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In episode 706, join Rob Walling for a solo adventure where he discusses a variety of topics. He starts with why it’s important to both consider and credit “prior art” in business. Rob outlines his 2/20/200 idea validation framework used to repeatedly evaluate ideas. He also covers why, though there are some advantages, designing by committee has some significant downsides.
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Topics we cover:
- 2:37 – Learning from, and crediting, prior art
- 10:27 – The 2/20/200 Idea Validation Framework
- 16:03 – Be wary when designing by committee
- 21:09 – When to crowdsource feedback
Links from the Show:
- Register for MicroConf US in Atlanta, April 2024
- Do Things That Don’t Scale by Paul Graham
- David Sacks (@DavidSacks) | X
- Hackers and Painters by Paul Graham
- Episode 705 | From Bootstrapped to Mostly Bootstrapped
- Episode 628 | The 5 P.M. Idea Validation Framework
- Use This PROVEN Formula to Validate Your Next Startup Idea
- Validate Your SaaS Idea FAST (Step-by-Step SaaS Validation Process)💡✅
- Start Small Stay Small by Rob Walling
- Metallica: Some Kind of Monster
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!
Subscribe & Review: iTunes | Spotify | Google
Rob Walling:
Is your outsourced development team dropping the ball? Maybe you’ve worked with a team that just couldn’t grasp your vision and needed constant oversight because they weren’t thinking strategically, or maybe you ended up wasting hours, micromanaging, often needing to jump on late-night calls across massive time zone differences to get alignment, and in the end, they delivered a sluggish app with a frustrating UI that didn’t come close to the solution you had envisioned. If any of that sounds familiar, you need to reach out to our sponsor, DevSquad. DevSquad provides an entire development team packed with top talent from Latin America. Your elite squad will include between two to six full-stack developers, a technical product manager, plus specialists in product strategy, UI/UX design, DevOps, and QA, all working together to make your SaaS product a success. You can ramp up an entire product team fast in your time zone, and it rates 75% cheaper than a comparable U.S.-based team.
And with DevSquad, you pay month-to-month with no long-term contracts. Get the committed, responsive development team that your business deserves. Visit devsquad.com/startups, and get 10% off for the first three months of your engagement. That’s devsquad.com/startups. Welcome back to another episode of Startups For the Rest of Us.
I’m Rob Walling, and in this week’s episode, I do a Rob solo adventure, where I’m going to talk through a few topics, always bringing it back to being a bootstrapped or mostly bootstrapped startup founder. Before we dive into that, I want to let you know it’s your last chance to get tickets to MicroConf Atlanta. The event is April 21st through the 23rd. Speakers include Rand Fishkin from SparkToro, Asia Orangio from DemandMaven, Stephen Steers, myself, and Dr. Sherry Walling. It’s going to be hosted and emceed by me and Lianna Patch of Punchline Copy.
I’m also going to be doing a fireside chat with Ben Chestnut, the co-founder of Mailchimp. He does not do very many public appearances, and so I’m very excited to host him at MicroConf this year. MicroConf.com/us, if you’re interested in grabbing tickets. Again, tickets are going to sell out soon, so if you’re thinking about joining me and about 225 of your closest bootstrap founder friends, head to MicroConf.com/us. My first topic of today is how the startup world and the bootstrapper, MicroConf community, and I’m kind of breaking those.
Those are overlapping Venn diagrams, but they really are two different things. I think of the startup world as probably being more of the Silicon Valley high growth stuff, and then bootstrapping, and MicroConf being maybe a subset of that with some overlap. But the idea is that the startup world struggles to not only learn from prior art, but to credit prior art. It’s two related things, but they really are different. So if you’re an academic and you go, let’s say get your PhD in psychology, or in computer science, and you’re writing papers or writing a dissertation or a thesis, it is 100% plagiarism if you claim someone else’s idea as your own, without giving credit.
