I’ve been doing a fair amount of speaking lately. It’s partly driven by my
recently released book, Inbound Marketing: Get
Found Using Google, Social Media and Blogs (which is doing exceptionally well -- more below on this). The topics I usually speak
on are startups (surprise) and marketing (surprise, surprise). And, when I’m
really on a roll and feeling adventurous, I talk about startup
marketing. 
First off, a quick confession. I’m not really a marketer, and I don’t play
one on TV. I’ve never had the word marketing in my job title, ever. The
closest I’ve come to any formal academic training in marketing are two marketing
classes I took in grad school. Neither of them were really about marketing a
startup (they were about pricing and branding and other high falutin’ stuff).
So, much of what I’ve learned about startup marketing has been through (gasp!)
actually doing it.
Now, I want to lead with the fundamental premise of this article:
Exceptional marketing can be a formidable barrier to entry.
For those of you that are new to the investor game (which is usually where
the phrase turns up), “barrier to entry” is loosely defined as that thing which
makes it hard for competitors to enter your market and
reduce your profits. In most cases, when VCs ask a startup about barriers to
entry, the response usually falls into one of two categories:
Type 1: We’re doing something that is so hard to do that few others can do
it. This is usually manifests in the form of some intellectual property (IP)
like source code.
Type 2: We’ve got exclusive/proprietary access to some important resource
that others can’t get to. This could be in the form of some product integration
partnership (like bit.ly has with Twitter).
Of course, there are other types of barriers to entry, but the above two
types capture most of what you’re likely to hear — and software entrepreneurs
are often focused on the first one (i.e. "lets build a kick-ass product that’s
really hard and others can’t replicate because we’re just so freakin’ awesome").
Nothing wrong with that. I’m a big fan of doing really hard things that you’ve
got a rare talent for and others can’t easily emulate. However, it’s entirely
possible that late at night, when you’re talking to yourself, you might say
“Self, I know my application is cool and all, but honestly, I don’t think it’s
that hard to build.” Be comforted in the knowledge that most
software being built is not particularly hard to recreate. So, the question is,
if it’s not the software that’s going to be your barrier to entry, and you’re
not fortunate enough to have a lock on some proprietary resource, what do you
do? My advice: Get phenomenally good at acquiring customers
efficiently. The emphasis is on the word “efficiently”.
So, here are some thoughts and insights on how I think you can build a
barrier to entry with marketing:
How To Build A Barrier To Entry With Inbound Marketing
1. Getting good at spending money doesn’t count. Your
strategy shouldn’t be “go raise a bunch of money, then use that money to go
buy your way to some customers. Then, make it up in volume.” Though that can
certainly work, that’s not a defensible barrier to entry. Just about
anyone can spend money (some smarter than others). You need to
focus on creativity, not cash. More on this later.
2. PPC (Pay-Per-Click) can be effective, but will not protect you.
One of the popular forms of marketing today is pay-per-click
advertising through programs like Google AdWords. I’ve seen entrepreneurs get
really, really good at figuring out just the right bidding strategy and figuring
out precisely how much they can afford to spend on a given word based on their
conversion rate and lifetime value of the customer. This is all fine and good,
except for one thing. PPC programs like AdWords run as a real-time auction.
She who pays gets the clicks. It’s easier to describe why this is a problem
with an example: Let’s say that you’re building a web-based app for home
theatre installers (random example that I just made up). Let’s also say that
over time, and with some maniacal focus and PPC bidding ninja skills, you figure
out that you can afford to pay up to about $2.76 a click based on the traffic
that these clicks generate, how many clicks lead to purchases, and the value of
each purchase. Life is good. For every $1 you put in to the PPC machine,
something > $1 comes out. This goes on for weeks/months. Then, all of a
sudden, you wake up one morning, check your analytics and discover that for some
reason, the price for your most important keyword went up. Way up. Enough that
your morning coffee comes shooting out your nose. After some poking around on
the Interwebs, you find out that some lame startup on the other coast just
raised $5 million from some lame VC. They just emerged from the shower freshly
sprinkled with a new round of funding, hired a VP of Marketing who then went out
and started buying AdWords. Your AdWords. The real tragedy with this story is
that this competitor is not all that bright. They don’t know that they
can’t really afford to pay that much for a click and make profits (they’re not
thinking about profits — they just raised a bunch of money). Your problem is
not that they’re super-smart, it’s that they’re super-ignorant. And that’s the
thing with PPC. You’re basically at the mercy of the stupidest market
entrant. Call me simple-minded, but that doesn’t sound like a
particularly effective barrier to entry when someone can just come along and
drive your cost of customer acquisition (COCA) up. And, it doesn’t happen
overnight — it happens immediately.
