A few years ago, I woke up in Sunriver, OR, and went to make coffee. The house had one of those bed-and-breakfast-type coffee trays. Drip machine. A stack of filters. Three bags of French roast coffee.
I picked up one of the bags of grounds and dumped it in the machine. Power on. As I trashed the wrapper, I noticed “Royal Cup Coffee” printed on the front.
Royal Cup is a family-owned business based in my hometown. I always thought it was a regional company. It made me smile that they had processed, roasted, packaged, serviced, sold, and delivered packets of coffee to this little house in the Pacific Northwest.
Then I googled them. I told my uncle how big they’d gotten. “Wait until you find out about the $100 million company that chops all the pre-cut fruit you buy in supermarkets,” he said.
There’s a thrill in finding quiet companies, operating in the background, cashing checks. Software has exploded the number of these businesses. Ten people working remotely can make millions of dollars a year.
No giant warehouses required.
My favorite example is ConvertKit. None of my friends have heard of ConvertKit. They ended 2019 with $20 million in ARR. Revenue is growing 30% year-over-year. They have 48 employees.2
Back to Patio11’s Law.
Austen Allred shared how, when matching Lambda graduates to jobs, he’ll discover software companies he’s never heard of in Oklahoma pocketing $10m/year in profit. Doing things like “making actuarial software for funeral homes.”3
It’s not surprising. Of the 3,000+ software companies acquired over the last three years, only 7% got TechCrunch, Recode, HN, or other mainstream tech coverage.4
Most software businesses are silently marching along in the background. The best ones won’t be acquired any time soon. Why would you get rid of a $10 million/year annuity?
Patio11’s Law: The software economy is bigger than you think, even when you take into account Patio11’s Law.
"patio11's Law": The software economy is bigger than you think, even when you take into account patio11's Law. https://t.co/8WA7e65UzT— Mark McGranaghan (@mmcgrana) May 12, 2020
One of the most interesting things about Lambda School is running into all the little software companies you’ve never heard of quietly pulling in $10m/yr in profit with a team of 25 in some city in Oklahoma you’ve never heard of— Austen Allred (@Austen) May 12, 2020
I actually have numbers on this: I found > 3000 software firm acquisitions over 3 years, and then looked at how many got a “mainstream tech” outlet mention (eg TrchCrunch, ReCode, HN, etc): ~7%— Einar Vollset (@einarvollset) May 12, 2020