Bootstrapped Founder #111: Passive Income and Entrepreneurship

Dear founder,

For many entrepreneurs, having passive income is the ultimate goal. It's a great goal, too: having money coming in without having to do any work sounds better than selling your time and attention to the highest bidder.

My entrepreneurial journey has mainly been focused on building a portfolio of income sources that are as passive as possible. Today, I want to share what I have learned and how I went about it.

Prefer listening over reading? Listen to this on my podcast.

Passive income is the holy grail of income strategies, and it often feels equally unattainable. Many ideas look good on paper but turn out to be lousy passive income generators. It takes a lot of experimentation to find the good stuff.

The great thing about the quest for passive income is that you can do it in stages.

True passive income that has high yields and is streaming in reliably is extremely rare.

Thankfully, there is a spectrum between active and passive income. We all start out on the active side. Consider your very first "job." The first money you earned was likely from some kind of physical activity: stacking shelves at the grocery store, mowing lawns, picking apples, cleaning cars. Most people start their income journey by offering a service of some sort.

Offering services is the most active kind of income generation possible. You trade your time and labor for money. If you don't do the work yourself, you don't get paid. Through the lens of wealth generation, this is a very risky approach: if anything happens to you or your capacity to do the work, your income stream runs dry. To make money, you need to actively sustain it, day in, day out.

There is another layer of risk at play here, too: your focus on this one income-generating activity makes it much harder to diversify. Diversification plays a big role in creating a passive income portfolio. The more independent streams of income you can create — no matter how active or passive they are — the more you'll be able to stay afloat when one stream breaks away. Industries change all the time, and your interest in serving your customers will fluctuate as well.

If a single, very hands-on service offering is one extreme of the spectrum, you'll find a highly diversified portfolio of very hands-off income streams on the other end. That's where I am heading, and you'll see this approach being quite popular among entrepreneurs, too. Daniel Vassallo calls it a "portfolio of small bets."

To move towards passive income, you need to diversify not just in quantity but also in quality. It's very similar to a popular non-entrepreneurial source of passive income, the stock market: you can bet on individual stocks, but there is a lot of volatility that can cause you horrendous losses. But when you invest in Index Funds — which cover large segments of the whole market by owning smaller shares of all the players in that market — you'll see more reliable long-term returns.

Take the same approach to your own passive-income generating efforts. Envision multiple distinct and independent ways of generating revenue. And while you're getting there, they don't need to be fully passive either.

Here is where I am on this journey: I wrote two books, I consult occasionally, I run a SaaS business, and I give conference talks. One info product, one software product, and two service products. It's a solid mix of active and passive streams, with my focus lying on creating more passive income components that will eventually push out the active ones.

Let's take this opportunity to look at our income spectrum again. We started at active income in the form of services rendered.

The next step towards passive income is productizing your services. That means turning your existing service offering into a system that can lead to "done for you" solutions for many more customers without having to render every service from scratch. By creating a package with customization options, you reduce your risk while increasing the value that you provide. A productized service also means less active work, as the system you have built will do part of the work for you.

Generally, creating systems and automated solutions are wonderful strategies to move close to a portfolio of passive income generators. Anything that allows you to stay away from having to sell your time and attention is a move in the right direction.

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A productized service offering often leads us one step further towards that goal: it has the potential to be turned into a software-enabled business. Software-as-a-Service businesses shine at serving hundreds if not thousands of customers simultaneously, offering the same exact service to each of them. The service itself is highly automated and rarely needs your direct involvement.

However, building a business really is not passive income. First off, while you may own that business, and you may own all the dividends, it still needs you to run it. So unless you can build a business that can run completely without you, you do not have a passive income. Usually, when you build a business, you're focusing all your time and attention on that business, making it hard to diversify. While serving many customers with one heavily productized solution is definitely a move towards passive income, it still is quite an active endeavor. A business is an ongoing concern, and the customer service that needs to be done, any billing issues or product development requirements will all need your time and effort.

The great thing about running such a business is that you are becoming an expert on solving problems in your particular field. You learn a lot, and where someone is learning, they might also want to teach. That brings us to one of the most passive kinds of income generators: info products. Be it books, video courses, cohort-based workshops, or any other educational form of product: info products tend to have the highest up-front building requirements but also offer an equally high potential to generate revenue for you passively.

Teach what you learned in a medium that you enjoy. The more applicable your insights are, the more likely you'll be able to turn them into a product that people purchase, consume, and talk about. Write useful books that people recommend to their peers. Create content that is loaded with clear and pragmatic knowledge that is accessible to everyone interested.

Self-sustaining products are generally a good idea: build SaaS businesses with built-in network effects where users invite new users. When you run an eCommerce business, build fulfillment chains that can operate without your involvement. Offer customization options that your customers can carry into their communities, exposing your business to more prospects.

Another viable method of speeding up your journey along the path to passive income is the compounding effect of cross-promotion. If you share your expertise by consulting, create an info product with answers to the most commonly asked questions and use it to find more clients. Over time, this can grow from a lead magnet into a for-profit info product offering. The book mentions your consulting service, and while consulting, you mention your book. Loops like this turn your collection of income streams into a self-sustaining and self-amplifying portfolio.

So that's the passive income journey: the continuous act of moving from active service work to many passive kinds of income.

It's quite the journey, I can tell you that, and it can feel like an insurmountable challenge at times. But it's absolutely worth it. It's like tending to a garden: you maintain and prune it, but the plants, fruits, vegetables, and herbs do the growing for you.

And they'll grow overnight while you sleep.

Because that is what passive income does.

Thank you for reading this week's edition of The Bootstrapped Founder.

If you like what I wrote about, please forward the newsletter to anyone you think would enjoy it too.

You can find my book Zero to Sold at zerotosold.com and The Embedded Entrepreneur at embeddedentrepreneur.com.

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See you next week!

Warm Regards from Ontario,

Arvid