3. Get spectacularly good at search engine optimization (SEO).
Instead of becoming really, really good at PPC, invest in the time and
energy to become an SEO-ninja instead. The first reason for this is that SEO is
cheaper. Not free (generally), but free on a marginal basis. Here’s why: In
PPC, each additional click costs you money (based on the cost-per-click). Want
1,000 more clicks? You pay for all of them. For SEO, once you’re ranking well
and getting traffic, the clicks don’t cost you anything. It’s going to take
some time/energy to rank in the first place, but once you do, life is good.
Further, unlike PPC, SEO does not reward the stupidest market entrant. Someone
that’s new to the game can’t just walk right in and snatch your #1 ranking.
Granted, they can spend some money and eventually get there, but it’s
not going to be immediate and you’ll probably see it coming. (All you have to
do is watch the search engine results for your favorite keywords and see who’s
creeping up on you). So, unlike PPC, the presence and skills you build in
SEO-land are much more sustainble and defensible. In fact, if you’re out
raising money, being able to demonstrate that you’ve got strong rankings for
traffic-generating keywords is a major, major plus.
4. Create content that kicks butt. It’s really simple. If
you produce things that are useful/interesting to your target customers — you
win. You win by drawing people in to your business not because you had
the largest marketing budget, but because you created something of value. The
kind of stuff that people tweet about, link to in their blogs and and share with
their friends. That’s magical. The type of content can be varied. At my
startup HubSpot, we’ve tried lots of
different things: “normal” blog articles, music videos, parody videos, songs,
cartoons — and of course, free marketing
tools. For most startups, if you took every dollar you would have spent on
advertising to try and beat your prospects over the head in the hopes that
they’ll buy from you and instead spent that dollar on actually producing useful
content, you’d win. Seriously win. This worked so well for us that almost all
of our increase in marketing spend is allocated towards hiring people that can
produce content. They make videos, write blogs, create research reports and
develop software tools. The beauty of this content is that long after you’ve
invested in creating it, it’ll continue to generate traffic and leads. To this
day, some of the early articles I wrote for our marketing blog drive consistent
cash into our bank account. We don’t have to spend a penny for those leads.
I’ll summarize again in four words: Create content. It works.
So, I want you to imagine this: Imagine that you’ve got a business that is
exceptionally good at pulling customers in by the truck-load. Not by spending
money on outbound marketng (like advertising, spam, telemarketing and direct
mail), but organically because they think the stuff you have to say is just so
freakin’ awesome. People are shouting from the virtual twitter rooftops about
how great you are. They’re so mind-bogglingly happy that they’re writing entire
blog articles talking about your company and your product. And you don’t have
to pay them a penny. Now imagine that some competitor emerges, raises money
from Sequoia and comes after you. Do you think it’ll be easy for them to
reproduce that magic that you’ve built? Nope. It’s hard. And that, my
friends, is what I call a bonafide barrier to entry.
On a closing note, I’m going to ask you a favor. It has been less than 36
hours since my book, Inbound Marketing has
been available in bookstores nationwide. Today was the big “release” day.
Already, it’s in the Amazon Top 100 business books list, and the #6 book on
marketing (if you helped make that happen, thanks!) The entire book is about
pulling customers in. I wrote it not to make money (it’s near impossible to
make money writing a book), but to try and convince more people — especially
startup founders, that inbound marketing is a better way to go. So, you should
buy the book. To make it easier for you,
I’ll give you my personal, one-question asked, money-back guarantee. If you buy
the book and don’t find it useful, just tweet me @dharmesh and I’ll send you $25 via
PayPal. (The only question I’ll ask you is “what should I do to make it useful
so people that read the next edition don’t waste their time?”).