It doesn’t mean you can’t talk about ideas that you’ve heard elsewhere, but you give them credit. So if you go on Twitter and you say, “I had this great idea, it’s to do things that don’t scale,” or even if you don’t say, “I had this great idea,” but you go on and say, “Here’s a secret to success, little known, do things that don’t scale in the early days so that those will eventually lead you to be able to scale up,” but you never mention that Paul Graham wrote an essay called Do Things that Don’t Scale, and he wrote it back in, I don’t know, 2006 or 2007. And it is a very commonly known idea and thought that he came up with, and you don’t credit that, you are plagiarizing someone else’s idea, because the people reading that think you came up with it by default. If you say something and don’t credit, they believe you came up with it. Not a week goes by …
Literally, not a week. Sometimes it’s more than that, that I don’t see someone on Twitter, or YouTube, Reddit, Hacker News, claiming a concept, or even not claiming it, but not crediting a concept that’s pretty well-defined, that either I invented or Paul Graham came up with, or Jason Cohen, or Hiten Shah, that has pretty obvious and clear prior art, and it’s not like someone saying, “Oh, work hard for success.” Right? That’s a pretty generic way of talking about it, but if someone says, “You have to work hard, and you need skills,” and then there’s a little bit of luck involved. Well, obviously, that is exactly the framework that I talk about for achieving success, is hard work, luck, and skill, and so you can rephrase those two things or whatever, but if you pick those exact three things, the odds of that being a coincidence that we both came up with it, that you came up with it on your own without the influence is pretty unlikely.
And this is really common, like in the creator maker influencer space, the info product, info marketing space. People are just kind of plagiarizing, and I find it frustrating, I think, as someone who does a lot of deep thinking about this stuff and comes up with a lot of frameworks, and seeing things, whether it’s mine or someone else’s, it just never feels right that folks on the internet, in the startup space, I don’t know why they feel like they need to do that. I don’t believe that it’s an accident. I think it’s pretty intentional, but the thing is, is it’s not just crediting prior art and just saying, “Oh, yeah, that person came up with this idea, but here, I’m going to build on top of it,” or, “Here is how I implemented it,” or, “Here is how it impacted me.” It’s not negative to you to just say that, to just give the credit, but the other thing is not just crediting prior art, it’s learning from prior art, and I see so many folks trying to reinvent the wheel and justify it by saying, “Well, I’m going back to first principles,” or, “That’s rule of thumb, common wisdom, therefore, I’m going to go against that.”
Like the teenager in the family, every what, generation rebels against the prior generation, right? There’s an example of Ryan Breslow, Breslow. I don’t know how you pronounce his name, but he was the founder and CEO of Bolt, and he was the guy … I don’t know, he’s a 20-something who just thought he knew everything, basically, and he went on Twitter, and what, flame Stripe and Y Combinator as being some type of mafia, or a cabal or whatever. Anytime I hear this type of phrasing, I’m like, “Oh, boy, someone really wants some clicks rather than fighting the good fight.”
But anyways, Bolt was giving loans to their employees so that employees could buy stock options, and then Bolt lost 97% of its value, and so anyone who took out loans to buy their stock options now owes the company money, sometimes thousands, sometimes tens of thousands of dollars. At the same time, this founder, Ryan Breslow, sold millions of dollars of his shares in secondary, so he seems to walk away okay, but it’s kind of a disaster for employees who are now on the hook for these funds. The thing is, this was already attempted. If you listen to the All-In Podcast, you’ll hear David Sacks talk about this, where this had already been attempted in the ’90s, and it was proven to be a disaster, but he was touting it as this great new invention, this employee-friendly thing. A, did no one tell him this is a catastrophic idea, they tried this 30 years ago, and this same thing happened, or B, did people tell him, and he waved that off, right?
He said, “Well, no, I’m going back to first principles. They did it differently. They did it wrong in the past.” I’m not saying we should be tied to every mistake that everyone makes in the past and never try things that didn’t work, but you have to learn from that art and do it differently. You have to learn from the failures and not just try the same thing again and expect a different outcome.
