Home » Interviews » Starting a Successful Hosting Business (With $600K+ Annual Revenue) Before Turning 18 with Cody McLain [TDI070]

Starting a Successful Hosting Business (With $600K+ Annual Revenue) Before Turning 18 with Cody McLain [TDI070]

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All successful entrepreneurs can be inspiring, but what really gets me fired up (with inspiration) are those who can do it at a young age – and keep it going.

Today’s guest, Cody McLain, has an awesome story.  I’m not exaggerating – if there is any interview you read on this site, this better be one of them.

Throughout Cody’s journey (which includes starting a hosting company and building it to more than 3,000 customers before the age of 18), he has learned a lot of really valuable lessons.  I won’t spoil too much, but one of his biggest failures was losing a business that he built up to $600,000 in annual revenue. He shares the full story, the lessons learned, and so much more in this interview.

Seriously. You will want to read this one.

Cody, from what I understand, you’ve built a few different online businesses, including a couple of web hosting companies that you’ve sold. Tell us some more about your background and your journey. How did you get into the hosting business? What specifically were the businesses you built and sold, and what types of projects are you focused on today?

Remember when you were a kid, and you had some crazy stupid idea to make a quick buck? My friend and I just wanted to make enough money to buy an Xbox, and he had this idea to signup for a reseller account at HostGator. Our partnership didn’t last more than a month before we had our disagreements, but I finally found my passion.

For the first time in my life, I felt like I had a purpose, a goal I could aspire to. It wasn’t easy, and I had my fair share of hiccups, one of which you can read about in this thread. Nonetheless, I stuck with it. I even had to resort to placing the merchant and bank accounts for the company under my mom’s name. I was able to get a handful of customers and worked hard to keep them.

Life seemed almost against me from the start, especially with both of my parents passing away when I was young. I found myself alone before I turned 18. I may not have had much, but the one thing I did have was my business. I finally found a sense of purpose, something to live for. I am very fortunate that I was able to have a clear goal at such a young age. There are many people in the world that will never experience this in their entire lifetime.

I remember the day Social Services discovered me living by myself, and took me away to foster care. It just so happened, that on the very same day, the server which hosted all of my client’s websites, crashed! I contemplated running away – I received a phone call from Scotland Yard. Apparently, they were investigating alleged fraud because my customers’ websites kept going offline, and I didn’t have access to a computer to fix the problem. It was unnerving and yet rewarding at the same time since it meant I had enough customers to call to the attention of a police investigation.

Regardless, I was able to get my customers’ websites back online a week later and started to put the pieces back together. Despite the server issues, anxiety, and so many sleepless nights -I kept on working at it. I gave up what small bit of a social life I had to dedicate it to the one thing that only had value to me.

I went on to build my first hosting company, and by the time I was 18, I had collectively around 3,000 customers paying me for web hosting, reseller hosting and dedicated servers. I leased all of my equipment, and as a result, my profit margins were low, but I was able to make just enough money to support myself in my small apartment.

Today, I run a multitude of online brands ranging from support services to web hosting and software. I’m always working on new projects and coming up with new ideas. I also love to provide consulting services to larger companies; by helping them figure out their inefficiencies, and making their brand appeal more to their customers eyes.

What do you consider to be your greatest success (or successes) so far with your online business? 

I’d say my biggest success was the sale of my last company. After a year of being on the market, and a handful of deals that fell through, I was finally able to sell PacificHost for a high 6 figure amount. The sale was the conclusion to a number of small successes I had within the company, such as appealing to the right target market, being profitable within 3 months, and non-stop promotion.

What were some of the bigger lessons you learned from selling PacficHost?

With PacificHost, I started it out of desperation, and wanted to do whatever I could to make it successful. I looked at my competitors’ pricing so I could make sure my prices were lower. It was a constant war between my competitors to remain attractive to the customers. I found that the cheapest paying customers were the ones that complained the most, posted the worst reviews and filed chargebacks. The customers who were paying me for a $40/month VPS rarely had any issues and we rarely heard from them, even though it was a managed VPS service.

Not to mention, I was catering to a huge audience, which limited the attraction in any specific market. It also was a major source of bad reviews because my techs could only support each software to a very small degree. They weren’t knowledgeable enough in the software I was marketing for my hosting service. This created upset customers who didn’t receive the level of support they were expecting.

