Noah Kagan, co-founder of Austin-based AppSumo, is no stranger to the startup world. He was Facebook's 13th employee and wears his termination from the company somewhat like a badge of honor. He was Mint.com’s fourth employee, and even put in some time at Intel and Microsoft. But it wasn’t until he was in the founder’s seat himself that he finally realized what kind of company he wanted to work at.
Taking the Entrepreneurial Leap
Kagan cut his entrepreneurial teeth at Gambit, a company he co-founded after spending a year and half creating Facebook apps. “I went through a quarter life crisis and realized that my goal in life was not to be creating Facebook apps,” he says. Gambit was an online gaming payment platform that signed on high-profile customers such as Zynga, and quickly grew into a multi-million dollar company.
“We were the no-frills cost leader and we grew to $18 million the first year and were on track for $40 million the second year,” he says. Nonetheless, Kagan was dissatisfied. “What I learned is that I’m much more interested in what I’m working on than in money.” The world of games and payments didn’t make his heart beat, so he left the company to his partners, so that he could noodle around ideas for another startup.
Helping Apps Find Customers
In the spring of 2010, Kagan hit upon an idea for a business that would help high-quality apps get more customers. He bundled similarly themed apps (for instance, productivity tools such as Evernote, RescueTime and MindMeister), and sold them at discounted prices.
“We got a great response,” he says. AppSumo, started with $60 paid to a developer in Pakistan, was born. Word of mouth, plus promotion from the apps themselves, helped grow the company. It also helped that Kagan and co-founder Chad Boyda targeted a very specific niche: They focused on Web applications that would help startup founders run their businesses more efficiently. Think analytic, developer and design tools.
Based on customer feedback, AppSumo transitioned from bundling apps to selling single apps at discounted prices, which are negotiated with its partners, and with whom it shares revenues. Marketing is done via an entertaining e-mail that’s sent to 750,000 people three times a week. “I want people to look forward to the e-mail and for it to make people’s days better,” he says. Case in point: A recent e-mail relayed a story of a robbery that left the victim without both his Macbook Air and his iMac. The deal of the day: highly discounted tracking software from Prey Project.
VC Money? No, Thanks.
Kagan is a proud bootstrapper and has politely turned potential investors away. That’s probably a good thing. Last summer, says Kagan, he began to feel the company was growing too fast and in a direction that was making him uncomfortable. “July was our highest revenue month,” he says. “But I didn’t like the products that we were promoting. They made us money but they didn’t represent the AppSumo brand. It wasn’t the business that we wanted to be running.”
So he dropped 100 of the company’s 300 products, cut staff from 16 to six employees, and reduced overhead from $150,000 to $50,000 a month. The company also developed an algorithm that gives each app a quality score. “Anyone who doesn’t meet the quality score gets cut,” he says. Kagan expects that another 100 apps will be cut from AppSumo’s offerings.
“If we had venture money, we’d still be running the business like we were six months ago and none of us really enjoyed that,” Kagan says. “The beauty of bootstrapping is that we can run the business our own way.”
Read more of Donna Fenn's Startup of the Week.
Photo courtesy of AppSumo