In Episode 562, join Rob Walling for another solo adventure to talk about enterprise sales, mental frameworks for founders, undoable decisions, and how to handle being approached about an acquisition.
The topics we cover
[2:33] Enterprise sales advice
[5:48] Measure twice, cut once for SaaS
[10:56] Holy Grail of SaaS: Expansion Revenue
[13:12] Holy Grail of SaaS: Virality
[14:25] Holy Grail of SaaS: Big space with slow-moving incumbents
[15:46] Things to keep in mind when being approached about an acquisition
Links from the show
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
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This is Startups for the Rest of Us. I’m your host, Rob Walling. For more than 10 years on the show, we covered topics relating to building and growing startups using an ambitious but sustainable approach. We’re not willing to sacrifice our health or our relationships to grow a company. We want to build real businesses with real customers who pay us real money. Welcome back to the show. Thanks so much for joining me this week. It’s a Rob solo adventure
I’m going to be diving into a couple of things that I found on Twitter. It’s actually a tweet that I sent out a couple of weeks ago. As well as a really interesting thread on enterprise sales from Josh Ledgard of KickoffLabs, and talk about a couple of other mental frameworks and things that have been on my mind recently.
As I’ve said before, a lot of these topics that I talk about in these solo adventures 10 years ago would’ve been a blog post or a chapter of the book. These days given everything that I have going on with MicroConf, TinySeed, and this podcast, I don’t have as much time to write as I would like. But I’m still exposed to so many new ideas on a weekly basis as I look across 60 companies that I’m invested in.
A chunk of those is through TinySeed, and a chunk of our private angel investments that I made before starting TinySeed. I’m seeing a lot of patterns. I’m talking to a lot of founders who are facing things like massive growth, not enough growth, planning for an exit, getting an offer, or considering selling and wondering what they might sell for. Having to fire an employee. Having to break up with a co-founder. Having to deal with getting hacked. Having to deal with lawsuits. These stories are incredible.
As I walk through these with these founders, give them advice, and a lot of empathizing, I just realized that there are so many commonalities and so many mental frameworks I think that can be helpful. That’s what a lot of these solo adventures are.
I want to start by letting you know that yesterday, TinySeed applications for our Fall 2021 batch opened. It’s our fourth batch of companies. It’s going to start in November and this should bring us up to about 60 companies funded through TinySeed. If you’re a bootstrapped SaaS founder who is interested in potentially getting mentorship, advice, guidance, and just the right amount of funding, head to tinyseed.com and check it out.
My next topic for today is a tweet thread from Josh Ledgard about enterprise sales. It came out in March of this year. He says, “Here’s a thread with lessons learned for SaaS companies looking to sign “Enterprise” deals at higher price points for customers…” I will obviously link this thread up in the show notes. This is advice from Josh Ledgard having done enterprise sales with KickoffLabs, I believe.
“1. Get a lawyer to draft you a SaaS agreement. We interviewed a couple firms to find one that had a lot of SaaS experience. Typically they already have a good boilerplate agreement you can start from.”
The beauty is 10 years ago, to try to get a SaaS agreement, there were a handful of (if any) lawyers who really had experience with it. We are at a great time to be running a SaaS company because there are just more people with experience. Whether you’re looking for a customer success manager or a salesperson with SaaS experience, there is more every day. Again, 10 years ago, trying to find a SaaS sales expert or a SaaS customer success person, that world didn’t even exist back then. That phrase came about maybe five or six years ago, it was really hard.
Back to Josh’s tweet. “2. Define clear limits and have a way to monitor and enforce them. When something goes wrong bc a customer under bought you should be able to demonstrate “Here’s what you bought and here’s where we enforced the limit.”
Don’t list anything on your standard pricing as “unlimited”.” This is advice I often give the founders. “Even if you don’t call out every limit in bold text… always define limits in your TOS. You’ll find these limits are helpful when customers think they will want to go over them.
Default to saying no to legal changes. Every single company that looks at your standard enterprise agreement is going to send back their own agreement or 50 changes. All lawyers want to get paid and prove they add value.”
Yes, this is very common. The moment someone says they want to edit your TOS, they want a custom TOS, they want their own, your price skyrockets instantly into the enterprise. If you have a $100 or $200 a month plan and someone says, I need to run my terms of service by legal, that’s when you’re like that’s our enterprise plan. That’s $25,000 a year. That’s the minimum. It has to be that because you know that this procurement process is going to be painful. Back to Josh’s tweet.
“4.1 We’ve found a little bit of pushback saves a lot of money. Most of the time you’ll find out “ok, we’re good with only this one smaller change”.So it is a negotiation.
“4.2 Charge for changes. We default to a base charge to “Implement” an enterprise agreement on top of the monthly fee.” That’s what I was referring to, “and require a min 3 month commitment. This is to cover the cost of having our team and lawyers review even the small change and any signed agreement.”
I would take it further and say annual. If you’re going to be an enterprise and you’re going to go through this painful procurement process, I don’t want someone sticking around for three months. They should stick around for a year if they’re going to put you through this ringer.
I don’t want to read through his entire tweet thread. It goes all the way through another dozen points or more. Actually, his last point, if you take away one thing from this thread, it should probably be the classic advice from MicroConf of charge more than you think you should. Really nice tweetstorm from Josh Ledgard. He is @joshaledgard on Twitter. As I said, we will link that up in the show notes.
My dad worked construction. He was an electrician for 42 years. He became a project manager and a supervisor and all that, but really at heart, he is a person who builds things with his hands. My brother still works in construction as a project manager. I worked for an electrical contractor my summers and breaks. And then for a couple of years out of college, I was wiring up office buildings, basically. I was a guy with a tool belt and a drill. We’re doing office buildings and sometimes manufacturing facilities that made chips and all kinds of crazy stuff out in the Bay Area.
Something that folks would say—I heard it actually a lot from the carpenters—is a phrase, you may have heard it. It’s measure twice, cut once. The idea behind this advice is that once you’ve cut, you can’t go back and uncut. Before you cut that piece of wood, before you cut that piece of rebar, before you cut that piece of wire molding, you want to be sure that you have the right length. It’s easy to measure twice, but once you’ve cut it, you’ve wasted the material, in essence. This is especially important when it’s something that’s very expensive.
What I’ve realized is that in construction, that advice is good. It’s sensible to be a tradesperson who is being deliberate and being thoughtful about what they’re doing. What I’ve realized is that in startups, this advice applies really only to those more permanent decisions that you have to make. Most decisions you make are undoable. There are things you can undo.
Making a decision to hire someone, you can fire them. It may suck to undo some of these things, but they are undoable. If you signed an office lease for two or three years, it may be a bummer and you may have to pay some money, but usually, you can negotiate your way out of it later if you decide to move. You can find tenants to sublet it. I’ve seen all of these things happen to startups. If you build your infrastructure on Heroku, it’s a big decision to move away from it, but it’s possible to move them to AWS or Google Cloud.
A lot of this stuff is undoable. Again with pain, a lot of these are undoable. Then there are decisions that are mostly set in stone. Maybe a life decision like usually getting a divorce is done. In theory, yes, some divorced people get married again. But it’s unlikely. Once you make that decision and the pain of it, it’s going to be very hard to undo that decision.
Selling your company. In theory, could you buy it back years later? Yeah, that happens 1 in 10,000 times probably. Selling your company is another, and I would say taking investment is one that is hard to undo. You can always buy out investors later, but these big financial transactions and financial decisions are ones that I think are a lot more difficult to undo.
I think another one is spending money on things that basically don’t hold their value. In a personal context, that’s buying that expensive brand new SUV. In a professional context, that’s renting an office and buying a bunch of furniture that you’ll never be able to get the money out of. Those are undoable decisions.
You can sell the SUV and take a hit. You can sell the furniture and take a big hit because you’ll sell it used. It’s partially undoable, but those are decisions that I would think long and hard about before doing a big capital expenditure. Depending on, of course, how much money you have to invest in it. If you’ve raised $500,000 and you’re making decisions about $1000 here, $5000 there, you are able to throw that money around and basically move faster. You don’t get the decision fatigue or the nitpick fatigue that you get when you are truly bootstrapped.
I felt this when we were bootstrapped with Drip, then we were acquired by a company that had $38 million in venture capital and suddenly, I made a lot fewer decisions that involved $100 here, $1000 here. I remember sitting in a meeting in the first couple of months after the acquisition and I was agonizing to the CEO and the COO about whether we should do something with our AWS hosting. They asked me how much does this cost.
I spent time with Derek talking it through and figuring out some ways around it and workarounds that we’re going to take a weeks’ worth of engineering time and it was $1000 a month. What I realized as a bootstrapper, we had thought this is important and they laughed. They said, you’re wasting your time, just do this because we have the money. Just go ahead and spend the money, basically, instead of spending engineering time because that was the more precious commodity.
In summary, measure twice, cut once, but only in those undoable or more permanent decisions. It’s a learned skill in my experience to identify which decisions are undoable, and what you’ll find is 80% or 90% of them are. Usually, at some cost. It’s either a personal cost where you have to come back and negotiate, apologize, or undo something that may hurt your pride. Or there’s a financial cost where you don’t lose all the money but you’ll lose 20% or 30% on the resale of it.
But I think it’s easy to get stuck in basically indecision, perseverate, and overanalyze decisions that are not that important and are decisions that you can undo later. And those ones you should make quickly and then fix down the line once you have more information.
Someone asked me the other day if I was going to start another SaaS company, what my mental criteria would be around it. I realized there were three requirements that I would absolutely want in any SaaS app that I was going to start today. Now, take it for what it’s worth because I’m a serial entrepreneur with successes under my belt. I would be able to raise funding. I mean there’s a lot here. I’m not on step one of the stair-step approach.
But there are these things that I think are the holy grails of SaaS, and I don’t think they’re talked about enough, to be honest. I started harping on these a couple of years ago, but I still don’t see people trying to either implement them in their own SaaS apps or to consider going in the markets with these. Number one is the high potential for expansion revenue. That is where, for example, with an email service provider, if I’m charging based on the number of subscribers you have, people who are successful are going to get more subscribers over time. It’s just what happens. Your list just grows if you’re successful.
You charge per subscriber or per 1000 subscribers. That means that in any given month, even if you add zero customers, your revenue will go up. Your MRR will go up. This leads to this unbelievable holy grail called net negative churn. That is where you can literally add zero customers in a month and your MRR goes up.
As you add customers, we always think of it as like I have 3% churn, I have 8% churn. When we sold it, Drip had net negative churn more months than it didn’t. If it was minus -1%, -2%, -3%, these are the businesses like the Salesforces out there, like the MailChimps, maybe the Basecamps (they don’t talk about the financials), but those businesses mint money. They mint money because they grow when you do nothing. Therefore, when you do something they grow even faster.
In terms of Salesforce, I talked about ESP, having subscribers. Salesforce has seats. Over time, successful companies hire more salespeople. They hire more employees and so they need to buy more seats. Again, I would only enter a market where there are expansion revenue possibilities, which could then lead to a net negative trend because to me that is the number one. There is a reason it’s first when I’m talking about these three things because that is the most important.
The second one is I would want some element of virality. I don’t mean in the old school like refer a friend or viral like one of those old Facebook games that invite your friends or whatever. I’m thinking more about some type of link that is shared. Think about SavvyCal, which is a Calendly competitor. The more people who use SavvyCal, the more people are sending out links to other people. They start to think, this is interesting. I wonder how this is different from what I’m using today.
Docsketch which is now SignWell, signwell.com is e-signature. Every time we at TinySeed or MicroConf send out a document for signature, that person sees signwell.com. There’s a viral loop there. Even if you were starting, I’ll back ESP because I have so much experience there. If I had a free plan with my ESP, certainly, my company name and link would be in the footer of those emails. Even without a free plan, if you have any type of interface, a popup that appears on your customer’s websites, an email capture widget or what have you, I would want that powered by my company linked in there.
We definitely saw people click through. We had a power by Drip link back in the day and we saw people click through and become customers. Then the third component that I would want in a space is I would want to go into a big space with slow-moving incumbents so that I can get customers to switch versus educate. That’s not to say that you shouldn’t consider going into a smaller niche without big slow-moving incumbents. You can go to tinyseed.com and scroll down and see all 41, 42 companies that we funded and you click through and there’s construction management, software for home improvement contractors.
There are three apps in the security niche. There’s one that offers financial data to MSPs, which are managed service providers. There’s a news API. There’s affiliate software. A lot of these are niche, and so I’m not saying don’t go niche, never go niche. But I’m saying, myself, these days, if I was going to go, I would go after a big opportunity. I would want to be in a space with slow-moving/hated/despised competitors where I see people complaining on message boards or on Twitter, and I can see an angle to doing a better job than them.
To go back to earlier examples, I mean, that was one of the reasons that Drip was successful is we had that in the ESP and in the marketing automation space. That’s something that SavvyCal has. That’s something that SignWell has. Given how long SaaS has been around at this point, it’s not something that’s impossible to find.
Finally, it’s relatively frequent that I have conversations with a founder who is considering selling, who has been approached either by a competitor or a strategic acquirer, sometimes private equity, about a potential acquisition. I mean, it’s probably once a week. Again, across my investments, but also just people reaching out because I have advertised on this podcast that—talk about undoable decisions.
I said, I’m not willing to do consulting. I can’t advise founders open-ended, but I can absolutely have a conversation for founders who are at a critical, critical point where hundreds of thousands, if not millions of dollars are on the line. It’s important to me that founders have, I guess, someone to bounce at that off of. I have a lot of conversations around this and eventually a particular bulleted list. I think this was in an email, maybe it was a Slack thread in the TinySeed Slack.
These are just a couple of things to keep in mind when a competitor, strategic, or private equity approaches you about an acquisition. The first is, this is way more common than people think. Across our first two batches of TinySeed, I think it’s north of one-third of the companies that have been approached about an acquisition over the first 18 months of the accelerator. It’s common that people start this conversation, most don’t go through.
That’s my second point. Remember that the most likely outcome is that no deal happens for one reason or another. Often it’s valuation. Someone wants a really good deal. They want to buy you for 1X ARR. They want to do an acqui-hire where here’s $500,000 in company stock, invested over this many years for you to shut your company down and come work for us.
Point three and my usual advice to people is have the conversation but work really hard to avoid being distracted by it. That’s one of the biggest mistakes you can make is to sink a bunch of time or a bunch of mental headspace into a deal that again is unlikely to happen. For every 10 or 20 conversations that start, maybe one deal closes. It’s just not likely to happen.
The second most likely outcome is that someone’s trying to acqui-hire you. As I said before, they offer you a few hundred grand to come be an employee. Most of the offers that I see, I’d say the majority—it’s not 90%, but 50% or 60% that’s really what the companies are trying to do. Know upfront whether that’s interesting to you, my guess is it’s probably not but I suppose it depends on your situation.
My last piece of advice, I’m not a lawyer, this is not legal advice but I would always sign an NDA before disclosing financials. Before I start tossing out my MRR, my customer count, or anything else. You also need to be aware that they may be asking for information that they will use to compete against you later. I mean, that’s the risk you take with a conversation like this. You have to weigh that.
An NDA is just a contract. It doesn’t stop someone from being a jerk. It doesn’t stop someone from lying. You would have to prove and enforce that they took what you said and use that against you, and you would probably have to do it in court. An NDA is really just a piece of paper. It’s a backstop, but there still needs to be a level of care that you need to consider.
When we were considering selling Drip, we got inbound interest. I think we had five inbound over the course of about 18 months. Every time, I had to evaluate how much do I tell them and will they use us even though we signed NDAs? Will they use this to someday compete against me? I had to just say, I guess anything I tell them, I need to be able to out-compete them.
That’s it for today’s episode. Thanks so much for joining me again. As a reminder, TinySeed applications for our Fall 2021 batch have opened. Head to tinyseed.com if you’re interested. If you have left this podcast a five-star review, I would really appreciate it. That’s a wrap for this week and I’ll be back in your ear buds again next Tuesday morning.
Episode 551 | Task-level vs. Project-level Thinkers, No Such Thing as an Autopilot Business, and More (A Rob Solo Adventure)
In episode 551 of Startups For the Rest of Us, Rob does another solo adventure to talk about hiring owner-level thinkers, the fallacy of an autopilot passive income software business, and more.
The topics we cover
[1:25] Hiring task-level thinkers, project-level thinkers, and owner-level thinkers
[07:43] The fallacy of an autopilot passive income software business
[15:21] Our bootstrap community
[20:45] Questions you should ask yourself when building/growing a company
Links from the show
- FE International: Professional M&A Advisor
- Quiet Light Brokerage
- MicroAcquire – Startup acquisition marketplace. Free. Private. No middlemen.
- Empire Flippers – Website Brokers
- Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork
- Invent and Wander: The Collected Writings of Jeff Bezos, With an Introduction by Walter Isaacson
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
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We value things like being meticulous, being disciplined, having a process that’s repeatable, and not relying on so much luck or a one-in-a-thousand chance to build a business that can change our lives or the lives of those around us. We know that starting a company is hard and more than half of being a startup founder is managing your own psychology, as well as making hard decisions with incomplete information, where the right answer is impossible to find through math or data.
It’s great to have you back. Thanks again for joining me this week. I am flying solo this week at Rob solo adventure, as I like to call them, and I’m going to bounce through a few topics that have been on my mind recently. I’ve used these solo episodes almost as ways to communicate things that 10 years ago I would put in a blog post, but now I like to put them in a podcast and potentially turn them into a Twitter thread at some point. Someday if I have more time, I would love for each of these to be a blog post.
One thing I want to cover is something I’ve covered briefly, danced around it in Q&A episodes, but it’s around hiring folks with different mindsets. Most specifically—I need to think of a good name for this—I think it is a task-level thinker, project-level thinkers, and owner-level thinkers.
Back in the day when I was hiring virtual assistants—it’s fresh off before our work week, this is 2007 or 2008—I realized I could try to replace myself by hiring a $5 an hour virtual assistant in the Philippines. They were very much task-level thinkers. I would record a screencast and it would take me 30 minutes to upload to a website and then send it to them—this is before Loom and all those things—but I could outsource some (I guess) rudimentary, truly just repeatable tasks, almost things you could almost automate with code but maybe they would take you too long to do, or things that were just easy to throw in a Google Doc or a screencast.
For years, I operated with task-level thinkers, and I was happy, basically a solopreneur with seven or eight, I think I actually peaked at nine contractors who are helping me. These are folks who were doing design work, folks who were doing administration, folks who were doing email support, developers, and it was like, all right. Here’s your next task. Take care of this.
But what I realized is I was then doing all the owner-level thinking which was longer-term stuff, and the project-level thinking which was this project needs—this is project management—seven things to happen, so now I get to manage all those people. That was fine when I was small, that was fine before I wanted to grow a multi-million company, but there was a turning point for me—let’s say it was around 2010–2011—where I hired a couple of people who were more project-thinkers. I can hand an entire project and they would then either manage the resources for me or they could do the whole thing themselves because they were essentially full-stack employees. That’s a developer term; I think most of you know it. It’s someone who can design, who can code, who can do database work, and maybe even DevOps work, but is someone who has a multitude of skills.
That’s when I realized this is the achievement that I’ve unlocked here. This is why when folks do raise a lot of funding, they will hire individual contributors who you could say they’re thinking about their own task, but you’re also able to afford project-thinkers which I was not able to afford prior to that point because I never had a business that generated enough income.
Beyond that after we were acquired—we sold Drip in 2016—I started seeing folks working inside a company who were not the C-suite, they were not owners, they were not founders of the company, but they really owned an entire segment and they thought creatively around it. So someone who’s a marketing strategist who ran this whole team of people, wasn’t just thinking about projects.
Actually, each of his people have their own projects, but he was thinking long-term, what do we need to do in 12–18 months? Coming up with new ideas, listening to the audio books, listening to the podcast, reading the books, and being what I call an owner-level thinker where it’s not about the equity that he owned but it was about ownership of the the results—soup to nuts—from the vision to the implementation, and working with the team to do it. So task-level, project-level, and owner-level thinkers are how I now classify in my head. That’s my mental framework.
The hard part is, of course, we want owner-level thinkers, these are senior-level people who can get a lot of things done but they’re very expensive. They tend to be (a) hard to find, and (b) out of the price range of a lot of bootstrappers. If you’re going to hire a contractor or someone who’s going to work for you part-time, I haven’t seen that work. Actually, I’ve seen it work in a couple of […] but it’s very rare. In general, I think these roles need to be thought about more full-time. I saw it again in the latter days of Drip when we had funding.
Of course, with TinySeed these days I get this question, Rob, you work on so much. You work on TinySeed, MicroConf, and a podcast. You do other stuff on the side. I hear you’re working on a book or whatever. How do you do all that? The secret, really, is that we have a great team. I don’t actually implement most of what happens with MicroConf. Producer Xander, who’s been on the show—you should follow him @ProducerXander on Twitter—he is that owner-level thinker of MicroConf.
He and I (I would say) share that role in essence, where we are both thinking about the vision, the brand, and the long-term, then we start getting to the short-term and the day-to-day. Producer Xander is able to go off, implement, and be a project-level thinker, even get into the nitty-gritty of it, be a task-level thinker and be that individual contributor who grinds it out and gets the task done.
The same thing on the TinySeed side, with Tracy Osborn who is the program director of TinySeed. She not only keeps the trains running on time. She’s not just thinking about how can I run this accelerator batch for this next month or two, but in conjunction with Einar and I, we’re all thinking what we need to do to make improvements and what does this look like a year from now, what does this look like five years from now, and really, what does it look like we’re running multiple batches in parallel.
This is a lot of things to be thinking about and it’s great to have someone who is committed to it and is thinking about it at that high ownership level. Again, its ownership of the results of wanting this to be successful. Tracy, you’ve heard around this podcast many times. She’s @tracymakes on Twitter if you want to follow her.
That’s really where I’m at in terms of a mental framework, is that having moved from hiring task-level thinkers—$5 an hour in the Philippines—to project-level thinkers, and then being able to work with owner-level thinkers. In the Silicon Valley parlance, it is just really senior folks who can drive entire efforts, both see strategy and tactics, get things done in the early days, then hire people to get things done, and manage them. That’s a lot of skill sets. Those are my up-to-date thoughts on hiring.
What’s interesting is until you’ve worked with or hired a project- or owner-level thinker, you usually think they don’t exist. Oftentimes, they are not cheap. When I think of inexpensive $5 an hour, it’s a $30 an hour contract or something, these folks require more budget and often funding to hire them, but it’s the way that you can often move faster and grow a bigger organization, if that’s something that you need to do or want to do.
My second topic for today is around this idea of an autopilot business or a business that you run on the side, don’t pay any attention to you, and it just generates income forever. I want to go on record saying there is no such thing. There is no such thing. Now, you can have an autopilot business for 6 months, 12 months, maybe 18 months. This is both from my direct experience where I used to have (I think it was) about a dozen small apps between $1000 and $10,000 a month, usually, and they all combine to make more than a full-time income for me. I had a bunch of those and I was trying to manage them all at once.
This is also the experience of folks that I see—MicroConf—and even folks who apply for TinySeed or who have talked to us on his podcast. There’s this sentiment where I’ve seen someone post a business for sale. It’s doing $10,000 a month. I want to sell it for this. I spend an hour a month on it or an hour a week.
There’s always someone who chimes in with, if it’s doing $10,000 a month and you’re only spending an hour a week, why not just keep it forever? The answer is because it’s not going to generate revenue forever on one hour a week. It’s in a maintenance mode, and what will ultimately happen is a competitor will come up and eat your lunch; or the organic rankings that you have in Google, YouTube, the app store, Amazon, or whatever will go away and you’ll lose your traffic overnight; or your ads that you’re running will stop working and you have to dive back in; or that API you’re connected to and relying on will change, go out of business, or quintuple their prices.
Things change. In this tech world that we live in, things change. That’s why I always say you can have an autopilot business for about 12–18 months, has been my rule of thumb. Again, I could probably name five examples of my own where this has happened, where the Google ranking stopped working, the Google Ads stopped working, the API broke, a competitor came into the space started eating my lunch because I wasn’t paying attention to it, because I was focused on Drip instead of my previous efforts.
I’m not saying you should never strive to have something that generates “passive income” and be an autopilot business. What I am saying is don’t delude yourself into thinking that you will be able to put something on the side and just have it running for years and years and years, generating income without you being involved or without an owner-level thinker driving it. If you just have folks doing task-level and maybe project-level work, you have your leads coming in, and you have your money coming in and such, that will work for a bit. But the odds of that going more than 12–18 months…
Look. If you have a dry cleaner or a grocery store, that’s not what I’m talking about. I’m talking about a tech business, a software business, something that uses a website to generate leads, usually, and it’s something that is in a space, like ours, that is pretty rapidly evolving. I’m mostly thinking about businesses that generate between $500 a month and maybe upwards of $40,000–$50,000 a month, some range of that.
I think, at a certain point if you have a $5–$10 million business, yes you can hire a CEO. Again, an owner-level thinker who maybe can run the business as good as you can or better. In that case, this is no longer autopilot. You’ve replaced yourself with a GM or a CEO.
What I’m really talking about, these businesses like the software product doing $5000 a month and it just kind of sells automatically because of these channels that are coming in—the Shopify addon I built, this Heroku addon I built. A lot of these are step one businesses. Although I have seen people try to keep on the side and be unwilling to sell it because it’s still generating so much income. Once I sell it I have this money in the bank that I’m essentially drawing down.
I get it. It’s a hard decision. It’s a hard decision to let that go and let the income go. But what I’ll say is then be prepared for every 6–18 months, 12–18 months to be drawn back into that business. You’re going to get drawn back in because the business is going to start to decline. That, of course, is the hard time. You’re not going to get drawn back in to tweak something or optimize SEO. You’re going to get brought back in because your traffic got cut in half, or your revenue got cut in half, or a key component of the business is failing—whether it’s an API, a long-time virtual assistant, a developer, an employee decides that it’s time for a change for them. And it’s tough.
I guess the bottom line is, again, I’m not saying don’t do autopilot businesses. I had them, they were great. They just all had a lifespan. That is a reason that, as I started moving on to larger efforts like I moved on to HitTail, I moved on to Drip, I either shut down or I sold those at a certain point. Now, some of them I held onto too long and I thought this is autopilot and the income’s so great, and they did get crushed by Google. I didn’t have the focus, didn’t have the time to go back.
Other ones I was smart enough, at least looking back, to get rid of them and get the cash to then invest in my future efforts. Both the purchases are okay. Keeping them around for income for a while if you play it right, I don’t think that’s a bad call. But again, just realize that there are trade-offs here. You will get pulled back into the business and be mentally prepared for that. That was always a big struggle for me. If I was focused on something, I had a really hard time going backwards and looking at this “old business.” It was a business that made me super happy three or four years earlier, but which I had kind of gotten over.
This is why I think it’s great that there is now this whole ecosystem around reselling apps. We have from FE International to Quiet Light Brokerage, Empire Flippers, and now we have Micro Acquire. There are ways to get value out of an app you’ve built if it has revenue. This was not really the case 10–12 years ago where I would buy an app at 18 months net profit—it was crazy—and to try to sell it for even 2 years was not easy.
Obviously, the multiples you’ve heard me talked about on the show are much higher for the types of products we build. That is (I think) a real benefit to those of us who do build businesses and either hit a point where they plateau and maybe we lose interest, or maybe we do need an influx of cash, or maybe we do want to move on to our next effort, at least these days we can get some type of reasonable compensation for these companies that we’ve built.
Hey, this is Rob, dropping in from a separate time and space to talk to you about Rewardful. Everyone knows it’s hard to grow an online business, especially in the early days. People are becoming desensitized to content marketing and paid advertisements. Instead, they’re turning to product recommendations from people they trust. How do you cut through the noise and grow through word-of-mouth?
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My third topic is around two books I read recently. One is called Billion Dollar Loser, and it’s a story of WeWork. The other is Invent and Wander, which it says it’s essays from Jeff Bezos. It’s his shareholder letters, which are (I’ll say) not super interesting, but then there’s an interview at the end that I found was pretty fascinating. It was excerpts from interviews.
Overall, I don’t recommend Invent and Wander as a read. It was interesting for me to read both of these books, and Billion Dollar Loser I would recommend if you want to be really angry at just the stupidity and this whole charismatic founder who convinces one person to give him a bunch of money and continues to just everywhere, the press is saying this isn’t going to work, it’s just real estate, and you know it’s a new way of doing things. This stuff is infuriating. It’s infuriating to me that people fall for this.
That said, I struggled with both these books and it was interesting as I listened to it because Adam, who is the founder of WeWork, was dating Gwyneth Paltrow’s cousin, and when he needed his early money he had these contacts in New York. He borrowed a million dollars from his girlfriend’s parents, buy the first building. I just couldn’t relate to that. I struggle with stories like this where, yes, he built something that winded up being worth something, but he didn’t start where the rest of us did.
The same thing with Bezos which I don’t know that I had realized that he mentions, when I was at Princeton and blah-blah-blah, and instantly I’m like, oh wow. Yeah, I went to a public university in California, University of California Davis, and I don’t even remember $3000–$4000 a year that I attended, and that was it. There were 25,000 people there and I went there to get an education. I didn’t go to Princeton, I didn’t go to Harvard.
He talks about, my parents were my first investors. They took out a bunch of money to make Amazon go. Again, unrelatable friends and family rounds, I always shrugged my shoulders, just like I didn’t have friends or family with money when I went to start things. I had to work a day job making $17 an hour, then I taught myself modern programming because I had graduated from public university. Everything was 10 or 15 years behind, so I was checking out books at the library to learn Perl and HTML because we didn’t learn web stuff.
I guess all that to say, this is why I like our community, the mostly bootstrapped MicroConf founder community that really is people coming together with the desire to build ambitious things, to provide value to the world, to change their life through frankly raising themselves up from making $4.50 an hour at their first job, or coming from a public school, or not even going to college. It just matters so much less in our circles and I’m really thankful for that.
I mentioned this in an outro of an episode the other day, but in case you didn’t hear it there was a study published in, and I forget the exact numbers, but it was like 80% of venture capital, maybe 90% of venture capital in any given year goes to people who’ve attended Harvard or Stanford. I was curious in that, in TinySeed, we’ve now done 3 batches of companies, 41 companies we’ve invested in, and I posted, I’m curious. Did anyone here go to Harvard or Stanford? I was like, no criticism if you did. I’m just curious out of all the founders that we have. I didn’t even know the founder count is now. It’s probably north of 70 if I were to guess.
Then I said, I went to a public university and a public high school, a public grammar school in junior high. People are weighing in and laughing, like, no, I went to this junior college or I didn’t even go to college. This (I think) is why people start to talk about founding startups being a meritocracy.
While I do see insiders making it, Jason Calacanis is a good example, I like the fact that he was from Brooklyn, didn’t know anybody, just hustled, became a journalist, an investor, and a founder. I just have a lot of respect for what he’s built. You can like him or you can not like him, you can agree with him or not, but he’s worked really hard and built himself a pretty incredible life.
I admire that about him and other folks who have done that and truly did it without going to Princeton, having your parents as the first investors, traveling in circles with Gwyneth Paltrow and borrowing a million dollars from your girlfriend’s parents.
Am I saying that these folks, that Jeff Bezos or Adam don’t deserve it, they didn’t work as hard, that they shouldn’t have used those things? Of course not. Use every advantage you have. But I did find myself struggling with the stories of the early days of WeWork and Amazon. I struggle to relate to them because I’ve never been in those situations and I’ve never had the advantages that they have. I’m guessing if you listen to this podcast, that might resonate with you as well.
I like this community, I love being a part of it, and frankly I’m glad you’re here as well. I hope that this podcast or MicroConf or just something that I’ve worked on or touched over the years has been an inspiration to you enough that you are able to, hopefully in the long-term, change your life but in the short-term just keep going, just keep putting one foot in front of the other, and using whatever advantages you have to get that product off the ground, to get that next customer, to make the next sales call, to do the next sales demo, to ship that next line of code, and to build a business that brings you freedom, purpose, and allows you to maintain healthy relationships.
My fourth and final topic for the day is a question (I think) you should ask yourself as you’re building, launching, and growing your company. So much for being a successful founder is knowing yourself and a question that took me a really long time to answer—in fact is still in flux and maybe for a lot of you in terms of getting your app off the ground, getting your company launched, getting traction—is what are you really good at? What are you naturally gifted at? Or what do you really want to get better at and something that you find yourself drawn towards? Other people often say that’s really hard, but you’re exceptionally good at this.
I want to say that in terms of shipping software, of course, being a good developer counts, but in terms of building a business, unfortunately, it doesn’t count for this question because there are a lot of good developers who can write code and ship code. There are even a lot of good (I’ll say) developers and UX folks who can ship a good product, so being good at product, let’s set that aside. What are you good at aside from that?
I want to give you a few examples. You may know Matt Wensing. You’ve seen him on Twitter, he’s a TinySeed batch one founder, and he’s working on Summit. That’s @usesummit on Twitter and usesummit.com. As I’ve watched Matt build, ship, and iterate, even evolve his product, what he seems to be really good at is connecting with other people, networking, and building relationships.
