Startup Culture Lessons From Mad Men

By Dharmesh Shah on July 26, 2010

The following is a guest post by Brian Halligan who is my co-founder and CEO at HubSpot (which means he gets to do most of the really hard work). 

I recently did a lecture at a Babson MBA summer class on Entrepreneurial Leadership.  I got a lot of questions from students about how and why HubSpot won the Boston Business Journal’s #1 place to work award….hmmm….good question.onstartups mad men

At the highest level, we are trying to create a “post-modern culture” (I just came up with that term…too high falutin?).  Believe it or not, this post-modern culture was inspired by the TV show Mad Men.  The show is set in an advertising company 50 years ago and it pokes fun at corporate culture in that era.  For example, almost all of the women in the office are secretaries, many of the married men are sleeping with these secretaries, everyone boozes heavily during work hours, etc.  While watching Mad Men, I couldn’t help but wonder what a show might look like 50 years from today that poked fun at current working conditions and company culture.  That led us to think a bit about what just didn’t make sense anymore given the realities of the Gen Y worker, broadband in the home, constant connectivity via mobile devices, the modern market for hiring exceptional people, etc.

Here are some of the more interesting features of working life at a post-modern company that have come out of that Mad Men inspired thinking.

1.  Vacation Policy = No Policy: In our father’s era where people needed to come to the office to collaborate and do real work, a vacation policy made a lot of sense.  The reality is that today I get emails from HubSpotters at all hours of the night and have a steady flow during the weekend.  No one asks for vacation credit for being on their iPhone while sitting on the beach on the Cape, so why should they have to ask for permission to take vacation during the week.

2.  “We don’t care which 80 hours you work”: In the early days of HubSpot, people used to ask us about working unusual hours or working part of the day at home and Dharmesh and I used to always say, “We don’t care which 80 hours a week you work, so long as you put in your 80.”  The reality is that most of us don’t work 80 hours, but you get the idea…

3.  Extreme Transparency:  Other than salaries, there are few secrets at HubSpot and I wonder whether we should just expose those too.  One manifestation of this extreme transparency is on the wiki where I personally write a new wiki article a couple of times a week about what is on my mind about the future of the company, problems I see that need to be solved, opportunities that I’d like folks to look into, board meeting notes, etc.  The articles are widely commented on and some of our best initiatives get spurred by these discussion threads.  Among my favorite articles written by other HubSpotters have the title “If I Were CEO Of HubSpot, I Would…”

4.  No door policy:  Many companies have an “open door policy,” but we have a “no door policy.”  No HubSpotters have an office – we all sit out in the open next to each other.  I am currently writing this article wedged between two developers, Michael and Andrew, whose work I’ve gotten to know quite well when I otherwise would have been out of touch in a corner office.

5.  Seat rotation:  If have been sitting next to Andrew and Michael for about two months, but we are about to do one of our quarterly seat rotations where we pull numbers from a hat to see who we will be sitting next to.  This ensures folks get to know different people from around the company.  I’m looking forward to seeing whom I’ll be sitting next to next week!

6.  HubSpot Fellows:  We hired Professor Andy McAfee from MIT Sloan to help us start the HubSpot Fellows Program, which is like an MBA for HubSpotters.  Courses offered so far:  Strategy HubSpot Style, Statistics, Learning Leadership From Legends, and Improving Written and Verbal Communications.  The courses are open to any HubSpotter and are taught by Andy and me.  …We did this because we want our employees to learn and we want to attract employees who like to learn.

7.  Free beer: I can’t remember how it got started, but we always have free beer in our fridge.  I’ve noticed folks seem to wander around and drink a beer or two at the end of the day to unwind.  We are up to about 170 people and I’ve yet to see someone do something stupid.  HubSpotters seem to be rewarding the trust we put in them here.

8.  Friday 4pm Happy Hour:  We are certainly not the only ones who do a Happy Hour on Friday, but we have our own unique twist on it.  Every Friday at 4pm ET, we film HubSpot.tv live in our office and encourage employees (and community members) to watch the show, play a little ping-pong or foosball, and hang out.

9.  Games:  We have a west coast style games room where people can play ping-pong, foosball, hang out on the couch, or hit the beer fridge.  We do this because it is a good way for folks to get to know each other and refresh their minds. 