Oh, and for whatever reason, if you owe me a favor (or $25), this is a great
karmic-loop way to pay me back. For some reason, even though the money made is
miniscule, I get some emotional gratification from seeing the book do well.
And, $25 is a small price to pay for my emotional betterment, don’t you think? OK,
that’s enough guilt for one blog article. Go buy the book on Amazon. Then, copy-and paste
this message into twitter — “I let @dharmesh talk me into buying his book (http://InboundMarketingBook.com). You should too".
Or, just click here to tweet it.
Thanks a bunch for your support and apologies for the shameless promotion this time (I don't do it that often). I promise to get back to my regular shameful promotion next week, once the newness of being a first-time author has worn off.
Oh, and what do you think about exceptional marketing being a barrier to entry? Agree or disagree that this could work?
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It has been a little over a year since I announced the news that my marketing software startup closed it’s Series
B round of funding. The article, “Insanity?
Why A Bootstrap Entrepreneur Raised $17 Million in Venture Funding”, was a
candid glimpse into the rationale for raising what seemed like a huge amount of
money to me at the time (it seemed huge, because it was — at least to me).
Today, we’ve released news that HubSpot has just closed on another
$16 million funding round (our Series C) bringing our total capital raised to a
whopping $33 million.
As I write this, I’m a bit worried that this article is going to come off as
arrogant and/or self-indulgent. I promise that’s not my intent. I’m just going
to let you “inside my brain” in the hopes that some of you will find the
excursion interesting, amusing or useful. Although not all of you are out
raising money (thank goodness!), I thought you might want an insider’s view on
why an otherwise rational and pragmatic entrepreneur would make this kind of
leap. I promise, the decision to raise this kind of money wasn’t as crazy as
you might think.
The Story Of How I Ended Up Raising $33 Million In
Funding
1. Did we need the cash? No, we didn’t need the cash. We
had over $6 million in the bank. But, if I’ve learned one thing about VC
fund-raising it’s that not needing to raise money helps a lot.
2. Why raise money at all? As the company has evolved,
we’ve learned a lot about the mechanics of our business. We have gotten pretty
good not just at predicting our growth path — but actually solving for
it. There’s no better way to illustrate this than with the graph below:
This graph shows the number of customers (people that pay us money) over
time. Note that our revenue curve is even better than this (because
the average revenue per customer has steadily gone up over the same period). In
short, things have been going pretty well. As we’ve gotten more visibility into
the business, we’ve gotten good metrics around the drivers in the business. The
two most important are: COCA (cost of customer acquisition) and LTV (lifetime
value). We’ve worked hard to ensure that COCA < LTV. And, this
margin is getting better over time. Given that we’ve got a decent handle on
things, it made sense to further invest in the business so that we can continue
to scale it. Once we found a model that works, we figured it would be a good
idea to iterate, execute and scale it. As I’ve noted here in the past,
we’re swinging for the fences with HubSpot and have not backed off of
that position one iota.
3. Should we raise now or wait? OK, fine that we decided to
raise money, but why now? Given the state of the economy over the past year,
some thought we were raising too early. The business has been growing
exceptionally well. The question was: “Why not wait until the economy
improves, the business is even further along, and raise at better terms?” That
was a good question. Our primary argument was that we didn’t want to wait too
long, because the longer we waited, the less leverage we would have (see #1
above). It was not a particularly easy decision. We’ve been fortunate to have
great investors in the company (General
Catalyst and Matrix Partners) who
have been exceptionally supportive. We were reasonably confident that had we
waited until next year, we would likely have had no issue raising funds. But,
even during our best times, we’re cautiously optimistic at HubSpot. A few
factors we were pondering: 1) Would the economy really improve? If so
how, when, how much, and for how long? 2) Even if the economy improved, what
would the VC industry look like next year? (We had already witnessed a fair
amount of shake-out and expected more). 3) Even if things did get better, how
much better would the deal be then vs. now? How much should we discount back
for risk? 4) How would a “wait until later” approach impact our decision-making
in the business right now? Would we take appropriate levels of risk or as time
passed, would we start to act with increasingly more conservatism?