If we are not as a community learning from prior art and reading books like Paul Graham’s Hackers & Painters, or the old blog post from Joel Spolsky, old posts from Peldi Guilizzoni, Patrick McKenzie, my books, my old blog posts and podcast episodes, if you just come on the scene and you don’t read any of that, then you can’t stand on the shoulders of giants. There’s a reason that in academics, you study and you go to school to learn what people before you have learned, so that you don’t have to reinvent everything from scratch every two weeks. If you come on the scene and you don’t read any of that, then prior to yesterday’s Twitter feed or Hacker News, do we just start over from zero every week or two, and we don’t drag anything along with us? Now, you could say, “Well, dragging things along is baggage,” and I want to, once again, go back to first principles, but at least know, “What’s been tried?” At least know, “What’s been talked about?”
And you can make a case to disagree with it, but even that, just knowing what the common wisdom is, and then zigging when everyone else is zagging, at least make that a deliberate decision, not just a decision of, “I’m going to do this because I didn’t educate myself that I need to actually market and sell this,” even though, every week on this podcast I’m saying that. You go and start a B2C business, it has high churn, and you’re surprised everyone is price sensitive, even though every other week, I talk about that. You go and start a B2C two-sided marketplace, try to bootstrap it with no audience, even though I’ve said it so much, it’s become part of the Startups For the Rest of Us drinking game. And look, I’m not saying just me. I’m not saying, “Oh, I should say things, and everyone on the internet should hear it.”
It’s not the case. There are so many smart people with experience that are talking about these things, and yet, there are so many people who are making the same mistakes over and over because they’re not doing any of the learning or the research on their own in order to stand on the shoulders of giants. As you start your journey, it’s hard enough already. Learn from the mistakes of others. You do not have to make every mistake yourself, and hopefully, if you’re a creator, if you’re recording videos, if you’re putting out podcasts, if you’re tweeting, that next time you mention someone else’s idea or framework, that you give them credit.
My next topic is a concept I mentioned on a podcast four or five years ago, and then poof, it just disappeared. I had forgotten it. I think it was during an interview, and the idea of it … I want to bring it back up today because I’ve realized that there’s a lot of value in this framework. It’s about early stage product validation, okay?
So if you’re a later stage founder, you may want to skip this section, but the framework I’m calling the 2-20-200 validation framework. So you know how I have the 1-9-90 rule, right? That’s where I think about 1% of tech companies should consider raising venture, about 9% should consider raising some type of funding, whether it’s angel, TinySeed, indie funding, whatever, and then about 90% should just bootstrap. It’s directionally correct. It’s directionally accurate.
As Braden Dennis said on the show a couple of weeks ago, “This 2-20-200 validation framework is similar, directionally accurate.” The idea here is that there are three steps, three stages that can happen in order as you try to validate or invalidate a startup idea, and the numbers stand for the approximate number of hours that I think you’re going to spend doing them. So two hours, 20 hours, 200 hours. And the idea here is the first stage of two hours is something you can do relatively quickly. So if you have five different ideas that you’re thinking about evaluating, well then, you spend two hours each to do this very first step.
And that first step really involves just implementing the 5 P.M. Idea Validation Framework that I’ve talked about on this podcast. You can Google that if you aren’t aware of it. I’ve recorded a YouTube video about it, and I am including it in my next book, which is about the earliest stages of building and launching a SaaS, and that book is already written, actually. I’m just going back and revising a few elements of it, but 5 P.M. Idea Validation Framework is something that, where you go through several steps and you can do it in literally a couple of hours. So if you have five ideas and you want to spend 10 hours over the course of a weekend, or a week, to just get a little better picture of which of these ideas might be the winner …
And when I say winner, I mean better than the others. You go through the two-hour stage of the 2-20-200 framework. 20 hours is where you take it to the next step, and this is where you either do landing page validation, or you speak one-on-one with potential customers, or you do both. I tend to do both when I’m thinking about building a product. The idea, of course, is that if you’re going to have a marketing funnel and a low-touch product, then you put up that landing page and you try to drive traffic, and the way that you’re going to ultimately market the product, and you see what kind of opt-in you get, and you see what kind of traffic you get, and you see how many emails you collect, versus if you’re going to do high-touch sales, and obviously you want to have more conversations, I think doing both is always better.
