Do you think about working as a freelancer? As I pointed out in my article about taking personal risks, I previously worked as a technical consultant. Becoming a freelancer was an easy decision for me, because it is already an established work model in the domain of software engineering. Will it fit for you as well? Let’s find out!
What is my mission as a freelancer?
I like the primary meaning of a freelancer:
A mercenary knight with no allegiance, who instead offers his services in exchange for money.
That means, that I, as a mercenary knight in the role of a web developer, am paid for the time I work for my client. I write every hour on an activity confirmation, let my client sign the confirmation and create my invoice based on it. There is not much loyalty for my current client, as the allegiance to him goes only as far as he pays me for the time I work.
Although I like the mercenary knight analogy, it might not be the most ideal to act on. Instead I’d like to follow a value-based approach. It is important that I provide a solution to a certain problem that my client faces for which there is a lack of time, resources or skills. With this approach the budget is a little more flexible as the overall problem is divided in work packages that may be organized to fit the given cost and time.
By using this approach it is easier to enforce value-based pricing in which I am paid according to the value I’ve delivered. This might be a percentage of the decrease in costs or increase of revenue my solution has provided. Over time I’ll always try to become a trusted advisor. I see myself as more than a contract developer or just a simple resource that can be used for scaling a development team. Hence my mission as a freelancing consultant is to help my client reach the right decision and take the necessary actions that follow this decision.
My first big freelance project
Regarding my experience in starting out as a freelancer last year, I was very very lucky. I maintained a good relationship with my last employer that helped me make the transition. They committed to task me with some development work to fill the first months. After that we were able to deliver a proof-of-concept for a client in which I provided a custom implemented solution that took roughly ten months. Everything went flawless. We delivered on time, the solution works fine and the client is happy.
These first steps took me by surprise. I didn’t expect the transition to self-employment to be that smooth. I value this first project as a “lucky shot” as I am sure the next project won’t be as easy to acquire and deliver. Luckily all went extremly well hence I’m able to use the last year revenue as a risk buffer.
Comparing freelancing to being an employee
After working for nearly a year in self-employment I’ve noticed some advantages and disadvantages compared to being an employee. A lot of the following considerations may vary heavily depending on your personal feeling. I’ll start with the disavantages:
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Self-organization and self-motivation: Nobody is going to tell you what you need to do or how to spend your time. This might be seen as an advantage but it also means you have no outside motivator like “I might lose my job if I don’t finish the work at the given deadline”. I’m currently in a position to sustain my lifestyle for at least 12 months. There is no extrinsic motivator that tells me to generate revenue by all means or “you’ll starve”. I’ve learned that I need a clear goal that I ideally can achieve with the support of different colleagues or a small team. If I don’t have this goal and someone to share it with I’m struggling to keep my motivation high. This is a feeling that I would never have expected to experience. Short-term motivation comes from meetups and events like the Startup Weekend, but I still haven’t found the right leverage to a long-term and sustainable motivation.
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Less socializing: As I work from home 90% of the time I don’t have someone for small talk, feedback or to talk nonsense with. Although I wouldn’t see myself as someone who needs much of socializing there is still a level of companionship that I need. Currently I see two solutions for this problem. I might work from a co-working space or rent an office near other IT companies, perhaps after hiring my first employee. Both of these solutions are cost drivers.
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Date of payment: The bigger your client, the longer the period of payment. If you’re used to getting your paycheck at the end of the month you need to establish a financial buffer. In my case I need to wait 45 days after handing over the invoice until the money reaches the bank account of my company. As I knew about the long period of payment I only started to pay myself a salary after six months, although I was prepared for 12 months without a salary.
Despite these disadvantages I don’t regret my decision as the advantages outweigh them in my opinion:
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Improved time management: One of the luxuries of working from home is the lack of the daily commute (or at least is is greatly reduced). To be fair, this isn’t an advantage of freelancing if your employer provides you with home office possibilites. For me it allows to save roughly an hour every workday. In regards to your time management for work itself you’re free to work anytime you want. My work schedule shifted more towards the evening and night time of the day. Although you may decide when to work, you’re usually expected to deliver according to deadlines. In the end I’m still working an 8 to 6 cycle that’s just slightly shifted in the timeframe of the day or split into smaller work periods.
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Full control: You’re in the drivers seat of your business venture. Nobody is going to tell you which projects to accept and which to decline. There should be a correlation between your performance and the resulting income. I like it that way as I value the financial leverage that may result from it higher than the risk associated with it.
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Lean processes: If you’re used to working in big companies you might have experienced “process hell”. You need approvals for every little thing and need to strictly follow the processes which involves a lot of time and involved parties. As a lone wolf I just do my travel expense accounting once at the end of the month. If I need hardware or accessories I simply order them. Although I have to prepare my invoices and expenses for accounting I use less time for administrative activites compared to my time as an employee. This will certainly change with the first hire and business growth.
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Commence operations: I’ve started my company in germany as a corporation with a legal form that ensures limited liabilities. There are various rights and duties associated with this legal form. After several months I was exposed to most of them and learned them on the way. I see this as a great learning experience to slowly getting used to the legal aspects of running a company.