After all was said and done, we decided that there was a price (or
more accurately a “set of terms”) at which we’d be willing to do a deal
now, instead of waiting until later. We were able to beat that “minimum bar”
(by a relatively large margin), so it made sense to do something now. Of
course, in these situations, it’s never “knowable” as to whether we made the
right decision or not. But, we’re relatively comfortable that we at
least made a pretty thoughtful decision.
4. Did you really need to raise that much? Not really.
Our model and plan called for significantly less than this. But, the
other important thing I’ve learned about venture fund-raising is that
you should always raise more than you think you need to get to the next
milestone. We had a model and plan in place that would make this the last
venture round we’d need. But, given the terms on the table, it made sense to
leave ourselves some wiggle room and buffer. This increased the probability
that we’d be able to get to where we wanted — even if things didn’t quite go
precisely as planned (which they rarely do). And, it’s painful to go through
the fund-raising process, so if you can condense things into fewer rounds, it
saves a lot of pain and agony. We had the opportunity to raise more than we
needed, with pretty “entrepreneur friendly” terms — so we took it.
5. What are you going to do with all that money? Well,
we’ve always been pretty capital efficient. One quick calculation I’ve been
doing in my head since the early days of starting the company is this: Figure
out your run-rate annual recurring revenue. Multiply this by some conservative
industry multiple (somewhere around 3X). Then, make sure that the total money
you’ve “consumed” is less than this number. When it is, you’re basically
operating on an “accretive” basis (i.e. the actual enterprise value built — even
if sold to a conservative financial buyer — is greater than the amount of money
used to build that value). In our case, we’ve been accretive from the early,
early days. And, despite our torrid growth, we’re still accretive now (revenues
and associated “enterprise value” is growing faster than our rate of capital
consumption). So, back to what we’re planning to do with the money: #1
product. #2 product. #3 customer acquisition. We have a backlog of ideas
that’s both uplifting and depressing at the same time. There are so many
great ideas for how we can deliver more value to our customers. We plan to
pick the best of these and execute on them maniacally.
We are out to build the next-generation marketing platform.
6. So what’s next? We’re also on to what we think is a
massive opportunity that helps organizations capitalize on the major tectonic
shift in the marketing industry. It’s a really, really big deal. But, with
radical change comes the need for radical education. And that kind of education
takes committment — and capital. We’ve got a burning passion to help people
figure out how to better reach their potential customers by pulling them
in. This is what caused me to devote most of the Summer to write Inbound Marketing (a book that captures a lot
of what I’ve learned about marketing by helping startups and small companies
figure out how to “get found”). But, enough about me. Let’s talk abut
you. You’re likely in the startup game because you perceive something
fundamentally wrong with the world that you know you can make better. I know
how you feel. My advice is to dig in, understand the problem as well as you can
— and go fix it.
OK, so reading back through the article, it came off as more self-indulgent
than I had planned. But, it’s 2:00 a.m. here in Boston and I’m not sure
investing more time is going to make the article much better. Such is life
sometimes. I trust you’ll forgive me for this lapse. It’s a big day for me and
my team at HubSpot. We’ve now got even higher expectations for ourselves than
we had before. Like you, we’ll be working hard to live up to those
expectations. I’ll close (once again) with my definition of success:
Success = Making those that believed in you look
brilliant.
What do you think? Did I do the right thing in raising all this funding or
am I just rationalizing my behavior decision? What would you have done?
Oh, and if you're a blogger/journalist/media type and are curious about details or want to write a story, feel free to email me at dshah {@} onstartups.com. Would be happy to chat.
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I’m a big fan of a site called Stack
Overflow. It’s a surprisingly useful Q&A site for posting programming
questions, and getting answers from the community. The site has been immensely
successful and is now often the first place I go to find answers to those vexing
questions. One of the things I like most about it is that both the
questions and answers get voted on by the community. As a result, the best
stuff surfaces to the top. You have to really use it to appreciate it. 