The idea behind 20 hours is, “How long does it take you to put up a landing page and/or reach out to your warm network for these conversations or reach out to your cold network for these conversations?” Set up ads. SEO takes a while, but cold outreach, whatever you’re going to do to start gathering qualitative and quantitative data around this. You’re not just sitting in a research modem like you are with a SEO keyword tool maybe within the two-hour section of this, but you’re getting out and spending more time. This is where, if you have five ideas, you probably don’t want to do all five ideas at the 20-hour mark.
It’s just a lot of time to invest, and that’s where the first stage, where it’s only two hours into each idea, is helpful to maybe narrow you down to one or two, and then you move on to this second stage, where you spend 20-ish hours. And then the third stage is the 200-hour stage, and that’s where you think about building an MVP. And, of course, an MVP can be a no-code MVP. It can be a human automation MVP, like I talk about in Start Small, Stay Small, or it can be a full-blown coded MVP, and whether we call it an MVP or a V1 or something to get into the hands of people to see if they like it, what parts of it resonate and what don’t? And honestly, I’m putting together a video course right now for MicroConf that’s going to be out in several months, and I dive more deeply into this because there’s a lot to say about it.
But the idea behind the 2-20-200 framework is to level-set in your mind that it’s not just this big amorphous cloud of “Validate.” It is there are specific stages that you can go through. I’m not saying this is the only way to do it. You can validate any way you want, but this is just a repeatable way to think about, “How am I going to go about being a little more confident?” This is the thing, right now, you’re probably 0% confident that this is a great idea.
After two hours, are you 10 or 20%? After 20 hours, are you 30, 40%? After 200 hours, do you get to 50, 60, 70%? If it works, maybe. That’s kind of the goal, is to get a little more confidence before you invest a ton of time, tens of hours, if not, hundreds.
You get a little more confidence, that the thing might work and that you might actually be building something people want, because that really is the hard part, right, building something people want and are willing to pay for. Credit to Paul Graham for saying, “Building something people want.” I added the and are willing to pay for, but doing that is really hard. I’m not saying everything else is simple, but there certainly is more of a playbook once you’ve done that, and my hope is that the 2-20-200 validation framework can be a sort of … It’s not a playbook per se, but sort of a compass or a guiding light as you think about validating your ideas.
All right, my next topic of today is about design by committee and why I have always believed that it is by far the least efficient way to do things and that you just get bland, crappy output. Your art or your product or whatever it is usually sucks if a bunch of people have input into it. One example I can think of is every school project I ever did, where it was a group project, the more people involved, just the worse the quality was, right? Unless it was like a hand-picked group of people who are all on the same page and had the same vision, it was like the vision just tore everybody in different directions. And even at larger companies that I’ve worked at, after Drip was acquired, or with TinySeed, which isn’t a huge company, I tend to keep input to a minimum of, that everybody around here is really smart and competent because that’s what we like to hire, that’s who I want to work with, but I bring in one, maybe two people even to make really big decisions because the moment that I have six, seven, eight, nine people weighing in on a decision, A, it grinds it to a halt, and B, I find the output is subpar.
And that two exceptional people who are on the same page with a similar shared vision can build incredible things, but the moment you get to three, four, five, it can often derail that vision. One example of this is a Metallica album called St. Anger. And if you’ve ever watched Some Kind of Monster … That is a documentary. It’s like two and a half hours. It’s actually pretty long, but it’s of Metallica almost breaking up.