So being able to look back, I made numerous mistakes with PacificHost, which I was only able to see in retrospect.

1. Limit your target audience. It’s not possible to support multiple markets at once and still be able to provide a good level of support. By limiting your target market, it will be easier to be seen as a leader in that area. Your customers will love you more because you’ll be able to more readily answer their questions and resolve their problems. In turn, this will decrease your churn rate and increase your customer base.

2. Don’t start a price war with your competitors. You’ll end up shooting yourself in the foot just to get a guy named Dave from Utah. He will call you at least once or twice a week, and submit tickets daily over everything he can think of. Sure, you can fire Dave and tell him to go elsewhere – but what looks better, having a price point that is too high for Dave to signup in the first place, or having him post multiple bad, fake reviews under different aliases about your company everywhere on the internet? (This actually happened to me more than once.)

3. Quality over quantity. I mentioned this before, but I think it’s important enough to reiterate. With PacificHost, I was trying to go after every type of customer, and so were my competitors. If I raised my minimum price from $3/month to $60 I would have eliminated nearly half the customers and half the headache involved in running the company. This can be translated into the 80 / 20 rule whereas 20% of our customers made the majority of the recurring revenue.

Every successful entrepreneur encounters some kind of failure along the way. What was your biggest failure with your business, and what did you learn from it?

When I lost my $600k business. Between the ages of 16-18, I built a company that was generating around $600,000 in annual income. I built this with a partner that was three times my age. The deal was, I would build the company, and he would take care of taxes, legal, financial and I would trust his judgment on decisions.

Unfortunately, he made several mistakes, one of which included convincing me to sell the business to a man I didn’t like. In exchange, the buyer was going to offer us shares in his penny stock company, and raise angel money for us. To spare all the details, through fraud, coercion and much more – I agreed to sell it after a year-long legal battle. It practically destroyed me inside to lose something I put my heart and soul into.

I later learned, he sold it as a fire sale to, none other than, Hostgator. They acquired it, even after knowing the details on how he obtained it.

It was truly a lesson to be learned. After years of building this company, I lost it all for a handful of stocks worth nothing.

If there is anything I took away from that experience, it is that there are some truly evil people in this world and you don’t know it until you encounter them. It made me more vigilant on future ventures and I feel like it contributed to my success later on. The biggest thing I learned was to follow your gut feeling. I was coerced into selling it and I let my guard down. This really taught me to stick with my thoughts and realize when other people are trying to influence them.

When it comes to building online businesses such as ones that offer web hosting services, I know one of the great challenges is customer acquisition. What have been your greatest strategies for getting new customers?

People launch their own hosting companies all the time. Almost to the extent that I feel embarrassed to say I run a hosting company. The natural thought is to think of a reseller with a handful of customers. The thing I did differently was to find my niche. I know it sounds almost cliché, but hosting companies are a dime a dozen. Nowadays, you have to find a niche, no matter how small that might be – it will amplify your success in the future.

I was always on the lookout for something new that I could integrate inside my hosting service. I found something called FFmpeg hosting. FFMpeg is a code you install on Linux servers which converts video into .FLV format. This is what allows you to upload videos to a site and watch them. Essentially, after Youtube got big, everybody and their mother wanted to have their own file sharing website.

I discovered this new and emerging market and decided to go all or nothing at it. I had it installed on all the servers and I negotiated deals with all the software companies that had video sharing scripts to become a part of my affiliate program. I gave them money for every sale they sent my way and slowly but surely I was able to build a steady stream of customers in this one niche market.

So really what I’m saying is that it doesn’t matter what niche you choose, no matter how small it may be. If you can own a bigger piece of that small pie it will give you a competitive advantage over the other guy that caters to 5 different types of hosting. WPEngine grew because they only catered to WordPress customers and had a very high entry price from $45/month when they first launched.

It’s better to focus solely on 1 or 2 markets, instead of doing what everybody else is doing. Which is offering a general hosting service and then advertising affordability with quality. That alone, just doesn’t sell anymore.

I like to think of hosting back in 2008 as the epitome of unlimited hosting offers. There were too many hosts (and still are today) trying to compete against one another for the individual or small business owner, but nothing really sets them apart. So tons of hosting companies decided to offer unlimited disk space and bandwidth for practically nothing in order to take all the naive customers in the marketplace, who were looking for a good deal.