In any case, I’m a big fan of the site. So, I was thrilled when Joel Spolsky
(who, along with Jeff Atwood of Coding
Horror) decided to make the software that powers Stack Overflow available to
others. I immediately reached out to Joel to see if I could get early access to
the software. (I’m speaking at Joel’s Business of Software conference coming up
in San Francisco, so we had communicated recently anyways).
I got access to the software a little while ago and am pleased to announce
that a new collaborative Q&A site for entrepreneurs is now launched and
ready for your use.
Here's the link: Answers.OnStartups.com
I have a long list of exceptional entrepreneurs I know well enough to arm-twist into
participating in the community. Here's a sample (in no specific order):
1) Adam Smith, Xobni
2) Drew Houston, DropBox
3) Jay Meattle, Shareaholic
4) Mike McDerment, FreshBooks
5) Neil Davidson, RedGate Software, Business of Software
6) Jeff Bennett, NameMedia
7) Brian Shin, Visible Measures
8) Sachin Agarwal, Posterous
9) Peldi Guilizonni, Balsamiq
10) David Cancel, Compete.com, Performable
11) Brian Halligan, HubSpot
12) Alexis Ohanian, Reddit
13) Andy Payne, angel investor
14) Rand Fishkin, SEOmoz
15) Don Dodge, Microsoft
16) Nivi, VentureHacks
I've got many more, but you get the idea. I know, I'm name-dropping a bit here, but I promise I will do my best into guilting these people to share their experience and insights.
Here’s the link again: http://answers.onstartups.com
Hope you’ll find it a useful resource. If you have ideas on how we might
make it better, please let me know.
Meanwhile, please help me spread the word. The early days of a community
like this are always the hardest (in a “chicken and egg” sort of way).
Thanks for your support.
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I have a picture in my head of what the average entrepreneur is
like. I’d guess pretty young (think Facebook, Twitter, Google, etc.) living the
red beans and rice lifestyle and working 80+ hours a week and sleeping under
their desk. On some parts, I’m probably right — but on many, I’m flat-out
wrong. This is demonstrated by a recent report from the Kauffman foundation for
entrepreneurship. The report is titled “The
Anatomy of an Entrepreneur”. It’s based on a survey of 549 company founders
across a variety of industries (that’s my first mistake, as it turns out
entrepreneurs start companies other than Internet software companies —
who knew?)
In any case, here are some of the points from the report that I
found the most interesting.
1. The average and median age of company
founders when they started their current companies was 40.
2. 95.1 percent of respondents themselves had
earned bachelor’s degrees, and 47 percent had more advanced degrees.
3. Less than 1 percent came from extremely rich or
extremely poor backgrounds
4. 15.2% of founders had a sibling that previously started a business.
5. 69.9 percent of respondents indicated they
were married when they launched their first business. An additional 5.2 percent
were divorced, separated, or widowed.
6. 59.7 percent of respondents indicated they had at least one
child when they launched their first business, and 43.5 percent had two or more
children.
7. The majority of the entrepreneurs in the
sample were serial entrepreneurs. The average number of businesses launched by
respondents was approximately 2.3.
8. 74.8 percent indicated desire to build wealth
as an important motivation in becoming an entrepreneur.
9. Only 4.5 percent said the inability to find
traditional employment was an important factor in starting a business.
10. Entrepreneurs are usually better educated
than their parents.
11. Entrepreneurship doesn’t always run in the
family. More than
half (51.9 percent) of respondents were the first in their families to launch a
business.
12. The majority of respondents (75.4 percent) had worked as
employees at other companies for more than six years before launching their own
companies.
Which of the above surprises you the most and alters your mental model
of what entrepreneurs are like?
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If you're building a SaaS (Software as a Service) startup you're in great company. Most software entrepreneurs today are taking this approach -- including me. Below are some simple insights that I've learned in the process of being in the trenches with my own startup. 
Insights On SaaS Startups
1. You are financing your customers. Most SaaS businesses
are subscription-based (there’s usually no big upfront payment). As a result,
sales and marketing costs are front-loaded, but revenue comes in over time.