Is it 20 years ago now? Yeah, it’s probably about 20 years ago, and they bring in basically a therapist, like a … It’s like a marriage counselor. No, he’s actually a sports counselor, but if I recall, they’re paying him at 40 grand a month to be on call, and he’s trying to keep the band together. One of the things that a couple of the bandmates had an issue with was that two of the members of Metallica, Lars Ulrich and James Hetfield, had pretty much written all the songs up until then, and the band’s been together since what, the ’80s, since the early ’80s?
So I mean, you’re talking 20 plus years, and these two guys had written almost all the songs and almost all the lyrics. Other people would come in with a riff or whatever, but then they would take it and they’d run with it, and there were some complaints, I think it was mostly from Kirk Hammett who’s one of the guitarists, that they wanted input. And so in this documentary, Some Kind of Monster, it’s pretty fascinating documentary, actually. If you’re at all into their music, it’s cool, but even if not, just seeing the dynamics and the craziness of trying to keep a band together, it’s a fun watch. I’ve seen it a few times, but one thing they do is they are writing the songs together as a group, and you can …
It’s just painful. It is just painful to watch them come up with a riff and to hear the song be like, “This is actually a cool song,” and then they’re like, “Cool, so throw out lyrics,” and people are just throwing out random sentences that have nothing to do with each other, and they string them together as the lyrics to these songs. And so if you listen to the lyrics of that album, they’re terrible. They’re terrible, compared to the cohesive … Look, I’m not saying Metallica are the best lyricists at all before that, but at least there’s a story there.
At least there’s poetry. At least there’s a cohesiveness to each song prior to that, but on this album, in particular, which … Look, a lot of people hate on this album, especially folks who really are into Metallica. I actually really enjoy the snare sound. It sounds like he’s banging on a beer keg, but kind of has this weird …
It’s a different sound, and it has kind of almost a punk-ish vibe, even though they’re playing metal, but I don’t dislike the album specifically about two or three songs that are good, and the rest I would pass on, but even then, the lyrics are awful, and I don’t typically pay attention to lyrics that much in Metallica songs, but it is noticeably cringe. And I think 99, if not 100% of the reason, that is the case, is because they designed this by committee. They didn’t collaborate. They didn’t get two people or three people together and all with the same vision. It was, “You said you wanted to write, and the therapist said that we have to let you write, so let’s sit here and just write stuff out on a sheet of paper. Just call things out.”
It almost feels half-hearted, and it certainly feels like they did not put out the best end product they could have because of this one or two people doing it could have done a much better job than the group doing it together. And so why do I bring this up, and why does it relate to startups? Well, back to my point earlier of, whether you’re on a big team or a small team, I feel like some folks are uncertain around what they’re doing and they feel like getting more opinions will add more certainty to that. And what I’ve found in rare exceptions is that the more people get involved, the more noise there is, and more chaos is created. Now, I will say that I’ve found it helpful to kind of semi-crowdsource some naming stuff recently, where I am trying to …
I mean, I’ve had to name three books in the past. I guess it’s like maybe year, is that right? Yeah, probably last year, I’ve had to name three books and I’ll have to name a course, and I always want those names to be really good and catchy. And so I do brainstorming and I talk to some people and I go to ChatGPT, and I come up with a list, and then I narrow it down, or I come back three days later when it’s cold, and I start narrowing and narrowing, and then I start asking opinions, but I don’t go and ask 20 people’s opinion. I go to like …
I’ll say my inner circle, and it’s like three or four people that I trust, that I know have taste and I know have an understanding of the space, and I say, “Hey, I have this handful of titles.” I don’t give them 50 titles to choose from, but maybe I’ll give them three or four, what I call short titles, which is like The SaaS Playbook, right? That’s the short title, and then I give them three or four subtitles. And with The SaaS Playbook, it’s build a multi-million dollar startup without venture capital. And so I have three or four of my tops that came out of like 50 plus, but it’s usually pretty obvious which of these I think are going to be great, and I get feedback there, and then I iterate, and I might even brainstorm again, then I go a little broader.