He’s a developer, day-to-day writing code. He came on this podcast and said, I don’t love doing sales, but I’m good at it. He’s good at having conversations about partnerships. He’s a phenomenal business development guy. He came to one MicroConf and he met all the people that he needed to integrate Summit with. I think it was Baremetrics and ProfitWell. I guess the original from ChartMogul there, but he didn’t even ask me for intros. I knew these people. I think he just went up and started building relationships. Suddenly, they had integrations and they were cooperating.
That is a super power, and it’s a super power I don’t have. But some people do, and if that’s you, you should take advantage of every advantage you have, and therefore set yourself up for success by getting into a space where business development, enterprise sales, partnerships, and networking can be an exponential driver to the business.
If you go into something where it’s all SEO, Facebook ads, and you’re selling for $10–$20 a month, I guess you could do partnerships and affiliates. There are ways to do it, but it’ll be a real exponential driver if you have larger contracts. There are just certain spaces where […] makes sense.
Another example is Ruben Gamez, who has been on this podcast several times. He’s building DocSketch and he’s TinySeed batch two founder. He’s good at building and managing teams. He’s good at a lot of stuff, but he’s really figured out marketing. As a developer who taught himself how to market 10–12 years ago, he has really doubled and tripled down on SEO.
He still runs Bidsketch but went to start his other app, which is again DocSketch, electronic signature. He was looking for a space with massive keyword volume, and less worried about the difficulty because he knew that that was a super power that he had developed and he had built, and thus wanted to get into a space where that would have a massive exponential upside for his business.
There are all kinds of things you can be good at. You can be good at building an audience. You can be great at having stage presence and maybe building a podcast following, being on YouTube, public speaking. Maybe you’re a great writer and it’s going to be a big content marketing and SEO play. Or maybe you have skills that don’t translate to SaaS apps and maybe you don’t go that route at all. Maybe you decide to launch courses.
There are other ways to use your gifts, but if you’re great at doing webinars and being on camera, then I would lean heavily towards getting into a space where doing webinars, getting on camera, and doing conference talks are going to exponentially move the needle. This is something that took me way too long to realize and recognize it myself, so I think a lot of these solo adventures when I have frameworks to make points, I’m talking to myself from five or six years ago.
To cap off this topic, of course, I will name the exception that proves the rule, and it is Derrick Reimer who’s building SavvyCal. Derrick is exceptional at product. He can design, he can build, he ships features like a team of five people. If you look at how often he’s shipping, it’s amazing. You could say his gift is building in public. He’s developed that.
Obviously, he’s developed an audience on The Art of Product podcast with Ben Orenstein. You could say he’s good on the mic. He developed that. If you go ask him, he wasn’t good at it when he first started. He was very nervous about it. But he’s someone who is so far off the charts in terms of his ability to not only write code but to design amazing features, ship the right things at the right time, and build them quickly as a one-person-team. He is using that to his advantage by competing in a space with a number of large competitors, essentially using his velocity to outmaneuver them, and then hiring out the things that maybe are not his core gifting.
As you probably know, he’s hired Corey Haines, who’s helping him with all the marketing efforts these days, and they’re obviously seeing positive results from efforts from both Derrick’s ability to ship features quickly and Corey on the marketing side.
To put a bow on that, so much of being a successful entrepreneur is knowing yourself. I do think it’s worthwhile asking yourself the question, what are you really, really good at? Then looking at building products that can exponentially benefit from that unique skill set.
This is the final week of our Rewardful sponsorship. I really want to thank Rewardful for supporting Startups For the Rest of Us and supporting independent SaaS founders. We haven’t had many sponsors of the show and it’s not something I plan to do every month, but sometimes there’s just a really good fit, it makes a lot of sense to do it, and helps us have the budget to continue with the transcripts. You may have seen us putting more effort into social media and video clips, and all that takes time and money, so it is helpful to have support from companies like Rewardful.
As a reminder, Rewardful has everything you need to start referral marketing for your SaaS, your membership, or ecommerce business. You can get 30% off your first 3 months by heading to getrewardful.com/startups. The offer expires in just a few days—May 31st—and I like to roll their final ad spot here.
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Thank you so much for joining me once again for this Rob solo adventure. I’ll be back next week in your earbuds with our regularly scheduled program, probably a conversation with an interesting founder, maybe bootstrapper news roundtable. I’m really enjoying the variety of the show these days and I hope you are, too. I’ll be back in your buds again next Tuesday morning.
Episode 519 | Profit Sharing, Stock Options, and Equity (A Rob Solo Adventure)
On this episode, Rob talks through profit sharing, stock options, and equity and makes a comparison between these various approaches.
If you are thinking of ways to incentivize team members as a bootstrapper, this episode is for you.
The topics we cover
[04:34] Bonuses
[07:52] Equity Grants
[11:47] Stock Options
[20:09] Profit Sharing
[26:09] Which is best for your SaaS?
Links from the show
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If you’re thinking about whether as a bootstrapped or mostly bootstrap startup founder, whether to set up a profit-sharing plan to offer stock options to do equity grants or to just pay bonuses or other ways to incentivize your team members, that’s what I’ll really be working through today.
First, I got a couple of the best podcast reviews I think we’ve ever had. The first one is from BrettxKelly via Apple Podcast, and he said, “Rob is the Chuck Norris of bootstrap founders. Thanks for all you do, Rob.” I really appreciate that, Bret. I appreciate the sentiment and the creativity of it.
The other one, the subject line is, “The podcast that changed my life. This podcast was instrumental in my journey from a blah day job to a successful tech founder. Rob and Mike for the first 450 episodes (or so) bring useful, actionable advice every week. I also really appreciate the honest delivery with none of the radio DJ sliminess that so many podcasts seem to embrace.”
Thank you so much for those reviews, and if you haven’t left us a five-star review in Apple podcast, Stitcher, Spotify, or wherever you partake of this show, I would really appreciate it because it definitely helps keep us motivated and it helps bring more listeners to the show.
Next, I wanted to mention hey.com. I’ve mentioned in the past that Basecamp is a headline partner with MicroConf and in partnership with MicroConf, I have had a few Basecamp ads on the show. We are switching those up, and are now for hey.com. If you’re listening to this podcast, you may have heard of it.
If you go to hey.com, you’ll essentially see that the folks at Basecamp have created an entirely new email service, and they say it’s “email’s new heyday. Email sucked for years. Not anymore — we fixed it. HEY’s fresh approach transforms email into something you want to use, not something you’re forced to deal with.”
Hey allows you to screen your emails like you screen calls. You can fix bad subject lines without busting threads, easily find your most important emails every time you log in. They have a built-in reply later workflow that was built from the ground up, and they block email tracking pixels among many, many other things.
I know many of you listeners are already using hey.com, but if you have not checked it out, head over to hey.com and you can try it free. Thanks to Basecamp and Hey for supporting independent startups, MicroConf, and Startups For The Rest of Us.
Let’s dive into our topic for today. As I said at the top of the show, I’m going to be talking through profit sharing, stock options, and equity. I touched on bonuses real quick just as a side note because it occurred to me as I was writing this outline that I should probably address that.
I had this conversation a bunch of times in the past three, four months, and have sent out a bunch of thoughts via email to folks. And I realized, if I just gathered those thoughts, put the bullets on paper, and talked it through that I can probably create, hopefully, an evergreen resource for folks who are thinking about motivating their team members.
I should be really clear that I’m not a lawyer, I’m not an accountant. Do not consider this legal tax advice or any kind of tax advice other than things I have learned from my own experience dealing with these types of incentive programs.
I’d also like to point out that I actually had a conversation with Dru from Trends.vc. If you haven’t checked out Trends.vc, Dru is putting out two reports a month on different trends he’s seeing in the startup space, the bootstrapping space, and he’s creating insightful reports and thoroughly thought out reports. I believe the reports are $20 each if you want to buy the paid version. Each one has a free version, or you can just subscribe for a nominal fee per year. I’m a premium subscriber.
He and I had a conversation a couple of weeks ago when he was preparing his report on profit sharing. If you haven’t checked that out, head to Trends.vc and you can pay a one-off $20 to read his report that’s focused on profit sharing. But today I’m going to be talking about profit sharing, stock options, equity, and touch a little bit on bonuses.
Let’s start with this first question of, I have one, five, ten team members. Why should I give them anything beyond just a salary or their hourly rate anyway? The idea is to align incentives. It’s to motivate people, not just by giving them amazing work to do every day, but to give them a financial incentive to really stick around.
Some people look at it as a retention incentive to not go elsewhere if they can do the same work and make more money. Others look at it as a way to make people just enjoy their jobs more or want to work a little harder and put in some extra hours because they feel like they can make a difference.
There’s a lot of different ways to do it, and of course, this is not a requirement. Giving bonuses or profit-sharing isn’t a requirement, but I personally feel like if your team is cohesive and is working hard to get the same end goal and you are creating profit, creating value, creating wealth. To me, it does feel right (in some way) to share that with your team members.
The first question of why not just give bonuses? Well, you can, and maybe in the early days, that’s something to think about. The big downside to that is oftentimes, bonus programs are pretty arbitrary. You’ve really just had to make a call and say you get a few thousand, here you get $5000, you get two weeks of pay at the end of the year or whatever.
It can feel a little squishy if you try to do this overtime for many years. People can feel like they get left out or they play favorites. Or if they talk among one another, they can feel like perhaps you’re giving more money to someone who doesn’t deserve it. You also don’t want to reinvent the wheel every year. You don’t want to have to reevaluate every year who gets how much bonus and why. As I said, it can feel or even be arbitrary.
In addition, there have been lawsuits from employees of companies where they’re given bonuses every year and they come to count on those bonuses as part of their income and the employees won. I believe this was in California many years ago, so even using the word bonus can be dangerous if you do it year in, year out.
If I were a brand new startup, I had one or two employees, and I wasn’t able to give a bonus one year or maybe two before I got something really structured in place, that’s probably okay. It’s a risk tolerance thing, but it can be dangerous long-term in terms of people to become reliant on it. And if there’s no formula (so to speak) of how to calculate that, which is what profit sharing and the others give you a formula or it’s a set thing that you don’t have to keep rethinking about and reinventing.
Lastly, bonuses are tough because incentives aren’t exactly aligned, are they? Something about profit sharing that’s nice is if the company doesn’t churn a profit that year, people don’t get the profit sharing. Whereas if a company doesn’t turn a profit and you don’t give bonuses, people can be really angry, and they can blame management or their owners. Or they can say it’s mismanagement, and you spent too much money on whatever thing that they don’t like. Therefore, we didn’t get bonuses because we didn’t get a profit.
Bonuses, I think, have a time and place. I think these days, profit sharing or stock options are actually probably better ways to go.
The second thing I want to touch on is equity, and I’m going through this almost in a reverse order of which I think you shouldn’t do. The reason equity is tough, meaning if you just give 1% of your company to the first employee or 3% to the CEO you bring in. Equity grants are not stock options. These are equity grants where you are literally giving a portion of the company. They are taxable on the current value of the company.
While that can be arbitrary, if you have a company—SaaS companies that are doing millions in revenue and you’re trying to give someone 1% of it, the IRS is not going to believe you when they file that the value of that 1% is $1000. You can have serious taxable events if you are given a substantial amount of equity or even an insubstantial amount (to be honest) if the company is large enough.
Now, I will say, if you run a services business, oftentimes—if you run an accounting firm or a legal firm—those can tend to have buy-ins, whereas you come up to become a partner, they value the business. They say, okay, you need to buy 5% or 10% of this business, and you have to buy-in that amount over the course of years. The partners are (in essence) taking that money out.
That’s not a taxable event for the person buying in, that’s different. It’s not an equity grant, that’s just buying into a business, and that is a model. Professional services usually use that model. I’m not talking about that, I’m talking about you’re running a SaaS company and you’re considering just granting equity to someone.
Aside from it being a taxable event based on the current value of the company. Assuming you are running a pass-through entity like an LLC in the United States, if you give someone equity, they now get a K-1 at the end of each year, which makes their taxes more complicated. And if they have never dealt with a K-1, they’re maybe going to want to hire an accountant to do it.
You can imagine this isn’t a big deal if it’s two founders of a company, but what if it’s 20 or 30 employees that you want to incentivize? You’ve suddenly complicated everyone’s taxes. That’s not an ideal outcome.
Another thing to think about is whether you are an LLC or a Corp, you need to have restricted units that vest over time. This would be, even with an equity grant, I wouldn’t tend to just give someone 1% or 3% right at the start. Typically, you have a four-year vesting period, and there’s an initial one-year cliff where they have to work for a year before they get any of the equity. And at that point, they get 25% and then vest it over the three years. That’s the most common approach. Obviously, talk to a lawyer to get specifics.
The interesting part about equity is it does make profit-sharing easy because if someone owns 5% equity and you take out a distribution, then they get 5% of that distribution. It’s simple. It’s tried and true. Equity has been around for hundreds and hundreds of years. It is simple in that respect, but honestly, there can be a danger too.
Let’s say you have an LLC. It makes $500,000 in profit that year, and you’ve given 1% equity to a key employee. Even if you haven’t’ pulled money out, it’s still in the LLC bank account. They get a K-1 for 1% of that $500,000, which will only be $500,000. But in essence, they would then have an income tax bill of $5,000 even though no money came out of it.
Equity makes things complicated. I’ll just put it that way. Know what you’re getting into. To me, equity is for founding employee type folks. If you have co-founders, you know what you are getting into. Straight equity with some vesting is something that a lot of us do. That’s how it’s normally done. But for employee incentives and aligning incentives, I don’t think personally it’s the best way to go.
One last note, if you hold equity for less than a year, it’s short term capital gains. And if you hold it longer for a year, then it’s long term capital gains. That’s one of the best parts of it is if you do have an exit, whether you sell your shares or whether the whole company gets acquired, you do get that nice capital gains treatment. Instead of essentially paying income tax levels on it, you pay 15% or 20%. There’s a much nicer basis there or there’s a much nicer tax outcome. Those are my thoughts on equity incentives.
Let’s move on to stock options, which are the standard Silicon Valley way to motivate folks above and beyond their salary. A stock option is just an option to purchase stock in the company. It’s a specific amount. You’ll say you have 10,000 options. It means you have an option to purchase 10,000 shares at a particular price called the strike price, and that’s set each year by a company’s filing with the IRS.
That strike price is usually quite a bit less than their last funding round. It doesn’t always wind up being that way, but what they say is, okay, you’re starting with us today. Here’s 10,000 options. You have to work for a year. […] Work a year, then you get $2500. And then each month after that, you get essentially 1/36 of the remaining amount up to four years. They typically give you another big chunk of options to keep you retained so you’re always working to just build that up.
A lot of folks don’t exercise their options. They just keep them around, and as long as you’re working at the company, you can just wait until there’s a liquidity event. Of course, the downside of that is paying short-term capital gains on it.
The good news about stock options is there are no capital gains to worry about. If you grant someone options, there’s no real value to them because essentially there’s an option to purchase at the price the company was worth when you’re given the option, so that’s not a taxable event. And they don’t receive a K-1 that complements their taxes, since they’re just an option to buy a share in the future.
It’s actually not owning equity, and there’s no profit sharing unless you would execute the option. They’re designed to payout if you have a liquidity event like going public or being acquired. I guess if you had options in an LLC, it wouldn’t be called stock because there’s no stock in an LLC but unit options, and then you exercise holding those. In theory, if the LLC took a dividend or distribution, you could get that. It’s a very uncommon scenario, and I don’t think people would typically go for that.
The other interesting thing about options is there’s usually this exercise window where if you leave the company and you haven’t exercised any of your options, you usually have about three months. And if you don’t buy the options, they just revert back to the company and you get nothing. I don’t really like that. I actually disagree with that. I don’t think it’s super ethical. I feel like that window should be much, much longer—one, two, three years—and there is a push for that to get longer because it kind of screws employees.
You think about an employee who comes in and they’re going to get 10,000 shares at a $2 strike price. That’s $20,000 worth of options. They work for the company for the full four years, and then they leave. They have this $20,000 that they could purchase. Maybe they don’t have that much in cash, or maybe it’s not a gamble that they can make at that time. But maybe the company sells or goes public a year or two later at $10 a share.
It’s a big gamble for some people to make, and I feel like having a longer time to evaluate that and a longer time to be able to purchase options feels to me like a better way to do it, a more fair way to do it.
The last thing before I tell you my own story about an experience with stock options is that if you exercise your options, you pay the money, then you own the stock in essence. Usually, it’s restricted stock, but it depends on if the company is private. It often has restrictions that you can’t sell it for a certain time.
But if the company is private, then you are typically just holding stock that you can’t sell. If they’re public, you can typically execute and then sell the same day or the same week. You then pay short-term capital gains on any gains that you get. You pay income tax. What I have heard about are folks who have enough money that they’ll exercise them. Hold them for a year, hope that the stock is still higher than when they exercise, and then you get long-term capital gains treatment on that.
My own story with stock options is back in probably about 15 years ago, I was a lead developer and a technical lead for an early prepaid credit card company in LA. We got options and I worked there—I got X thousand options granted, and I only stayed there for 2 years before I went out on my own.
I got half the options that were granted, and when I left, I had to make the decision within 60 or 90 days. Do I buy these? I did, I bought them all. I wound up spending under about $10,000, which is quite a bit of money for me at the time. I figured, hey, it’s a gamble. Maybe it’ll turn out.
Within a year or two of leaving, they raised another round of funding. They didn’t go public, but they allowed people who owned stock to sell a certain percentage of it. I don’t believe I sold any in that offering, but I did sell a little later for about half of it for 10X gain, and then another half for between 10X and 20X gain. It was several hundred thousand dollars, which was obviously really nice at that point in my life. We used a big chunk of it as a down payment on a house, then a chunk of it to fix the roof on the said house, and fix a bunch of other stuff that was broken. Don’t get me started on homeownership. But all in all, it was a good outcome.
If I had stuck around another 2 years I could have made double the money. But I’ve always thought, those were the years that I really cranked up on entrepreneurship. I started writing my book. I built the Micropreneur Academy. It was some early-day stuff. There were a lot of opportunity costs that probably wouldn’t have been worth it.
But my experience with stock options is that one experience. They did later go public, and I actually sold the last of my shares after they went public. My experience, of course, was positive. The reality is in almost all cases, there is no liquidity […]. Most startups fail. Most venture-funded startups fail, and so most venture-funded stock options really aren’t worth it. They just aren’t worth the money, aren’t worth the paper they’re printed on (so to speak).
That’s the reality of gambling on startups. We know that as founders. That it’s dangerous and that it comes with risk. I think it’s harder as an employee when you have so much less control over the company and over the success of it. But these are your choices that you have to make as an employee.
Now, as a founder, as a CEO, if you’re going the Silicon Valley route, you’re raising a big round of venture funding, and you’re doing the Delaware C-corp, stock options are the standard way. If you did anything else, people would look at you funny. I think with bootstrap startups, you can do this.
I think a big question is stock options typically aren’t worth much unless you plan to have a liquidity event, and that doesn’t mean sell or go public necessarily. You can sell shares on a secondary market. Future employees can buy them back. Founders can buy them. There can be some type of liquidity events that can happen. You could take just a minority investment even at some point if you wanted to provide liquidity for employees with a stock option pool.
The bottom line is most startups and most SaaS apps do sell at some point. The vast majority, they do sell within whatever timeframe we could define, 7-10 years. There are very few bootstrappers who are still running the same SaaS product that they were running 10 years ago. That is a reality to think about is there may likely be a liquidity event even if you don’t particularly plan on it today.
I think stock options are a reasonable choice. I hate to even make a recommendation for or against. I think they’re a longer-term play for sure because they do require that liquidity to be worth anything versus profit-sharing, which is more short-term cash out of the business type approach.
But frankly, if you’re not going to pull cash out of the business, if you’re in a high growth market—I think about when we were growing Drip—we weren’t pulling cash out of the business. If we had implemented profit sharing, people would have wanted us to become profitable. The goal at that point was not to be profitable yet, it was to keep growing. In that sense, I think a better motivating or incentive alignment would have been through the use of stock options, even though that can feel weird.
I think about an LLC having stock options, and it’s totally possible to set up a structure like that, but it can feel a little different than the typical C-corp setup. Again, I want to reiterate that not only am I not a lawyer or an accountant, but there are just a lot of pros and cons to these things. If there were one right answer, then everyone would choose to do that. It just depends on the situation and the specifics of the type of company you’re trying to build and how you’re building it. If it’s going to be profitable in the short-term versus long-term, and how you want to structure things for yourself.
Lastly, let’s talk about profit sharing. What’s nice about profit sharing is if you don’t ever plan on selling or having liquidity events, then money and profit distribution make sense. It’s what real businesses are built on. Real businesses sell real products to real customers. To me, again, it makes sense to share those in some form or fashion that the employees and the team members who are building that company with you get to share in some form or fashion.
One drawback to profit-sharing that you don’t see with the other approaches is that if an employee leaves, they don’t take the profit-sharing with them. It ends when their tenure with your company ends. It’s not like having equity or stock options where you can hold onto these things for a future gain. I left that credit card company two, three years before it went public. But I had that lasting piece of equity that I had exercised. It’s maybe not as ideal for employees who want to leave, which works as an incentive to keep them there but can also be a bummer for folks when they leave.
One thing I would think about if I were structuring profit sharing is to make it a pool, not a committed percentage to an individual. That’s a mistake you can make with an early employee is to say, oh, you get 1%, 2%, or 3% of profits. I would think more about, hey, let’s have a 10% profit sharing pool, and all key employees share in that, or all employees share in that.
Such that as you add more people, obviously, that first employee’s percentage of the whole chunk will go down. But ideally, the company should be growing, and these individuals should be contributing to that. If you’re going to do profit sharing, you probably want to stay away from being a C-corp because that’s going to give you double taxation, so you’re going to want to be in a pass-through entity.
Again, I mentioned Trends.vc at the top of the show, but there’s a really good report that Dru put together over there talking about the ins and outs of profit sharing. The best article I’ve ever seen written on profit sharing is from Peldi Guilizzoni. He wrote about the profit-sharing that he designed for Balsamiq. We’ll link that up in the show notes. But he basically said, they started off with a 10% pool—10% of the profits. I believe each quarter was distributed, and then he moved that to 15% at a certain point, years into the company. Now he’s up to 20%. I love that range right there. That feels really solid to me. To be honest, that 10%-15% stock option pool is also the standard size that a Silicon Valley startup would have.
That number does ring in that zone that I feel personally comfortable with. From Peldi’s article, one thing he talks about is they do quarterly distributions, which is probably what I would do if I was going to do it because if you do monthly, it’s too often. It’s just too much paperwork. If you do yearly, then people wait around and it’s bonus season. People will stay past that mark.
If they’re unhappy, they collect the profit sharing for the year, and then they take off. I don’t like that gap. It should be 3 or 6 months tops. But Peldi says, “Our quarterly bonus program allocates 20% of profits to full-time employees: 25% is split equally and 75% is split based on seniority, then it’s all weighed by the cost of living in each location.”
That’s how he structures it, and I do like that there’s a part split equally. There’s a part split by seniority. I have also heard of folks doing it based on the amount of salary people make, and then not having that cost of living of your location factor in because that’s already factored in.
One thing I would stay away from personally is using performance evaluations as some type of thing that affects profit sharing. That can be dangerous as different managers across a company might rate people differently. Basically, you should have A-players on your team, and if not, then they need to be let go in essence. If someone is performing at a subpar rate, then you need to be addressing that rather than essentially docking a bonus because there’s a lot of ways that this can backfire. Personally, I would not be including employee performance as a part of the criteria.
One drawback of profit sharing is that it’s really always taxed as income. It’s a big hit. If you’re talking about, you’re in the 33%, 35%, or 40% tax bracket, and you get a chunk every 3 months in essence, that’s a big difference versus if you were drawing out dividends. I guess through a C-corp, you’d pay double tax on it anyway. Or if you had a stock that you were able to sell, that long-term cap gains is a really big difference, and it can make a really big difference in the tax bill. But that is what it is.
Profit-sharing is cash. It’s a short-term motivator. I shouldn’t say short-term because it can motivate people over the long-term, but it really does allow employees to focus on not only growing the top line but potentially looking at reducing expenses, which the profit is obviously the revenue minus expenses.
I do think that a lot of folks in your company can impact the net profit that it has. If they’re thinking about their share of that, it does a pretty good job of aligning those incentives in a way that perhaps stock options are pretty nebulous.
Why is the stock worth more? Well, it’s typically worth more when someone buys the company or when you raise that next funding round. Is me saving $2000 a month on our AWS bill going to really impact the value of my stock options? It’s very unlikely versus profit sharing. You can see the money hit the Excel spreadsheet, the Google Doc, and you could see how it could literally trickle down to not only the company’s bottom line, but then to your own.
Some companies have folks vest into profit sharing or not be eligible for the first 6 or 12 months. I don’t think that’s unreasonable much in the same way that many companies have a waiting period to get on health insurance or to start a 401(k). This is another perk that makes sure the person’s a fit for the team, that the team is a fit for the person, and then evaluate getting them set up with all of the benefits.
These days, if I was going to evaluate these approaches for my own SaaS startup, I would think about whether I was going to be able to run it profitably. Obviously, profit sharing might be the choice then. Think about whether I was going to grow this and sell it, or have a liquidity event at some point. Then obviously, stock options might be a better opportunity.
Again, I think bonuses can be useful in the early days, but personally, they’re a little too arbitrary and can create a little bit too much chaos or just reinventing the wheel syndrome every year to personally be my favorite for having to run it long-term. And then equity, obviously, I mentioned, if it’s founder-level folks, then you can talk about that. But there are a lot of complexities there—taxable events, K-1s, and all that—that I don’t think scales to a full workforce.
Thanks again for joining me this week as I talked through different ways to incentivize your team members. If you have thoughts or comments on this episode, please give me a shout out on Twitter, @robwalling and @startupspod. I will talk to you again in your earbuds next Tuesday morning.
Episode 499.5 | The (First) Six Stages of SaaS Growth – Part 2
This episode is part two in a two-part conversation. If you haven’t already, listen to Part 1 first.
This week is the second part of a conversation between Rob and Jordan Gal, the founder of CartHook. In the episode, Rob and Jordan dig into the 4th, 5th and 6th stages of SaaS growth and compare their journeys 1:1 between growing Drip and growing CartHook. They come across several parallels between their journeys, as well as some differences. This episode is part two in a two-part conversation.
Jordan started CartHook as cart abandonment software and later pivoted into a checkout replacement solution for Shopify. He has been on the podcast several times answering listener questions and has spoken at a handful of MicroConfs. He is also the co-host of the Bootstrapped Web podcast.
Every time we come up against the hill and then climb it and get to the top, when we look outward, we see so much more. So, the opportunity just keeps getting bigger the further we go. We’re not even close. We’re just barely getting started.
– Jordan Gal
What we discuss with Jordan Gal
- 1:10 Rob’s experience with Stage 4: Escape Velocity
- 4:35 Jordan Gal’s experience with Stage 4: Escape Velocity
- 9:06 Parallels between Drip & CartHook’s journeys
- 9:50 Jordon on hitting limitations and looking beyond money
- 15:27 A fast-growing business isn’t profitable
- 17:26 Rob’s experience with Stage 5: Scale
- 21:54 Jordan’s experience with Stage 5: Scale
- 25:10 Stage 6: Company Building
- 27:39 The range of skills founders need when building a startup
- 30:18 Jordan Gal on the future of CartHook
Links from the show:
- CartHook
- Bootstrapped Web
- Jordan Gal | Twitter
- [Watch] Two Years in the SaaS Trenches – Jordan Gal | MicroConf Starter 2017
- [Listen] “We Went from Hundreds of Free Trials to a Few Dozen…On Purpose” with Jordan Gal | Episode 476
How can I support the podcast?
If you enjoyed this episode with Jordal Gal, let him know by clicking on the link below and sending him a quick shout out on Twitter:
Click here to thank Jordan Gal on Twitter.
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This episode covers the final stages of SaaS growth that we didn’t have time to cover in part one. If you haven’t already listened to part one, I would highly recommend doing that so you have the context as we finish up our conversation with Jordan Gal of CartHook.
Stage four, I’m calling escape philosophy. This is where you have product-market fit and you’ve discovered at least one, maybe two, repeatable channels that are driving leads. You’re converting. You have repeatable sustained growth. Maybe that growth rate is increasing month-to-month. Maybe it just fits $3000–$5000 a month.
If you haven’t raised the Series A, it doesn’t take that much time growing it to $5000 a month to build a hell of a business. For me, I put escape philosophy. It was for about $25,000 MRR up to about $80,000 MRR. It’s probably about $1 million when I think about it. Maybe three of three. During that time, we’ve already done some integrations, but we realized they were working really well. The more integrations we build, not only did we drive traffic, but we were able to retain customers more because they would link them up and there’s just a lot of value created. We did quite a bit of content with some success. It was enough success to keep doing it but it was not the main driver of growth. There was an ROI there. We did some pay-per-click and it worked.
I was doing a ton of podcasting, public speaking, and that was raising it. It was hard to measure but it just continued to have Drip in the conversation. They used to say Infusionsoft and Ontraport as the lower-end marketing automation because I ran thousands a month. Soon, I wanted Drip to be the number three or number two, frankly, just to be the other one that was mentioned in all the blog posts and in all the conversations.
I started hearing it on podcasts and seeing it on blogs with people I’ve never met, never talked to, didn’t reach out to, to say hey, should you mention this? It just started getting on people’s radar because enough people were using it. We also have a ‘Powered by Drip’ link that contributed during that time. I was doing more outreach to influencers and friends who I knew. We were doing cross-promotion and stuff.
It was a bunch of things. There was not one thing that worked amazingly for us. There were about probably two that drove half of our trials in any given month and three to probably grow 75% or 80%. During that time, we grew to a headcount of five people in total. It was me and Derrick, then we had a guy doing support, and another developer. They’re our first customer success.
A person, Ana Jacobs, who many of you know from MicroConf, she’s been in MicroConf circles. She was in Fresno and she was doing essentially marketing work and agency and really wanted to get into products. She was an early game-changer for us because I was doing all the sales demos and trying to do onboarding calls. I’m just not good at that. You’ve got to know your strengths and that’s not my strength at all. She was able to take that off my plate. Not only did I think our conversion rate went up but we’re able to handle bigger customers who wanted someone to hand-hold them.
At a certain point, I started saying I’m just not going to do these anymore. Although Drip’s starting price was $50 a month, we have people approaching us like hey, I remember bringing a list over and we’ll pay you $500-$800 a month. That’s substantial growth for an app that’s doing $40,000–$50,000 a month. The fact that we were able to service them, work with them, and do the extra that they want was a big transition for us during this time.
Still total chaos in terms of the business. I was starting to burn out, in all honesty. I made personal mental health mistakes in terms of just not hiring more out. Everyone was doing their job in terms of building products, onboarding customers, and anything else I took on. I shouldn’t have done that. It seemed like the right decision at that time to keep the business moving forward. I was trying to maximize growth. In fact, I maximize my personal unhappiness because I was doing a bunch of tasks that I didn’t want to do.
That was my escape philosophy phase. Really, your escape philosophy was more with the second product, what CartHook is now. You listed it as a $20,000–$80,000. I think we’re actually in a similar range of thinking about these stages.
Jordan: Yes. We broke every rule. We did not do what I would suggest anyone do. We just built an isolation and we just launched. We fully went the ‘build it and they will come’ route and it just happened to work. This stage for us was, again, a huge success and so much pain.
I’m looking at our ProfitWell graph from all time. It was a theme for us where we have a few months of incredibly fast growth, then sustained period of no growth, and then forcing our way out of it again. The reason it happened to us, it’s the same thing that happened in this phase from $20,000–$80,000, we got the product right. That’s what people wanted. That guest at a customizable check I would upsell that worked with Shopify and allows you to do all this marketing stuff, that’s what the market wanted.
As soon as we released it, the word of mouth was huge and we got overwhelmed with demands. We did one thing that was really, really, important for the whole trajectory of the business as soon as we released it and got too much demand. In the first 30 days, we had, let’s call it 100 or 200 sign-ups. It was $100 a month. We were like this. We found the right thing, but the product wasn’t quite ready yet. After that first month, it was just total chaos. We couldn’t keep up. We couldn’t onboard people. We didn’t even know how to support our own product. What we did, we decided we need to slow it down.
How do you slow down demand? We did it in two ways. We first said you have to do a demo. You got to talk to me. I want to understand who you are or what you’re trying to do and build a relationship. The second thing we did was we tripled the price. We went from $97 a month to $300 a month. We assumed those two things would lead to slower demands. No such thing happened. It just stayed exactly the same, which is where we realized okay, we mispriced the product. Thank God we realized it in 3X the price, and then I just went to work just doing one or two demos every day for forever.