This can create cash-flow issues. The higher your sales growth, the larger the
gap in cash-flows. This is why fast-growing SaaS companies often raise large
amounts of capital. My marketing software
company is an example.
2. You’ve got operating costs. In the shrinkwrapped
software business, you shipped disks/CDs/DVDs (or made the software available to
download). There were very few infrastructure costs. To deliver software as a
service, you need to invest in infrastructure — including people to keep things
running. Services like Amazon’s EC2 help a lot (in terms of having flexible
scalability), but it still doesn’t obviate the need to have people that will
manage the infrastructure. For a startup, the people cost to manage the IT
stuff can be significant (since the team is very small). So, even though
hardware and infrastrucutre are cheap, managing it can take a significant
percentage of the startup’s time.
3. It Pays To Know Your Funnel: One of the central drivers
in the business will be understanding the shape of your marketing/sales funnel.
What channels are driving prospects into your funnel? What’s the conversion
rate of random web visitors to trial? Trial to purchase? Purchase to delighted
customer? As a SaaS startup grows, a lot of leverage can be found by
understanding the shape of the funnel and removing the “leaks” (i.e. where are
you losing business)? For example, if a lot of people are signing up for the
trial, but very few convert to paying customers, you should dig into what the
early usage pattern is. Are people logging on at all? If so, where are they
getting stuck? Remove the friction that is keeping customers from getting value
and you’ll unlock some revenue. Do this at all stages of the funnel (focusing
on the easy stuff first).
4. Install Knobs and Dials In The Business: One of the
great things about the SaaS business is you have lots of aspects of the business
you can tweak (examples include pricing, packaging/features and trial
duration). It’s often tempting to tweak and optimize the business too early.
In the early days, the key is to install the knobs and dials and build
gauges to measure as much as you can (without driving yourself crazy).
Get really good at efficient experimentation (i.e. I can turn this knob
and see it have this effect). As with most experiments, don’t change
too much at the same time (even though you think several different things will
all have positive effects). The reason is simple: If you change more than one
thing, you won’t really know what really happened. Unless you have
lots of data points, simple tests are usually better.
5. Value the Visibility: One of the big benefits of SaaS
businesses is that they often operate on a shorter feedback cycle. You’re
dealing in days/weeks/months not in quarters/years/lifetimes. What this means
is that when bad things start to happen (as many experienced during the start of
the current economic downturn), you’ll notice it sooner. This is a very
good thing. It’s like driving a fast car. Good breaks allow you to go
faster (because you know you can slow down if conditions require). But, great
visibility helps too — you can better see what’s happening around you, and
what’s coming. The net result is that the risk of going faster is
mitigated.
Running a SaaS startup is a lot of fun. There are so many more things under
your control than the traditional shrink-wrapped business. Use this to your
advantage. Keep your feedback cycles short, maniacally track the data and
invest in continual (but cheap) experimentation. In the long term, these things
will give you a huge advantage.
What have you learned while building your SaaS startup?
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A little while ago, we had a great guest post here by Jason Cohen titled “Why
Your Startup Shouldn’t Copy 37Signals or Fog Creek”. In it, Jason makes
some great arguments on why you shouldn’t copy successful startups like 37signals. I (mostly) agree with Cohen. Blind
copying just doesn’t work for reasons Jason Fried (CEO of 37signals) outlines in
a follow-up article. 
Here’s what Fried had to say:
“Here’s the problem with copying: Copying skips understanding. Understanding
is how you grow. You have to understand why something works or why something is
how it is. When you copy it, you miss that. You just repurpose the last layer
instead of understanding all the layers underneath.”
I (mostly) agree with Jason Fried too. When you copy, you do miss a lot of
what made what you are copying successful. But, although copying specific
things is ill-advised, drawing inspiration from and copying certain
practices can often work quite well.
Here are the things I think you should copy from 37signals:
1. Share your expertise. Whatever it is you are passionate
about or an expert in — share your information. Contribute to the community.
Help others learn. Blog, podcast, speak — whatever works for you. Jason and
the 37signals team are phenomenally good at this. They blog, they speak, they
wrote a fantastically practical
book.