I might go into the TinySeed Slack, or I might go to a MicroConf Slack, and get some input, and it’s always noisy, right? It’s always fuzzy. You’re guessing like, “Oh, all right, more people like this.” That doesn’t necessarily mean it’s the best one, I’m going to use it, but there’s a signal there, right? And then maybe after that, I might wind up on Twitter, and at that point, I’m probably trying to more confirm my own favorite pick or have two that are so similar that it maybe doesn’t matter, but I certainly don’t want to go to Twitter with 10 different options because you’re going to get 10% of the people liking each of the 10 options, and then how much good does that actually do you?
So I do think that getting a lot of voices and input at a certain point can help, especially the further along it is, right? Let’s say you’re building a feature, you’re trying to figure out how it is complicated, how to build it, you get one or two people together, and you crank on this thing, and you put it out, and it’s art and it’s science, and you’ve got this amazing screenshot or this design that you’re using, then you bring it to some people who maybe kind of know how your product works, so they’re kind of in the space, right? And then you bring it to a few inner circle customers, and then you get broader and broader and broader, but you refine it as you go. So I’m not saying you can’t get other voices involved, but if you start with 10 people trying to design that same screen or that same idea, it is so difficult, so time-consuming to get everyone on the same page in a way that you can then be productive and actually move forward in a way that’s not just compromise. “Well, we all disagree, so let’s just do the thing in the middle,” and the mushy middle is like eating a mayonnaise sandwich.
It’s very bland. A note to the listeners, I put mayonnaise on my turkey sandwiches. I also put mustard, and cheese, and often lettuce, and guacamole. I don’t dislike mayonnaise. Last time I said a mayonnaise sandwich, several people thought that I was ragging on mayonnaise, when in fact, what I’m ragging on is a sandwich that is made up of two pieces of white bread and mayonnaise in it.
That is the analogy I’m going for when I say a mayonnaise sandwich. If it had turkey in it, I’d call it a turkey sandwich, but in this case, I’m saying, yeah, two pieces of bread with mayonnaise is just very bland. That’s the analogy. That’s all we have time for today. Hope you enjoyed this episode.
Thank you for coming back this and every week, listening to Startups For the Rest of Us. If you haven’t given a five-star rating in iTunes, Apple Podcasts, Google Podcasts, Spotify, wherever your greater podcasts are served, really appreciate it. If you have, could you please go to Amazon or Audible and rate The SaaS Playbook as a five-star? You don’t even have to leave a review, I believe, and it helps me continue to progress on my mission to multiply the world’s population of independent self-sustaining startups. I’ve been doing that since I’ve started blogging in 2005, so almost 20 years.
Yeah, next year it’ll be 20 years, and each year, as I’ve pushed that boulder up the hill, I’ve been able to increase momentum and grow the audience and grow the number of people that are impacted by this message. At this point, I do it because it changes people’s lives. I want everyone who wants to be an entrepreneur to have the same freedom, purpose, and healthy relationships that you and I do, so I always appreciate any effort you can put forth to help me continue on that mission. This is Rob Walling signing off from episode 706.
Is your outsourced development team dropping the ball? Maybe you’ve worked with a team that just couldn’t grasp your vision and needed constant oversight because they weren’t thinking strategically, or maybe you ended up wasting hours, micromanaging, often needing to jump on late-night calls across massive time zone differences to get alignment, and in the end, they delivered a sluggish app with a frustrating UI that didn’t come close to the solution you had envisioned. If any of that sounds familiar, you need to reach out to our sponsor, DevSquad. DevSquad provides an entire development team packed with top talent from Latin America. Your elite squad will include between two to six full-stack developers, a technical product manager, plus specialists in product strategy, UI/UX design, DevOps, and QA, all working together to make your SaaS product a success. You can ramp up an entire product team fast in your time zone, and it rates 75% cheaper than a comparable U.S.-based team.