10.  Tournaments:  We have frequent tournaments, including ping-pong, foosball, iron chef, and softball.  All of these are just plain fun and bring folks together across groups.

11.  Dress code = no dress code:  Doesn’t made sense to me to tell people what to wear…we’re not in a boarding school -- we are in a company where we want people to be as productive as possible.

12.  Big Hairy Mission:  Our mission is to “transform the way the world does marketing.”  At least to me, that mission is big enough that I can really get psyched about it and be proud to tell others I’m working on it.  I don’t know for sure that other employees feel the same way, but I suspect it is the case.  Modern workers are more like cathedral builders than brick layers if you give them the right mission.

13.  Social media policy = we trust you:  Any of our employees can post an article on our blog, can tweet, can blog privately, etc.

This last point of “trust” is a common theme that runs throughout a post-modern culture.  If you are hiring exceptional people who have lots of good options, you should trust them to make good decisions that will improve the enterprise value as your interests are strongly aligned.

What aspects of corporate culture do you think are passé?  What creative corporate culture things are you doing at your company that you think we could emulate?

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SaaS 101: 7 Simple Lessons From Inside HubSpot

By Dharmesh Shah on July 19, 2010

It’s been a little over 4 years since I officially launched my internet marketing software company, HubSpot.  (The “official” date is June 9th, 2006 — for those that are curious about such things).  So, I’ve had about 4 years on the “inside” of a fast-growing, venture-backed B2B SaaS startup.  Quick stats:  ~2,900 customers, ~170 employees and $33 million in capital raised.  But, this is not an article about HubSpot, it’s an article about things I’ve learned in the process of being a part of one of the fastest growing SaaS startups ever.   (I looked at data for a bunch of publicly traded SaaS companies, and the only one that grew revenues faster than HubSpot was Salesforce.com). onstartups saas blackboard

In any case, let’s jump right in.

7 Non-Obvious SaaS Startup Lessons From HubSpot

1.  You are financing your customers.  Most SaaS businesses are subscription-based (there’s usually no big upfront payment when you signup a customer).  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 SaaS companies often raise large amounts of capital.

Quick Example:  Lets say it costs you about $1,000 to acquire a customer (this covers marketing programs, marketing staff, sales staff, etc.).  If customers pay you $100/month for your product and stay (on average) for 30 months, you make $3,000 per customer over their lifetime.  That’s a 3:1 ratio of life-time-value to acquisition cost.  Not bad.  But, here’s the problem.  If you sign up 100 customers this month, you will have incurred $100,000 in acquisition costs ($1,000 x 100).  You’re going to make $300,000 over the next 30 months on those customers by way of subscriptions.  The problem is that you pay the $100,000 today whereas the $300,000 payback will come over time.  So, from a cash perspective, you’re down $100,000.  If you have the cash to support it, not a big deal.  If you don’t, it’s a VERY BIG DEAL.  Take that same example, and say you grew your new sales by 100% in 6 months (woo hoo!).  Now, you’re depleting your cash at $200,000/month.  Basically, in a subscription business, the faster you are growing, the more cash you’re going to need

2 Retaining customers is critical. In the old enterprise software days, a common model was to have some sort of upfront license fee — and then some ongoing maintenance revenue (15–20%) which covered things like support and upgrades.  Sure, the recurring revenue was important (because it added up) but much of the mojo was in those big upfront fees.  The holy grail as an enterprise software startup was when you could get these recurring maintenance fees to exceed your operating costs (which meant that in theory, you didn’t have to make a single sale to still keep the lights on).    In the SaaS world, everything is usually some sort of recurring revenue.  This, in the long-term is a mostly good thing.  But, in the short-term, it means you really need to keep those customers that you sell or things are going to get really painful, very quickly.  Looking at our example from #1, if you spent $1,000 to acquire a customer, and they quit in 6 months, you lost $400.  Also, in the installed-software world, your customers were somewhat likely to have invested in getting your product up and running and customizing it to their needs.  As such, switching costs were reasonably high.  In SaaS, things are simple by design — and contracts are shorter.  The net result is that it is easier for customers to leave. 