Those demos are really important, obviously, to hear what people wanted but also for the psychology of the team. It was just still the four of us at this point. We eventually hired a few more. We ended up with a team of six or eight towards the end of this phase. In the beginning, it was just the four of us. The motivation we got from my conversations was wild. People were like, I cannot believe you built this. This is exactly what I want. We just heard a variation of that over and over and over. That gave us the motivation to just keep going.
The problem was that the product was just not good enough yet. A checkout product, you can’t be 75% good. If you do anything wrong, you cost people money. We went through this period of growth despite the product not being good enough which just meant a lot of very, very, frustrated customers. That just gets you after a while.
For me, mentally, in this period, I had a really rough time because I’ve basically gone two years of working on this product, took this huge risk, took money from friends and family, then from my point of view, I got it right. I found the right product at the right time for the right market which is rare enough, and then the tech just couldn’t satisfy it.
The tension within the team was tough. The tension with the customers was tough. We just kept growing. We got to around $80,000 in this phase. I’m supposed to be happy, right? I just went $0–$5000 in one year, $5–$20,000 in another year, then $20,000–$80,000 in four months. I’m supposed to be happy. I was anything but happy. It was mentally very difficult. As we brought in new employees, they just entered a world of pain. If you’re trying to support people, trying to help people get onboarded, everything we were doing was just filled with pain, but we knew we were on to the right thing. That just helped us get through it. It was not pretty.
Rob: Yeah. You effectively caught lightning in a bottle. You were early to that space of this replacing the checkout in Shopify. Again, it’s being prepared but getting a little lucky to have been at that place right at the right time and done that because if you have done it a year later, the window is over. You couldn’t do it.
It’s interesting to hear about our journeys. The parallels and then the not parallels. Drip was essentially entering a completely crowded market and trying to build a less expensive, easier to use version of these clunky, expensive tools that were generally not loved. That was a very different approach than what you took with CartHook which was I see an opportunity, I need to shoot this gap and get there right as this opens up. You’re being early.
I had a talk called The Unfair Advantages of Building a SaaS. One of them is being early. In this case, you were early. It was because you were there. Outsiders couldn’t have known that this opportunity was available. That’s the thing. Doing things in public, creating opportunities.
Jordan: Yeah, that’s right. I’m curious to hear from your side. At this stage for me is when I started to hit some real limitations in my experience. When it was a group of four of us, it was pretty straightforward, Guys, let’s make some money together. Let’s do this. Let’s change our lives by building this thing together.
Once we started hiring people, that got tested. I remember, specifically, one conversation that Ben pulled me aside and said look, man. You’re our leader. We need you to go beyond money. Our employees here don’t stand to make millions of dollars if we sell this thing. They need to work for something more than just that. That conversation with Ben I appreciate and think about all the time. That was a real turning point on me needing to look beyond money and create something of a mission, something more important.
I had a challenge because I am very against the ‘change the world, make the world a better place,’ […]. I didn’t want to become a phony and say that that type of thing is our mission when I didn’t believe it. I needed to figure out a way to authentically create a mission for the company that I felt was honest and sincere. Did you encounter something like that as you started to grow the team?
Rob: Not in that way. I think it’s because, from the start, building Drip wasn’t about making money. I never said that. It was more about building a really cool product. There was a lifestyle component to it, but by the time we have three, four, five people, it became, we are truly innovating in this space and building an amazing product for people who don’t like these other alternatives. Isn’t that cool? We are makers and we want to have a very high standard of building an amazingly easy-to-use product that is super powerful for people.
All of our team members, including me, loved the product. We were enamored with this power that we could have. When we looked around our competitors, we were like, that product’s like a toy compared to Drip. That product is super hard to use and expensive. We genuinely believe that we were not making the world a better place but we were email marketing and marketing automation just more accessible. I think at one point I said we’re trying to bring marketing automation to the masses, which is a little bit manifesto-ish and highfalutin. It sounds, in retrospect, whatever, but it really was.
That was something that our team was just onboard with. We talked about that during the interview process. As everyone comes in, it’s like look, this is Drip. You’ve heard about it. You’ve seen it. It’s this product that’s genuinely helping marketers do better things and be more relevant. The codebase is great and the product is easy to use. It’s powerful. It was just all of that. We were proud of it. There was a sense of pride among the Drip employees that I think, partially, I was really proud.
Derrick and I were really proud of what we built but also because it was a damn good product. I think from the start, I didn’t do it intentionally, right? It’s how we think about it. Derrick and I are makers. You know why I wanted to make money? It’s so I can make whatever I want to do, so I have the freedom to do that. Money has never been an end to me. It was the freedom that was the end. I think I accidentally stumbled into, oh, building a great product motivates other people as well or at least the people who should be on that bus.
Jordan: Yeah, I admire that and I think it’s fantastic. That was not my journey. I went into it trying to be clever. How do I basically make $50,000 a month for myself while not doing any work type of thing? It’s not surprising that you went in with that mindset and didn’t have to figure it out in the middle.
For me, it had to get figured out along the way. It’s only recently, over the past two years, that I fell in love with what we do. It took longer to get there. Where we found authenticity is in helping other entrepreneurs. That’s where we get our pride. As opposed to, we’re so proud of this product. We’re very proud of the results. We see these companies come in and just become more successful because of our product. Then, they hire more people. Then, they grow.
What we like to look at is we like to look at the individual level and not the business level. The people running the company, the people working at the company, they have better lives because we help them find more success. It took some time for the clouds to part and to have clarity on that.
Rob: That’s what it became for us was as well, actually. Users would come in from another tool. We call them Infusionsoft refugees where they were coming and try to escape this tool that they didn’t like. They would be so over the moon with it. They would tell us which is so much easier, or this is changing my business. That did become our huge part of motivation, it wasn’t the results. I’m glad you called that out. I think it started with, oh, didn’t we build a great product? Then, it became, oh, aren’t we helping entrepreneurs get more leads or do this easier?
Another memory I have from this escape philosophy phase was up until that $25,000–$80,000 MRR, I kept thinking we’re going to be profitable soon. We would be profitable. We’d break even then we’d grow. Then, I’d hire. Then, we’d grow. Then, I’d hire. We were never very rarely losing much money. Never raised funding. I was pulling some money off the HitTail for a while. At a certain point, Drip was totally sustainable.
I kept thinking much like you, like when is the time when I can start making money at this business? It comes down to this thing that says something that I said at several MicroConf talks of a fast-growing business isn’t really profitable. If you do want to make money out of it, you can. You’re just going to slow the growth.
Jordan: Yes. That is one of the absolute, most critical conversations in the entire experience of building this company. It was the conversation I had with you where I was not trying to be a jerk but it could’ve been viewed as a jerk question. I think we were at $10,000 MRR and you were over $100,000. I was like, you must be profitable. What are you possibly doing at that stage if you’re not pulling profit at $100,000? I could not even fathom it. I couldn’t imagine.
That’s what you said to me. You said look, when you get here, you will have a trade-off decision. If you starve it too early, you’re going to kill the whole trajectory of it. You might also exhaust your team because you won’t be investing in hiring to keep up with the growth. It might sound like an easy decision to be profitable but wait until you get here and then let me know. You were right and then another $100,000.
Rob: Oh, man. We should couch this whole thing of CartHook and Drip are very successful apps in the grand scheme of things. In terms of so few products making it to product-market fit, even fewer make it to a million ARR, fewer make it to multiple millions of ARR. I don’t want to normalize it and say everyone should travel the same journey that you and I did or anything like that.
I do want people to know that if you grow and you do grow fairly quickly in a space, you do have success, I think it’s good to be aware of these stages so that as you enter them, like when you hit product-market fit, it’s like okay, now I should be thinking about repeatable marketing channels. At a certain point, you find one or two and it’s like okay, mental check. I’m in an escape philosophy phase. What did I say about this? It’s going to be chaotic. It’s this and that. That’s really why I wanted to talk through this to get people set. Again, it’s not going to be for every app. It’s $20,000–$80,000. It’s this and that. I think certain apps grow faster and slower, obviously, but I do think that these stages can be helpful as a mental model.
That actually brings us to stage five which I’m calling scale. For Drip, that was $80,000. It was about a million, $83,300 and up. For us, we went into a million, and then into multiple millions. We have 10 people. We were acquired. I stuck around for a year-and-a-half. By the time I left, I believed there were about 60 people working on Drip under the lead pages umbrella. We weren’t independent of the whole scale phase. We were acquired basically mid-scale, I would say.
Part of the early scale was hiring more people, which again, was that decision, that tradeoff of we’re not going to be profitable. We’re still growing. I think this market’s very big. Part of that decision was I was burning out pretty bad but also do we raise money? Or do we sell?
I got five potential acquirers contacting us in a span of about 15 months. As you do when you get on the radar and you built this many brands, two emails a month, three emails a month, from people who said we will fund you. Sometimes, it was junior venture capitalist prospecting and stuff. Other times, it was serious people who I knew had the money and really wanted to invest in a fast-growing SaaS app.
That was a big decision for us as to whether to get acquired and take the chips off the table or whether to basically raise a round, double down, and be like all right, we’re going to do this for two, three, four more years before we think about next steps.
Jordan: We’ve talked about the corporate and the financing side of things a lot through this journey. I think you did things exactly right on the corporate position you are in. Like the amount of equity you had, you hadn’t raised money. You got to this point and then the risk-reward calculations of selling or not, I think you did the right thing. You don’t know what’s going to happen in the future and you built something that’s growing really fast, is very attractive, and you don’t need $100 million acquisition in order for it to be a success.
If you raised a bunch of money, if you’re at the exact same revenue that you were at but you had raised $3 million, you’re in a completely different world. You limit your option set when you take money early. I’ve always thought about that. What we’ve always looked at is how do we raise just enough to get going but to keep those relatively low acquisition offers into play? It’s just much more likely to get acquired for under $50 million than it is to get acquired for over $50 million.
Rob: Yeah. It was a calculated gamble. Derrick and I have talked about it since then over beers. I asked him—this was probably six or eight months after the acquisition, we’re having beers, and we’re still both working at Drip—do you ever wake up and regret it that we sold? He said never once. I said me neither. I have never woken up in a day.
I think part of that is the acquisition took 13 months. We have a hell of a long time to think about it. Derrick and I were very cautious. We think things through. We’re not flipping. It was not an impulse decision. By the time we got to that point, it was like no, we really want this to happen. The harder part would have been if we got there and that hadn’t happened because we were bought into it at that point.
I’ve heard you talking on your podcast about taking some chips off the table about the big raise from the clubhouse app and the founders each took a million off the table, I believe. Some people think oh my gosh, that’s catastrophic. How can you do that? It’s a pre-launch app so I’m like wow. I can’t even believe it.
Aside from that, taking enough chips off the table, I was like look, my whole net worth, I’m worth millions and millions of dollars in completely illiquid private company stock. I have whatever I have, $50,000 in the bank, and I had a couple of $100,000 in a retirement account. That’s my net worth right now and I’m concerned. There was a huge stock market drop and SaaS valuations were cut in half as we’re talking about the acquisitions. Recessions, competitors were just jumping at our heels. There was all this stuff going on that I was thinking, it was exactly that type of press. Let’s not talk it through the podcast before but it really is.
It’s like do I take some chips off the table here or do I double down, keep going, and see what happens?” It would be different for everyone, but I do think having a small win early on and getting to some money that is in your bank account where you can then take bigger risks like, I’m now in a position where I can just take bigger risks. I can grow a TinySeed which is not going to really pay me much for years. I can do that now because of this.
Stage five for Drip, as I’ve said, was scale. It was $80,000 and up to acquisition. For you, you named it out about $80,000–$200,000 of MRR. You want to talk through what your experience was like getting there?
Jordan: Yes. This was the opposite. Book cased by failure first and then really big success towards the end of the stage. When we got to $80,000 with all that pain, we came to the realization of okay, you know what we’re going to have to do? We’re going to have to break another cardinal sin. We’re going to have to rewrite the app. And we did.
Rock, who is now the CTO, is probably the CTO right now because he’s successfully pulled off a rewrite of an app with hundreds of customers and hundreds of thousands of dollars a day in payment processing. We got stuck at $80,000. We got stuck at $80,000 for months and the churn is wild. Churn was like 15% per month. Just growing and losing $20,000 in both directions every month. Just adding $20,000 in MRR and losing $20,000 in MRR. Just over and over and over. That’s why that stage was so exhausting.
We came to the conclusion that we had to rewrite it. It has to be better. We have to take the lessons learned, all the mistakes we made, and just make a better version of it. That’s what we did and then it worked. They pulled it off between Ben, […], and Rock. They pulled it off. As soon as we released version 2, the thing just popped. We went from $80,000–$200,000 again in just a handful of months. That stage was really okay.
Let’s build out the team, let’s build out a support team, a success team, QA, different engineering leads. Let’s get this thing ready so we can actually handle what we have in front of us. Let’s get marketing so I’m not doing it. Let’s get success so I can stop talking to customers. All these different things like building up the company. It was the rewrite and the growth from that is what allowed us to hire about 20 people. That’s when everything just became much more promising. That’s what I look at as that stage for us. Then, at the end of the stage, we got stuck around $200,000. That’s kind of what led us to the next phase.
Rob: I’m calling this the sixth stage of SaaS growth. Obviously, there are many more because we’re going to wrap this up around a few million single-digit ARR. Getting to $20 million, $50 million, $100 million. Of course, there are stages you get to 100 employees, 500, then 1000. We’re not going to cover those because we haven’t done them. After the scale phase, you specifically called out that there’s this transition of all right, we’re scaling but north of about $200,000 at least for you, given the timing, it became company-building where you have to, as a CEO, as a founder, your mindset has to shift. Talk us through what that phase has been, what it feels like.
Jordan: Yes. We built a team in that stage five, the $80,000–$200,000, but we really didn’t build the company infrastructure. We hired the people that we needed but when someone got hired, it was, here’s a laptop. Here’s someone else that does the job similar to yours. I wish you the best of luck. That was effectively our employee onboarding.
The next stage, the company-building stage is when we really have to figure out a lot more around process, a lot more around org structure, reporting structures, where the lines are in the company of who’s responsible for what, and under what circumstance. I needed a lot of help with that. I had never done it before. We hired people, coaches, actually, thanks to an intro from you, who has been hugely helpful (and still is). That’s the phase that we’re in now. We are well over $200,000 in MRR. It feels like we’re just now really starting to set the foundation for being able to grow to 50 and 100 employees. Before we do that, we really need to get our act together in many ways.
It feels like for a very long time, survival was just the only real goal. Now, we’re transitioning into, how do we make this a great place to work? How do we make the mission something that’s clear, that’s everyone’s working towards? How do we attract great talents? How do we keep the employees happy so that they don’t get bored of them wanting to go on to their next challenge? That’s pretty far removed from me convincing a potential customer that they should use our product because of X, Y, and Z. It’s just a new skill set that I’m being forced to learn.
What I will say is, I started off at the other end cynical. How do I make a repeatable revenue? This process of going from that to building a real company, by far the most fulfilling experience has just been the other people involved. Developing other people, watching them succeed, watching their confidence grow once they really settle in.
I talked about this week, we signed our biggest customer ever. I didn’t talk to them. It just makes me really proud and happy about what we’ve done, what we’ve built, and just watching the team kind of start to turn into a higher caliber version of ourselves. That feels like the stage we’re in now. It’s tough to tell what comes next. I’m sure it’ll be crazy because it’s been that way the whole way. This stage right now feels pretty amazing.
When the crisis hits, we just have the ability to take care of people the way we have been able to, it feels amazing. It’s much more fulfilling than starting out and saying let’s make money together. That part of it has been great.
Rob: Building a startup changes you for the better, doesn’t it?
Jordan: Yeah.
Rob: Yeah. You know what, with Drip as we talked through these stages, just the range of skill sets that you need if you’re going to start a company as a founder to do the customer development, to convince a developer to help you or to pay them or to scrap and cold email, to do a launch, and then to grow to $20,000. Then, to start hiring. Then, hire more. Then, hire managers who hire managers. Then, being at a company-building. What a broad range of skill sets that you have to learn on the fly or makeup as you go along or what have you.
This is a reason back in the day when venture capitalists would fund a company. The founder would grow it to a certain amount. Then, they’d oust the founder. They kind of have a clause. Either the VCs owned enough or they have a clause and it’s like hey, we can boot you. Oftentimes, the founder isn’t the best person to run a $100 million company because a $100 million company with X thousand employees is a very different skill set than what you and I have talked about today.
Personally (I’ll speak for myself), I don’t want to run a team of even 30 people. That doesn’t sound fun to me. Certainly, 50, 100, 1000, people. Maybe I don’t understand what that requires, but it sounds like a burden. It’s partially because my goal was never to build companies. My goal was never to make a bunch of money. It really was to achieve freedom so I can work on interesting problems, interesting projects, and make things. It all comes from making. When I roll that back, it’s like if I want to do that, then I need to make money. If I want to make money, I think I’m going to use my skill set and start a company.
Companies were a means to an end and have been. I, of course, loved talking about it or I wouldn’t have done 500 episodes of this. I’m curious, from your perspective, you’re going to come back on the podcast and you’re going to talk to us about stages seven and eight. Who knows what they’ll be. Do you see yourself running a team? You think you could be happy running a team of 50? 100?
Jordan: Yes. I think I could. I think that’s what I want. I remember when we started out. I remember looking at the Inc. 500 magazine every year as I grew up. The only thing I paid attention to was the ratio of revenue to employees. I didn’t care about the total revenue. I wanted the ratio. I wanted the revenue per employee because looking at a company that made $100 million but had 1000 employees, I looked at that and said that just sounds miserable.
If a company was making $20 million with eight employees, I thought to myself that’s what I want. I want efficiency, I want a small team. I want everyone to be in a small tight community. I still want that efficiency but I think I wanted it to be a lot bigger.
One of the things we’ve said is that every time we come up against the hill, then climb it, and get to the top of that hill, when we look outward, we see so much more. The opportunity just keeps getting bigger the further we go. We’re not even close. We’re just barely getting started. The more we grow, the more it feels that way.
Right now, if an amazing acquisition ever came through, something that I just could not say no to, I am 100% certain that I would regret selling because we’re just starting.
Rob: Just starting, man. I love it. I’m serious about you coming back to talk. We’ve got to figure out what’s after company-building.
Jordan: There’s not too much drama. That’s all I ask.
Rob: I love this conversation. This may be the longest episode of the Startups for the Rest of Us ever. I couldn’t cut it off. I feel like what we’re talking through, I think it’s insanely valuable. It certainly was entertaining for me to listen to your stories and reliving them with you.
Jordan: First, thank you for guiding along. Sorry for making it long. Just 2X the speed. I am proud of us that we stayed away from the darkness.
Rob: Yes.
Jordan: There’s a lot of darkness that we just didn’t touch on and that’s always there. There’s a skill in ignoring that darkness and moving forward that we exemplified in this podcast.
Rob: There are a whole nother hour and 10-minute episode of us just talking about the worst part of each of these stages. That’s something. Maybe that’ll be in your memoir.
Jordan: Thanks for having me on, man. I really appreciate it.
Rob: Absolutely. If folks want to keep up with you, you’re @jordangal on Twitter. Of course, carthook.com, if they want to check out what you’re working on. Bootstrapped Web, that’s the podcast I tune into every week. They can hear you on your journey, man. Thanks again.
Thanks again for joining us. Again, to recap these first six stages of SaaS growth are prelaunch, post-launch/pre-product-market fit, product-market fit, stage four’s escape philosophy, stage five is scale, and stage six is company-building.
I appreciate you joining me twice this week. I look forward to seeing you next Tuesday for episode 500. Talk to you then.
Episode 499 | The (First) Six Stages of SaaS Growth – Part 1
This week is a conversation between Rob and Jordan Gal, the founder of Cart Hook. We dig into the six stages of SaaS growth. We compare our journeys 1:1 between growing Drip and growing CartHook. It’s shocking how well the journeys line up with each other. Some of the differences in the journey are also quite striking. This episode is part one, and part two will go live later this week.
Jordan started CartHook as cart abandonment software and became a checkout replacement solution for Shopify. He has been on the podcast a few times answering questions, and he has spoken at MicroConf a few times. He is also the co-host of the Bootstrapped Web podcast.
The finer points of the episode:
- 6:00 – Stage 1: Prelaunch
- 8:33 – How to create your own luck when your SaaS app is in the prelaunch phase
- 13:37 – Stage 2: Post Launch
- 14:25 – The journey to finding product-market fit
- 22:25 – The most challenging parts of the journey for Rob and Jordan
- 23:29 – Stage 3: Product Market Fit
Items mentioned in this episode:
This week’s episode feels like it’s going to be one of my favorite episodes in a long time. It’s a conversation with myself and Jordan Gal, the founder of CartHook. He and I dig into the six stages of SaaS growth. What we do is we compare our journeys one-to-one between growing Drip and growing CartHook.
What’s interesting is that we took different paths to get there. He raised money, we didn’t, and yet there are so many parallels between the two journeys and the stages line up shockingly well in terms of MRR ranges, of pre-launch, to product-market fit, and to escape velocity. I was struck by (a) some of the parallels, and (b) some of the deviations.
When we started, I figured it would be a normal-length episode. We wound up chatting for almost 1 hour and 15 minutes, so I’ve broken this up into a part one and a part two. Part one is what you’re listening to today, and in part two, we’ll go live on Thursday. I would kick it next week, but of course, episode 500 is next week, and I’ve been planning for that for several weeks. We’re just going to do a twofer this week. I didn’t want to drop a 70-minute episode in your feed today.
We cover the first few stages of SaaS growth in this episode. What’s interesting is I was going to call it the six stages of SaaS growth, but you’ll hear me, towards the end, realizing these aren’t the only six stages. There are stages after this. I have the parenthetical, the first six stages of SaaS growth as defined and discussed in the conversation you’re about to hear.
A little background on Jordan, in case you haven’t heard of him before, he started CartHook, which was cart abandonment software and became a checkout replacement solution for Shopify. It’s doing several million dollars a year in ARR. Jordan has been on Startups for the Rest of Us four or five times answering listener questions, walking through his journey. He’s just a founder in the space. He’s come to several MicroConfs, he’s spoken at multiple MicroConfs, and he’s executing well and doing what a lot of us are trying to achieve. He’s done a really good job executing over the last six-plus years as he’s grown CartHook. The time flies quickly. He’s also the co-host of the Bootstrapped Web podcast, so you may have heard him on there. With that, let’s dive into our conversation.
Jordan Gal, thanks for coming back on the show, man.
Jordan: Absolutely. Great to be here.
Rob: It’s always a pleasure. I’m really stoked to be talking through our journeys, our entrepreneurial journeys, and looking at these six stages of building and growing a SaaS. What’s a trip, what I like about this is I floated this idea to you, like would you be interested in coming on to talk about your journey because you’ve just made it so far so quickly. I know it probably doesn’t feel that way, but I was thinking back to growing Drip, there were some pretty distinct stages. There was the pre-launch, the post-launch, trying to find product-market fit and all these things. I was wondering if ours would at all match up.
When I typed mine out in an email, I shot it over, and how do these match up with what you have, it’s pretty close. The revenue numbers are not exact but the general headspace and what you’re trying to do at these stages, at least at this end of two is shockingly overlapping.
Jordan: Yes. I think because we both started at zero. We were forced into going through these individual stages. It is really different from stage to stage. I’m excited to go back into it. I’m a little worried about all the memories and emotions that it’ll bring up because it’s been a hell of a ride. A lot of it is good and plenty of challenges.
Rob: I’m wondering how much PTSD this is going to bring up for either of us. It’s as you said, of course, there are some great memories. I can reminisce and say oh, man. Remember the good old days? Remember when it was just two of us doing this thing? But you know what, it was super stressful when it was just two of us because we didn’t know if we were building anything people wanted. It was six months of just grinding it out with no market validation and all that. It’s easy to romanticize any of these stages.
Jordan: Yeah. It’s also easy to forget how far you’ve come. Rok and I had a moment the other day. Rob’s my CTO and really my co-founder at this point. We’re really partners. He runs the tech team, I run the rest. We had a moment because we hit 100X from the time he joined. We were like you know what? Let’s take a little time out, get on Zoom, have a drink, and have some laughs because we just keep going through these milestones. There’s so much to worry about and think about, it’s tough to even look back at what we’ve done.
Rob: I’m glad you guys took that time. That was something I was not good at with celebrating the wins and celebrating the transition, and oftentimes, even realizing we were making the transition from one stage to the next. It was Sherry, my wife, who encouraged me to slow down and be like you realize you just built a million-dollar business the day that we crossed $83,333. I was like wow, that really is something that I’d been wanting to do for a while.
Jordan: Yeah, and they change. Recently, this week I had a new milestone. We closed our biggest deal ever, and I never talked to the prospect at all.
Rob: Wow.
Jordan: The team did everything. We’ll get into these stages and the stage that we’re in now. Let’s get there. Let’s start at the beginning.
Rob: Six stages. I’ve named each of these stages because what I’ve noticed is I’ve already (and a lot of folks already) used terminology around this, like pre-launch, post-launch, pre-product market fit, and post-product market fit, but I’m tapping into your and my later experience. Have a couple of stages that I think are cool to define and think about because I think if you do get into the multiple millions of dollars, that you will enter those. We’ll get to those in a bit, but pre-launch, we’re going to start there.
Obviously, I could tell a bunch of stories of pre-launching different stuff, but I’ll stick to Drip for my examples here. Obviously, you’ll stick to CartHook. Pre-launch, for me, was a bunch of customer development, and it was a bunch of validation. That was even pre-building. It was going out. I had 17 email threads going with founders saying if we build this would you pay this much for it? I got about 10 or 11 people said yes, I would at least try it out.
For me, it was a lot of marketing as I had a contract developer who was building into the background first half-time, and then he switched over to full-time. That contractor is a guy that a lot of folks may know. His name is Derrick Reimer. At the time, he was just a 1099. He was a friend of mine who wrote Ruby, and he was a good developer. This was going to be really the first app that I had built that I wasn’t going to write any code on. It was partially an intentional decision to pick a language I didn’t know.
My memory of that was me and this contractor both working remotely. We would chat on the phone once or twice a week, and we had met once to basically spec out what the original version of Drip was going to be. I was thinking about that, I was building the marketing list, I was going on podcasts, and I was running some Facebook Ads to landing pages to test value propositions, I mean all the smoke test stuff. I was also doing some MicroConf stuff, speaking, and the podcast. I was staying busy, but it was very much one of many irons in the fire that I had going on. I’m curious to hear how your experience with pre-launch compares to that.
Jordan: Similar in that your real pre-launch started years prior. What allowed you to really hit the ground running was years of work prior, and yes, the same for me. I ran an ecommerce company with my brothers several years prior to starting CartHook. My customer development was my own experience. My pre-launch was consumed with figuring out how to get a product built if I am not technical myself. Going through all these different options, talking to agencies, looking for freelancers, looking for employees, and looking for co-founders. I just went through all these different options.
I knew the product that I wanted to build. It was a cart abandonment app. It was something similar to what I used as a merchant. I knew it made me money and didn’t cost too much. The ROI was great. I knew I wanted to build something that specifically generated new revenue for merchants so I could price based on a percentage of revenue. I had all that, and my pre-launch challenge was how do I get someone to build this? As often happens, it was preparation plus luck. The luck for me came in the form of bumping into an old family friend of my wife’s.
We were doing our 18-month excursion where we lived in a different city for a month or two to figure out where we wanted to move. While we were in San Francisco, I bumped into the younger brother of one of my wife’s friends from back in Connecticut at the laundromat. I had just known him through the years as the computer whiz kid. It was just a coincidence. We ran into each other, then we started having coffee, and then it turned out that he had been doing a bunch of freelance work. He really wanted to basically learn more on the business side.
We just had this match between I want something to build, he wanted to build something, and that’s what happened. I gave him a piece of the company, basically took three months off from freelancing, built the first version of the product, and then handed the baton over to me to start selling. That was my version of pre-launch.
Rob: Wow. The younger brother of a friend of a sister in a laundromat? Sounds like you’re making it up. It sounds ridiculous.
Jordan: Look, his line item on the cap table will speak the truth. That it’s very real, it’s there, and I hope it really works out for him.
Rob: Quite a trip. A lot of questions for you actually because I haven’t heard you talk much about this stage of your business. As an investor, I guess I should have said that upfront. I’ve invested a couple of times in a couple of rounds in CartHook. I’ve been along on the journey with you, but I wasn’t involved yet at this point. I’m wondering, did you validate this idea? I’m imagining this already existed at the time. Why did you decide to build something that already existed, if that was the case?
Jordan: I liked the low-risk approach of that. I used to use a product just like this, and it was a terrible product. It made me money. When I looked at software ideas after selling the ecommerce business, what I did was I looked through our credit card statements. In the ecommerce business, where were we spending our money? I just identified that app as really high value and really low quality. What I said was okay, what if I build a better version of that?
At this point in time, I don’t really have the intention to build a company. My intention is how do I make $10,000 a month so I can do whatever I want. I don’t know where the software thing is going to go, but I like the idea of recurring revenue.
Rob: Life’s now business.
Jordan. Exactly. I wasn’t full-time on it, I was just exploring. I had worked in a previous business where I was a partner that had this quirk. It generated revenue about a year after doing the work. I had about a year of income without doing any work. That’s when I just said okay, I need to register to replace this income, so I can maintain this freedom to explore. I wanted specifically low risk. I didn’t want to come up with something new and not know if it was going to be wanted by the market.
I had my own validation. What I did, really, as part of being able to convince Charlie, the developer that joined me as the original co-founder, I did the legwork to show him that he wasn’t going to waste three months of his time.
Rob: That’s what I was going to ask you.
Jordan: That was the big thing to convince him. I said look, I’m the business person. I’m not just talking. I used to be a merchant, and I’ve been emailing. I did the cold email thing—30 different people a day—I had an inbox full of people saying, yeah, that’s interesting. I would be interested in looking at that. I would pay for that.
Rob: We get emails in the podcast and I get just emails to me personally about how do I find a developer, a technical co-founder if I’m not technical? I always say you prove your worth as that non-developer side. You prove that you can market, you can make sales, that you will hustle, and you will do work alongside that developer so that they’re not working for three months, like you’re saying, while you’re sitting around doing your thing, and then suddenly you’re going to magically market this thing. Most people aren’t able to do that. I didn’t know that.
My next question was going to be how did you convince him to do it? I love that you basically lived that. You showed him that it was worth it and that you could potentially build it. It’s interesting. You thought that you could build something similar but just better because the UX, the user experience of the other one wasn’t good?
Jordan: Yeah. The design was horrible, the UX was horrible, and the onboarding was terrible. It was a bad piece of software but it made me 3000 or3000or4000 every single month, and I paid them $79 a month. I would never cancel it because it kept making me money. I basically said I want to be that guy. That was where I landed. I had a few other ideas. That’s my pre-lunch.
Rob: What’s cool is the parallel of when I launched Drip. I say ‘I’ because at that time, I viewed it as another one of my apps. As we get later on, it’s we because it was Derrick and I as co-founders, and then it was a team of people. When I launched Drip, I absolutely viewed it as a lifestyle business. Similar to you, I was thinking I had already grown HitTail to about 25,000 or25,000or30,000 a month. That wasn’t super interesting to me anymore, I wanted it to be bigger, but I didn’t expect it to grow as quickly as it did from a start.
Once we got into it a little bit I did, but I was really mostly thinking about it like you were just like hey, I want to freaking build a business that throws off a bunch of cash. It’s funny that we wind up going down similar about different paths.
Let’s talk about post-launch. For us with Drip, as we were working on this, it was from about obviously zero in MRR. We built for about six months and then started a slow launch where I would launch to 300 people on the list. I think the total list was 3400. It’s about 300 people every couple of weeks. Getting them and we were trying to get onboarding set. We were trying to not churn everybody out. By the end of that launch, we were between 7000 and7000and8000 a month in MRR.
Over the next six months, we were flailing trying to find product-market fit because I was driving traffic, I was marketing it, and I was doing all the things that I had done in the past that had worked and they weren’t working. Churn was too high, trial-to-paid was not great, and it just wasn’t working. From about 0 to around0toaround10,000 or $12,000, I view this as a pre-product market fit stage, post-launch/pre-product market fit.
For those you’ve heard product-market fit on the podcast a bunch of times, I have a text expander in my head of product-market fit equals you’ve built something people want and are willing to pay for. That’s how I think about it. And are able to reach them at scale and have a bunch of leads because to me, that’s escape velocity, which is two steps from now. That’s the stage I’m […] to. But at this point, it was me and I believe Derrick at that point I’d say hey, I’m thinking of buying a house, I need a couple of pay stubs, W-2 in order to buy a house. We switched him over from 1099 to W-2, and I think he was making about the same amount of money, but it was more of an accounting thing.