2. Be your own customer. Try (if you can) to eat your own
cooking. A product works out much better when you use it yourself. Solve your
own problems. Fix the things that annoy you the most. Beyond just 37signals,
there are lots of examples where people built software that succeeded in part
because they use it themselves. GMail comes to mind.
3. Minimize unused inventory. Don’t write a bunch of code
that not a lot of people are going to care about and you don’t need
today. We have a tendency to “design for the future” and add features
or architectural elements with the expectation that they’ll be useful someday.
Wait for that day. You might “overpay” if/when you do get around to needing it
(because it’s more expensive to add things later), but on average, you’ll be
better off not writing that code that you don’t need just yet. This is not an
excuse for poorly designed software — it’s an argument for being selective as to
where you design in future expansion.
4. Take a stand. Have an opinion and take a stand.
37signals does a great job with their “less is more” stance. They have a
passionate position and are willing to defend and debate it. You don’t have to
take extreme positions on everything, but there should be something you feel
passionately about that you don’t just pick a happy, non-controversial
middle-ground. Ideally, it’s this particular idea that your startup is centered
around.
5. Charge early, charge often. There is no shame in
putting a price on your product. Doesn’t matter how early it is. Just give
customers an easy way out. Let them decide whether your product is
worth paying for. If not, keep cranking. Too many startups feel like they need
to have the “perfect” product before they can begin charging for it. That’s
almost always a mistake. Charge early. Once you start charging money, all
sorts of good things start to happen (for example, customer feedback starts to
happen, because you actually have customers). Then, try to charge as
often as possible. Instead of “big chunks” of money changing hands, try to move
to smaller, recurring chunks. Many SaaS businesses function this way (with some
sort of subscription or “pay by the drink” model). It works.
6. Contribute Some Bits Back: As you know, David Heinemeier Hansson, a
partner at 37signals is responsible for the phenomenally successful Ruby on
Rails. This benefits them more than the “positive karmic loop” thing. By
contributing to the open source community, they’re able to leverage the power of
that community and make the platform they use for their own stuff much better.
But, please don’t misunderstand me. I’m not suggesting you should go out and
try to build some platform/framework. In fact, please don’t try and go
do that (99.9% of us should not be obsessing over building platforms/frameworks
— particularly folks like you and me). Just find ways to contribute
back — even if they’re small ways. It’ll help in at least two ways: You’ll
develop better stuff and you’ll attract better people.
7. Build A Community: Software companies these days
are about more than just the product — they’re about the people around the
product. This includes both those that built the product’s users. Invest the
time and energy to foster a vibrant community that connects the people that care
about you, the company and the products. Allow customers to engage with each
other. This is useful not just from a “more value in the software” perspective
— but it also helps with respect to competition. If a big, 900–pound competitor
comes after you some day, it might be easy for them to build some of your
product features, but it will be much harder for them to steal your
community.
Are you a 37signals fan? Did you read “Getting Real”? If so, what other
practices or philosophies do you think they use that most other startups should
emulate?
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I’m going to go on a bit of a rant here.
I’m miffed that the industry term for the process whereby startups invest
in building their businesses is called “burning cash”. If your startup is
burning cash (as shown in the cartoon above), you’re doing it wrong. You
should’t be burning money, you should be investing money —
with the goal of growing your business.
I find it interesting that when venture capitalists (VCs) take money from
their limited partners (LPs), they don’t say: Hey, we’re going to take your
money and go burn it on a bunch of different startups. Why? Because
that’s not what they do (not the good ones anyways). What they do is
invest the cash in the hopes of generating a good return.
So, I’m going to ask that all startups that have raised funding to no longer
use the term “burn rate”. Instead, lets call it what it is (or should be): An
investment rate. As in "our startup has an investment rate of about $400k/month".
Oh, and if you really are burning cash, please start using smaller bills.
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First off, just to be clear, I’ve never been a sales person. I’ve never even
played a sales person on TV. All the points below have been pulled from startup
sales teams that I think work pretty well (including the team at my marketing software startup).