Quick math:  Figure out your total acquisition cost (lets say it’s $1,000) and your monthly subscription revenue (let’s say again say it’s $100).  This means that you need a customer to stay at least 10 months in order to “recover” your acquisition cost — otherwise, you’re losing money.

It’s Software — But There Are Hard Costs.  In the enterprise-installed 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 and very low up-front costs), but it still doesn’t obviate the need to have people that will manage the infrastructure.  And, people still cost money.  Oh, and by that way, Amazon’s EC2 is great in terms of low capital expense (i.e. you’re not out of pocket lots of money to buy servers and stuff), but it’s not free.  By the time you get a couple of production instances, a QA instance, some S3 storage, perhaps some software load-balancing, and maybe 50% of someone’s time to manage it all (because any one of those things will degrade/fail), you’re talking about real money.  Too many non-technical founders hand-wave the infrastructure costs because they think “hey we have cloud computing now, we can scale as we need it.”  That’s true, you can scale as you need it, but there are some real dollars just getting the basics up and running. 

Quick exercise:  Talk to other SaaS companies in your peer group (at your stage), that are willing to share data.  Try and figure out what monthly hosting costs you can expect as you grow (and what percentage that is of revenue). 

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 a random web visitor to trial?  Trial to purchase?  Purchase to delighted customer?  The better you know your funnel the better decisions you will make as to where to invest your limited resources.  If you have a “top of the funnel” problem (i.e. your website is only getting 10 visitors a week), then creating the world’s best landing page and trying to optimize your conversions is unlikely to move the dial much.  On the other hand, if only 1 in 10,000 people that visit your website ultimately convert to a lead (or user), growing your web traffic to 100,000 visitors is not going to move the dial either.  Understand your funnel, so you can optimize it.  The bottleneck (and opportunity for improvement) is always somewhere.  Find it, and optimize it — until the bottleneck moves somewhere else.  It’s a lot like optimzing your software product.  Grab the low-hanging fruit first.

Quick tip:  Make sure you have a way to generate the data for your funnel as early in your startup’s history as possible.  At a minimum, you need numbers on web visitors, leads/trials generated and customer sign-ups (so you know the percentage conversion at each step). 

You Need 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).  But, be careful that you don’t make too many changes too quickly (because often, there’s a lag-time before the impact of a change shows up).  Also, try not to make several big changes at once — otherwise you won’t know which of the changes actually had the impact.  As you grow, you should be spending a fair amount of your time understanding the metrics in your business and how those metrics are moving over time. 

Quick advice:  If you do experiment with pricing, try hard to take care of your early customers with some sort of “grandparenting” clause.  It’s good karma.

Visibility and Brakes Let You Go Faster.  One of the big benefits of SaaS businesses is that they often operate on a shorter cycle.  You’re dealing in days/weeks/months not in quarters/years.  What this means is that when bad things start to happen (as many experienced during the start of the economic downturn), you’ll notice it sooner.  This is a very good thing.  It’s like driving a fast car.  Good brakes allow you to go faster (because 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.

Quick question:  If something really big happened in your industry, do you have internal “alarms” that would go off in your business?  How long would it take for you to find out?

7 User Interface and Experience Counts:  If you’re used to selling client-server enterprise software that was installed on premises, there’s a chance that you didn’t think that much about UI and UX. You were focused on other things (like customization, rules engines and remote troubleshooting).  That was mostly OK, because on average, the UI/UX of most of the other applications that were running on user desktops at the enterprise sucked too.  So, when you got compared against the other Windows client-server apps, you didn’t fare too badly.  In the SaaS world, everything is running in a browser.  Now, the applications you are getting compared to are ones where someone likely spent some time thinking about UI/UX.  Including those slick consumer apps.  You’re going to need to step it up.  In this world, design matters much more.  Further, as noted in #2 above, success in SaaS is not just about selling customers, it’s also about retaining them.  If your user experience makes people want to pull their hair out and run out of the room screaming, there’s a decent chance that your cancellation rate is going to be higher than you want.  High cancellation rates kill SaaS startups.

Quick tip:  Start recruiting great design and user experience talent now.  They’re in-demand and hard to find, so it might take a while.

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So, what do you think?  Are you running a SaaS startup now?  What have you learned?  Would love to hear about your experiences in the comments.

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