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Cygnus in the Early Years

Having mapped out the theory, it was time to put the theory into practice. Creating a service-based business is easy enough, if you know anything about business. Unfortunately, between the three founders of Cygnus, not one had any experience in running a business.

Always make new mistakes.
Esther Dyson
We used books from the Nolo Press to incorporate our business, establish our by-laws, and complete various other formalities. For every penny we saved in the first year, we paid out dollars by the thousands later on down the road. (It's not clear that we could have done any better hiring professional advice since the first such advice we received cost us hundreds per hour, and still cost us tens of thousands later to fix. For the most part, that still says more about our inability at the time to properly judge the scope of legal/corporate problems and to request the proper advice than it does about the particular incompetence of the many lawyers we tried talking to.)

Having created a completely new business model, we also created our own concepts of finance, accounting, marketing, sales, customer information, and support. Each of these creations served us adequately in the first year of business, where everything was chaotic, and everybody was focused on doing whatever job was necessary to get the business off the ground, but each needed to be completely retooled as the business grew.

Cygnus -- We Make Free Software Affordable
John Gilmore
To combat the chaos, we worked hard to make the basic business premise as simple as possible: we were going to provide proven technical support for proven technical software, and we were going to use economies of scale to make it profitable. In our estimation, we were going to provide two to four times the quality of support and development capabilities that in-house people could deliver, and we were going to provide these services for a half to a quarter of the cost. We downplayed all the other stuff about open-source software because it was far too nebulous to sell. We just focused on giving people better tools for less money, and contract by contract, we learned how to do that.

We wrote our first contract in February of 1990, and by the end of April, we had already written over $150,000 worth of contracts. In May, we sent letters to 50 prospects we had identified as possibly interested in our support, and in June, to another 100. Suddenly, the business was real. By the end of the first year, we had written $725,000 worth of support and development contracts, and everywhere we looked, there was more opportunity.

For all this success, we were brewing some serious problems. If we were selling our services for half to a quarter what an internal resource would cost, then were writing contracts that would cost in total between $1.5M to $3M to deliver, yet we only had five people in the whole company: one sales person, one part-time graduate student, and three founders doing everything from Ethernet wiring to letterhead proofing. How big would the business have to be before economies of scale really kicked in? At its current rate of growth, how many more all-nighters would we have to pull to get to that point? Nobody knew, because we didn't have any financial or operational models.

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Last updated: 1999-08-06