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Small scale entrepreneurship: If you see yourself as a product that you need to sell, freelancing is a great way to learn the ropes of entrepreneurship. I need to sell myself, deliver what was promised, run the back-office and essentially do all the parts that a business consists of. Hopefully this will ease the transition to operate a growing business.
Reduce your risks
A lot of people associate self-employment with high risks. From my point of view there isn’t that much risk associated with it. In germany I’m still eligible for social benefits if I fail and I’m still able to cover any costs caused by health issues due to a proper health insurance. The biggest costs that might occur from self-employment are the opportunity costs that manifest if I would have worked a better paying job. This is a tradeoff I am willing to take. Although self-employment isn’t going to kill anybody there are still a few things you can do to reduce the risk of failing:
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Education: Luckily I did my studies in computer science and trained myself early in software engineering. Despite this formal education I need to constantly educate myself about new technologies, tools and programming languages. If I hadn’t started to work with JavaScript, especially Backbone.js and RESTful web services, I couldn’t have delivered my last big project. Keep an eye on the market demand and adjust your skills accordingly.
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Professional help: As I’ve chosen the legal form of an incorporated company there was no way around a professional accountant and tax advisor. Without this help I would’ve put myself in a position of high risk for personal liability. Depending on your legal form you’ll need to minimize the risk for this personal liability.
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Third party experience: Beside educating myself about technology I’ll try to read a lot about experiences and failures of others following the same path. You’ll get in similiar situations and the more you know beforehand the more likely you’ll manage these situations with a positive outcome. To give you an example: I learned a lot from the book “IT-Freelancer: Ein Handbuch nicht nur für Einsteiger” (german language) in regards to freelancing.
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Location: Choose your business location wisely to minimize costs and travel time. I’m located in Stuttgart with a lot of small, midsized and large companies around, which operate in different industries like IT, automotive and engineering. With a 2 hour drive I can reach the cities Karlsruhe, Frankfurt and Munich. There are different meetups and communities for IT and startup related topics. It’s easy to grow your network in such an environment and find well-paid work as a freelancer in web development.
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Minimal fixed costs: Luckily I am not a big spender. My monthly personal fixed costs are low and I’ve even managed to lower them since self-employment. This applies also to my business in which I try to keep the fixed costs as low as possible. The higher your fixed costs the higher the risk of failure due to low free cash flow. Even if I run in a dry period I won’t accumulate a lot of debt that way.
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You are the product: What are your features? What is your unique selling proposition? In what way are you better than your competition? If you regard yourself as a product that you need to sell you’re forced to define and emphasize your special traits. The more detailed the “product description” of yourself is, the easier it will be to find the projects and clients that you benefit the most. This might also involve a competitor analysis in your region and a pivot of your skills to a smaller niche or more specialized industry or technology.
Hard decisions: from freelancer to entrepreneur
Until now I’m not used to making hard decisions that may result in losing business. My overall target is to scale the business and let it grow itself. For this to happen I need to adjust the way I think about delivering value. As a long term goal I need to step back from software development to get free time for business development by delegation. This isn’t easy to achieve and my biggest challenge for the future. There are other decisions ahead on my way to entrepreneurship:
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Loyalty: As an employee you’re used to being loyal to the brand and identity of your employer (or at least you should be). As a freelancer nobody can expect this loyalty from you, but is it always reasonable to act like the mercenary knight and seek the biggest contract? If you are part of the supply chain for a company that bids in a public invitation to tender, you’re only utilized if the company wins the bidding. Alternatively you can reach out to the winner of the bid and try to work for them. So far I’ve had success with being loyal to big clients, but this might change in the future if there isn’t enough work for me to do for them. At this point my loyalty will be questioned.
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Sales: I haven’t done any cold calls or written cold e-mails in my whole life. I’ve never tried to sell a software on my own. I’ve never closed on a deal, negotiated the price or written a big contract. In 2015 my target is to sell at least one software license.
For the future I see two different paths ahead of me:
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Freelancing: Professionalize my freelancing, build a bigger network, find clients, specialize more and build a project funnel. Grow the business by winning bigger and bigger projects, hiring other contractors or employees. Find reliable software and project partners, gather experience and build own methods. The starting point for this would be to update my profile on various freelancing platforms and reach out to my existing network as well as participate in the local development communities.
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Product development: Find a specific pain in an industry, design a solution, find customers to fund the development, build it and sell licenses. The necessary insights can be gained by freelancing for different industries and also to use some freelancing revenues as investments for product development. The short-term revenues of freelancing are tempting, but in the long-term the business scales better with a business model partially consisting of software licensing. To achieve this long-term goal there might be longer dry periods with investments that won’t transform in revenues immediately.
Realistically there will be a combination of both ways. I’ll work as a contractor if someone requests my support. In the meantime the development of my own products will be continued. As a risk buffer I’ll try to always keep six to twelve monthly costs in funds available and maintain the fixed costs on a minimum level. The outcome should be a business that generates half of the yearly revenues by consulting services and the other half by selling licenses for own software products.
Although there is a lot to do in the future I’m confident that I am on the right path. I’m writing this post from a cafe near my apartment at early afternoon. I like to think that I already achieved a lot of freedom in a short time, with the exception that I still need to work to make ends meet.