At the time, I believe, Derrick and I were the two W-2 employees, in essence, working on it. It was still super scrappy, we had no office. Derrick would come over to my house. There was a […] on my property and we would sit there, chat, map this stuff out, and talk about what we were building next. It was totally freewheeling. It’s just week-to-week, day-to-day. I was doing the email support for the first few months until we brought someone in. That’s my post-lunch, pre-product market fit story. I will add, this was perhaps the hardest part because it was the mental game of not knowing if we were going to find product-market fit.
It took us from November 2013 until about it started changing in May, but it really peaked in terms of churn just plummeted, trial-to-paid doubled, and just every sign of product-market fit you can imagine happened in a 90-day span from May to August of 2014. Depending on how you measure it, it was somewhere between six and nine months from launch to where, oh my gosh, the unit economics on this business all of a sudden are amazing. The ROI of dumping more leads into the top of this funnel is going to scale this thing. That was the moment that I feel like that was product-market fit. That’s that stage three, so I won’t go into there yet, but I’m curious to hear similarities and differences of your post-launch, pre-product market fit stage.
Jordan: Look, good for you because mine was an extended torture session of 12 months, I guess. It was not pretty. This stage, like really good off the ground, launching, and generating some revenue was really no fun. What happened was Charlie passed the baton over to me. He built the product to a point where it’s good enough and now let’s start to sell it. I started with cold email and it worked. I got it to 500 MRR, then500MRR,then1000, then 1500. And then, Charlie got the offer of a lifetime for just his dream job at1500.Andthen,Charliegottheofferofalifetimeforjusthisdreamjobat1500 a month. I had to just tell him you have to take this job. I’m not going to let you stay with me. I’m not even doing it full-time. It’s making $1500 a month. This is your dream job. You have to do it.
He agreed and he took the job and committed to continuing to help nights and weekends. Then I was alone again. I was doing it half the time, I didn’t really know if it was going to go anywhere, and I was just filled with doubt on it. I just kept going. I figured out a cold email system that allowed me to grow faster. I had information built with, got sent over to a VA, then they qualified, and then they sent those records over to another VA that loaded them up into the cold emailing software. What got spit out of the process was scheduled demos for me. Then I would just do a few demos a day and then we started to grow. That got to about $3000 a month and then a little bit more luck came my way.
For me, this first phase really ended when Adii Pienaar, God bless him. We know Adii from the MicroConf community and just from the startup scene overall. He’s a great guy. He built a company called Conversio that just recently got acquired by Campaign Monitor. He’s obviously from WooThemes and WooCommerce prior to that. When Adii was starting his new company, Conversio, he emailed me and effectively offered an acquisition/partnership. He said look, I think what you’re doing with CartHook is interesting. I have this thing going on. At the time, it was called Receiptful. He said would you think about joining me?
I knew that it was too early to have any financial impact, but the conversation got me thinking. It made me perk up and take the opportunity more seriously with what I was doing. By coincidence, I was in New York at the time and started telling some of my friends about this potential partnership/acquisition interest. That’s when my friends, who all went into finance and made far more money than all of us, said why would you do that? It’s so early. Why don’t you just take a few bucks from a few of us and really give it a go?
That’s what started the next chapter for me because when I entertained really taking money, I knew I needed a full-time technical co-founder. That’s when I found Ben Fisher and that’s when we teamed up and the business changed trajectory. That first phase was just 12 months of doubt, pain, taking every credit card over the phone, and just doing it that way until it got a little bit of interest. Then I used that interest to parlay up into investor interest and then raise money. That’s when the next stage started for me.
Rob: That is crazy. That is also another case of serendipity in essence, right? Just a weird conflux of ATP and are asking you all that stuff and not getting you talking to some friends who decide to convince you guys around. What’s a trip is that’s when, at least the way I have it in my Google spreadsheet that I track my angel investments, I have September 2015 of writing the first check. My memory is you were around $5000 MRR at that time. Did you raise me on this?
I probably told you this in the past, this was a pre-Drip exit for me, so I had some money, but I was not in a place to be crazy with cash. I was still trying to grow Drip, and I was honestly trying to conserve cash. I had done a couple of angel investments prior to that. One of the things that I liked about what you were doing because we knew each other, you’ve definitely done Attendee Talks. I don’t know if you’d spoken at a MicroConf yet or not, but we had definitely hung out at MicroConfs.
The way that you executed, you just hustled. The whole cold email system that you explained to me at the time (and I was super impressed by that), the fact that you had scrapped as a non-developer founder to $5000 MRR in SaaS, which I knew is hard enough to do if you’re the one writing the code and doing everything. The other thing is the Bootstrapped Web podcast. I listen to you talk every week or most weeks, I guess. Three weeks out of the month. I was like this guy’s sharp. He just thinks about things in a way that I think makes sense. It felt to me like you were going to be successful. It was literally a bet on you more than even an abandoned cart.
I was like, an abandoned cart? Cool. I don’t know the abandoned cart space, I don’t know if there are 10 apps, I don’t know ecommerce. But if you’re telling me you think there’s an opportunity there—I’ve seen you execute on this—I want to be involved in this. That was a big piece of it for me.
Jordan: Thank you for saying that, by the way. All of us have these serendipitous moments come through. What I got good at over the years was just identifying how to take one small little thing and just keep parlaying that up into bigger things. That is a theme throughout the company. The way I found Ben Fisher, the co-founder, is he signed up for my product. He just had a cool email address, then I looked him up, and he sounded legit. I got on the phone with him and then impressed him enough to join me as co-founder. It was, again, a tiny little breadcrumb. I think all of us are surrounded by these things.
Building up the radar on knowing I should pursue this little tiny thing because there might be something bigger. I don’t know if it’s talent, skill, luck, or some combination of them.
Rob: I had said that post-launch/pre-product market fit for me was the most painful, agonizing part of the journey, do you share that sentiment, or were there times later that have been worse?
Jordan: Two stages from now was the worst for me. I’ll explain that. For me, stage two—post-launch—just felt like an extended torture session that I had to go through on the way to the next thing. I didn’t like it. It wasn’t for me. I would love to skip it on any other company in the future. It’s just something that I had to just deal with until we got somewhere better.
Rob: If you look at the State of Independent SaaS Report that we did or just look general on the internet and see revenue reports, most people don’t make it to the next stage. Stage one was pre-launch, stage two is post-launch/pre-product market fit, and stage three is product-market fit. Again, build something people want and are willing to pay for. For me, with Drip, keep in mind I also had an advantage that I had an audience at this time. That’s a big part of what got me to 10,000–10,000–12,000 without having to do the hustle and send the cold emails. I was able to lean on that audience for that initial kick-start.
Stage three I have as product-market fit. The numbers that I wrote down—this is starting to be from memories, so you got to give it a little fuzzy around the edges—is from about 12,000 MRR is up to about12,000MRRisuptoabout25,000 MRR. That was me and two W-2 employees. It was me and Derrick. As we were going through this phase, this is when Derrick and I started talking like you’re indispensable here. Derrick was starting about going off and doing his own thing because he’s entrepreneurial. That’s when we had to have that conversation about let’s figure out a way to make this work for everyone and make it worth your while, basically, to stick around so you don’t feel like you’re working a day job.
During that time, we hired a second developer. We were just building the product out. We were playing catch-up. We were first at launch to try to compete. We were just going to be like an email capture thing and autoresponders, then it’s like we’re going to compete with MailChimp and AWeber, and then we realized that the real market with the real money in it was—not that MailChimp’s not a real market with real money—that we could go up-market and compete against the Infusionsoft. At the time, it was Office Autopilot that later rebranded to Ontraport. It’s really not on most people’s radar anymore. Then ActiveCampaign was just coming about. They had been I believe white-labeled software, downloadable software. They were not really SaaS for that long before then.
We realized, wow, there’s so much more money the higher price points there. This product-market fit stage was from 12,000–12,000–25,000. We were building out the product and I was just trying to find repeatable marketing channels that extended beyond my audience because I really had exhausted just the usual my things. I call it a concentric circle marketing where it’s like first I’m going to talk to everyone who listens to me—my email list, Twitter, and podcast list. The next one out is my friends’ audiences, so I go on podcasts, I do that. The further out you get it’s like can I make content and SEO work? Can I drive cold traffic from pay-per-click ads? Can I do webinars?
This was a very scrappy phase of just trying to find repeatable channels that drove repeatable traffic. Again, at about 25,000, that’s when I felt like we had started hitting our stride, which is stage four. I won’t go into that yet, but I’m curious to hear how your product-market fit, essentially25,000,that′swhenIfeltlikewehadstartedhittingourstride,whichisstagefour.Iwon′tgointothatyet,butI′mcurioustohearhowyourproduct−marketfit,essentially5000–$20,000, how that went, and how you think about it in retrospect.
Jordan: I remember when Drip launched. The power of getting off the ground. I remember because I was in the struggle at that time. I don’t know about the timing but I’m pretty sure we were under 10,000 in MRR. Once you get to10,000inMRR.Onceyougetto10,000 MRR in 60 days really shows the power of an audience. We still see that these days. We see my podcast co-host and friend Brian Casel launching something with an audience. We see Adam Wathan and Steve and how much value they give. Whenever they launch a product it’s so much easier. I will remember that for the future.
For us, this stage, that 5000–5000–20,000, was bookended with success at first and then failure toward the end of the stage. Right around 5000 is when we raised some money. We raised friends and family’s money. It was like5000iswhenweraisedsomemoney.Weraisedfriendsandfamily′smoney.Itwaslike275,000, and that allowed us to go full-time, focus on it, and hire two engineers. It was myself, Ben as co-founder, and two engineers. Those two engineers are still with the company, by the way. One of them is Rok who’s the CTO. The other one is Jan who is now on infrastructure.
We built something actually worth paying for. We improved the cart abandonment product and then I went on a search for a flywheel. Just something better than the cold email because as soon as we left the Volusion market, which is where I built my ecommerce business and it was really easy to email the owner of the company, cold email stopped working. Then we had to figure out a better way. What we ended up figuring out were partnerships. What we would do is we would do the integration with a platform, then we would try to do some co-marketing, and we hit onto this perfect situation with a platform called Cratejoy.
Cratjoy was a brand-new ecommerce company run by Amir. He used to work at Zynga, who’s super smart, and they were growing like crazy. Full-on hyper-growth was just crazy. Every one of their merchants kept asking them for cart abandonment email. They didn’t want to build it themselves, and I just stuck my head out at just the right time and said we will build it for you, and then you could just tell her customers that they could use us so you don’t have to worry about it. He was like that’s exactly what we need to do.
We did the integration and then what they did is they took us and just built us directly into their admin. Everybody that created a new account saw CartHook right in front of them and then a lot of people signed up. That ended up being so critical to the whole life of the company because as we started growing in this way, the failure bookend of this phase was really coming to terms with the fact that cart abandonment was just not going to do it for us. The market started to get crowded, everyone started to go cheaper, our differentiator started to get worn away.
Our thing was that we captured the email as soon as it was typed into the field, and only the larger, much more expensive solutions were doing it, and then everyone else started doing it. I just did not like the future of the company in cart abandonment, and that’s when we made the decision to build the second product. But we couldn’t have done it without the flywheel, specifically from Cratejoy because what it allows us to do is spend six months building a new product while the revenue just kept growing anyway.
Rob: You self-funded yourself out of revenues in essence. I remember the conversation where we talked on the phone and you said I see this opportunity that’s not cart abandonment, and I want to build a second product. I was like, shiny object syndrome. I was like you need to convince me. Every founder ever wants to build a new product, why? You convinced me. My memories were like look, this is super risky, it’s another product. You now have to go find product-market fit again, but you’re mired in this every day and you’re thinking about this 100 hours a week. This is where you want to go with it, then you got to trust your gut. This is that founder gut-check moment.
Jordan: Yeah. It was very risky but I pretend to be more risk-loving than I really am. I always want to protect the downside. In many ways, I’m risk-averse, but I want the cake and to eat it too. I want to take additional risk while also protecting the downside. That’s the situation I found myself in when we said at the very worst, this thing’s just going to keep growing but slowly, because of the flywheel we’ve built. Even if we take this risk, at worst, I pare everything down. It ends up as two people doing 20,000, and we can survive. It was definitely a huge risk to take to build a second product with a team of four people and20,000,andwecansurvive.Itwasdefinitelyahugerisktotaketobuildasecondproductwithateamoffourpeopleand100,000 in the bank.
Rob: You had this cart abandonment app that was thrown off, let’s say, $20,000 a month and you used it to build the second product. You want to tell folks what that was and why you saw an opportunity there? Why was it unique? There was timing involved in this.
Jordan: Yes, there was. That’s right. Here’s what was happening. Everyone knows Shopify now and the incredible success story rocket ship like ridiculous performance that they’ve had, especially since going public. When we were in the ecommerce market, this was four years ago, Shopify was becoming successful and being talked about, but it was not the clear, straightforward, obvious winner in the market.
What was happening was as Shopify got better at making it easy to launch a physical product business and the ecosystem around it of fulfillment and importing from China, all these things started coming together in such a way that made selling physical products almost as straightforward and hands-off as selling digital products.
What that did is it started to attract all the marketers that were traditionally in the digital marketing space selling courses and e-books, it started to attract them into the physical product world. It is much easier to sell a physical product than it is a digital one in many ways. You put a picture of it on the site, you write some copy around the benefits, you put a price, and then there’s a buy button. It is much more straightforward than a digital book that explains how to do X, Y, or Z. That started attracting people, and at the same time, ClickFunnels was exploding.
The reason ClickFunnels was exploding was because it was building products in the market of those traditional digital marketers, but it was showing them how to very easily build things that sell physical products. The problem with ClickFunnels was that it didn’t have the infrastructure on the backend like inventory, fulfillment, and shipping. It just had a great system to just put up a landing page and be able to sell, most importantly to sell with post-purchase upsells. What people were doing is they started selling physical products on ClickFunnels. They would find success, but then they would run into the issue of not having enough infrastructure to do fulfillment, shipping, and so on.
They were dealing with CSV exports and losing their minds. Then they went over to Shopify, which had a much better system for selling physical products. But when they did that, they lost a lot of the marketing strategy functionality around the checkout and post-purchase upsells. There was just this huge pool of marketers that wanted to sell on Shopify with the post-purchase upsell functionality. That’s what we saw as the opportunity. If we build post-purchase upsells and a customizable checkout for Shopify, all of these people that are currently on ClickFunnels and want to come over to Shopify will come over along with our ability to provide them what they want. That was the moment right there in the market.
Rob: That was the right bet based on your growth since then. It’s a trip, and you no longer have the cart abandonment functionality at all, right?
Jordan: That’s right. We sunset it from the public eye, maybe 6 or 12 months ago, and we just left some of the merchants that wanted to stay on. It is amazing how long people will keep software around if you keep making them money. We haven’t touched the thing in three years, but we still have people paying us $100 a month because it keeps making them money.
Rob: It’s back to your initial premise of I paid 3000 or3000or4000 a month, or I made 3000 or3000or4000 a month from this software, and I was never going to cancel it as a merchant. That’s the thing.
Sorry to break in here but that is the end of part one. To recap, Jordan and I talked through the pre-launch stage, the post-launch/pre-product market fit stage, and the product-market fit stage. Part two that comes out in about 48 hours, we will cover the remaining stages of SaaS growth. Thanks for listening. I’ll talk to you then.
Episode 425 | How to Launch a Product Into a Mature Market
Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike talk about how to launch a product into a mature market. They give a definition of what a mature market is, list some examples of established players in different markets, discuss how to tell if you should enter a particular market and how to execute on it.
Items mentioned in this episode:
Mike: And I’m Mike.
Rob: We’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, sir?
Mike: It’s the end of the year, so I’m just doing a lot of end-of-year paperwork that’s—mostly required government filings and getting ready for taxes and stuff like that. I had to submit, I think it was a affidavit of eligibility for my health insurance and it had to be done before the end of this year for my health insurance to be able to be renewed in April or something like that. It’s like, come on, you have to be kidding me. This far and advance and at the end of the year they’re requesting it but whatever you have to do it.
Rob: Yeah, that’s fascinating. The end-of-year stuff is always a pain in the butt. Because I’m always taking this time off. I take a week off, sometimes a week and a half off but it’s not fully off. I’m recording podcasts and doing a few calls here and there but a lot of thinking and planning scheming for the next year, and so it’s a bummer to have to think about government filings and that kind of stuff during this time.
Mike: How about you? What’s new with you?
Rob: Well, you probably hear I’m a little sick right now. Happy New Year everyone. This episode goes live on New Year’s Day. I hope your hangover is treating you well, and that Mike and I can be there for you. And for me, it’s another year, man. My birthday is December 28. So I turned 34 this year.
Mike: Did you say 34?
Rob: Yeah, I’m glad you caught that. Good. So listeners may or may not know how old I am. But everyone knows now that I’m definitely not 34.
Mike: I’m surprised you didn’t try to shoot for like 29.
Rob: Yeah, now that would have been good. I still get carded here in Minneapolis. So they’re funny. In California, they don’t card you very much at bars once you look old enough, but they still card everyone here. So it’s kind of not. It’s something you say, like, “Oh, I still get carded.” But it’s like, everyone kind of gets carded here.
Mike: Yeah, certain places I’ve seen where, like it’s just as a general rule. They’re like, hey, it doesn’t matter. Like, you have to card everybody. And depending on where you are, certain states or jurisdictions, they’ll say that if you have a violation of any kind, like you immediately lose your liquor license, and then, like, your entire business is gone. So I think that’s the case of the next town over here in Massachusetts, and they’re like, they’re not willing to take the risk. So there’s like, “Yup, we card everybody and if you don’t have ID, too bad.”
Rob: Yeah, that’s funny, you know, I found a retreat in California, and I walked into a bar and they carded me and when I walked an interval said they didn’t card him and was just laughing and laughing because they were like, “You look so old dude,” and he went with it but I think that’s funny when one person in a group gets carded and it’s kind of obvious you’re all the same age and I believe he’s like a few years younger than me as well.
So we have three new iTunes reviews. Three Mike, three in December. This one is from MJ SFS, says best Startup podcast. I’m on my fourth software, venture to battlemaps.co, and this podcast has been invaluable. Keep up the great work guys.
Another reviewer says a podcasting masterpiece filled with actionable product focused insights. It’s never moved from the top of my podcast list. Robin Mike are always full of enthusiasm, insights and great knowledge acquired from years of actually building products.
Thanks so much for those five star reviews. If you have not left startups for the rest of us a five star review. I would invite you to log into Stitcher or iTunes and help us get a few more listeners help us stay motivated and help us on those long, lonely winter nights when we’re sad and considering crying ourselves to sleep, and instead, we actually read our iTunes reviews to make ourselves feel better.
Mike: Because we’re not actually 34.
Rob: That’s because we’re not actually 34. So this week’s topic is interesting. I was going through our listener questions and there was a question that I felt like almost warranted an entire episode. So, I started just hammering out a quick outline. It turns out, it’s at least an entire episode and could probably be a book chapter. But the question asked, his name is Eric Roberts and he’s asking about how to launch into a mature market. He says, I know from listening to you guys, the competition in place is a good thing. But what about an overly mature market? How can you tell if a market is primed for a new solution to an old problem? And I think there’s a lot of nuance to this. I mean, there’s the idea of, what is a mature market, then how can you tell when you should or should not enter one, and how do you execute on that those are kind of the three angles that I was thinking it through. And so, that’s what we’re going to talk about today.
Mike: Cool. So where do you start?
Rob: Let’s talk about, what is a mature market, a give a little definition and some examples. So when I think of a mature market, I think of a market that has established players that are well known. So, think of examples in CRM, it’s definitely mature market, there is Salesforce, there’s HubSpot, there’s Base, there’s Pipedrive, there’s a long list Trigger, CRM, long list of folks there.
In addition, I think in a mature market, there tends to be maybe two or three really obvious choices. So if I say CRM, a lot of people think of Salesforce, HubSpot, maybe Highrise maybe Base or Pipedrive, in email marketing, in ESPs, people think of MailChimp, they think of AWeber, they think of Infusionsoft. I mean, there’s this kind of short list, it’s the opposite of the long tail, it’s the fat head, it’s called where there’s a cluster of companies, be it one, two, or three that have the vast majority of the market and kind of sit at the top of the market share. In addition, I think the third piece of that is that there are these product norms that have developed.
So if you think about CRM, there’s this nomenclature of leads, and deals and contacts. And if you think of ESPs, there’s this, these norms that are developed, like lists and subscribers and forms. And so, while this may not be an exhaustive list of everything that defines a mature market, those are the three pieces that I think of, in my mind, that kind of defined it, that’s having established players, it’s having two or three obvious choices, and then having kind of norms or nomenclature that have developed through those products – and then in the other products that are also entering the space.
Mike: I think the easiest way to recognize whether or not something is a mature market is if you go out to a handful of people and say, “Hey, do you know of any companies that are in this particular software vertical, whether it’s you know, CRMs or mailing lists,” like if the people that you know, or who are in your circles who have any familiarity with that can name at least two or three or four different companies that are in that space then it’s probably a mature market, obviously, like if they’re if it’s a not well-known industry, for example, let’s say like virtual tabletop software. If you talk to a bunch of people who are in that particular industry, they’re going to know very well like who the players are. But it doesn’t necessarily mean that it’s a mature market.
Rob: Yeah, I think that’s a good point. I mean, anytime you see a forum post that’s like, what do you use for CRM, you know, and then you’ll get dozens of responses and almost everyone’s using a different one, or what do you use for your to do lists? And, you know, there’s, there’s dozens and bug tracking and issue tracking and all these things. So what’s interesting is, I don’t think, you know, a mature market doesn’t necessarily mean it’s a big market.
Mike: I was just thinking that.
Rob: Yeah, because to even think about like more aware software where they have a mature product in a market that has been around now for more than a decade. They build a SaaS app for countertop installers. People who install the actual physical tile that goes in a kitchen or bathroom and that’s not a huge market, right? That’s not a $100 million market. And yet if you were to try to enter that now they are so far ahead, the market has matured because they launched in, I don’t remember what it was like 2006 or 2007. And they’ve just kept adding things in and maturing the market during that time.
Mike: Well, I guess it makes – tt begs the question like, is it considered a mature market? Or is it like mature players in that market? How do you differentiate between those two things like CRM, lots of people use it so by definition you could call that a mature market but for table countertop installers, they are more aware as is very mature player in that market. But the market itself is small. So do you consider it a mature market? Because it’s not like there’s a lot of competition or a lot of people in that market? So like, is that a mature market. Do you consider that?
Rob: Well, I guess by my definition, I have three points or is there an established player or players in the countertop installer market? Yes, because there’s more aware. Is there one, or two, or three obvious choices? Yes, there’s more aware and I think they own most of the market, but there’s obviously at least one other competitor and have they developed product norms that may not have existed before software into the space. I don’t know their space well enough, but I’m guessing that there’s nomenclature in things in their product that they came up with that that didn’t exist before then.
So I would say yeah, I would say even a small market I understand your differentiation of mature product versus a mature market but I feel like once there is a mature product or two in a market the market becomes mature at that point yeah.
Mike: I was just kind of thinking about the product norms piece of it because if there aren’t a large number of products in that market and obviously like there’s room for that software to grow and for the products who are already in place to grow that’s fine but do the majority of countertop installers know about them? How many of them are actually using software of any kind or how many of them are looking for it? Do you see kind of the direction I’m going with that because like if there’s 100,000 countertop installers, but only 500 of them are using software of any kind. Does that establish a product norm, because that’s only five percent.
Rob: That’s a good point, yes, and imagine if they’d been around for, you know, if you’ve been around for 10 years. So you’d say, “Hey, this is a pretty mature product. There’s a lot of features, it’s stable,” all those things, but you only have five percent market penetration. Is that a mature market? I don’t know. I don’t know that I have a good answer to that, other than that either means that they’re not marketing very well. And we’ve now removed from more of our software that we’re doing a hypothetical at this point. But in that hypothetical where this company has been around for 10 years, they only have five percent market penetration, and there’s really no one else, it’s only five percent of market is even using software, then either that’s a really tough market. It’s a market that is highly resistant to technology, or that company is not marketing themselves very well, right? They’re not penetrating the market past five percent.
So I would then ask myself – If I wanted to enter that market, which of those is it, because if they’re not marketing very well, we’ll come in and out market them. But if the industry is just highly resistant to it, then that’s probably not a good market to throw yourself into.
Mike: And I would say that that’s probably a general rule. If it’s hard to get into them, then it’s because they’re resistant to change and resistant to adopting technology, then I would probably would avoid them in general. But it’s a very different story if they’re not marketing themselves very well. And you just trying to make a name for yourself there.
Rob: Right. And I think, that’s a good point. Because the kind of the second point that I wanted to cover, this question I want to answer is, how can you tell when you should or should not enter a mature market? I think we’ve just touched on one.
If you determine that, boy, this market is mature and really no one else wants to use software in it and I’m just going to have to be pulling from the existing competitor who only has five percent of the entire space that would give me pause, that tells me about the customer type and about the how they don’t want to change, right. So then that means that even getting them to switch from a competitor is going to be really difficult. I think also entering a mature market, I personally would not do that as a first time founder without money. One example that I kept coming back to of course is the one that I lived, entering a mature market with the drip, becoming an ESP and then becoming a marketing automation provider.
If I had not had the experience and the past successes that I had and did not have the self-fundability, you know, I was pulling money off of hit tail and other apps that I had, I don’t know that we could have made it. I don’t know that Drip would have survived because the market had so many mature players. Again, MailChimp, AWeber, Infusionsoft, and others – and it cuts both ways because, obviously, that’s what made it possible to grow Drip so quickly is that the market was – it did have opportunity. But if you’re a first time founder and you’re not going to raise funding, I would seriously reconsider trying to enter a mature market because these are the ones we can get a lot of success but these markets are very, very hard to penetrate, if you don’t have the right tool set.
Mike: I just have a quick search for, something kind of running through my brain is where we’re talking about what constitutes a mature market and there’s terms like total addressable market and then serviceable available market, which to me it seems like going back to the example of, if there’s a total of 100,000 countertop installers but only 500 of them are actually using that type of software then maybe your serviceable market is only about 1000 or maybe it’s 750 or something like that versus the total market which is 100,000. And you can look at that and say, well, if the established players have 50% or 75% of the serviceable market, which again is only 750 or 1000, then that’s a fairly significant chunk of those people. And it’s because those types of people are resistant to adopting technology or adopting software solutions for that. And maybe the delineation there is like, are they established players? Do they have most of the addressable market or the serviceable market?
Rob: Yeah, I think that’s a good differentiation there. As I think through this, when I think of mature markets, where there is a lot of adoption. So let’s flip back to the ESP or the CRM or markets where total addressable and serviceable are approximately equivalent, or at least 80%, 70% of the total addressable is already using some type of software and is able and willing to pay for this, I don’t know that I can think of a really good reason not to try to disrupt one of these markets if that’s your ambition.
Like, disrupting an existing market is where that hyper growth comes from and hypergrowth for us bootstrappers might be getting to seven figures in two years and hypergrowth for AirBnb and Stripe, maybe was getting to seven figures in six months, you know, past the point of product market fit. Because you think about AirBnb, did they invent a new market? No, they really essentially disrupted the hotel market. It was an existing place where people were already spending money on these things and they figured out a different way to implement it.
Stripe is the same one, I have them as an example later in this episode. Did invent a whole new market? Did payment processing exist before them? No, of course not. There was Off.net, there was PayPal Web Payments Pro. There were all these gateways and all these services that were really a pain in the ass to use. And Stripe came in and just made it a heck of a lot easier. And even, Drip is the same thing, I think about – there were already ESPs, there were already marketing automation providers. But that made it that much easier to basically pull existing people away who were unhappy with the current state of affairs.
That’s what I think you have to find, is if everyone in the market is using a product and loves it, then maybe you shouldn’t enter that market. But I don’t know of a mature market where people aren’t disgruntled and you think of QuickBooks. Everybody hates QuickBooks, but everybody uses it. So is that right for disruption, you think of Slack, everybody uses Slack but now we see level.app from Derek Reimer, there’s a couple other apps in that space as well.
The more I think about—if that’s your ambition, and you’re willing to really go to the mattresses because it’s going to be a hard fight. I don’t know that there’s a good reason not to try to disrupt. Honestly, if you want to build a little niche lifestyle business and generate that low six-figure income and have it on autopilot and be able to work five or 10 hours a week, then don’t go into a mature market. That’s where I would say, think twice about it, because I’ve had apps like that and they don’t have the great single channel of traffic, and they made whatever it is maybe $1000 a month, and maybe it was 10 grand a month. But there were these awesome little niche products. I mean, they were not—they were in these very nascent markets in these very tight niches and you could autopilot them, but they would never grow past that.
And so, I think that’s the thing to think about, your personal preference. Does it sound interesting, fun to do the hard work and the stress of going after these mature markets? Because I think my hypothesis is that, like, most mature markets right now are ripe for disruption in one way or another.
Mike: Now, one question I have about everything that you just said there is that, it feels to me like a lot of what you talked about relates to the product itself and not necessarily the channels at which those markets are accessible. And something that really comes to mind is enterprise sales for certain types of software, so anything that’s installed across the entire organization, whether it’s 500, or 1000, or 50,000 endpoints in that environment, it feels to me like those are cases where it’s probably a mature market already. You probably can’t start there on day one, you’re going to have a really hard time going into those and being able to offer something that is going to compete with existing solutions. One, because they’re so far ahead of you, but two, also to be able to have the resources to walk in the door and do that at 10, 50, 100 different potential customers, because you don’t necessarily have the time. So, I feel like the channel that you use, that you’re going to get in front of these customers has to come into play here.
Rob: Yeah, no, it absolutely does. That’s where bootstrapping versus raising funding comes into play. If you’re going to bootstrap then your point is dead on. Don’t go after enterprise sales and a mature market because you’re just not going to have the cloud, you’re not going to have the logos, you’re not going to have the time to execute on that.
I have a good friend here in Minneapolis, who has worked for two different companies over the past few years. Both of them were heavily, heavily venture funded and both were going after these massive and mature markets. One was like data storage and the other one, I don’t even really know exactly what it is. But it’s deep-tech stuff. It’s stuff that kind of competes with like parts of AWS, or it competes with stuff that HP or HPE has, or launches or whatever. And yes, they were upstarts but they had to raise buckets of funding in order to do that and build out a team in advance of having any real revenue. And if it works, then they’ll take part of this huge deck of billion dollar market, but that’s the gamble. If it doesn’t work, then they’ll burn through their funding. If they have enough traction after 18 months, they won’t be able to raise the next round.
Obviously, we tend to talk to more to bootstrappers and folks who are listening to this podcast or probably on that side, but it is possible it’s just a whole different playbook if you’re going to do that.
One other exception I can think of when I would give it a second thought as to whether or not I wanted to enter a mature market is if there are other startups also entering that same space who are getting traction. To me, I’m more scared of other startups than I am the big, lumbering, 800-pound gorillas in the space, right? I’m less scared of sales or competing with Salesforce and I’d be more concerned of competing with Pipedrive or one of the other like, smaller, more agile CRMs that I see kind of innovating and things.
Mike: Yeah, I would agree with that. Although there are certain times where if your features start to show up in Gmail or something like that, like you probably want to be a little concerned.
Rob: Yeah, I agree. That’s just Gmail or Salesforce is going to move so much slower that it’s almost by coincidence. I feel like, if you build a feature and one of them, build it within a few months, they’ve probably been working on that for six or eight months. They don’t move fast enough to copy a little upstarts, until you become not a little upstart.
Mike: Yeah, for sure.
Rob: The other thing I would think about perhaps not entering a space, is if you find a space that doesn’t have early adopters. So you find a market – because that’s what you’re going to need, right? You’re going to need, you’re going to need early adopters to basically jump ship on existing solutions who are willing to switch. If you found a space where there are no early adopters—we could go back to that example where we had the company who only had five percent market penetration, and it took them 10 years to get that, it’s pretty obvious no one wants to change. And so, there really aren’t going to be, early adopters.
I can’t think of another good example. I mean, maybe I think of like, the legal space. I know that, when I was a consultant, I worked for a guy who launched a product and legal space. I remember, he just had a really tough time getting traction, because there were not many early adopters in that space. So that could be, I don’t know, that space today and maybe there are more early adopters, but it’s spaces like that that I think are going to be hard to compete with where, the person’s motto is, “Well, I never got fired for choosing IBM,” or “I never got fired for choosing Salesforce.” If that’s really the mantra of everyone, then it’s going to be hard to penetrate.
Mike: I think the other consideration there is whether or not you have to essentially build something that is going to completely replace an existing solution, or you’re just solving an extreme pain point that an existing solution doesn’t solve adequately. And if people are angry about it and looking for a solution to that and they’re willing to plug your product, in addition to whatever it is that they already have as kind of a stopgap measure because it’s so painful versus you have to—it’s the difference between implementing two or three features versus implementing 250 because you have to completely rip and replace that entire product.
I think you have a lot easier time if you only have to implement a couple of things. And if you execute on them really well, people are willing to spend a little bit of extra money to get your solution in there because they’re in such a huge amount of pain.
