads into a web-based discussion. The other is a complement to an address book that lets you keep notes on all the people you know, using tags.