How and when you get paid. Should you be like Popeye’s Wimpy?

School is back in session, traffic has increased, and I think the Padres have a real chance.  

Our little AI company has a classic problem, one that every startup company has, namely we need to get paid for the software. But perhaps the more interesting issue is how/when do we get paid.

Enter J. Wellington Wimpy, the soft-spoken, gentlemanly character from the Popeye comic strip. He is a mooching, gluttonous and hamburger-loving fellow who famously says, “I will gladly pay you Tuesday for a hamburger today.”

At first glance, this sounds like a con. But not so fast. The puzzle is a subtle, nuanced and fascinating one. Sure, Wimpy, I will gladly sell you a hamburger today and you can pay later. The cost of the burger on Tuesday is $4, but J. Wellington, if you commit to buy seven burgers, one each day, I will only bill you $22, instead of $28.

Wimpy thinks this is terrific. After all, he is hungry now. But there is a fishhook. If Wimpy doesn’t buy all seven burgers, if he only eats four, then at the end of the week, I send him a bill for $22. After all, that was the deal, he agreed to eat seven burgers.  

I staffed up, I bought a new grill, I committed to buy hundreds of pounds of beef, based on your promise to eat seven burgers per week.

So, when the bill comes, Wimpy, being a math genius, figures out that the four burgers actually cost him $5.50 each. He is outraged, screams and storms into my kitchen. I calmly point out to him that he promised to buy seven. This is known as ToP — Take or Pay. You owe me, J. Wellington.

Then I take his hand (the one that is not greasy from the most recent burger), and I tell him that I can reduce this bill, and what I would like is not a seven-day commitment, I would like a seven-year commitment. And then, of course, the price of the burgers will go down to $2.93 each.  

And in a stroke, I have created what is known as recurring revenue, an annuity. A solid promise to pay over time. A good, well-crafted legal agreement (pay the pencil necks, they are worth every dime) is financeable. Welcome to Microsoft and many others who figured this out.

Still, not so fast. I have made a promise as well. Our little company needs to create more features, more value, in fact, it does indeed need to buy more stoves, but that is OK, knowing that I can finance against unearned future revenue.  

This is famously called the pipeline. For a reason.

It was the natural gas industry that figured this out first. They needed to build hundreds of miles of pipelines and infrastructure, and the only way they could do it was to create ToP.   

The cities needed gas to grow, and the natural gas companies needed money to build, so they entered into that devil’s agreement. Of course, there were some sharp elbows, and in the early days there was litigation. In the end it proved to be beneficial to all the parties involved.

The next question to analyze is to decide the starting price for the hamburger. How do you start this waterfall annuity, so you can dominate the burger industry?  After all, J. Wellington has been going to McDonalds for years. Their basic burger is $2.29, and now you want him to come over to your offering.

Well, how does two for $1.49 sound?  

Our board of directors is outraged; there is wailing at the wall. They are furious. Way too cheap, our margins are lousy, you guys are idiots. This burger has Wi-Fi, Internet, auto-sync with your French fries, low calorie, extra organic sauces. It is worth way more than what you are charging. 

OK, we don’t disagree, but then we point out to the old White guys pontificating about gross margin that we could end up with 40,000 locations (like you know who), and they reluctantly harumph and nod and we adjourn and go out for, of course, a Wagyu $15 burger with truffle fries.

Make clear promises to your customers, and meet those promises. No one ever leaves a really good burger.

Rule No. 797:  Animal-style.

Senturia is a serial entrepreneur who invests in startups. Please email ideas to neil@askturing.ai