Rob: So the third part that I want to cover is if you decide to do this, how do you execute on it? I think the thing that – maybe the common wisdom is you have to be 10x better in order to get people to switch. I would say yes and no to that. I don’t know that you need to directly build a 10x better product. I think you do need to build a better product. But I think there’s other things that you can improve upon that are not just product basis, not just a feature race or usability race. So I want to talk about three or four ways that I feel like you could be two-x better in each and perhaps they multiply together to give you more than more than 10x and this really comes out. I mean, the more I wrote this down, this just came out of the Drip playbook. It’s the playbook that I executed as we as we built Drip up and it was these four places where we innovate.
There may be more but this is what comes to mind. The first is, price and if you’re in a mature market and you have a huge player, they often have pricing power where they their brand name and they can charge a lot more than everyone else and you won’t be able to without that brand name. And not only can you not charge that much but you can use that strength of that player against them. And if your product—It’s easier to use and you’re cheaper, you can get these early adopters to start switching
Now, you and I’ve talked a lot about Don’t be the low cost provider. The point is not to be the low cost provider forever. It’s long term to raise your prices. But in the early days trying to price match a large competitor with a brand name, when you don’t have the feature set that they do, it’s going to be difficult.
And so, either price innovation, where you’re innovating on the pricing model itself, that’s risky, but you can think about it or just being cheaper. Again, it cuts in multiple directions. It can bring people who turn or who are more price sensitive in all honesty with drip. I mean, we were priced against Infusionsoft, and Infusionsoft was $300 a month to start and it had a $2000 sign-up fee that you paid right at the beginning.
And that was easy to be cheaper than them and still turn a heck of a profit, right. But we could start at $50 or $100 a month and still not have people who were super price sensitive because if you’re paying $50 or $100 a month, you still have buy-ins, it’s not like we’re going down to $20 a month or something. And so, that’s the kind of pressing I’m talking about, right? Or Salesforce, I believe, is $125 per seat per month, if I recall.
Think about being able to innovate on that and charge $20 or $30 a month per seat, that’s still a nice revenue stream as you’re getting started, and you’re not bottom of the barrel, you’re not a B2C pricing, but it is and can be a competitive advantage, especially in the early days.
Mike: Yeah, I think what you’re kind of referring to there is not using the price as just the sole way to get in the door and be cheaper like because, obviously, you don’t want to do that long term, but it’s really to unlock that the unwillingness to move by having the cheaper price and get them to take that step. You reduce the friction enough by lowering the price to be able to get them to say, “Well, you know what, I’ll give it a shot,” versus if you are priced exactly the same and you have an identical feature set or they have a much better feature set because you’re just not there and they’re mature in the market, then it makes it easier for them to justify giving it a shot. Or even just like saying, “Okay, you know what, I can’t buy into all that stuff because I can’t afford it right now.” Or I’m not even using 90% of it.
I’ve seen a lot of mature solutions out there where they will throw every feature under the sun into the product. And eventually it just becomes this model with that is difficult for some people to adopt. Because they know that they’re not going to use 80% of it. They’re like, “Well, why am I paying this much money for something, I’m only using 10% or 20% off.”
Rob: Second place, I feel like you can innovate and outmaneuver your bigger competitors with the sales model. Oftentimes, you’re competing against enterprise-ish sales models where they have high-tech sales process. You can’t sign up on the site, you have to see a demo. There’s often setup fees to pay the hefty commissions they’re paying to the sales processes. And so, if you bring them and make them, either no touch, or low touch, or even medium touch, you can innovate on that process.
Again, coming back to Salesforce, it’s very hard to go to their site. I don’t believe you can just go to their site and sign up for an account. You have to go through this long process. Whereas with Pipedrive, you can go and sign up for it. Same thing with with Infusionsoft versus Drip, that was always a differentiator, is that you could come and try Drip out, there was a free trial. Infusionsoft, you didn’t even get to see the product unless you were on a demo. They didn’t want to in there playing around with it. So that can be another way to, basically, bring your innovations to the masses and outmaneuver folks and it’s not a product, it’s not just a feature, usability, it’s actually implementing a different sales model that can be more conducive to bring on early adopters.
Mike: I would say that this cuts the other way as well. Because if there are products out there that don’t offer like the ability to get on to a demo because they’re trying to be mass market and they’re trying to have a low-touch sales process. If you go the other direction, then you can have a lot of success there because you can get those people who have given those solutions to try and they got confused or lost and they just said, “Well, how do I get on a demo or have somebody show me something.” And if that company doesn’t offer it and you do, then you can get them on a call and you can – I won’t say gloss over the things that your product can’t do but you can essentially offer to do those things for them and do that high touch onboarding process and thereby justify a higher price tag for your software.
Rob: The third area where I feel like you can outmaneuver the big competition is in product and this one I it’s really hard to do. But it’s pretty straightforward to describe it. You make it way easier to use, which doesn’t tend to be that hard when you’re dealing with larger clumsier companies with 10 or 12-year-old code bases, you ship faster—so you have a better shipping velocity of new features. And it feels like products are constantly improving versus there are once or twice a year launch cycles and you build a unique feature, or two, or three that no one else has for now. You try to figure out a way to go back to first principles and innovate on something that is really hard for them to do.
So, adding automation into your ESP, when it takes everybody else a year to do it. Because the code base and they’re already at scale is one way to do that, or adding a lot of integrations that you know, that the early adopters will use that your competitors have not added. Because again, they just move slower than you do. So, you know, you look around and you say, “Oh, there’s this whole new ecosystem around Stripe.” And there’s there, Baremetrics, and there’s ProfitWell, and there’s Termbusters, and there’s Stunning, and there’s all this stuff, it’s like, you know, Infusionsoft or Salesforce, they’re not going to integrate with those tools yet, because they’re just not on their radar. But if you integrate with all of them, you could scoop up this early adopter, you know, the bootstrapper crowd the, the online business folks, because they use those tools. Gumroad is another one, but I want to, underscore that having those features is a short-term thing, because if they are successful, other folks will implement whether other upstarts or you know big competitors will implement them. But that’s how I think about, product innovation.
Again, easier said than done. But that is the playbook that I see working as, as startups try to attack these more mature markets.
Mike: Something else, I think that kind of falls under this bucket is just making your product look better. I mean, there’s products out there – I’ll specifically look at things like paychecks or ADP where, to log into them, you’ve got to have this weird looking JavaScript plugin on your website, that you load into the browser or some download that it looks terrible. It looks like it was built in the 80s because it actually was and they’ve never changed it. They’ve never updated it. And you end up with companies like Gusto that came out, which used to be ZenPayroll, and they just looked fantastic and just the look alone makes it feel like it’s in a more modern application.
Of course it is because it was just recently built, but the look and feel of it can go a long way towards making people feel like you’re responsive to the needs of the customers and you actually care about how your product looks and is presented.
Rob: I think that’s a great example. I think Gusto is another example of a company that entered a very mature market and through—I mean honestly, if you look at these points I hadn’t—so here’s a great example, because I was thinking about Drip, and Stripe, and others, when I wrote these four points of price, sales model product and marketing, which we’ll get into next. But gusto came in their price was cheaper than paychecks. I think I was using paychecks before at Gusto and Gusto was cheaper, Gusto’s sales model was so much better, it was all self served. I didn’t have to talk to people, it was a lot easier for me the product itself was easier to use. It was a better looking as you said, and they file, I don’t know, all my stuff. I guess Paychecks did some of that too, but the experience of Gusto in the communication is all via email, like click and do things like it is so much of a better thing and then their marketing, I would say that I really heard about it from word of mouth and the other three price sales model and product really drove that for me, but obviously their marketing to get into the hands of early adopters like us, I think was a pretty deliberate decision.
Mike: Yeah, I think the word of mouth marketing, if you have a good enough product that, I won’t say, it sells itself. But like if the customers that you have love it so much over the other things that they’ve tried then that word of mouth is really going to drive a lot of revenue for your new customers. And I don’t know how easy it is to recognize that that’s what’s actually going on. But I have seen that happen. And, there’s certain products that I’ve recommended where you look around and you don’t see a lot of marketing for them, but you’ve recommended them a lot to other people or other people have recommended those products to you. It’s just easy to see when those things are actually working.
Yeah. When you’re in a mature market, and the number one player is big, but everybody hates using it. That’s when word of mouth is huge. Because you will be you will become the thing that we’re all talking about, on our podcasts, at conferences on our blogs. I mean, think of Gusto or, again, ZenPayroll when it came out. Think of when Stripe came up, a ton of it was word of mouth.
Zenefits, it’s basically likes Gusto but for health insurance and other benefits. Drip had a really strong word of mouth in the early days. You know, there’s others. I’ll give another example, ready to wrap up, but we’re working on something that’s really hard to generate in general, and it can be a cap out, when people don’t know how they actually grew. I’ll often hear founders say – Oh just word of mouth, and it’s like, Yeah, I don’t think it really was word of mouth. You know, you just don’t really know, you don’t track your metrics. But in this case, like a mature market where you have this reviled number one player, I think getting in there, building a better product, better pricing, better sales model can really lead to word of mouth and some good stuff.
I think the other thing that they don’t mention about marketing in a space like this is you can take the approach of being the underdog, right? It’s easy to market against big guys when you can basically talk about being the anti them. So Salesforce had their – especially in the early days, no software, right. They had the circle with the red line through it and it said software in it because they were saying, no on-premise software, no massive installation and server footprints and stuff – we are just this thing in the cloud.
They were anti software. Less accounting was kind of the anti QuickBooks. I don’t know that they mentioned QuickBooks by name but I remember one of their headlines was about all accounting software sucks or sucks less. I mean, it was it was a good—It was a really interesting approach to it. Drip was the not Infusionsoft, what was my headline – lightweight marketing automation that doesn’t suck and I was implying that most marketing automation software sucks and listed the Marketos and Eloquas and the Infusionsofts that are just not fun to use and they’re not fun to be sold because the sales model sucks and they’re really expensive and here’s all the reasons that you don’t like them and here’s why we’re the opposite of all of that.
So, if you’re going to enter this market embrace market leaders’ strength and turn it into their weaknesses. I think it’s Jiu-jitsu, where if your opponent is really strong and he or she swings you do a parry and you let their momentum carry them through and that’s a big part of marketing against these really big players in established markets – is what is their biggest strength can be turned against them as the biggest weakness.
I feel like we’ve covered this topic pretty well. I think the one last thing I’ll say is we’ve given a ton of examples of people doing this, talked about Stripe, Gusto, Zenefits, Drip, and a few others. The one other example, I think, that’s doing a good job of it today is Superhuman and it’s that email client that—they’ve changed the sales model, they’ve actually gone from no touch the opposite direction, there’s onboarding, every person individually. Their product, from what I’ve heard, is easier to use and it’s amazing. Their marketing is, obviously – they’re doing a good job with it. Now, their price is interesting because they’re more expensive than any other ESPs. So that’s a whole that’s a whole other thing from extremely experienced founders that they’ve, basically, made a gamble to say we think we can build something truly 10x better and we’re going to charge for it.
I think they charge $30 a month, which if you think about it, compare Gmail to Superhuman, Gmail is essentially free. Although, I pay for it now because of how much storage I use, but, very different pricing model there. So they’re one example that’s doing it successfully today. And they’re not following, you know, the exact playbook that we’ve laid out here. But I they also have buckets of money. They’re three and four-time founders. So that’s where you can, in my opinion, you can start breaking rules because you know which rules to break.
Mike: Yeah, and that’s really a matter of like, certain types of people are in so much pain, that they are willing to be the early adopters and they’re willing to pay more money for it because it just makes their lives that much easier. And whereas no knock against Gmail because I use it as well but there’s certain things about Gmail that I wish were just a little bit easier and I’ve heard the guy who runs Superhuman spoke before and he’s talked about like, how the experience is really what they focus on and I’ve seen him commenting on Twitter here and there and showing pictures of all the different things that they’re testing. Somebody said, “Oh, why don’t you support this products on,” such and such. And he showed them a picture of like eight different laptops, where they were testing different variations of like the browser client, and he’s like, “We’re working on it but this is what we’ve got so far.”
It’s incredible because it partly tells a story, but it also explains or demonstrates how much pain certain people are in to be requesting that stuff and still willing to wait for it.
Rob: Yeah, and they worked on Superhuman, I believe, for 18 months to two years. It was a small team of developers before they launched. So they broke they broke a lot of “rules”. And again, it’s because they did have a lot of funding, they had prior exits. I mean, the guy had started Reportive and sold it to LinkedIn. And then, he had even another one before that.
When you get to that level, you’re just at the point where you can make some difficult calls and pivot out of the risk because of your experience in funding. Frankly, which is something I talked about earlier in this episode.
Mike: I’m sure Data had something to do with it.
Rob: Indeed.
Mike: Well, I think that about wraps us up for the day. Thanks to Eric Roberts for sending us that question. If you have a question for us, you can call it into our voicemail number at 1-888-801-9690 or you can email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from “We’re Outta Control” by MoOt used under Creative Commons. Subscribes to us in iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening. We’ll see you next time.
Episode 406 | Should Bootstrappers Raise Money?
Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike answer the question of should bootstrappers raise money? The guys distinguish the difference between venture capital and angel investing and how raising an angel round may be a good fit for some types of entrepreneurs.
Items mentioned in this episode:
Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you build your first product or you’re just thinking about it. I’m Mike.
Rob: And I’m Rob.
Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s going on this week, Rob?
Rob: We have new iTunes reviews.
Mike: Oh, cool. What do we got?
Rob: This one from Find Fitness Pros. It says, “This is my go-to podcast every Tuesday morning. Rob and Mike continue to give their insights, not just info on exactly what to do,” and from Nathan Bell, he says, “Great information. I listened to one episode and I’m hooked. It was full of great information I can easily implement. Some of the info was a little bit advanced for me currently, but I’m confident that by selectively listening to more, I will pick up more.”
Those are a couple of new iTunes reviews that we have. I used to keep a worldwide tally of it using CommentCast and when I moved to my new computer, I don’t have the .exe or what is it called, it’s a .app I guess in Mac. I don’t have the executable anymore and you can’t download it anywhere. So I moved over to mypodcastreviews.com but it only gives me reviews, not ratings. We’re up to almost 600 worldwide ratings, I believe. People don’t necessarily need to write sentences or whatever, but I don’t have that tally anymore. Certainly, we’re above 600 at this point.
Now, what I have is I have 347 worldwide reviews and that’s a lesser number. I want to get back to the world’s rating. I think the guy at My Podcast Reviews says that they are going to add ratings but neither here nor there, the more reviews or ratings we get, the more likely people find the show, the more motivation it gives us. If you feel like we’ve given you some value as a listener to the show, it would be awesome if you can open iTunes or Stitcher and just give us a five-star review. Really appreciate it.
Mike: The solution to not having that app that gives you the numbers is just make up a number. So we’re at 3000 reviews I think.
Rob: That’s right. 3422 reviews. That’s great. How about you, man? What’s going on this week?
Mike: Well, this morning, I published a public API for Bluetick. Of course, I say it’s a public API but there’s actually only one person who actually knows about it.
Rob: It’s in beta?
Mike: Yeah, basically.
Rob: Early access, good.
Mike: I had a prospect who wanted to sign on and they’re like, “Yeah, I really need to have a public API that is available for me and Zapier wasn’t going to work for them. Basically as I said, I spun it out because I heard from a bunch of customers that I currently have, and I started talking to them about, “What is it that you need?” and trying to figure out what’s the minimum that I could build that this particular prospect or customer would need to get started. They only needed four things. Build those, put them into it, and then there’s all the infrastructure changes that needed to go into it.
It took a week-and-a-half just to do the infrastructure changes but now the best stuff if all taken cared of. I got that published out there and waiting for them to start using it, and then figure out what needs to change. I already made it very clear upfront, like, “Hey, here are some things that I know we’re going to change, and then over here, based on what you tell me, other things could change, so treat this as an absolute beta. Eventually at some point it will become stable, I guess, and then I’ll start pushing it live to everybody.
Rob: That’s nice. It’s nice to do. You’re basically doing customer development on what is its own little product. You can say it’s a feature but really some entire products are just APIs. You want to get it right from the start, and by start, I mean by the time you publish and people start hooking into it, you can’t change it at that point. I think it’s really good to take this approach of roll it out slowly, roll out one endpoint at a time and really think through how you want to structure it.
I was just on your site trying to guess the URL. I was going to just type in a bunch of stuff so you’re going to see a bunch of 404s in your error logs. Not a hacker, it was me, but I didn’t find it alas.
Mike: No, that sucks. I would tell you if you asked for the right price. Other than that, I also got my first fraudulent charge from Bluetick. It took a lot longer than I expected it to but somebody signed up, then they logged in, and absolutely they didn’t pay any attention to the onboarding emails. Come time when their trial is up, they got charged, and then I forget how long it was later. I was maybe probably three or four days later, I got a notification from Stripe saying, “Hey this charge looks fraudulent,” and I looked at it. I think it’s a debit card too and I was like, “Oh great.” Three hours later though like, “Oh you’ve had a chargeback.” I was like, “Wait, I didn’t even get a chance to decide that to do with this potentially fraudulent charge,” and they already converted it into a chargeback, which cost me an extra $15. Well that sucks, but, oh well.
Rob: Was it a person not using or was it a stolen credit card? Is that what you think? Or do you think that they just went in with the intention that it was their own credit card and they just intended at the whole time?
Mike: I’m not sure. It looks legit. The email address, I couldn’t quite tell whether it was real. I think it was a Gmail email address. I couldn’t really trace it back to a company or anything like that but the name on it seem to match what the email address was. I don’t know. I’m not entirely sure but I think it was from a real estate company or something like that. All right, well, whatever.
Rob: Yeah, that sucks. It’s going to happen. It’s definitely a milestone you don’t want to hit but you’re going to hit it eventually.
Mike: Yup. Certainly not a milestone to celebrate but I definitely hit it.
Rob: Yeah, exactly. Cool. What are we talking about today?
Mike: Today, I thought we would have a discussion about whether or not bootstrapper should be raising money. I guess by definition if you’re raising money, are you no longer a bootstrapper at that point? I think there’s maybe a time during which you are bootstrapping a company and self-funding it. I almost called it self-funding, like should people who are self-funding raise money, but again that would go against it.
The idea came because I saw Justin Jackson had tweeted out a link to an article he wrote over on Indie Hackers called The Bootstrapper’s Paradox. In that article, he shows a graph or what they’re doing for transistor.fm, which is the new startup that he’s working on. Basically it shows a graph of over the course of 60 months was 10% exponential growth and 5% turn. The MRR will get to $21,000. But 60 months is five years of time.
I thought it would be interesting to just have a conversation about this because when I was reading through the tweet that he had put out, there were a bunch of people who chimed in on it, mostly people who were listening to the show would have heard of like Des Traynor, Jason Collin, and Natalie Nagel. They’re giving their thoughts on this stuff and I just thought it would be interesting to talk about it.
Rob: Yeah, that’s for sure. 10% growth every month sounds like an impressive number but when the number starts very small, like $1000 a month, that means you’re growing $100 MRR a month. You just can’t do that early days or if you do, it’s going to take five years. You either need to figure out a way to grow faster or you need to be really patient.
This is a struggle. It’s funny that, Justin called it The Bootstrapper’s Paradox. I don’t know that it’s that as much as this is the reason people raise funding. We know people who are just bootstrapper through and through, you should never raise funding and 37signals used to say that and even mentions it that DHH and Jason Fried took funding from Jeff Bezos two years after launching Basecamp. It wasn’t even funding that went into the company. They took money off the table. If I recall, I think that number is public. I think it’s $10 million that he invested, was my memory and maybe I don’t think I’m making that up. It’s either rumored at that or it was announced.
They had essentially at that point had FU money and it’s really easy to make different decisions or just say, “Hey, we’re going to grow as slow or as fast as we need,” when you have that kind of money in your personal bank account and you’re just running this business day-to-day.
Justin’s article is a bootstrapper’s realization of “Oh Sh*t.” This is why people do raise money. It’s coming to that realization at this point and I think it’s a good thing to call out for sure. I’ve been thinking about this so much so I’m looking forward to today’s episode because in my Microconf talk this year, I talked about things that I learned bootstrapping and then self-funding and then in a venture back company after Leadpages acquired us.
In the last five to seven minutes I did just a little snippet about fundstrapping, which is this term that Colin from customer.io coined, where you’re kind of in-between. You bootstrapped a little bit and you raised a small round. I say it’s between 200,000 and 500,000 and you raise it with the intention of getting to profitability. Without, you’re never going to raise institutional money, or raise it from friends or families or angels, so you don’t give up control, you don’t give up a board seat, you really have the benefits of funding without the institutional chaos of it, the headache.
It wasn’t a throwaway piece but I almost didn’t include it in the talk. That piece has gotten me more emails, more comments, more thoughts, more people came up to me, ask me what that’s like, asked if I would invest or find new people who were doing fundstrapping. It’s just fascinating response to this, this thing that’s been percolating. It’s a long rant on it to start but I just think this is becoming more and more of a viable option and potentially even a necessity as the SaaS market gets more and more crowded.
Mike: Yeah. That’s the part that I think has changed over time, where five or 10 years ago, you could come out with a SaaS and you’d launch it to the public and you would start to grow by virtually the fact that there was nobody else out there or there were very few competitors out there doing what you were doing. Now if you launch anything, you probably got a couple of competitors just right out of the gate. If you don’t, then you probably don’t have a product that’s going to go anywhere. But if you have any competition, it’s probably substantially more competition today than you would’ve had five years ago or 10 years ago. Just by virtue of having launched five or 10 years ago, you were going to be more successful quicker than you would if you did the exact same thing now. It’s going to take longer, which means that you’re going to burn through more runway and it’s just going to be harder.
Rob: Right. Now, five or 10 years ago, there was less competition but the expenses would have been higher, 10 years ago especially because you literally needed a rack server. There was no Amazon EC2. In addition, there was still like when Basecamp first launched on their homepage, they were like, “You don’t have to install any software. No downloads needed.” They were still educating on just the concept of being in the cloud and there were hurdles there.
Mike: That was almost 15 years ago.
Rob: Yeah, that’s true. No, you’re right. That was 2005 or 2006? You’re right, 12 or 13. You’re right. But even with that, say 10 years ago, even with that, it’s still I believe was easier back then. But that doesn’t mean you shouldn’t start something today. It just means you got to house some more, you got to pick a better niche, you got to have more skills, or you need a little more money in the bank.
Whether that means you raise it yourself out of consulting efforts, which is what I did, or if there’s definitely more money being thrown around as funding these days that is, I’m not going to say no strings attached because it’s certainly they take equity, but 10 years ago if you took half-a-million bucks, boy that was typically institutional money, it was a pain in the butt to raise, you are giving up a lot of control, you are giving up a board seat, that is no longer the case. There really is this viable option, this in-between.
Mike: I think if you look at the businesses that, in the past have tried to figure out how to raise capital, one of the things that most people, 15-20 years ago, it was common to say, “Okay, let me go to a bank and get a loan from the bank.” But that is a non-starter for most new businesses. You got SBA loans and things like that where you can use the money to take over an existing business where they’re able to evaluate.
But if you have a business that you’re trying to get off the ground, a bank loan is basically a non-starter, especially when it comes to SaaS because they don’t understand how to calculate how much that business is worth. There isn’t any inventory and with software, it’s going to lag in terms of the revenue over something like a physical goods business, or a coffee shop, or a fitness studio where they know how many people are coming in and they can put a value on the equipment whether it’s the coffee machines or the spin cycles on a fitness studio. Banks are okay with that. They understand that.
But when you got a software business, the expectations today are much higher than they were five or 10 years ago. You have to do a lot more in order to make your product a lot more polished, which means it’s going to take time to do that which burns through your runway. It burns through that money a lot faster today. I guess you wouldn’t burn through it faster. It’s just you burn through more of it than you would have 10 years ago to get to the same point.
Rob: Even if you can get a loan, you have to send a personal guarantee. Now, all your personal assets are on the line. And if you decide to shut the company down, you owe them money. If you borrow $100,000 it’s a big deal. To me, that is more of a risk than I think an entrepreneur should take, unless you’re at the point where you already have, “All right, I’m at $10,000 MRR,” in which case you may or may not need the money, but if you’re at $10,000 MRR, you should raise equity funding anyway.
But if you know the business is going to succeed, that’s fine. When I hear that people charge $50,000 or $100,000 on credit cards to start a SaaS business, I’m like, “Oy vey.” That is going to be catastrophic. That is a really, really stressful way to live and it’s something I would not do, especially when we’re in a space where raising equity capital is relatively inexpensive. Raising a small angel round and selling 10% or even 20% of your company to reduce a lot of stress and to get there faster, I think it’s a pretty reasonable idea these days. It’s not impossible to do, I’ll say.
Mike: I want to talk about that specifically right there. What you just said was raising capital is relatively inexpensive. The reason I like the way that you put that is that when I think of the way I thought about raising funding years ago was that, “Oh, I’m going to have to give up a lot of control, I’m going to have to give up a lot of equity, and I don’t necessarily want to do either of those things.”
But if you’re thinking about putting together a business and you have anybody who’s helping you—a partner or a co-founder, something like that—your immediately giving up 50% of the company anyway, and then there’s a whole lot of difference between doing that and giving up 50% when there’s really nothing there, and yes, it could grow up to be something huge, but you’re giving up 50%.
So there’s like a mental block there of you saying, “Okay, well I’ll raise $250,000 in exchange for 10% of this,” and you don’t want to do that but you’re willing to give up 50% to somebody else when there’s really nothing there that’s being invested except for their time. Do you know what I mean?
Rob: Yeah. It’s cognitive dissonance I believe is the term where two things that don’t agree or paradox, I guess. It’s something in your head you’re rationalizing one way but then you turn around and give away 50% to a co-founder. That’s what you’re saying, It’s like you can give a small amount to get a big chunk of money, or even if it’s a small chunk of money.
Here’s the thing. Let’s say you live in the middle of Minnesota, or the middle of Nebraska, or something and you have an idea and you raised even $100,000 or $150,000 and you paid for your salary for a year or a year-and-a-half. That gives you a year or a year-and-a-half to get to some point of revenue that makes sense. Even if you gave away 15% of your company, you’re valuing it at $1 million right off the bat, or if you give away 20% or $750,000, it still makes your life a lot easier.
I think that’s the realization I’m coming to, is that at Microconf, or through this podcast, or whatever at different conferences, we meet smart people who are trying to launch businesses and something that stands in their way often is that, “I have a wife and kids. I have a house. I can’t do this nights and weekends. But I don’t want to raise funding because it’s really complicated. I don’t know how.”
What’s funny is you outlined this episode and you brought the topic up. But this is something I’ve been thinking a lot about, and there’s a gap here in the space. We do have folks like indie.vc which, if you haven’t heard my interview with Bryce from indie.vc, it’s episode 310 of this podcast, and it’s a more realistic approach to funding. It’s kind of a fundstrapping model. I’d recommend you go listen to that.
In addition, I feel we’re coming to an inflection point where there’s this gap and there’s a level of interest in something, and no one is filling it. No spoilers on what I’m up to next, but I’m starting to feel I might be the person to tackle this, to take it on. I’ve been spreading the word about it. I have been talking about it for years and I’ve been investing in startup like this.
We talk about Churn Buster, LeadFuze, CartHook. These are all small angel investments. I’ve done about 12 angel investments and I think three or four of them were essentially fundstrapped. it’s where they took money from a handful of folks and they never planned to raise a series A. I put my money where my mouth is, but now I’m thinking I only have so much money, how is it that I can take this to the next level in a realistic way. It’s something that’s definitely in the back of my mind and it’s something that I’ve been thinking a lot. Hopefully, we’ll dive into more in the future.
Speaking of that, if you listen to this and your thinking, “Oh, this is an interesting topic,” go to robwalling.com. Enter your email because it’s going to be something that I’m going to be thinking more about in the future as well as on this podcast for sure.
Mike: One of the comments that jumped out of me on the Twitter post that Justin had put out there was from Des Traynor and he said, “I think a second piece people don’t really internalize is that 60 months of the best years of your career is a substantial upfront investment too. Like a seed round but instead of money, it’s your life.”
That’s a fascinating way of looking at this because even back n the day, I would always say, “Oh, well. You know you’re basically trading money for time,” and I don’t think that I really equated time with years of my life. It sounds intuitively obvious. That’s exact same thing. But when you’re in the middle of working on stuff, you don’t think, “Oh, I’m trading five years of my life away of hard toil to get this thing to where it could be a lot sooner if I were just to take some money and trade some of that equity for it.”
Rob: Right. It could feasibly be a lot sooner. It may or may not. Money doesn’t solve all the problems but it certainly makes things, I’ll say less stressful and you having done it with true bootstrapping with basically nothing and doing nights and weekends, to then self-funding with revenue from HitTail going into Drip, and then venture funded. I’ve done all three of these. I will tell you that having that venture money, I didn’t have to raise it and I did attend the board meetings but I didn’t necessarily have to report to the board. My life was less stressful at that point than either of the prior two scenarios.
I think it’s a good point, man. I don’t want to come off. You can tell, I’m coming off kind of pro-raising a small round, and I don’t want to come off too one-sided. We’ve never been anti-funding ever. From the start, Microconf, I think in the original sales letter. It was, we’re not anti-funding. We’re anti everyone thinks the only way to start a software company or a startup is with funding. That maybe from the introduction of my book, actually—Start Small, Stay Small.
Even back then in 2010, I was saying, “Look, raising funding is not evil in and of itself. It’s the things that you have to give up by raising funding. Just know what you’re getting into.” Yes, we have seen founders that get kicked out of their own company. There was, I figure what that app it was. Was it Tinder? Something sold for $460 million. No. It’s FanDuel. It’s sold for $460 million and the founder who started it, and I believe was CEO when it started, he got no money because of liquidation preferences and he’s suing them.
That’s a huge exit. He got I believe it was zero dollars from the exit. There was an article or something that was like, he’s suing them now. If the contract say this is what the liquidation preference is, that’s one thing but he’s suing them because he thinks they screwed with the valuation intentionally and there was fraud or something. He’s not going to win if he just says, “No, that wasn’t the deal,” because he signed the papers. These VCs are not stupid but he’s trying to do that.
Yes, that does happen. But I believe there is a way to do this and I’m seeing it with these smaller SaaS apps. A way to do it without that much stress, without giving up that much equity. Brennan Dunn, RightMessage. That’s another one. I also wrote a check. And Rand Fishkin’s SparkToro. He’s doing the same thing. He’s not calling it fundstrapping, but he said, “Hey, we’re going to raise around, and we’re going to get to profitability, and we don’t want to do institutional money. If you listen to Lost and Founder which is his book, he talks about the perils of all that and you couldn’t read that and say, I can see really they didn’t like – once they raise funding, he really didn’t like it.
You can look and say, “Well, Rand’s anti-funding now.” But no, he’s more anti-institutional money, and there’s a difference. Venture capital is institutional money. These angel rounds tend not to be.
Mike: But I think even back, we’ve talked about it on the podcast before. As you said, we always had the position that, it’s not that we’re anti-funding, we’re anti-this-is-the-only-way-to-do-it. That’s always been my thought behind it. I’ll say the majority of my career and thought process has been like, “Yeah, I really just don’t want to take funding in this more because I don’t want to necessarily give up control.” Back then there weren’t really the options for that. Now, things have changed a lot. It’s not, say, front and center on my radar, but it’s something I’m definitely looking at niche and exploring a little bit more.
I definitely think that—like with Bluetick for example—there’s ways to go further faster, but I just don’t necessarily have the money to be able to do it, which sucks but at the same time, it’s always a trade-off. I think that’s what you always have to consider is, what is the trade-off and what am I going to have to give up in order for me to get X amount of influx and then what are you going to do with that?
You have to have a plan. You can’t just say, “I want to raise money.” You got to have a plan for not just raising money but also what are you going to do with that money when you get it? How are you going to deploy it? How are you going to build the company and how are you going to grow things? You can’t just drop $100,000 in your bank account or $500,000 and say, “Okay great. I’ve raised money. Now what?” They’re not going to give you the money if you don’t have a plan.
Rob: And if you don’t know what you’re doing, money’s not going to fix that. You’re just going to make bigger mistakes. This comes back to the stair-step approach. No chance I would have raised money in 2005-2009 with ,DotNetInvoice, and Wedding Toolbox and just beach towels and stuff. Even if I could have made the case that DotNetInvoice would grow to something, I would have made huge mistakes because I made small ones back then. But I learned and I gained experience and I gained confidence.
By the time I get to HitTail, I remember thinking, “Yeah,” because remember, I bought HitTail for $30,000 and then I grew it up to basically that much MRR per month but end and I value at it. Maybe I should raise a little bit of money in it. It would make this a little easier. But to me, it was the headache of it. I was like, “I do not want to slog around and spend months asking people and the paperwork.” It just felt like a pain in the butt to me. I don’t know if I could have. Did I have the name recognition? Could I have raised enough?