Today, times have changed and I feel the general populace on the internet has learned unlimited isn’t what they thought it was, and we are seeing an emergence of limited plans again. Don’t get me wrong, unlimited isn’t bad in and of itself, but it’s the fact that it was the primary competitive advantage that thousands of companies saw in an attempt to grow their market-share. For many, it gained them a few extra customers, but was by no means the determining factor that made them successful.

We should not assume the customer is naïve in this regard. We shouldn’t try to deceive or upsell them in a tricky manner. Doing so may increase your income but fails to build customer loyalty of your brand. You never see any startups using any methods that might even be remotely controversial.

So apart from finding your niche, whether it’s Drupal hosting, or high-end luxury hosting, it’s more important to focus on a core customer base and own that. If you offer Drupal hosting, Joomla hosting, WordPress hosting etc… you are devaluing your company’s worth in the eyes of your customer for each market you go after. Companies try and hide this with landing pages specifically built for certain markets or keywords, but ultimately your brand can only grow to dominate a market if that is all that brand does.

My favorite metaphor for this are those restaurants inside most hotels, the food is just alright and typically never amazing. People don’t flock to the hotel because of the restaurant; they come for the comfort, luxury and price of the room. So stop trying to be a hotel and a restaurant, and instead focus on your core market and own it.

Improving productivity is another area you like to focus on. What have you found to be a couple of really good productivity tactics for your business?

10011903_10152107039654440_1488757570_o I am a productivity freak. I spent months of personal time trying to figure out how to optimize my daily routine, and my overall mentality. I’ve read tons of books on willpower, positive psychology and habits. I’ve been able to optimize my daily routine to maximize my work effectiveness and mood. I used to wake up everyday, eat and dive straight into work, and now I actually give myself personal time every day. It starts with a 45-minute gym workout, followed by a 20-minute meditation, and a chapter of the current book I’m reading.

After all of that, I make myself breakfast and spend about 20 minutes watching TV. Studies have shown that the benefit received from watching TV is generally maximized at about 20 minutes. The rest of the day I work until mid-afternoon, and then I slide in my treadmill from Lifespan, and raise my desk from Geekdesk.com where I’ll spend a few hours walking and working. It’s been shown that simply exercising daily does not combat large periods of sitting down which can have as bad of an impact almost as smoking.

Being able to optimize my personal habits, and giving myself 3 hours of personal time in the morning everyday has helped lower my stress levels and allowed me to work without getting burnt out. As we all know, getting burnt out is the arch nemesis of productivity within itself.

In terms of how I run my businesses, I’m sort of the behind the scenes mastermind. I create the brand, infrastructure and build that overall idea on how we’re going to approach the market. Then, I have an Operations Manager who is in charge of actually running the companies themselves.

No matter how small you are, you should always outsource your work. You can outsource pretty much everything from a virtual assistant to a web developer and much more, for just a few hundred dollars each. The amount of time that I saved initially by hiring from the Philippines was immense. As more revenue started to float in, I was able to replace some Filipino jobs with employees in the US.

I never would have been able to get to this point without first outsourcing from the very beginning. Most small business owners have this ideology that they need to put on many hats and do all of these different roles, when in fact that is not the case. If you’re not good at social media, outsource it for $300/month. There are only so many things you can do in a day and still have a life outside of work.

I’m answering this interview from Lake Atitlan in Guatemala. Why am I here? I just woke up one day last week and decided it was time for a trip somewhere, and I ended up here. Running a business doesn’t have to be 12 hour days with no life. That’s how it used to be for me but I’ve been able to change that. I now consider my time much more valuable than any amount of money I could ever have.

Looking generally at becoming an entrepreneur: If you had to take your best advice or inspirational thought and put it into one sentence or phrase, what would that be? 

Focus on your strengths, and outsource the rest. [Click here to tweet this]

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What are your favorite online resources?

Instead of necessarily listing resources, I’d like to list software that I use with my company. I have spent years trying to find the best software to fulfill each role in my company, and how I can integrate them to work with one another. I believe in simplicity over features and integration over any be-all-end-all type solutions. I recommend the following software with high regard. I’ve tested every competing product and have found the following to be the best in their field.