Building Startup Sales Teams
1. Don’t hire sales people too early. In the early days, the founders
should be able to sell (and should be selling).
2. You don’t need sales people, you need sales. Don’t think VP of
Sales — think “Revenue Engineer”. (Not the greatest analogy, but just like you
won’t hire a development “manager” as one of the first 5 people in a startup,
you shouldn’t hire a sales “manager” either). Don’t get caught up in fancy
titles — focus on dollars in the door.
3. Don’t hire several sales people at once. Your goal is to figure out the
“pattern” of what kinds of people are best based on what you’re selling and who
you’re selling it to. You need some feedback from the system so you can
continue to iterate on your hires.
4. If you’ve never hired or been around sales people before, be prepared for
a bit of a shock to the system. They’re not bad people, they’re just
different. If you're an introverted geek like me, it's helpful to remember that your startup needs to sell stuff.
5. Resist the temptation to create complicated compensation plans. If it
requires a spreadsheet to figure out the commission, it’s too hard. You’ll have
plenty of time to confuse sales people later — start simple.
6. Agile methodologies can work in sales as well. Iterate! Refine your demo script, your
slides, and any other collateral information. Capture the lessons learned by
the best-performing people and spread it to the rest.
7. Sales people will generall act in mostly rational (but often surprising)
ways based on incentives. The rules of the game defines the behavior of the
players. You were warned.
8. ALWAYS connect incentives somehow to ultimate customer happiness. If you
reward just “deals getting done”, you’ll get deals — but at too high a
price. You might get push-back that sales people don’t control/influence
customer happiness, but they do. They “pick” customers, they set expectations,
they control the degree of “convincing” applied.
9. Make sure you understand the economics of your business. Figure out your
total COCA (Cost of Customer Acquisition). This includes sales people,
marketing people and marketing campaigns. Quick example: Lets say you paid a
sales person $10k, a marketing person $10k and you spent $5k on Google AdWords
(for a total of $25k) last month. If you sold 10 customers last month, your
COCA is about $2,500. Different businesses have different needs in terms of
sales vs. marketing spend. Make sure neither is too far out of whack.
10. Your life-time-value (how much revenue you expect to generate per
customer) should be higher than your COCA. No, I did not need a degree from MIT
to figure that out. Once your LTV is a multiple of your COCA, you’re ready to
start turning the knob and scaling the business a bit (hiring more sales
people). But, if your LTV is way lower than your COCA, proceed with caution.
If there is no hope for LTV getting higher than COCA, you’ve got a
problem. Don’t try to hire additional sales people until the economics sort of
make sense. If the car is pointed towards a brick wall, hitting the accelerator
is not a good idea.
11. Track data maniacally (even if it’s just in a spreadsheet). Information
you will want includes: What was sold, who sold it, when, for how much, etc.
This data will be invaluable later as you start to scale. For example, you
should be able to answer the question: We had 14 customers cancel last month —
who sold those customers? Is there a pattern? In the early days, you likely
won’t have the volume (or the time) to analyze the data — but you should at least
capture it for future use.
12. Your pricing should be in line with your sales structure. For example,
you can’t expect to have an outside salesforce (that meets with customers in
person) if your average deal size is only $10,000. The math won’t work.
13. Once you get beyond three or so people, running your sales in a
spreadsheet will become painful. Start looking at CRM systems (like
Salesforce.com).
14. Start watching the shape of your “funnel” as early as possible. How
many leads are you getting a month? How many turn into opportunities? How many
of those convert into paying customers? Once you understand your funnel, you
can slowly start tweaking your system to fix the “leaks”.
That’s all I’ve got for now. For those of you that have built early-stage
sales teams, what are your ideas and insights?
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Just a quick note that I'll be speaking at the Startup Idol Conference in Redwood City, CA this Thursday (July 23, 2009).
Registration is free: http://bit.ly/cMGnH
Looks like there are over 450 people already registered, so should be a fun event (and the agenda is unsurprisingly packed with lots of startupy goodness).
Please leave a comment if you're going to be at the event (and definitely stop by and say hello).
Hope to see you there.
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