Arguably, yes. By the time I got to Drip, it was definitely like it. If I haven’t had that HitTail money, let’s just say I’d had none of it. I basically used a bunch or revenue from HitTail to fund Drip. If I hadn’t had that? I absolutely would have seriously considered doing what we’re talking about raising a small round. I knew Drip was ambitious, I knew it was going to get big at least by the time we are six or eight months in, and it had a need for that.
That’s what we’re saying here is the words always, never, and should, they’re not helpful words. Don’t say, “I should always raise funding.” “I should never raise funding.” “I should raise funding other people think I should or shouldn’t.” These are not helpful words. Just evaluate things and look at them, and like you said, look at the trade-offs. Pluses and the minuses, and the realities of them, not the FUD. Not the fear, uncertainty, and doubt.
I can tell you the story, “Oh, look. The founder of Fandle. He got screwed by his investors. Therefore, I’m never going to raise investing or I’m never going to raise funds.” That’s dumb. Actually look at the black-and-white of it. I think that’s what we’re talking about today. We;re not saying you should or should not, but it’s look at the reality of it.
Now, you and I talked about this in-depth in episode 211, When To Consider Outside Investment For Your Startup. We went in-depth on what are funds and family round, an angel round, or often called a seed round was. We talked about series A, B, C. Once you get to the serieses, that’s when you get to institutional money, which is when things get way more complicated. Once you raise a series A, it’s the point of no return. It’s implied you’re going to raise a B, a C, and go on to either have this huge exit or an IPO, and it’s growth at all cost for the most part.
But if you’re able to stop before that series A and stick to people who are on board with you, angel investors and such are on board with, “Hey, let’s build a $5 million, $10 million, $15 million company with it, it’ SaaS. Let’s do a 30%, 40%, 50% net margin on this thing.” That’s great. That’s the kind of company I want to build and that’s the kind of company I want to invest in.
But venture capitalists don’t want to invest in that. If that’s not your goal, to go to $100 million and do what it takes to do that, then you don’t want to go down that road. You want to have those expectations clear both in your head upfront, as well as anybody who’s writing you a check.
Mike: Right. The problem with that is that episode 211 when we talked about that, that was four years ago. That’s a long time in internet time.
Rob: I might need to go back and listen to that episode to hear what we said. How much you want to bet? Oh, I’m going to go search it and see if the word fundstrapping if I mentioned it in there.
Mike: I don’t think so. Oh, it is.
Rob: Is it?
Mike: Yup. About 20 minutes in, you said, “I heard the term fundstrapping and I really like it. It was from Colin at customer.io.”
Rob: There it is. In 20 minute then boom. This is 2014, November of 2014 even back then.
Mike: But you were in the middle of Drip at the time, were you?
Rob: Yeah.
Mike: Was that right?
Rob: Yup. In the middle of Drip and I was probably already thinking about because at this point, we were growing fast and I was dumping all the money I had into it, both from that revenue and from HitTail, and I was thinking, “Boy, if I had half a million bucks right now, given our growth rate could have raised it. If I had half a million bucks right now, we could grow faster. I can hire more and have more servers and not shut down EC2 instances on the weekend.”
We used to do that to save money that’s insane, that lengths. I remember valuating Wistia versus SproutVideo, and Wistia, for what we need, it was $150 a month and Sprout was $30. It’s a nice tool but now way it was Wistia. I went with SproutVideo because I needed that $120 bucks to pay something else. We had to migrate later and it was a bunch of time and all that stuff. I never would have made that choice if we’d had a little more money in the bank. It’s the luxury of having some investment capital.
Mike: Yeah and unfortunately, you have to make a lot of trade-offs like that. You spend a lot of mental cycles and overhead making those trade-offs and just making the decisions because you don’t have the money, which is a crappy situation to be in. All that said, part of the problem is, you don’t necessarily want to raise money if the idea itself or the business model just simply doesn’t have merit. Maybe that’s partly what those investors are there for is to make sure that they act as something of a filter.
That’s always the problem that I’ve seen with angel investors is that they’re the ones who are in control, not you. Maybe angel investors isn’t the right word, but outside investment where they basically end up getting control of enough of it that you don’t get to make the decisions anymore. They’re the ones who make the decisions whether or not your business is going to succeed based on whether or not you get the money. If you can’t set aside the time, like nights and weekends, to be able to do it, it’s just not going to work out. You need that money in order to make the business work, then it’s going to be a problem for you down the road.
Rob: And that’s the thing is the losing control of your business tends to be if you raised multiple rounds because each round you sell, let’s say, 15%-20% is typical. May 15%-25% and if you do one round, you still have control. You and your co-founder or you if you’re a solo founder still own that 80%. But if you do another round, another right you get two, three rounds in, it’s typically by series C or D where the founders are the minority shareholder and investors now own most of it. If you don’t been on the path, it’s unlikely, or if you just make bad decisions.
I saw someone on Shark Tank where they had no money upfront and they sold 80% of their company to an investor, to an angel investor. Shark Tank was like, “We can’t fund you because you’re working for nothing.” All the work is for the investor. If you make a bad choice, that’s another way to do it too. You do need to educate yourself about it and I think that’s something that some people don’t want to do because it is boring stuff.
I really like the books that Brad Feld does and this one is maybe like venture funding or like a guide to venture funding. I got four chapters in and I just couldn’t stand it because it was all terms. He didn’t write it. It was more of a series that he’s involved in. The terms were just so boring that I stopped. I understand if you don’t want to learn at all. You need to learn enough about it to do it.
I want to flip back to something that Natalie Nagele responded to Justin Jackson and then it was actually just what I was thinking when I saw his graph. It was five years to $21,000 MRR. In all honesty dude, I would shut that business down before I wait it that long. I forget how long it took Drip but it was maybe a year. I don’t think it was even a year from when we launched and it was probably 12-18 months from when we broke around on code, that we had $21,000 MRR.
Drip was admittedly a bit of a Cinderella story. It was fast at growth than most but if you’re growing $100 a month in the beginning and you continue that 10% growth like that, you can’t do that. You need to get it up—
Mike: But I don’t think that’s a fair comparison, though, because if you look at the way Drip was funded into, you said 21 months or so to get to that point? He’s talking about a completed self-funded company versus something where you put money in from HitTail. Those are two entirely different things. I don’t know all about the details of Transistor but my guess is that there’s a huge disparity in terms of the amount of code and the quality of code that needs to go into something like Drip because of the sheer complexity of it versus something like Transistor.
Rob: Yeah, that’s true. I was for the long entrepreneurial journey too, I would say. I had successes that I’ve parlaid into it. You’re right. It’s not a fair comparison. I shouldn’t say with the Drip but…
Mike: I was just arguing about the point of, if it was five years to get to the $20,000 in MRR, should you shut that down? I think it’s a very different answer based on what it is that you’re putting into it. If you’re dumping $200,000 into it, yeah, you probably should shut it down if it’s still going to take you five years to get to that. But if you put nothing into it, or $10,000 into it but it takes five years to get there, it’s like, “Uh, well, I don’t know.” It’s a judgment call.
Rob: It’s interesting and that’s the thing. When I think back in 2005, I started with DotNetInvoice, making a couple of grand a month. It took me until late 2008 to get to where I was making about $100,000 a year, between $100,000-$120,000 a year and that’s when I stopped consulting.
So it took me three and a half years. But again, I did it with no funding and I cobbled it all together myself. That’s the situation we’re talking. I wasn’t doing SaaS. I did it with these multiple products. I think if I was less risk-averse, I’ve could’ve done it faster. I think that’s probably what we’re talking about here. It’s getting a little bit more ambitious and trying to speed things up. How do you do that?
Mike: Part of being more ambitious these days, I think, is because you’re forced to, because of the level of competition that’s out there. You have to do something that’s quite a bit above and beyond what you would have done three or five years ago because the competition is there and people are going to be asking for features that they see in other products that you’re trying to compete against. If you don’t have those features, they’re going to say, “Well, I could pay the same amount of money to you versus this other product and they’ve already got those features so why would I go with you?”
You’re just not able to compete unless you have those features there that you can demonstrate. It’s not even just about the marking. It’s about having the things they need. If you don’t have them, they can’t go with you. It’s not even that they like you. They just won’t do it.
Rob: Yeah and that’s true. Again, funding even the way we’re talking about it, it’s not going to fix all ills. If you pick those markets that’s too small or you don’t build a good product, you’re not going to get to action. Or if it’s a market that people aren’t interested, or you don’t know how to market, you don’t have the experience, you don’t suddenly become an expert startup founder just because you raise funding but if you have the chops and funding is a big piece.
Time is a big piece because you’re only working nights and weekends. You can only put 10 hours a weekend or rather 15 hours. It’s a big difference if you can suddenly go to 40 or 50 hours with two co-founders. It doesn’t fix everything. In addition, does it come with complexity? Yes. You have to report to your investors once a month with an email. You can feel the stress of that.
That was actually something that I asked Justin McGill, Jordan Gal, and Matt Goldman, those are the co-founders of those three businesses that I mentioned earlier, CartHook, LeadFuze, and Churn Buster, and I said, “Hey, do you feel raising this money made things more stressful or less stressful?” They each have their own take on it. If I recall, Justin McGill was like, “It’s more stressful because I feel like if we don’t grow, we’re going to let you guys down.” A lot of the investors he has a lot of respect for. That’s one way it cut through. It can make it more stressful.
I don’t want to put words in people’s mouths but I think Jordan had said, “It’s more stressful but better because it motivates him to succeed.” you got to think about how your personality is and if you feel like it’s going to add more stress, if suddenly five or 10 people that you really respect, that are friends, colleagues, and fellow Microconf attendees write a check to you, how does that make you feel?
Mike: Yeah. I think the answer’s going to be different for every person, especially depending on what your product is like, what the expectations are, how you’ve position it, and how the investor views it. Some investors just say, “Yeah, I may lose all this and that’s totally okay,” and other ones may say, “I have these expectations and you’re not meeting them,” if you miss a deadline or something like that.
There’s a lot of dynamics and complexity there. Some people will thrive in it and some people won’t. I think at the end of the day, I also feel having money has the potential to make the downsides of your product or business model worse. It will just exacerbate some of those issues. If you don’t have a market that you can actually go to, if you think you do but you don’t, and you get a bunch of money in, I think it’s just going to make it worse because yes, you can try a bunch of things and you’ll be able to throw money on it, but then you’re burning more money than you would have otherwise.
Rob: That’s the thing. I know we’re going long on time but really important. I would not raise any type of funding before I have product market fit. That’s a personal thing because (a) your valuation is way last before then, and (b) no one is going to give you money if you don’t have a product, period. You have to have a product these days. You can’t raise money on an idea unless you’re Rand Fishkin, or Jason Cohen, or a founder who’s been there and done that.
You have to have a product, you have to probably be live or at least have beta users, your should have paying customers. That’s a bare minimum to even think about trying to raise funding. You have to get there. You have to write the code, you have to beg, steal and, borrow to get someone to write the code. But the valuation is going to be way less and you’re probably going to burn though a lot of that money just trying to get to product market fit. From the time you launch until you’re part of market fit, I’m going to say it’s 6-12 months if you know what you’re doing.
You see founders like Shawn Ellis, you saw Jason Cohen, you saw me do a Drip. You see people who are pretty good at it and know what they’re doing, and it still takes them six months, and ours still takes 9-12 months to do it. At that point, once you do it and you do kick it in a little bit of that growth mode where it’s like, “Okay people, are really starting to uptick it.” That’s when you pour gasoline on the fire.
But before that, I have seen at least one startup in the last year raise a small round before product market fit, and just burned through it really fast because they staffed up, do a lot of marketing and do a lot of sales, and it just that their churn was so high. That’s typically where you can tell his people aren’t converting to pay it or they aren’t sticking around. There are dangers there. Like a samurai sword, like a said in the past, it’s a weapon that you need to know what you’re doing with to wield well and I think you need to be smart about when you raise.
Mike: Yeah and it sounds like there’s obviously different takes on it. If you want to go down like the VC or angel route, series A funding down the road, I think it’s possible to probably raise money if you have any sort of history or relationship with them, like if you don’t have a product yet. But you’re still also going to get eaten alive in terms of the equity shares and everything.
I think that point that you raised about you have to have a product and you have to have paying customers before you start to go raise money, that’s how you maintain your equity, a fair amount of the equity, enough of the control to be able to what you want, need to with the business, and also be reasonable sure and confident that you’re not going to just waste the investor’s money and burn those relationships. You can use that money for good, and you know what that money will do for you versus you’re still trying to get to product market fit. You don’t know who’s going to but it or who uses it, or why.
Rob: Yeah and the once exception as I’m thinking about it is if you raise a big chunk, let’s say you raise $250,000 or $500,000 and you feel like you need to spend it, and so you staff up but your not part of market fit, you’re going to treat their money. But the exception I can think of, is like I said earlier. What if you just bought yourself 12 months of time and you didn’t staff up but you just worked on it, or 18 months. You didn’t raise this huge amount of money or raise a small amount to just focus on it and work, I could see doing that before product market fit. That would get you to the point where then you can raise that next round.
I’m not trying to be wish-wash but I’m realizing I never said never raise before product market fit but I did say I wouldn’t personally. But I have the resources to get me to product market fit and I could work on a full-time to do that. It’s an exception. If was I doing it nights and weekends, then I would take money before I see I have to think about where the advice is coming from or where the thoughts are coming from. I’m just thinking it through as if I were literally doing this nights and weekends, I would consider taking money as soon as I could. If I was going down this road because going full-time is a game-changer. Being able to focus full-time, being able to leave everything behind is a big deal. It really is and a night and day difference.
Mike: I know there’ll be a range of opinions on it, but I wonder what most investors would think about, somebody saying, “Hey, we got this product. I’ve been working on it and I’d like to get some funding and money in the bank, basically to extend the runway because I got a little bit of something going here, I got partial product in place, I got some customers, but it’s not a lot. I need runway in order to make it work but I don’t know specifically how much runway I necessarily need or how I’m going to get to having $10,000-$20,000 MRR, but I need time to get there. There’s something here but I don’t know what.” I think it’s hard to evaluate for anybody what that looks like.
Rob: Yeah. I don’t know of any investors today that would work with that. I think that’s a good thing to bring up. It’s like, is that a gap in the market then? Could that be a successful funding model of looking at people who essentially have the potential and have, like you said, pre-product market fit but have something to show for it and looking at backing them for a period of time.
Anyway, I love this topic and I think that we’ll probably talking about it again, just soon you’ll be hearing more on it from me, but I feel we might need to wrap this one up today.
Mike: Yeah. Great talk. I like it.
Rob: Me as well. So if you have a question for us about this or any other topic, call our voicemail number 888-801-9690 or email us at questions@startupsfortherestofus.com. Our theme music is an excerpt from We’re Outta Control by MoOt used under Creative Commons. Subscribe to us in iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each and every episode. Thanks for listening and we’ll see you next time.
Episode 231 | Breaking through SaaS Plateaus with Ruben Gamez
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Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike discuss breaking through SaaS plateaus with Ruben Gamez.
Items mentioned in this episode:
Transcript
Rob [00:00:00]: In this episode of Startups For the Rest of Us, Mike and I discuss breaking through SaaS plateaus with special guest Ruben Gamez. This is Startups For the Rest of Us, episode 231. Welcome to Startups For the Rest of Us, the podcast that helps developers, designers and entrepreneurs to be awesome at launching software products. Whether you’ve built your first product or you’re just thinking about it. I’m Rob.
Mike [00:00:28]: And I’m Mike.
Rob [00:00:28]: And we’re here to share our experience that will help you avoid the same mistakes we’ve made. So [?] this week Mike?
Mike [00:00:28]: Well we’ve got an e-mail from Trevor Smithland. He wrote in to let us know about a product he has called Enhance Cast and essentially it’s a podcast listening app that allows you to instantly access the content that is coming out of the podcast. So essentially they do some transcriptions and they basically bookmark a bunch of different things and if you’re busy doing something, essentially it allows you to bookmark the content to be able to come back to it later. They do some fancy [pasings?] to make sure that the content is marked up with meta tags, but I looked at it and it was pretty cool. It was almost like a visual representation of the podcast. You can find that at enhancecast.com.
Rob [00:01:06]: Very nice. Lets dive in the interview today. This week we have a special guest on the show. It’s Ruben Gamez with Bidsketch. Thanks a lot for coming on the show Ruben.
Ruben [00:01:15]: Thanks for inviting me.
Rob [00:01:16]: So my guess is that most people listening to this podcast already know who you are. Ruben is the founder of Bidsketch which is proposal software, it’s a SaaS app and started of being focused on designers but now really Bidsketch is more of a horizontal app and it has a pretty [?] market. Ruben when did you launch Bidsketch?
Ruben [00:01:35]: I launched Bidsketch about five and a half years ago.
Rob [00:01:37]: In terms of Saas timelines you’ve been around quite a long time.
Ruben [00:01:41]: Yeah, I’ve been doing this for a while in the interviews that I had I used to say that I was in software. I guess I have to change that up a little bit.
Rob [00:01:48]: Yeah because it changes over time and now you can say SaaS and a lot of people know what that means. Where as five years ago we used to say web based software and that’s still how I kind of talk about my stuff at cocktail parties and I typically get the “what does that mean?” So the reason we wanted to have you on the show today Ruben is you and I talk quite a bit. We’re more in touch about things. We’re actually in a mastermind group as well and one thing I’ve noticed about how you operate is that you are really good at breaking through plateaus. There are inevitable plateaus when you are running a business and specifically with SaaS I am starting to see this pattern of folks hitting a plateau right after launch. So typically in revenue is in we’ll say is about a thousand bucks to two thousand bucks to low four figure amount and people launch and then that launch dies down and they don’t know what to do next. So there is kind of a plateau as they figure that out. And then the next plateau depending on pricing, [insurance?], and all that stuff seems to hit around lets say ten to twelve thousand bucks a month and it often requires an adjustment. Unless you’ve got everything just right from the start and you knew your market and your pricing’s on, you’ll probably going to hit a slowdown about there and then there tends to be this next one, let’s say it’s in the twenty five, forty thousand dollar range that we see folks hitting. There are different causes for each of these but you’ve powered trough these plateaus and I’ve seen you do it using a series of tactics, you’ve a good mind set about it and frankly you seem to have a high level of process. I know you haven’t blogged about it and I haven’t heard you talk about it on a podcast so I kind of wanted to dive in to that today and figure out how it is you think so that others can learn from you.
Ruben [00:03:27]: Sure. One thing I’d like to mention is that what I’ve noticed from certain apps is that that first plateau is a lot higher if the price point is higher for the app or product.
Rob [00:03:39]: That makes a lot of sense. I mean I saw myself with HitTail which was a ten, twenty dollar product on the low end versus Drip which was a 49.99 product on the low end. Although they were slightly different and that I had a launch list for Drip so I could get out to several thousand people quickly. That first plateau, instead of being a one or two thousand dollars it actually was about seven thousand dollars. So which was a much better place to be at. If you were trying to quit your job you’re almost there if you’re already at seven, but I agree. People who are going after ten dollar price points, even getting to a thousand dollars a month is quite a bit of work. So I guess to start when your opinion or from what you’ve seen, because you’ve also talked to a lot of entrepreneurs, founders are asking you for advice and that kind of stuff. Why do you think there is that one to two thousand dollar plateau right after launch?
Ruben [00:04:29]: Sometimes I talk to people that have hit that plateau or say they’ve hit a plateau but actually haven’t hit a plateau. It’s more about that they haven’t got enough product market fit to get any growth initially. So there is a difference between hitting a plateau and just getting started.
Rob [00:04:46]: Yeah, go into that further. What do you mean by that, the difference?
Ruben [00:04:48]: So if you just launched and you have maybe no customers or you have maybe five customers or six customers because I’ve talked to a group of people that fit this profile. They either have no customers or they have 10 or fewer customers. Generally that means they never had growth for them to get to a plateau. So they haven’t plateau, I don’t consider that a plateau. They’re just getting started. They need to get enough product market fit to actually get some interest and get people paying for the product. At that point it’s very questionable whether there is anybody that really values the solution to the problem enough to want to pay for that product.
Rob [00:05:29]: So the question is still “have they built something that anyone wants to use?”
Ruben [00:05:34]: Right.
Rob [00:05:35]: They haven’t even answered that yet.
Ruben [00:05:35]: Right.
Mike [00:05:36]: So at that point that’s very different place than you do have a thousand in recurring revenue or two thousand in recurring revenue so there is some interest there. Right? And obviously getting to product market fit is really hard. It takes a lot of work and there is a lot that you can do to get there. For the people that are in that one to two thousand dollars and they start to hit a plateau generally you see a couple of reasons why they’re hitting that. One of the more common reasons is that they just don’t have enough volume, they don’t have enough trials, they don’t have enough qualified traffic to be able to get to where they want to get. They are trying to get to six thousand or ten thousand and ten thousand is pretty common for a lot of people, but they are working on optimizing their conversions because they think that they need more customers. “Well I’m not getting enough of these trials to convert to customers” or “I’m having to many people cancel”, but in reality they just don’t have enough trials to focus on that just yet. It’s really important to not ignore that but if you’re just getting a thousand visitors a month or two thousand visitors a month your price point isn’t extremly high and you’re converting a hand full of those customers. [And to trial some of those to customers?] then you’re not going to optimize your way in to a ten thousand dollar a month business.
Rob [00:06:57]: Well that’s more of a balancing act because your balancing between getting traffic versus making sure that you’re not leaking everybody out the bottom of your funnel. So how do you go about making sure that you’re balancing that correctly?
Ruben [00:07:10]: Well this is why I mention that there is a difference between the businesses that just have something like ten customers and the ones that have enough to be in the thousands and recurring revenue because they do have some interest. So one of the problems that I see often is that people don’t know where their conversion rates should be or their retention should be. Now every business is different but there are ranges right, there are rules of thumb. So I’ll see somebody working on trying to improve their retention. Let’s say that they’re trying to do somewhere around 5% or 8% or something like that, but they’re working with such low numbers that you can’t really count on those numbers too much. Now I’d look at retention and say “wow, you really need to work on retention!” even in low numbers if a quarter of your customers aren’t sticking around then that’s definitely a red flag for me. But really when it’s just you, you kind of need to switch and focus more on one thing than the other. Especially if you’re doing part time so once you learned what the ranges are and you see there aren’t any obviously red flags to where just nobody is converting into a paying customer and almost everybody leaves after a couple of months then really the next thing is to get enough volume to sort of take you to the next level, but then you also want to go back if your retention is a little high and focus on that and make that better.
Rob [00:08:34]: Yeah I view it as a pendulum. I always swing to one side and then I notice that you kind of optimize something to the point of these numbers are starting to look good. [?] has gone down and now it’s time to insert more traffic into that funnel. I’ve even seen a pendulum swing over, lets say maybe four years ago, I remember Mike and I talk on another podcast about how everyone is focusing on traffic and people weren’t optimizing enough and they weren’t split testing enough and they weren’t doing that stuff. I see it the other way now. I think to many people are trying to optimize to early, but that’s basically what you’re saying here is that you can’t optimize your way in to a ten thousand dollar a month business. Yo need to drive five, ten thousand uniques a month in order to get to that point probably, and it depends on price point and all this other stuff but one or two thousand uniques a month isn’t going to do it.
Ruben [00:09:24]: Right, exactly. That’s one of the more common things. Another one is pricing. So you’ll probably not going to get pricing right when you launch. You’re probably not going to have pricing right a year or two after you got your product out and people don’t spend enough time testing and adjusting their pricing early on. In the early days in the first few weeks and months that’s when you need to test your pricing most. It can be a little bit harder if you’re working with very small numbers, but we’re talking about businesses that do have some customers and have had a little bit of growth. So you should be just testing prices and improving that.
Rob [00:10:02]: Yeah, that makes sense. I’ve done the same, I’ve changed HitTails pricing twice after I required it and with Drip I’ve changed the entire pricing model. It was based on one thing when we’ve launched and it’s now based on a number of subscribers. It’s a more standard marketing automation approach. Then I think I’ve actually changed not the price points themselves but the volume that you can do for each price point. I think I’ve changed it at least twice, maybe three times and all that is based on user feedback and looking at reports and that kind of stuff. I won’t say it’s right or wrong but I know it can be better optimized but it’s something I don’t have time to invest in to much right now.
Mike [00:10:36]: Right, and it’s better than it was when you first started.
Rob [00:10:39]: It is, I’ve moved in the right direction. I think when you first start to it’s hard because lets say you wan’t a 99 dollar a month app. You really need a lot of functionality for someone to pay 99 bucks in any type of volume and so you either have to spend a lot more time building that app or you have to have some type of brand name because over time the more customers you get, the more people are talking about it, you do become that brand and people will say, “Oh, well everyone recommended this to me so I am willing to pay 99 buck.” But when no one has heard about you it is hard to ask as much as your app might be worth up front.
Ruben [00:11:12]: That’s true. In the early days I modeled my pricing after after fresh books pricing because a lot of people just look at ether competitors or alternatives that may be similar and basically copy them in pricing and that’s pretty much what I did. Fresh books wasn’t a competitor, but they were the most similar of the apps that were out there because after someone creates a proposal, once they get a deal then they create an invoice. I went with that pricing mode but it was wrong for my business. I didn’t learn that latter until I started testing pricing and sort of learnt what worked for my business and start talking to people. Once I did that really ignited some big growth for it.
Rob [00:11:50]: I kind of mentioned at the start that we have three plateaus we’re going to talk about. There is that first one that is post launch and sounds like the pattern you’re seeing is most people try to optimize their way up to there, bur really they should be going after more traffic in general. The second plateau if I recall when you hit, that is when you adjusted your pricing, is that right?
Ruben [00:12:08]: Right.
Rob [00:12:09]: Talk to us a little bit about that process. You hit this plateau lets say between ten and fifteen grand a month and you’re wondering why it’s not going up. How did you figure out what the cause was? Did you have to run a lot of different tests and try things or was it pretty obvious? And then how did you go around fixing that?
Ruben [00:12:24]: I launched with that same pricing, so I’ve gone a long time without testing pricing at all. So I had this feeling in the back of my mind that I should make a pricing change, that I should do something there. Also I’ve added a lot of features since then so it was a very different product from when I launched the other thing is I wasn’t charging very much for a B to B app. So if you have a B to B app and you’re charging ten dollars a month or twenty dollars a month for your low end plan, that isn’t necessarily wrong but you can very likely charge a lot more for your lower tier plan. So there are all this things that are coming together and there was some feedback. Feedback is tough with pricing, because a lot of the feedback that you get with pricing is that is too expensive which isn’t right. You have to mostly ignore that unless almost everybody tells you that, you are going to get a certain amount of people just telling you that every single month so one of the things that I did was add a cancellation comments in a free form text field. When somebody went to go cancel, it was required to fill out and add their comment in there and every once in a while I’d see people complain about the price, so I think my lower end tier plan was nine dollars a month and people would say this is too expensive etc., etc. I kind of wondered about that, “should I charge it a little less”, I never did it. I think I charged five dollars a month, but one of the interesting things as I moved up my pricing and ran all different types of tests is that every time that I change pricing, say right now my lower tier is 29 dollars a month, I always get the same number of people saying that it’s too expensive, but if I reduced it by five dollars or ten dollars, they’d pay for it. That never really happens because my product was ten dollars cheaper, it was twenty dollars cheaper, so I always find that really interesting.
Mike [00:14:18]: But I think that it’s difficult for somebody who is starting out to make those mental leaps because you’re looking at this looking back in retrospective and say, “well I was there and you didn’t buy it then and now it’s more expensive and you’re complaining that five or ten dollars would have made a difference”. But for the person who is stuck at this plateau they don’t have that history, they’re not that much further in to the future and trying to look backwards.
Ruben [00:14:39]: Right. I think the important thing for them is to know that it’s normal to get people saying that it’s too expensive. If they’re not getting that then they’re definitely under charging. I think the time to wonder whether it is over priced might be just when a lot of people are saying that, that is one of the top reasons why people are cancelling.
Rob [00:15:02]: I would agree with that based on experience as well. So that was at the back of your mind and that’s why you’ve attacked it early on. How did you go about figuring out what your pricing tier should be and do you actually restructure your pricing or did you just kind of increased the tiers themselves, just increased the dollar amounts per tier?
Ruben [00:15:19]: There had been one or two tests that I ran in the past, early on when I first launched with pricing. Basically I just increased the pricing on the tears I had and I got to a point where I just wasn’t making as much money. So then I lowered the pricing back to where I was making the most money. Later on when I revisited the pricing and I wanted to run these new tests, I changed my approach I didn’t just increased the pricing on the tiers. So that was okay to get me up to a point, but the big results came from just completely just restructuring my pricing. Started of doing a lot of customer interviews and looking at my usage data. So it was a combination of qualitative and quantitative data that I used to figure out what were the key features that people were using and what type of customers were signing up. So I changed my pricing from two plans to three and those three plans directly reflected the type of customers that I get. So one of them is a freelancer plan, the other one is a studio plan, and the last one is an agency plan. All of those changes helped me earn more per customer per month.
Rob [00:16:31]: After you made that pricing adjustment you keep saying you tested it. Now did you run a split test where you had half the people see the old pricing, half the people see the new and then did you just follow it through trial signup or did you followed it all the way through to see how many converted which each price point?
Ruben [00:16:47]: Yes so I actually had multiple tests with pricing, so I tested pricing maybe four, five months, something like that. I started of with some of the more simpler tests. I wanted to isolate for example plan names from pricing increases. I wanted to know that going with three plans was actually making a difference. So I wanted to know that renaming the plans from these generic plan names: basic, premium, whatever I was using to something to what a customer could look at and say this is the plan for me. I wanted to know that that made a difference. I also did that with plan features. Then once I actually got to the revenue number, I’ve let those run a little bit longer, in each case didn’t just look at whether or not more people were clicking on the signup button. I’ve also looked at, “do more people sign up” and then, “okay, now I have a trial”. Then I continued to look at, “do those trials convert”. So at the end do I end up with more money? Same thing with retention, it takes a lot longer to look at a retention because customers some times will be around for a year or two. You can’t always follow on retention until it’s just been several months. I actually had to row back a pricing change that had been in place for three months because I looked at that retention and it wasn’t better. Everything else looked good, it looked like I was making more money, but about three months later when I looked at retention for those [cohorts?] I saw that this is actually worse than what I had before so I [went right back?].
Rob [00:18:20]: It’s crazy. So you really have to look at your data and not just look at how many people clicked that initial sign up button, it can change all the way down the line.
Ruben [00:18:29]: Right, once I decided okay, this is working better I switched it over. So I did split test that and I switched it over but when I rolled back my pricing I wasn’t still split testing that. Everyone was going over the new pricing. The important thing about that is I think that you just have to continue watching it and sort of compare it to what it was before your price increase.
Rob [00:18:53]: Right and are you using KISSmetrics to kind of track that all that way through? Is that longitudinal data?
Ruben [00:18:57]: Yes I use KISSmetrics and then I just look directly in my data base. So I use both.
Mike [00:19:02]: It sounds to me like one of the interesting points that you kind of– I was almost completely glossed over, but you at least mentioned it that testing these pricing points I mean it sound like they’re early on when you hit that post launch plateau, pricing is one of those issues that you really need to look at to make sure that you are charging the appropriate amounts and then at the next plateau you hit, by changing your pricing you are able to essentially accelerate your growth of the product. But in each of those cases it takes a while to get through those pricing tests. I think you have mentioned three or four months of testing in order to just test the price and then in addition to that you said that in order to test retention and basically make sure that you’re not loosing people faster that takes even longer.
Ruben [00:19:42]: Right, but you can capitalize on these pricing changes sooner. So some of these pricing changes are– if they’re working early on meaning if you’re getting more trials out of it, there is a pretty good chance that those trials will convert at a similar rate. So what I have seen with price testing is that that’s what happens, most of the time they will convert at the same rate. The churn will be about the same, there might be some differences but it’s not major, so you can actually switch things over, but if you do that then you do want to watch that to make sure that you are right about the trial to payed conversion rate and that you are right about the churn rate as well.
Rob [00:20:18]: So you kind of make a quick decision and then you back check that and 90 days later you can truly verify that everything turned out the way you thought it would based on your math.
Ruben [00:20:26]: Right.
Rob [00:20:29]: So it’s interesting you know we talk about these plateaus and I imagine that there might be someone in the audience who doesn’t know what that looks like so I was thinking as you were talking that you might have a SaaS app where you’re doing four grand a month and the next month you’re doing fifty five hundred and that feels fantastic. Then the next month you’re doing six grand and then seventy five hundred and you’re just going up. You’re at ten grand, eleven grand, twelve grand, and then all of a sudden it’s twelve two and the month after that is twelve thousand four hundred, and twelve thousand five hundred and literally your revenue just stalls out. I’ve been through it, you’ve been through it, we’ve seen this and it can kind of rattle you because a) it’s unexpected, it’s like, “everything was going so good and all of a sudden it’s not working” and it can also discourage you. So we’ll touch on the mindset in a second because I think that’s important but when you’ve seen these plateaus coming the first time it kind of shocks you, the second time you kind of figure it out and the third time it’s like almost expected, you’re almost anticipating it. How long have most of these plateaus– do you think there is a range, like how long is it taking you to break through each of them? In months.