HipChat – Amazing chat client that allows us to have different rooms for each project we have running. It will auto-paste images from links and we often have meme battles in chat.

Zapier – This tool will integrate practically any service with another. We primarily use it for sending vendor updates, or tweets about service interruptions from our datacenter to this room. It requires a bit of creative thinking, but if you can think of it, the integration will surely be there. The biggest benefit for us is our ability to set up notifications in HipChat about Raid alerts on any of our servers, in case a hard drive fails.

Google Drive – I was using Dropbox but in terms of managing your business Google Drive is the way to go. I’ve been using Dropbox for years and loved it’s simplicity. However I’m sure some of you might have noticed with Dropbox that sometimes your files go missing. This is a Dropbox bug that they seemingly refuse to acknowledge and fix. It’s because their client only operates 2 protocols, delete and upload. When you move a file from one folder to another it actually deletes and re-uploads that file. If say you created a new file, then it starts to sync that file but what if you move that file while it’s syncing or even change the name of that file while it’s syncing – then there is a chance it might disappear on you.

Google Drive doesn’t have this problem, but even more so, has a full suite of built-in editing tools so you can collaborate effectively with your team. I tried using Evernote Business but it lacked that real time editing since you have to wait for the sync to complete. I have several folders for different groups of teams inside my organization. Customer Service reps have access to a specific folder with FAQ, Getting Started and internal walk-through videos I created. While my web developer has access to the web development folder where I keep scripts and html files that go on the website. Everything is compartmentalized and yet the sharing is instantaneous. I recommend you check out this article to learn more about the features inside Google Drive.

Redbooth – I’ve used TeamworkPM, Asana, Azendoo, Wrike etc.. You name the task application and I have tried it. I vetted each for it’s simplicity, ease of use and features. While Redbooth doesn’t have everything we need, it’s by far the best at allowing you to delegate tasks and keep track of them.

With other task management applications it is much easier to get lost in the chaos from too much going on, and tasks that are missed or forgotten about. Redbooth avoids this by centralizing the dashboard around activity related to tasks you are subscribed to. Say you assign a task to Sammy to update your Facebook page. He comments that he needs the login details. Instead of getting spammed inside my inbox, by every action made inside a comment I am following, the dashboard will show me a to-do-list of to-dos that I need to respond to. After I am done with each I simply X out the list item and therefore know I have done everything to ensure my employees have what they need to accomplish their tasks.

Mitro – Password Management for organizations is an absolute pain-in-the-ass. I have tried every team password manager I could get my hand on, and quite frankly, every one has fallen short to my expectations. Mitro is still just a small startup, but their simplicity makes it the best company password management I have come across. The software allows me to categorize different passwords into separate teams.

For example: I have Marketing logins, Forum Logins, Customer Service Logins, Vendor Logins etc.. This allows me to keep track of which passwords are assigned to each team and person. It also gives me the flexibility of assigning individual passwords. Let’s say I need to give my secretary access to PayPal so she can pay a bill – but I don’t want to give her access to my entire Financial Folder of passwords. I can individually assign her access to that password.

One can also prevent employees from copying passwords, which also prevents them from changing the password. Most of the time systems require the current password is required to change logins on most websites. Mitro will still never replace my love for 1password, which I still use for storing personal passwords, but it lacks the sharing and syncing capability of Mitro.

Finally, where can people find you online?

Sure! I established my new blog not too long ago, called MindHack.com. I talk about productivity and a little bit about psychology and the underlying ways in which we as humans think. In the future I’ll be converting my website, codymclain.com into a blog where I intend to give more specific and actionable information on how other entrepreneurs can grow their business and manage a team.

Meanwhile, you can follow me on twitter at @codymclain

Thanks so much for sharing your story with us, Cody!

What did you think about this interview with Cody? What do you think about the hosting business? Leave a comment below!

(Also, if you enjoyed this interview, like us on Facebook, and stay in touch with every new interview we publish. Thanks! 🙂 )

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8 comments

  1. Superb interview guys! And thanks for sharing your experiences, Cody.

  2. Really impressive journey.

    I’ve got to up my game.

  3. Loved it. thanks 🙂

  4. Awesome interview!

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