Ruben [00:21:29]: In months?
Rob [00:21:29]: Yeah.
Ruben [00:21:30]: Generally four to six months. It depends.
Rob [00:21:35]: It depends on how deep it is and how much stuff you have to do to test and all that.
Mike [00:21:39]: I think the sooner you can break out of it the better, I mean the best thing is to avoid them. Do it all together right.
Rob [00:21:44]: Just see them coming and be constantly– see that’s something you’ve done really well. Recently as you have run a lot of split tests now you’re at the point obviously where your traffic tens of thousands uniques a month and you can run split tests and optimize your way to an increase in retention or whatever.
Ruben [00:21:58]: right but even in the early days when you have a lot less volume you can forecast when you’re going to plateau. I think barometrics came out with some forecast tool that — for free recently — that helps you do that. But it’s a really simple calculation you can just do it in a spreadsheet or open up a calculator and looking at a percentage of the customers that are cancelling at what point am I basically going to plateau. [As the number of trials not in customers?] are not going to be enough to upset that.
Rob [00:22:26]: Yes, then you can look and say, “is churn to high” and if so I need to start working on that now, six months in advance of that plateau. Or is it that my number of trials is still at a hundred and fifty every month, but if my churn is low but I only have a hundred and fifty trials, how do I get to three hundred trials in the next six months? Right? Six hundred is sustainable. Or is it a price point? If my average revenue per customer is only fifteen dollars a month, twenty dollars a month, how do I double that in the next six months? Right? Is that the kind of process you go through?
Ruben [00:22:56]: Exactly so one of the more interesting things was that even in the earlier days like I said a lot of times it’s just volumes. Sometimes it is retention. Well, it’s always retention, retention is always part of it, but sometimes it’s churn that they need to focus on. So one thing that I was thinking about was at what point in the early days, lets say somebody has a thousand dollars a month in recurring revenue or so. At what point is their churn to high to actually say, “okay, this is the thing that I need to focus on”.
Rob [00:23:29]: Earlier you said it was a quarter, 25%.
Ruben [00:23:32]: Yeah, even lower than that like if I was starting over again and I had product and my churn rate, even in the early days and even if I know that numbers aren’t all that great when you don’t have that many customers, you don’t have that many trials coming in, there is a difference between having a 15% churn rate and 5%. I have had 5% churn in those early days. If I had a product that had a 10%, 15%, I’d probably pay attention to that.
Rob [00:24:01]: So I think my number would be anywhere over 15%, it would be any twenties too high. The problem with this is that we’re talking about an average and typically your first sixty day churn is going to be a lot higher then everything else and when you average everything in it gets kind of muddy.
Mike [00:24:18]: The other thing that makes that difficult is that it could be a function of what your product is. So for example when Rob and I were testing things with the [?] we noticed that there was a distinct drop of at the forth month. And by that time someone has paid a couple hundred dollars they have to really think about it, it’s like, “am I really going to continue on this path or is this just something I was kind of interested in but not really and I’m not going to follow through with it”. And people were making the decision around the forth month to basically just kind of drop out. So sometimes it’s time dependent as well.
Ruben [00:24:46]: I agree. It very much depends on the type of product. With some products it might be kind of natural like how you mentioned of membership sites and [?]
to where you see a big drop of after a certain point of time. And for that industry or for that type of product, churn reads might be higher, so that’s a good point. Even Jason Cohen mentioned somewhere that he was worried of his churn at 2% for WP engine and then he found out that, “hey, that’s actually doing pretty good, that’s the normal for hosting”.
Rob [00:25:16]: That’s crazy low. Most SaaS operators would kill for that. So that’s the thing I mean I think to talk about an aggregate number is not totally accurate, it would be so much better to have that cohort, that churn grid to be able to look at it, but with Drip I didn’t have the churn grid, until maybe four or five months ago because the data just wasn’t there in order to get an aggregate number. So when I was looking at it when we first launched it was 23% a month or something. It’s because I had a ton of new trials in the funnel and as those moved on and my trial volume kind of dropped of after the launch, that dropped way down, it dropped in to the I think it was at 12% or 13% for a while and then I get a bunch a new trial and it kind of bounce right up because for sixty days your so ruff on churn.
Ruben [00:25:59]: Yeah well that’s the other thing that I like. Drip is a really good example because you can’t solely rely on just you analytics, not to look at collective data. Watching you work on Drip and getting to product market fit so a lot of people just say, “well getting to product market is binary”, but it’s not, it’s a [gradient?]. So you can have a lot of product market fit or just enough to get to a point. What I found interesting watching you work on Drip was that early on you didn’t have really good numbers because the amount of customers you had, but you relied a lot on customer conversations and gut kind of, right? You knew what you were building and what you wanted to see and because you did have that experience on other products and apps it’s sort of a little bit easier to go with gut sometimes.
Rob [00:26:51]: That’s right and I think that if you don’t have that then the customer conversations are huge and then I think finding someone either a mastermind or a mentor or adviser, someone who does have that feeling and who has experience to [?].
Ruben [00:27:04]: Exactly.
Rob [00:27:05]: Cool so we kind of cover the first two plateaus that one to two thousand dollar range, the ten to fifteen. Then there is this twenty five to thirty thousand dollar plateau. Lend you thoughts I mean how did you push past it, do you have thoughts on the general cause of that that you see in other apps? Or do you think it varies widely?
Ruben [00:27:22]: So there are obviously a lot more people who back at one thousand or two thousand dollars a month or ten thousand right then get to twenty or thirty thousand or even forty thousand. So I know fewer people that gotten up to that point and then only some of them plateau there and it seems to kind of be different from the ones that I know so I can’t really say that I noticed really specific patterns but it’s usually a retention. Right? Losing way to many customers still or you just need to get a lot more customers to get in to the next stage. For me it was more about setting up, once I automated my marketing because it’s a combination of some manual processes and automation, but setting up systems and processes to scale up marketing.
Rob [00:28:06]: Kind of moving it up to the next step or the next level.
Ruben [00:28:10]: Right, it’s more about doubling down on what’s working.
Rob [00:28:13]: So you have seen a lot of plateaus, you have gotten through a lot of them. When you see that you are going to be plateauing in how ever many months it is, what’s your process at that point? Like how do you start thinking about it mentally in order to– are you preempted or when you get there to start systematically knocking out the things that are keeping you at that plateau?
Ruben [00:28:35]: Generally if you look at it at the highest level what I do is try to identify where is my problem. Ether I am not getting enough customers or I’m loosing to many customers. It’s always a combination of both, but one of them is going to be a bigger problem then the other. But that’s too broad it’s too hard to tackle. So even if I say, “ok well I’m just not getting enough customers” then what? There is so many different things that you can do with that, so what I do is I break it down to the smallest possible things that I can. So I’m not getting enough customers so “ok, why not?”, am I not getting enough traffic? Am I not getting enough qualified traffic? Am I not getting enough trials? Are those trials not converting into customers at the right rate? What is it that is going wrong? So as part of this process is setting a goal that I want to reach and I typically start with this. I’ll pick my number and I want to get to– it’s usually revenue based to this much recurring revenue, what do I need to get to that number, so then I start to break down how many trials I need at this price point to get there. What does my churn need to be? Maybe start to play around with some numbers. What if I get more trials or increase my average revenue per customer or move down my churn? Typically once I’m looking from that perspective and then I take a look at my problem areas I just start by picking of the lowest hanging fruit. So there are going to be some things that are just a lot easier to do then others. So maybe increasing my traffic will get me more customers but so will dramatically reducing my churn, but maybe my churn is at a low enough place to where it’s just going to be way to hard and way to much work to do that, so the easier thing is to really get more traffic.
Rob [00:30:30]: Got it. And getting those rules of thumb. What kind are the ranges? What should my churn be? What should my trial to paid be? What should my visitor to trial be? But that’s part of the method that you’re using to analyze this and the way that we have come across those values is a) by personal experience of the apps that you run, right it’s your experience, it’s also by talking to other founders weather it’s in a mastermind or talking to people, doing skype calls, talking to people at a conference, maybe MicroConf. I think folks in Founder Caffe or Micropreneur Academy could easily if they brought their numbers, I would happily analyze someones numbers on the forums. There are probably some blog posts somewhere that kind of talk about it but I think there’s so much more value being able to talk one on one or one to a group with other founders because the specifics of the situation always dictate where your numbers should be.
Mike [00:31:20]: Right, right.
Rob [00:31:22]: Any range that you and I could throw out here it’s still going to be a wide range because it depends on your pricing and your market and your this and your that.
Mike [00:31:29]: I think knowing the range is bare minimum that you need to know and there are too many people that don’t know that. So if I didn’t know that it would be almost impossible for me to be able to break out of one of these plateaus. And it would be a guessing game and it would have to be luck, complete luck.
Rob [00:31:48]: I’m going to throw out some ranges and I wan’t to see if you agree to them. Kind of a small B to B SaaS app lets say between Bidsketch which starts at around twenty nine bucks and on up to something that maybe starts to ninety nine bucks a month. That’s the lower end range that we would be dealing in with boot-strappers. I would say from visitor to trial when asking for credit card up front you should be between about 0.8% and 2%.
Ruben [00:32:12]: Yes.
Rob [00:32:13]: Alright, maybe 0.75 I mean one would be great but I think that if you would charge around ninety nine bucks a month I think getting 1% is ambitious and you could do really well. So that’s where I have that loathing. Not asking for credit card – what’s the range there? Is it five to fifteen? Is that too broad?
Ruben [00:32:29]: I went almost a year without asking for a credit card upfront. So I would say that five is too low but you know, I guess it depends on how much traffic you’re getting in and all that stuff. I would go with that. If you’re getting less then 5%, just know that five is low.
Rob [00:32:46]: Right so better have like a ninety nine dollar product if you are doing five. If you have a ten dollar product and you are doing five you’re in real trouble. You should be closer to fifteen. Okay, and trial to paid if you’re asking for credit card upfront I want to be between 40% and 60% conversion trial to paid. I know that some people go higher than that but –
Ruben [00:33:05]: Some go a little lower but if you’re in the thirty’s –
Rob [00:33:09]: Yeah, there’s room for improvement. And if you’re not asking for credit card, I’ve never had an app that I done that with but the range is what like ten to twenty? Five to fifteen? That’s the one I forget.
Ruben [00:33:22]: Yeah so I’d say five is too low. Maybe on the low end eight to twenty. Several people have done this. I’ve done this myself and it’s interesting, I’ve actually moved up that number like 8% to 17% and not have a significant or meaningful increase in paid customers. Simply because of how aggressive or passive I am in converting those visitors into trials.
Rob [00:33:49]: That’s right because if you are overly aggressive then they churn out really quick. Is that right?
Ruben [00:33:53]: Well less of then convert into paying customers, because I’m being super aggressive into converting them into a trial.
Rob [00:34:00]: Into a trial. Got it. Okay, and then churn rates, typically I see the first sixty days combined somewhere between lets say if you’re at 20% I think you’re doing pretty well and I’ve seen churn rates at about 40% in the first sixty days. To me that’s the danger zone if you’re above thirty nine.
Ruben [00:34:22]: It’s crazy that when you look at a business like [Mas?] and they’re like 40% from their first ninety days or something like that. They have a really nice business [?].
Rob [00:34:35]: Yeah I think that’s price point because they started at ninety nine, they had a lot of traffic, but I think forty is where the top end of where I’d want to be though.
Ruben [00:34:42]: Yeah if I had 45%, 50% I’d –
Rob [00:34:46]: [crosstalk] And then lastly post sixty day churn or ninety day churn. I mean this one really depends like you said Jason Colen with hosting with WP engine 2%. And that’s 2% per month after the first sixty that’s phenomenal. I think most SaaS businesses would kill for that. The ranges that I see I feel like 5% to 8% is where I see most bootstrap businesses in our price range landing. Like if you’re at 9% or 10% I’m starting to feel less comfortable with that. That means after your initial sixty day of churn you are now loosing one in every ten customers if you’re at 10% and that’s a lot, I mean it’s tough to replace that.
Ruben [00:35:23]: It is a lot. Typically at most any scale, if you’re loosing that many customers then you’d want to take care of that.
Mike [00:35:34]: So going back to the discussion about plateaus a little bit, once your business comes to this screeching halt, how do you go about making sure your mindset is in the right place because I think it can be incredible demoralizing hitting one of these plateaus and your entire business basically grinds to a halt for basically months at a time and you’re not able to kind of push to and figure out really what’s going on. Because your business it may not be getting worse, but it’s certainly not getting better and you are always looking to make sure that things are going up and to the right. So how do you make sure that your mind is in the right place and that you are thinking about the right things to help push through that plateau.
Ruben [00:36:10]: I think it helps to know that it’s normal, most businesses unless they have 0 churn or negative they’re going to plateau at some point. Expect it if you have a SaaS product, try to predict it, it’s pretty easy to do, so those things help. They help but it still sucks. When you hit it they’re not going to make it so that you feel like, “okay, this is okay, I can do this” and you’ll move forward without being fazed at all. For me it’s frustrating, I think one of the more common things I felt in the past, frustrated with the progress and especially if you try a lot of things, or in my earlier days when I had less experience I had less confidence that I could break through. S o the questions would come up and still to this date they come up, “can I go past this?” these are the negative talk that comes up every once in a while. And I think that one of the things that has been super helpful for me is that just being able to talk honestly about it. First it’s just being honest to myself about it and then having a mastermind group and having friend that I can talk to about it. It’s really easy for people to just ask, “hey how’s it going with the product, how’s everything?” and for the automatic response to be, “yeah, it’s going great” and then just talk about things that are going well. It’s a lot harder to be honest and just say that you’ve hit a plateau and that you’re struggling with the trials or churns or something like that. But I think it’s important to do, it’s helpful, it’s really tuff to just not talk about it and sort of try and deal with it entirely yourself in your head.
Rob [00:37:46]: Awesome. Ruben thanks so much for coming on the show, you’ve dropped a lot of knowledge here today. If folks what to keep in touch with you online, keep tabs on what your up to, what’s the best way to do that?
Ruben [00:37:56]: Twitter probably so earthling works on Twitter.
Rob [00:37:59]: Very good and thanks again hope to have you on the show again soon.
Ruben [00:38:02]: Thanks for inviting me.
Mike [00:38:03]: If you have a question for us you can call it into our voice mail number at 1-888-801-9690 or you can email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from We’re Out of Control by Moot, used under creative commons. Subscribe to us on iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening and we’ll see you next time.
Episode 222 | The Stair Step Approach to Launching Products
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Show Notes
- How Star Wars Conquered the Universe
- In-N-Out Burger book
- DotNetInvoice
- Rob’s old duck boat website
- Baremetrics
- DistressedPro
Transcript
[00:00] Rob: In this episode of Start-Ups for the Rest of Us, Mike and I discuss the “stair- step” approach to launching products. This is Start-Ups for the Rest of Us, episode 222.
[00:08] Music
[00:15] Welcome to Start-Ups for the rest of us, the podcast that helps developers, designers and entrepreneurs be awesome at launching software products; whether you’ve built your first product or you’re just thinking about it. I’m Rob.
[00:24] Mike: And I’m Mike.
[00:25] Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, Mike?
[00:30] Mike: Well, last week I had talked a little bit about some of the Twitter and Facebook advertising campaigns that I was doing. Somebody pointed out to me that one of them was using this massive image that had not been re-sized properly so it was like 700k on a page.
[00:44] Rob: Nice.
[00:45] Mike: And I re-sized it. It only needed to be 65k.
[00:48] Rob: Oh, man. Was it impacting page load time? I mean, obviously it would have some impact but it could be negligible. If it’s like three tenths of a second people are not that likely to notice.
[00:59] Mike: The total page size was only about 2.5 megs so you add 700k to that and it’s like 3.2 which is about a third of the size but it depends a lot more on latency at that point than anything else. And I don’t think that it was a big deal but with a file that size, depending on how long it takes to download that one and how your browser is probably only going to download that and maybe one other thing at a time.
[01:24] Rob: Yeah, obviously if someone was hitting it on mobile or something it would be a bigger deal but you’re probably not targeting mobile users, right?
[01:30] Mike: No, for the most part I think I excluded them. Although the Twitter ads, I don’t know if those were excluded. I haven’t really fully reviewed the results and stuff yet because it just ended but I need to go back in and take a look at those things to see if it impacted it at all. I’ve got data so I can go back and adjust things in any way. I’m probably never going to know for sure whether it had that much of an impact but it was a stupid mistake.
[01:51] Rob: If that’s the worst thing that happens to you this week I’d consider yourself lucky.
[01:55] Mike: Right. The other thing I noticed was that on the Twitter ads – because I’m experimenting over there, I haven’t really run Twitter ads before, but when a Twitter ad is finished, if you give it a dollar amount, when it’s done it’s listed as being exhausted.
[02:10] Rob: Nice. I like that. It’s just so tired that it has to stop.
[02:14] Mike: Yeah.
[02:15] Rob: That’s cool. So, continuing with my stretch of reading a lot of books, I have a couple other books I wanted to mention today. The first one, it’s called “How Star Wars Conquered the Universe” and it’s a pretty thick book. I think it was twenty something hours on audio which is more than I tend to attack but it’s by a reporter from Mashable, and he basically wanted to write the definitive history of Star Wars and how Lucas came up with the concept and how he was influenced and then launch of all six films and the re-releases and all the controversies around it. He really goes in depth. I was super impressed with the quality of the research. I’m a Star Wars fan, I have been since I was a kid. I’ve seen the movies a lot of times and I know a lot of trivia but this guy dove in way deeper than anything I had ever read so if you’re at all interested in that, or even if you’re not a Star Wars fan, it’s fascinating to hear how every movie pushed Lucas to the breaking point, whether it was the financial breaking point or the sanity breaking point. It reminds me of launching a start-up. It pushed him to the edge so many times where he struggled even to complete the movie. I highly recommend this book.
[03:30] The other book is called “In and Out” and this is one, if you have considered reading it I would recommend against it. I really love hearing start-up tales and “In and Out” is a hamburger chain on the west coast of the United States and they’ve stayed private. They’re privately owned, they’re not franchised and they still basically have the same menu that they did when they launched in the ’50’s. It’s a really cool story about a business that’s staying small even though there are a couple hundred restaurants around the west coast of the US. The book itself was not very well researched, not very well written and overall I would just say if it’s on your wishlist I would probably take it off. I was pretty disappointed with it. It felt very surfacey. It was like, “this happened next, and then this happened” and the other thing I didn’t like was that it was really pro “In and Out”. It kept saying, “and then, due to the founders’ will and determination they launched another ten stores.” But they had to have done something negative over those fifty years and it really skipped over that. It wasn’t a harrowing tale. It was more of an encyclopedia or a long Wikipedia entry about it.
[04:41] Today’s episode was inspired by a question from Chris Cottham and he says, “I really liked how Rob illustrated his path through small, one time sale products to recurring revenue SaaS apps in his MicroConf Europe talk this year.” So Chris obviously attended MicroConf Europe. He says, “I think it would make a great topic for a podcast. So, what I wanted to do today is talk through the “stair-step” approach to launching really any type of products but we’re going to focus more on software products today. Mike and I have tossed out concepts from this “stair step” approach for years on the podcast but it wasn’t until DCBKK and MicroConf Europe that I decided to sit down and formulate it and make it concrete. I spent five or ten minutes with a slide and demonstrated how I view the “stair-step” approach, how it works and all of that. It seemed to really resonate with people because it’s a framework for getting started and moving from beginner to intermediate to advanced. So, that’s what we’re going to be talking about today.
[05:43] The “stair-step” approach really has three steps that I talked about at the conferences. I’ve added a fourth step that we’ll talk about here that I’m still formulating and figuring out what it means and if it’s even a good step to go to. What I want you to imagine is a set of stairs and obviously step one is on the bottom and step two is above that and step three is above that and each step gets a little more challenging but you step up to that step once you have more experience. Step one is what I think is the approach that I would recommend if you’re just starting out today and you don’t have any products with any revenue because the problem that we see is, folks are coming in and they’re seeing what successful people are doing. They look at Heaton Shaw, Jason Cohen, Patrick McKenzie, whoever, and they say, “well, they’re doing SaaS apps so I’m going to do a SaaS app.” I don’t always think that’s the right choice because SaaS apps– it’s a very long, slow, SaaS ramp odf death to the revenue, it is very complicated to build them and it’s hard to market them, et cetera, et cetera. Instead, I want you to imagine step one as one time sales. Instead, I want you to imagine step one consisting of products with one time sales. Imagine a WordPress plugin or maybe a mobile app or a Magento add-on or a Photoshop add-on or even an E-book. These are just one time sales and the price point is not huge and in addition, think about it as a single traffic channel.
[07:09] Examples of a single traffic channel might be, it gets all it’s traffic from SEO or 90% of it’s traffic from SEO, or it gets all of it’s traffic from WordPress.org from the plugin repo. Or, I know folks selling things as more physical goods but their entire sales channel is Amazon or their entire funnel consists of YouTube. That’s step one. The benefits here are that you are starting small with something simple to get some revenue in the door and learn this whole process.
[07:39] Mike: I think one of the overlooked aspects of this is that it can be a lot easier to sell something that’s a one time sale or something that people just buy into up front and they don’t have this recurring payment that they have to keep paying to keep using it afterwards and people mentally think of that differently than they do the one time sales. It’s easier to convince people to do this and it helps give you that fundamental understanding of how sales work and how you can convince people to buy using different marketing messages. The marketing messages for example for a book are radically different for the customers than you would for a recurring revenue model for just about anything; whether it’s a book or a physical product or any of those types of things, or even a downloadable application or even a mobile app, those things have a fundamentally different message inside of the marketing material and how you go about on-boarding people and marketing to them. There’s a difference between the different types of channels that you’re going to be able to use for those one time products versus something that’s more of a SaaS model.
[08:46] Rob: Right, and that’s the idea here is to get some experience writing marketing copy, supporting a product, just pushing a product out to market like launching and doing something in public. A lot of folks have never done that and it’s really terrifying the first time you do that. I shudder to think of the absolute beginner who has never launched anything in public trying to build a SaaS app and launch that with all of the complexities involved in that; in terms of marketing support, the code, sales, everything that’s involved. This is such a simpler way to do it and cut your teeth in, maybe it’s the minor leagues or maybe it’s college ball instead of jumping right to the pros. We all need to go through that development. You can’t just jump up to the hardest task right away. We see a lot of folks having success with this approach. A lot of Micropreneur Academy members are doing this. There’s WordPress plugins, Magento add-ons, one off e-books; and you may not make ten grand a month and you’ll very likely not going to make ten grand a month from this thing. You’re not going to quit your job in step one but that’s not the point. The point is to get experience and gain confidence in your skills and learn one tool. I always like to think of it as I have a tool belt of marketing approaches. When I first started out the tool belt was empty and I had no tools on that. The first thing I learned, I’m pretty sure it was SEO, so then I had SEO in my tool belt and the next thing was AdWords, that was the second product I had.
[10:10] Then I had SEO and AdWords and I started acquiring and building products that I knew I could market with SEO and AdWords. So, if you learn the ins and out of SEO or AdWords or Amazon or WordPress.org or YouTube or any other single traffic channel, and then you build a fairly simple product that sells for twenty to fifty dollars a pop, you’re going to learn a ton from doing that. And with that confidence and a little bit of revenue that’s where you start moving up into step two. Step two is basically to repeat step one until you own your time. It’s until you make enough money that you can buy out either your salary gig or any consulting work you’re doing. An example of this is, a colleague of mine, a friend of ours has three WordPress plugins now and he has basically bought out his time. He didn’t do it with just one. It wasn’t this big splash and it didn’t happen right away but he learned how to build and launch a WordPress plugin, how to market it, how to do the support and all of that stuff and then got one to market and basically has repeated that twice. At this point he actually quit his job this month. This path from step one to step two is a lot easier than trying to jump straight up to the most complex task.
[11:25] Mike: The nice thing behind doing that is that once you’ve done something once, it makes it a little bit easier to do it the second time, especially if you’re repeating almost the same process because you can use the things that you learned from the first iteration through that process on the second time and the third time and the fourth time. Eventually what you’re doing is you’re growing this revenue base that you’re going to be able to use to essentially replace what your current revenue stream is.
[11:49] Rob: Right. And this interesting thing with this “stair step” approach is that I kept seeing it with people at the academy, people at MicroConf and I kept seeing them start small and then build up and eventually get to the next level and be able to buy out their time. I noticed it was a pattern which is why I started thinking about something to try to classify it or have a higher level theory about it. Then I looked back at my own experience and realized that a lot of what I did fits the “stair step” retroactively and I had no idea about that. If you look back at products I owned I had DotNetInvoice which is one time sale downloadable software, I had “Apprentice Lineman Jobs” which is essentially a job board. It’s a subscription but it’s very short lived. People only look for one or two months but it’s a small price point and it had a single source of traffic, SEO, CMS Themer which was a theming service which was a one time sale, it was a higher price point but it had one source of traffic which was actually banner ads and then I had a couple E-books that I had purchased on random topics like beginner bonsai and there was one about building a duck hunting boat and all of these things had a single source of traffic and none of them made more than, some of then topped out at between three and four grand a month but each one of them taught me one more thing. It was either SEO or AdWords or banner ads or PPC advertising or copyrighting and how much it takes to support a software product versus an info product. So, it’s interesting that I essentially followed this path, kind of stumbled into it.
[13:25] Mike: What Rob has done for example is, he had DotNetInvoice and Apprentice Lineman Jobs and CMS Themer, which are all completely unrelated areas but if you map things out in advance you can make those things into the same business or address different problems inside of the same market vertical such that you are building upon your previous audience. Essentially you have this lower end product that is a one time sale and then you look up stream a little bit and say, “okay, well, what is the next step? What is the product that somebody who has purchased this and actually implemented it would use after this?” Essentially what you’re doing is creating this closed feedback loop where customers that you’re bringing in hopefully purchased the first product and then you may very well be able to get them to buy into the second. So, depending where they come into the process, you may have additional higher end products that you can sell them. Your initial product might be an info product or a book of some kind. Then you might sell some specialized consulting services around that. Then you might have a SaaS app or something along those lines. You’re basically just moving up the sales funnel maybe with higher price points. You don’t have to do that in advance. There are certainly places where that’s not only not warranted but you just simply can’t do that. But that’s an approach that you can think about.
[14:42] Rob: That’s a mistake that I made early on was as you said, I did it in disparate niches so I did not have the advantage of building either an audience or more likely a customer base that I could then sell more things to. That’s the one thing with the “stair step” approach. I wouldn’t say it’s required that you do it that way, that you keep it all in the same market, but it’s definitely going to be easier for you if you can. It’s always easier to sell a new product to your existing customers or an existing product to new customers. But it’s never good to sell a new product to new customers unless you absolutely have to. I think that will give you a leg up if you take that focus. On the other hand, it was either me or the podcast received an email from someone saying, “I want to start the “stair step” approach but I’m thinking if I want it to all be in the same niche then I need to think five years out because what I launch today has to relate to everything I build in step two and the recurring revenue app I’m going to launch in step three.” I think you could put a little too much importance on that initial product at that point. If you’re holding off because you’re just not sure you want to be in this niche for five years then I think you’re over thinking it.
[15:57] Mike: Yeah, I would agree. I think if you’re starting out you don’t necessarily want to try to plan that far out in advance because you may very well launch this one time purchase and it may not go anywhere. It may just be that the market doesn’t want what you have to offer or that there’s not enough money there or that you can’t reach those people. There’s all these problems that I can see with that and if you aren’t sure of all of those things and you’re trying to plan around this vast sea of unknowns you can very well talk yourself out of doing anything at all before you map everything out. At that point you’re basically just wasting a heck of a lot of time planning for things that are just never going to occur.
[16:37] Rob: So then step three is basically getting recurring sales and in our world this typically means SaaS. It doesn’t always have to be that way but I think that’s the direction you move. One of the benefits of SaaS, we’ve talked about it before, is the fact that you don’t have to get a large sale upfront. You can get a smaller sale every month from that group of customers. And there are pros and cons to this that we discussed ten or fifteen episodes ago but the bottom line is, if you want to build a sustainable revenue stream then having one time sales is not the way to do it. So step three is going after recurring sales and examples of this, they’re all around us, an app like Baremetrics or Bidsketch or Drip, Planscope or there’s even recurring info products like Brecht Palumbo who is a Microprenuer Academy member and host of “Bootstrapped with Kids” podcast. He has distressedpro.com which there’s some software to it but there’s also a lot of training. We have microprenuer.com and the Microprenuer Academy which is essentially training. There’s no software involved with that. So, you can go both ways it doesn’t just have to be software. Even productized services I think could fit into this level if you get folks to sign up to a subscription for them.
[17:53] Mike: Yeah, most of this conversation today is limited much more toward the software side of things and getting started but you’re absolutely right that there’s a lot of other ways to have different up sells for people that can buy into, whether that’s with their wallets or with their mentality. If you look at what we’ve done with the Microprenuer Academy, in some ways you can look at it as a complete sales funnel where we’ve got our blogs and I guess I’ll say our online profiles but we’ve also got the podcast which is free to everybody and then if you want to buy into the Microprenuer Academy and those types of approaches and that community, there’s a fifty dollar a month price point with that and then up stream from that is MicroConf and there’s a lot of different ways that that whole life cycle of products could be viewed. The “stair step” approach kind of falls in line with that.
[18:45] Rob: Yeah, I agree. If you just think about our ecosystem as a funnel. I don’t think either of us intentionally did this but there’s all these things that kind of feed into each other. My book is one thing. Certain people hear about my book from the podcast and from MicroConf but other people hear about my book from something else and then they later listen to the podcast or become an academy member or buy a MicroConf ticket. All four of those things really feed into each other. Brennan Dunn is another guy who has done this really well. He has multiple e-books and podcast, a blog and his software product. And he runs training, in person training. So that all fits in and he will actually say that he stair stepped it in the wrong order. He launched the SaaS first and it was so hard to get traction that he went back and started writing e-books and stuff to make money and then realized that the experience he gained there and the audience that he built fed back into it. The “stair step” approach is not about building an audience. I don’t think you need to be a personal brand or build an audience to do this. But I do think that building a customer base and then learning these skills, how to launch, how to market, how to copyright, all of that stuff is the key to it. So, don’t feel like you have to be a big personal brand in order to make that work or even have this big ecosystem of products. I don’t necessarily think that if you got to step two and you had the WordPress plugins and you decided, “I’m going to launch a SaaS app” and you sold those WordPress plugins enough to give you a runway to then go build the SaaS and grow it, I don’t think that’s a terrible decision. I’d take it on a case by case basis but I think that’s an option. You don’t necessarily have to keep everything as you’re moving up the stair steps.
[20:23] Mike: I agree with that point. That’s one option and there are certainly viable reasons for saying,”okay, I’ve already got this one product but I want to do something completely different.” I think both of them are valid approaches. Going back to what Brennan had done where he had kind of done things out of order, we did things out of order with the Microprenuer Academy as well because we launched the academy first and that has a subscription model to it and then we did the podcast which is kind of down stream from that. And then we did the conference which is up stream from that. So we did things in the wrong order as well but it’s not something that we planned out front. We just kind of fell into it and decided, “what is it that we want to do next and what are people looking for?” Sometimes you just need to get into the market to figure out where things need to go or where they should go. And where they should do in some cases may very well be in a completely different market because you don’t want to deal with it anymore.
[21:15] Rob: Exactly. And then step four is something I’m still mulling over. I did not mention this in the MicroConf Europe or DCBKK talk. I mention it offhand. I think step four might be having multiple recurring apps, multiple SaaS apps or something but to be honest, few companies or people that I’ve seen are able to maintain this because basically one eventually takes the lead and makes so much money that the others seem inconsequential. So, if you look at what 37signals did as an example, they just kept launching apps, kept launching apps and then Basecamp, I’m assuming, 10x’ed or 100x’ed everything else and at that point it’s just hard to devote any time to something that’s making you ten grand a month when something is making you a million dollars a month as an example. I don’t know their numbers but you get the idea. There are a few companies, like Wildbit does this, they have multiple SaaS apps. Certainly you and I have multiple projects going on. I have multiple SaaS apps plus the academy and conference and stuff. So it’s not impossible to do but I have definitely found it hard as some of my apps grow and they tend to X other apps in my portfolio. I have a really hard time going back to those apps that are making the small amounts. I think at that point that’s when you want to sell one off or shut it down even if it’s not worth selling. So I’m not sure that step four is aspirational. I don’t know that getting to multiple recurring is really necessary. I do like that it diversifies you. When I had issues, HitTail’s revenue took a hit when Google did the not provided stuff and it was nice that I had other revenue streams but I’m not sure that trying to manage multiple SaaS apps or multiple recurring revenue streams should be a goal for everyone.
[22:54] Mike: Yeah, if you look at what Basecamp has been doing, even over the past four or five years, they used to have, I think it was called “sortfoloio”, they got rid of that, right now they’re in the middle of the process of getting rid of things like Highrise and changing their company name from 37signals to Basecamp and getting rid of all of the other things that they’ve build and they’ve sold and launched and been successful with them but they haven’t been nearly as successful. They spell out in fairly large detail on their blog and in a lot of their communications that “we’re getting rid of all of these other things because they serve as distractions.” I was at the Business of Software, I even met somebody who was heading up one of the business units that they’re spinning off and saying, “okay, we’re going to take this entire product that is making money that could fully support at least a couple of people and just get rid of it because it is taking time away from our core business and that’s where we make our money.” Even in the stuff that I’ve done and Rob, obviously in the stuff that you’ve done, there’s things where you get to a certain point or you just don’t want to work on them anymore because it’s not worth the time or you lose motivation for it, and at that point it becomes a mental drain because it’s always in the back of your mind and you’re thinking to yourself, “oh, I should devote some time to that” or you’re coming up with ideas for it. But if you don’t even own it anymore it’s a lot easier to not think about it.
[24:10] Rob: That’s right and that’s something you always have to weigh is whether to sell it and walk away or to keep it running in the background because there is a mental weight to it like you said. If you’re listening to this “stair step” approach I think you could feasibly be skeptical and say, “well, if I ultimately want a SaaS app, why would I start with a small product?” Maybe you really don’t want to launch a small WordPress plugin, you just want to do SaaS because that’s what the cool kids are doing or something. I think that the optimal way and the way to maximize your chance of ultimately being successful at it is to do something like this “stair step” approach but I think there are other avenues. I think if you were to intern within a bootstrap SaaS app and have someone mentor you and teach you the ropes, that you could feasibly learn it without doing it yourself and then go launch your own SaaS app. So I do think there are other ways around it, they’re just a lot less common. They’re going to be harder to find because how many of those opportunities are there compared to how many people are there who are able to go launch the WordPress plugin and go up the stair step?
[25:11] Mike: Yeah, I almost look at the different steps as learning experiences where somehow you have to figure out the knowledge within that particular arena. The “stair step” approach is obviously one method for doing it. Doing some sort of mentorship would be another method, and then going straight to step three and beating your head against the wall a lot to figure out all the different things that you should have learned in step one and step two, that’s another mechanism for doing it but there’s the risk of going straight to that step and beating your head against the wall so many times that you get frustrated and you just give up. So, I think there’s definitely some inherent risks there but there are also some very clear, exceptional cases out there where people have successfully gone straight to step three. I would say that in some cases, not all of them, but some cases, those are used as examples of “this is exactly how you build a software product and this is exactly how you build a company from the ground up.” I’ll point specifically to 37Signals for that because I think a lot of people have held them up on an alter and said, “this is exactly how you do it. We scratched our own itch. This is the way to do it.” And then you’ve got all these other people who are going out and scratching their own itch for a product that not everybody is going to pay for. So, there are definitely ways to do it and there are I’ll say red flags for other ways that it can be done but aren’t necessarily going to be successful. Success is not something that you can just say is going to happen. There’s a lot of red flags but there’s also ways around some of those red flags.
[26:41] Rob: I think 37Signals would have been successful whenever they had done it. They’re very smart and they’re great businessmen and they build things people want and all that. But I don’t know that they would have grown to how large they are as quickly as they did without their timing. They really hit SaaS at the early stage right as the concept was taking off and they got in first and they really got a first movers advantage which I think is great because they took a risk and it paid off for them. But I think that in the decade since Basecamp was launched, I think it launched around 2005-ish, a lot of things have changed so five maybe six years ago, still going directly into SaaS, I could see that potentially working. I don’t think it was nearly as competitive as it is today. So many people want to launch SaaS. It really is something that the funded companies are talking about, B to B is talking about it, B to C is talking about it, it really is something a lot of people are aspiring to and as a result a lot of people are doing it and a lot of the niches that didn’t have SaaS apps a few years ago have them now. So that’s where it’s just become so much more difficult to do it that I think jumping straight into the deep end of the pool is going to fail more often than not. That’s not to say it can’t succeed sometimes, and as you’ve said there are examples of people who have done it and even examples of people who have done it more recently. But what I tend to find is if you dig into their stories a little more, someone might say, Josh Pigford, with Baremetrics, he launched a SaaS app and it was successful but if you look back at his story he basically had two other smaller apps, he did stuff before that. It’s that ten years to overnight success type thing. You could say the same about me, right? Some would say, “oh, he has a successful SaaS app with Drip” but I have this whole long history of launching things, launching smaller things and then moving up this ladder. So it’s not that it can’t be done I just think it’s done a lot less often, especially these days.
[28:32] Mike: Right, and as you moved up that ladder you’ve built things that are more and more complicated. A duck boat E-book is a relatively uncomplicated thing but you get to something like Drip and that’s very complicated. There’s a lot of moving parts that are constantly moving and shifting whereas selling somebody an e-book on how to build a duck boat is relatively straight forward in comparison.
[28:54] Rob: That’s right.
[28:55] Mike: But if you take that example of how to build a duck boat as an e-book, you can translate that to one section of a marketing campaign that you might run for Drip. All those things that come up in step one and step two basically become these modules of knowledge that you drop into place when you get into things that are a lot more complicated and become a lot more successful because of the modular learning process that you went through before.
[29:22] Rob: That’s exactly right. Each one is, like you said, a module that fits together. I think that’s a good analogy.
[29:28] Mike: If you have a question for us you can call it into our voice mail number at 1-888-801-9690 or email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from “We’re Out of Control” by MoOt used under Creative Commons. Subscribe to us at iTunes by searching Startups and visit Startupsfortherestofus.com for a full transcript of each episode. Thanks for listening and we’ll see you next time.
Episode 167 | How to Organize & Run a Startup Mastermind
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Transcript
[00:00] Mike: This is Startups for the Rest of Us: Episode 167.
[00:04] Music
[00:11] Welcome to Startups for the Rest of Us, the podcast that helps developers, designers and entrepreneurs be awesome at launching software products, whether you’ve built your first product or you’re just thinking about it. I’m Mike.
[00:19] Rob: And I’m Rob.
[00:20] Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week Rob?
[00:24] Rob: You know, things are going pretty well. I’ve been spending some time in the code. I’ve been working on the HitTail keyword algorithm. I mentioned that since not provided came through. I found it through the Google web master tools, there’s another source of a bunch of keyword data and so I’ve spent a lot of time repurposing, tweaking that algorithm and it’s actually given me a better – before HitTail could say hey, here’s a keyword and yes it’s a suggestion you strut about or not.
[00:52] Now I actually have a gradient where I can give it a score and it’s a number on like a 1 to 100 scale. So it’s been fun to get back in the code ready to kind of get this thing out. Right now it’s in alpha and I have four different people who’ve sent me spreadsheets and I’m uploading them and seeing how it goes but it’s nice to be moving forward with the goal of getting HitTail back on track basically. Growth had really stalled and things starting to go sideways with it as the value that it provides is a lot less than it did 4 or 5 months ago.
[01:24] Mike: That’s really cool that you’re able to assign a score to those things that you use so people have some sort of ranking to help them decide what they should do next. That’s one of the things that people had asked me to do when Audit Shark was there like this information is great but I need you to score it so I know what to concentrate on. The analysis paralysis that people tend to experience when they just really don’t know what it is that they’re looking at and they don’t have a basis for comparison, that really hurts. And giving them those benchmarks or those ways to sort the data can be really, really helpful.
[01:56] Rob: Yeah. I agree. So hopefully, getting that out into production in the next couple weeks, I’m going to need to get a designer on board to make some minor tweaks to some stuff and then I’ll probably hire a developer. It’s just enough work. I think it’ll probably be 20 to 30 hours of work because there some complex stuff to actually implement it at scale. I’ve realized these days man, if I need to get 30 hours of coding done, it’s going to take me like a month to do it because I can’t get in the flow ever because there’s so many little things going on but hopefully fingers crossed, another few weeks maybe end of February have that all up and running.
[02:29] Mike: Very cool.
[02:30] Rob: How about you? What’s going on?
[02:32] Mike: Well I got an email from Wes O’Hare who put together a resource website for people who make web products and the URL, we’ll link it up in the show notes is produx.co. So check it out if you want. There’s a lot of good information on there. There’s a few couple things I’ve never heard of before. So if you’re building a web startup of any kind there are definitely some good resources there.
[02:55] Rob: I wanted to call out two things. The first is I was on a podcast this week. It’s the Linchpin podcast and I was talking all about email marketing and creating email mini courses so linchpin.net/podcast if you want to check that out. It’s a short one. It’s probably 25-30 minutes. The other thing is Brandon Dunn, lifetime academy member, he and I were emailing about some stuff and I loved the story he sent. He said hey, I set a new personal record. I had an idea for a WordPress plug-in last Friday, learned how to write said plug-in over the weekend because I’ve never really dug in a WordPress before. I’ve run paid ads today plus some inbound from my blog and so far I’ve admitted two new customers who weren’t friends or in my network. I love it. It’s like a super fast implementation. Talk about taking action. It’s at wordpressconversionfunnel.com.
[03:48] And if you do nothing else, checkout that URL because look at the way Brandon puts together this sales page. It’s a long form sales later. Its written from his perspective and it’s all about how the tactics that he’s included in these WordPress plug-in has helped his own business very elegant, well put together, very folksy, it feels like you’re just having a conversation with someone and they’re kind of just telling you about something while you’re sitting at a bar. I wanted to share that with the audience and kind of give an example of a way to get something done well and to do it fast and execute like Brandon did. So congrats sir.
[04:18] Music
[04:22] Mike: We’re talking about how to organize and run a startup mastermind. Over the past couple of months, I think that you’ve probably gotten just as many questions as I have if not more about what is a mastermind? How do I go about putting one together? What sorts of things go on? How can it help? So what we’re going to today is we’re going to take some time and set aside the entire podcast episode for talking about a startup mastermind and some of the different experiences that you and I have had in running our own.
[04:49] Rob: And to give you some background, the term mastermind as far as I know is first mentioned by Napoleon Hill in the book Think and Grow Rich and if you read through that, it’s going to almost barely resemble what we’re talking about today because A) things just have developed so far in the past 75 years since he wrote that book and B) we do some very specific things that work very well because we’re talking about a startup mastermind. It’s not just a generic group of people getting together to talk about something but really focus on a startup right on the startups that you’re all running with other founders. And so I think that’s something to keep in mind.
[05:25] The other thing I’d like to mention is that one of the reasons we’re doing this episode is because Mike and I have realized the value of masterminds in our successes and just the power of community through MicroConf and through the Micropreneur Academy and that’s one of the big reasons that we are revamping micropreneur.com this year and we’re going to put an extra focus on community.
[05:47] And this mastermind stuff will be part of that. I mean we want to foster, help people get involved in mastermind and help them run them well whether they setup local Micropreneur meet ups as we’re seeing spark up. Last count, they were approaching maybe 10 worldwide of these Micropreneur meet ups just people getting together. That’s a little different than a mastermind but there’s overlap there. I mean the flipside is setting up Skype masterminds, as we’ll surely talk about in this episode.
[06:13] Mike: So the first question that somebody might have is what is a startup mastermind? To me, a startup mastermind is a group of people who are business owners or have applications that they are selling online and they want to talk to other people who are in a similar boat, other people who are encountering similar problems have a similar type of business because if you’re talking to somebody who’s running a brick and mortar type business, they’re going to have very, very different problems than you would as somebody who’s selling software over the web. So you really want to make sure that you’re talking to people who are in at least a similar situation as you and these types of people will help you make decisions. You can open up to them. You can talk about the types of problems that you’re having. They can give you suggestions. It tends to be a lot easier to talk to these types of people than it is to talk to your customers or your employees.
[07:04] And as a business owner it can be very I’ll say isolating when you’re running a business and maybe you have employees or contractors and you need advice but you don’t necessarily know where to turn. And a startup mastermind can really help with that because you can open up and you can talk about a lot of different things and essentially lay all your cards on the table and get the feedback that you really need in order to move your business forward. And if you don’t have a mechanism for doing that, then you may very well reduced to talking to your spouse or talking to your friends who if they don’t do that sort of thing, then they don’t have any basis for making decisions or offering advice. It becomes very difficult to get anything out of those conversations.
[07:44] Rob: Your spouse, your employees and your non-founder friends will never ever understand what it is you’re doing at the level that you need them to actually provide you with helpful support and feedback. You must have someone who understands that founders are a different breed and what we’re doing in startups is such a unique thing that talking to your parents or god forbid your employees about this, it almost never yields helpful information.
[08:12] I think the point that you brought up about isolation is a big one and I just double underline that on the notes I’m taking here. Isolation is something you need to avoid. I’ve gone through it. I think a lot of founders go through it. I see a mastermind as a way to get a group of supportive people around you, a way to have accountability, a way to have people invested in your startup not financially but just mentally invested without having a cofounder. So if you do have one or two cofounders, I don’t know that you necessarily need a mastermind because that’s kind of you have your mastermind there. But especially if you’re a single founder, I just view the startup mastermind as a semi-replacement for having cofounders.
[08:52] Mike: So the next question you might have is how many people should you have in your startup mastermind and this number I think can vary quite a bit. I’ve heard a lot of people say 2, 3, 4, 5. I think I heard one group that had I think 6 or 7 people in their mastermind. I feel like that’s way too much. My mastermind group has three people in it and with three people, we each get about half an hour to talk and we talk about our own products and we used to talk about our own stuff every single time we meet so it’s not as if you’re going 2, 3, 4, session or something like that without talking.
[09:24] Half an hour seems like its enough time for you to be able to get through everything that you’re talking about. And if you go a little bit long, it’s usually not a big deal but to me, I feel like three people is a good number to have. I think it can work well if you have two people. I think that once you start getting to a 4 or 5 people I feel like the mastermind gets too big and people don’t necessarily have enough focus and you spend more time waiting than you do talking about the things that you’re working on and getting the feedback that you need to move forward.
[09:52] Rob: Yeah. I take a pretty hard line on this. I think a mastermind, its best startup mastermind only works with 2 to 4 people and I’ve been in one that was 2 people and it worked great. I think 3 is the ideal number because then you’re getting two perspectives on things instead of just the other person. You want someone to have 20–30 minutes to really get in deep because if each person has 5 minutes to talk, you just can’t understand really what’s going on with their business.
[10:20] Now I have heard of masterminds like you said with 5, 6 I’ve heard of 8 person masterminds. Those are just run entirely differently than what you and I do. Those are run where it’s like every meeting 1 or 2 people get to speak for a longer period of time. Maybe you get 20 minutes when you’re on the hot seat and everybody else only gets a 5 minute update. I can’t imagine being part of a group like that. That’s not called a startup mastermind. Maybe that’s some other type of meet up or something else but it’s not at the level that we’re talking about when we’re using the term startup mastermind.
[10:53] Mike: So the next question is how often should you meet? I’ve heard of a lot of other groups that will meet once a week or even a couple of times a week. My group meets once every other week and I feel like every other week is the right amount of time because with half an hour allotted to each person, you get to talk a fair amount but at then at the end of it there’s an accountability area and that gives you – or the week in between each meeting gives you enough time to really buckle down and work on those things. And if you run into any sort of issues, you still have time to be able to get some of that stuff done from one week to the next. If you’re meeting every single week, it almost feels like any sort of commitments that you have or that you’ve set for yourself, it may very well be very difficult to meet some of those commitments just because you don’t have enough time to do it.
[11:40] It’s like okay well I’ve got things that I’m going to work on and its going to take me 2 weeks to do or 3 weeks to do and your report for the week is for 3 or 4 weeks straight is going to be well yeah, I’m still working on that. I’m not done yet. I’m sure you can go into a lot of detail about it but to me it seems like meeting every other week has worked out really, really well for us and with that sort of schedule, you can still move it around a little bit during the week. It’s not that big a deal. I think that we’ve only had to move ours I think twice but we still resorted to email updates on those weeks where we just couldn’t meet. There are ways around that sort of thing but to me it feels like once every other week is probably ideal. I think you could get away with once every week. I think Rob you’re in one that meets every week right?
[12:23] Rob: No, both of mine are every other week and it’s for the reasons you’ve outlined. There just isn’t enough time to bite off a large enough chunk to make it interesting if you’d meet every week. Plus if your mastermind like you said, yours run 90 minutes and mine typically run between 90 minutes and two hours and that’s a big chunk to bite off every week just to sit down and talk about work and not actually work. And so to bite off two hours a week, I want to kill that time but certainly it’s helpful in the broader sense but to not be able to be productive for those hours would be a big deal.
[12:55] I agree with you pretty largely that every other week since to be the ideal tempo. If struggling kind of with your business or with the mental side of it that then it would feel like too long and that there’s not enough accountability that you could feel isolated so that’s where I feel the two week touch point that even if you’re having a rough time, that’s often enough that it can kind of get you back on track.
[13:17] Mike: So here’s another question for you specifically. Since I’m only part of one mastermind group, you said that you’re in two different ones. How does that work and how does that I guess correspond to when you were a member of just one because I imagine the experience is a little different but as you said, dedicating that time every week would be really hard but again you’re in two so you’re basically dedicating twice as much on those weeks where you do have the meeting and then none when you don’t. Do you find that it’s more helpful to have a second one?
[13:48] Rob: That’s a good point because since I’m in two every other week it’s kind of like I’m in one a week. The reason that it works for me is because I’m not in two Skype mastermind groups. I feel like for me, that would be too much time because that would essentially be two hours every week on Skype. One of them’s in person and one of them’s via Skype. And the Skype one is with some more experience founders who are in other parts of the country and we really dig into a lot of nuts and bolts and detailed stuff that literally maybe 10,000 people in the world have any interest in at the level that we’re talking about. I mean it’s just such a small – maybe it’s 50,000 but it’s just a tiny, tiny number. And so there are just aren’t that many people who can discuss the intimate metrics that we’re talking about and really understand the design element. So that’s where the Skype comes in as just finding people to do it is tough.
[14:36] The in person one is a little more casual, it’s a little more fun and we almost always do it at happy hour. And so we go to a pub and we’ll have a few drinks and we’ll have appetizers and then we’ll chat. Sometimes we’ll do it in my house and I’ll host but it’s basically the same thing. I’m pouring drinks and more hanging out in the evening. So that’s where I almost use it as its both a social/have fun type thing but we also, we do get into the nitty gritty of our business but our businesses aren’t as closely aligned as with the Skype mastermind. I think I’d have a tough time being in two intense hardcore masterminds like my Skype mastermind is.
[15:13] Mike: Do you find that you actually get anything done while you’re drinking like that or no?
[15:16] Rob: Yeah. We do. It’s not like we’re frat boys doing keg stands. I mean we’re having conversations. We’re reading from notes, taking notes, asking opinions. Definitely making decisions and helping each other. Yes. We definitely get things done. The nice part about being in person is a couple guys come over and we’re sitting there chatting and having drinks for three hours, it doesn’t feel that long because we’re just hanging out. But being on a three hour Skype call is pretty irritating. It just gets old and you’re sitting or too long and we can be more casual with the time and even at times go into more depth on certain topics just because you have the luxury of being there in person.
[15:57] Mike: So one of the things that we did which was actually a recommendation from you was when we were setting up our startup mastermind, one of the things that we did was we essentially setup expectations for what that mastermind should be and what we expected from everybody. And two other things that really came out was 1) an expectation of complete confidentiality from everybody. Anything that you talked about during that meeting or during those various meetings would not go beyond the people that were there. It was kind of regardless of the topic whether it was personal stuff that came up or whether it was business related or contracts and stuff like that because there are legal issues that you may need to discuss with people and those are the things that you don’t necessarily want going out to anybody else or discuss outside of your circle.
[16:40] The second thing that also came as a recommendation from you was having an opt out clause after some sort of a trial period. I think it was something like eight weeks to say is this working for me or is it not because eight weeks, it sounds like a long time but it was really just four meetings and I think that if you don’t really gel as a group within four meetings or so, it probably isn’t going to happen and you might want to go off and find other people to be part of your startup mastermind group. Are there other rules that you setup in your masterminds?
[17:09] Rob: I can’t think of any but the confidentiality I think is one that I want to underscore because if I’m going to do this, if you’re going to be serious about this, you need to bring it to the table. I bring everything. I bring my lifetime value, my customer churn numbers, revenue, net profit, super decisions I make. I bring stuff in there that I don’t talk about with anybody else and that means there has to be confidentiality. They can’t go talking to other people about it. I think that’s a key. And then you mentioning the out clause, that’s something that I’ve done with both of mine and I think the important thing is that you’re going to probably be setting this up with people you know. Right? It’s kind of friends. And so if it doesn’t work out, there really needs to be a no hard feelings opt out period for 6-8 meetings or whatever.
[17:56] So as you said, yours was four meeting and I think that’s the ideal duration to really figure out if you’re going to get value out of it because think about it. If you get in there and you’re talking and maybe let’s just say you think you know these acquaintances or these friends and you get in and one person just dominates and doesn’t really offer a lot of information and you feel like you’re wasting that 90 minutes every two weeks, you need to feel comfortable that you can say you know what guys, this just isn’t working out for me. I’m sorry. And be able to back out and have that no hard feelings thing. Just as anyone else who comes in, maybe they just don’t feel comfortable. They want to be on their own or whatever that you don’t have the judgment of them if they decided to leave.
[19:34] So I think those are some pretty key aspects of it to keep it less stressful because anytime you’re setting something like this up with friends, it always has the potential to kind of go downhill.
[18:44] Mike: So in terms of logistics, we talked previously about the schedule and for us, we have a very regular schedule. We meet every Tuesday night at 8:30 and it’s from 8:30 ‘til about 10 or 10:30. Do you use a regular schedule or no?
[18:59] Rob: So the Skype one is a regular schedule every two weeks Wednesday morning and then the in-person was regular for a while and now we’ve kind of let it flux and I’ll find that we, unless one of us thinks about it, it will go three weeks and its even over the holidays when I think a month. I was thinking the other day that we need to get it back because it used to be every Thursday afternoon at three o’clock at this one place. There’s a happy hour and so we probably just need to kind of pencil that in the game. I think there’s a lot of value to making it regular because if you have to plan it individually every time it’s so frustrating but if everyone just blocks this thing out for the next year and blocks out that same time on Tuesday or Wednesday or whatever, that’s really the way to go.
[19:36] Mike: Yeah and I think that you and I found that even just recording this podcast very, very early on, just setting that regular schedule really helps because it was like oh well, at this time and every single week I know that I have X planned so I can’t plan anything else for that as oppose to saying okay well I can move this around or always trying to find a place for it and it’s just logistically it’s hard to think and plan for stuff when its constantly changing every week. So I really feel strongly that having that regular schedule is extremely helpful not just for mastermind but for other things that you’re working on.
[20:08] So the same point, using the same type of media mechanism every week to prevent technical issues or from cropping up and switching let’s say between Google hangouts and then to Skype and then to something else, always trying to new things just because they’re new, I feel like that’s not really conducive to having a mastermind or we use Google hangouts every week. I think you said you use Skype?
[20:30] Rob: Yeah. We used Google hangouts for a while but they kept changing the interface and it was causing us problems. Just the technical part of it. People weren’t getting invites and all this stuff so we have switched to Skype. I paid for – you know you have to pay for a pro account for a year. It’s like $50 but then you can do the multiple video Skypeing with multiple people. And so I just forked it over and now at 10 AM we’re all there and I call both people.
[20:55] Mike: Yeah. We’ve definitely had some issues with Google hangouts. It depends on what everybody’s comfortable with whether you use Google hangouts or whether you use Skype, I would definitely recommend this and I think Rob, you’ll probably agree with me that you definitely want to use something that has video. I think that’s something that people might overlook when they’re beginning to build up a startup mastermind and I think that people don’t necessarily think about it but I think having that phase in front of you where people are talking and you’re actually seeing them talk and facial expressions and having them be able to hold stuff up and show you things, that is such a valuable experience because it just adds so much context to the things that they’re talking about. If you’re just hearing this voice on the other end of the line, it’s a little bit disconnected and it doesn’t necessarily give you the same impression that you get when you’re talking to somebody through video.
[21:44] Rob: Invaluable. Yup, I echo that.
[21:47] Mike: So what about accountability? We have our own mechanism for accountability but what do you do in yours?
[21:53] Rob: So we use Google docs. We have a single Google doc with bullet points and the three people’s names in the doc and then we talk about what we’ve done and what we’re planning to do over the next two weeks and challenges that we faced or stuff we need opinions on. I’ll admit that as of late, we’ve started to fall off the wagon with that. I have just started it up again with the most recent mastermind meeting and started updating their Google doc again but we did that for maybe six months and then just kind of we go from the top of our head now and it’s not quite as valuable I think to be able to look back through the history. It’s really interesting to look through the history and see what you’ve talked about and to think wow, you know, I remember when this was making $1,000 a month and now it’s making – that’s just crazy that I was actually at that point. It really gives you a sense of accomplishment and a sense perhaps of what the group has done for you.
[22:43] Beyond that, I know you guys touch base between or you have a message that comes out between your meetings and I think that’s a really good idea. I’ve never done that but I think it could be really helpful. Why don’t you tell folks how that works?
[22:55] Mike: Sure. So as I said before, our startup mastermind meets on Tuesday nights between 8:30 and 10 to 10:30 or however long it goes. And what I do is I essentially assign myself to be the scribe for the startup mastermind and what I’ll do is I basically keep track of who is supposed to be speaking and what the schedule is. So there’s three of us and everyone’s got I guess an assigned slot. And then if I spoke first this week then the next that we meet, I would speak third and I would speak second and then I would speak first again. And we just rotate so that everybody starts in different slots. So it does rotate and that’s definitely helpful.
[23:36] The other thing that we do is there’s essentially three different things that I take notes on. The first one is what people’s previous commitments were and those are generally copied from the previous week so whenever I start a new meeting, I fire up Evernote. I throw everything in there and I basically just write down everything that they said they were going to accomplish last time. And then I have a section for what people’s accomplishments were and then what they have said that they were going to accomplish the following week or the following time that we meet.
[24:04] And then what I do is once the meeting is done, I take the three sections for what people have committed to doing by the following meeting, I throw those into an email that I send out using boomerang that I schedule for the following Tuesday. I might do it on Monday. I forget which. But it’s basically early on the following week so that once about a week goes by you may have kind of forgotten about what some of your commitments were to the group for the next meeting and that email in your inbox basically becomes a trigger that says hey, these are the things that you said you were going to get done. Where are you?
[24:33] And I started this I don’t know, it was probably about after 6 or 7 meetings because I started to realize hey, I’m waiting until Monday to start working on some of these things and go back and look and see what it is that I should’ve been doing for the last 12 or 13 days. So instead, as a trigger to myself I was like well let me remind myself of the things that I should’ve been working on and I said well why don’t I just send this to everybody? And people loved it. I mean nobody complained about it. Everyone said hey, that’s an awesome idea. Thanks a lot for doing that. And it’s worked out really really well and I actually even get requests here and there for me to resend it on occasion if we move a meeting or if we have to skip one because of the holiday or something like that.
[25:16] Rob: Yeah. I really like that idea. I can see the value of it. When we’re having our masterminds, I’m taking notes and then I typically put them in my Trello board when I say here’s what I’m going to do over the next two weeks. I put them in Trello to do but that can get lost pretty easily if I come back and there’s a bunch of email and I really don’t get back to Trello because I’m too busy churning through a bunch of fires. It’s easy to forget that so I could see a lot of value and have that email sent out off week.
[25:40] Mike: The one thing that I liked about what you said was that you guys use Google docs and I don’t know, I guess I didn’t really think about that because I throw all of my notes into Evernote and then I just have a separate note for each of the meetings that we have but it probably makes a lot more sense for me to switch over and take everything, throw it into a Google doc and then share it with everybody so that everybody can see the entire history of everything as opposed to me just having the history in Evernote.
[26:04] Rob: Right. And then other people can modify if maybe you misquote by accident or you put some in there and they decide they want to add some extra things, it’s kind of nice to be able to collaborate.
[26:16] Mike: So next major question that I think somebody might have is how to find people for your mastermind and I think this is a hard question because you really have to look at who your peers are and you have to know the people that you’re going to invite. I mean you at least want to have some sense of what it is that they do. You want to make sure that they are doing the same types of things that you are and for me, I met the people who are in my mastermind group at MicroConf. So for me that made it extremely easy. If you’re going to MicroConf, definitely look around for people to join a startup mastermind with. But what about you? How did you go about finding the people who are in your startup mastermind?
[26:51] Rob: Pretty much the same way. It was through MicroConf and the academy and just kind of the stuff we’re doing. I can’t imagine starting a mastermind with someone I had not met in person. I received this question. How do you find people for your mastermind? And I’ve heard suggestions like well, go on forums or get to know people via email and this and that. And that might work but there’s always a large part to how to people interact and the intimacy of a startup mastermind and what you’re sharing, it really depends on interaction style. Do people listen? Do they always want to talk? Do they want to dominate? Do they just want to give advice? There’s a lot of subtlety there that you can’t pickup over a forum or another non in-person mechanism. So personally I would go to an in-person event.
[27:33] The most masterminds I’ve heard come out of anywhere is out of the MicroConfs. We’re these Micropreneur meet ups and masterminds just springing up out of MicroConf Europe a number of them have already come out of it and same with the Vegas one. And I think the other place where I have seen stuff start to spring up is of course the academy. It’s our membership website so there’s a community there. And like I said, this year we’re going to be doubling down on that and really focusing on building that community and expanding it and so that’s the kind of place that I think you can go.
[28:02] I don’t know if you can go to a public forum like the old business is software stuff or answers down on startups.com or those kinds of places. I don’t know if you can go and do that. I’ve never done it and I haven’t heard of it being done. I’m sure it’s possible but I really think that you kind of have to go to that in person aspect. The other thing I’ll say is when you’re looking for the types of people to invite, you really want to find people that are ahead of you.
[28:30] In an ideal world, the other two people would be just enough ahead of you that they still remember what it’s like to be where you are but that they can give you advice based on what they’ve learned. Now obviously, that’s not possible if there’s three people. Everyone can’t be a head of the other. But what I have found interesting is that in the masterminds I’m in, there’s typically some expertise in a certain area. So one guy might be really solid on UX and ahead of everybody else and another person might be a head in terms of high touch sales and another might be ahead in terms of content marketing, another ahead in terms of paid advertising. There’s these different aspects of it.
[29:04] And so I think when you’re setting up a mastermind, don’t just grab the first three people you know who are your friends who are also founders but think about who is doing what I’m doing? So if you’re running a Saas app, try to find two other Saas founders. If you have a WordPress plug-in, try to find two other WordPress folks and if you’re doing info products, try to find info products etcetera. It’s not to say that’s the only way to do it but I think that in the ideal scenario, if you’re B to B, they would also be B to B and the type of software and they would be relatively close to you within let’s say a year ahead or behind you in terms of the path you’re traveling as a founder.
[29:39] Mike: I found that even when you’re working with other people in the mastermind group it’s really nice to get that additional perspective because other people have different experiences than you especially if their background are different. So I don’t know as I would necessarily shy away from people who are not Saas founders for example because Audit Shark is a Saas based business and the people that are in my mastermind group, none of them have a Saas based business right now. So I still get a lot of good information from them though so I don’t necessarily know as I would shy away from them. I’ve gotten a lot of great things out of it and even just in how to deal with a recurring revenue business, they’ve had some really, really great ideas that I’ve been able to take and implement. There’s other sides of it as well.
[30:21] Rob: Absolutely. It can work both ways for sure.
[30:23] Mike: It depends a lot on the type of people but I mean we’ve kind of talked about that is like you need to have the right types of people and make sure that the personalities don’t clash and get that trial period or opt out clause in there so somebody can walk away with no hard feelings as long as things are working.
[30:38] Rob: I think what you’re saying is personality may trump similarity of business and I would agree with that. The personality mix in your mastermind is going to have 80% to do with whether or not it’s actually successful because again, if you get people, if you come into the mastermind and you feel judged or you feel put down or again you feel like someone dominates, you feel there’s personality clashes in any direction and people are trying to pull away, it can really degrade the experience of the mastermind and it ruins the trust.
[31:08] I’ve also heard that mastermind’s going downhill because certain people just don’t show up or they commit to stuff and they just never do it. I mean there’s a bunch of things that can really kind of degrade the experience so you have to think to yourself are these folks reliable and are they someone who I want to spend two hours talking to every other week and really invest this time? Because that two hours is valuable. As a founder you can do a lot with that and I think you really need to think hard before you get into a mastermind relationship and I think that you will need to make sure that the folks are going to be compatible with kind of your working style.
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