And with DevSquad, you pay month-to-month with no long-term contracts. Get the committed, responsive development team that your business deserves. Visit devsquad.com/startups, and get 10% off for the first three months of your engagement. That’s devsquad.com/startups. Welcome back to another episode of Startups For the Rest of Us.
I’m Rob Walling, and in this week’s episode, I do a Rob solo adventure, where I’m going to talk through a few topics, always bringing it back to being a bootstrapped or mostly bootstrapped startup founder. Before we dive into that, I want to let you know it’s your last chance to get tickets to MicroConf Atlanta. The event is April 21st through the 23rd. Speakers include Rand Fishkin from SparkToro, Asia Orangio from DemandMaven, Stephen Steers, myself, and Dr. Sherry Walling. It’s going to be hosted and emceed by me and Lianna Patch of Punchline Copy.
I’m also going to be doing a fireside chat with Ben Chestnut, the co-founder of Mailchimp. He does not do very many public appearances, and so I’m very excited to host him at MicroConf this year. MicroConf.com/us, if you’re interested in grabbing tickets. Again, tickets are going to sell out soon, so if you’re thinking about joining me and about 225 of your closest bootstrap founder friends, head to MicroConf.com/us. My first topic of today is how the startup world and the bootstrapper, MicroConf community, and I’m kind of breaking those.
Those are overlapping Venn diagrams, but they really are two different things. I think of the startup world as probably being more of the Silicon Valley high growth stuff, and then bootstrapping, and MicroConf being maybe a subset of that with some overlap. But the idea is that the startup world struggles to not only learn from prior art, but to credit prior art. It’s two related things, but they really are different. So if you’re an academic and you go, let’s say get your PhD in psychology, or in computer science, and you’re writing papers or writing a dissertation or a thesis, it is 100% plagiarism if you claim someone else’s idea as your own, without giving credit.
It doesn’t mean you can’t talk about ideas that you’ve heard elsewhere, but you give them credit. So if you go on Twitter and you say, “I had this great idea, it’s to do things that don’t scale,” or even if you don’t say, “I had this great idea,” but you go on and say, “Here’s a secret to success, little known, do things that don’t scale in the early days so that those will eventually lead you to be able to scale up,” but you never mention that Paul Graham wrote an essay called Do Things that Don’t Scale, and he wrote it back in, I don’t know, 2006 or 2007. And it is a very commonly known idea and thought that he came up with, and you don’t credit that, you are plagiarizing someone else’s idea, because the people reading that think you came up with it by default. If you say something and don’t credit, they believe you came up with it. Not a week goes by …
Literally, not a week. Sometimes it’s more than that, that I don’t see someone on Twitter, or YouTube, Reddit, Hacker News, claiming a concept, or even not claiming it, but not crediting a concept that’s pretty well-defined, that either I invented or Paul Graham came up with, or Jason Cohen, or Hiten Shah, that has pretty obvious and clear prior art, and it’s not like someone saying, “Oh, work hard for success.” Right? That’s a pretty generic way of talking about it, but if someone says, “You have to work hard, and you need skills,” and then there’s a little bit of luck involved. Well, obviously, that is exactly the framework that I talk about for achieving success, is hard work, luck, and skill, and so you can rephrase those two things or whatever, but if you pick those exact three things, the odds of that being a coincidence that we both came up with it, that you came up with it on your own without the influence is pretty unlikely.
And this is really common, like in the creator maker influencer space, the info product, info marketing space. People are just kind of plagiarizing, and I find it frustrating, I think, as someone who does a lot of deep thinking about this stuff and comes up with a lot of frameworks, and seeing things, whether it’s mine or someone else’s, it just never feels right that folks on the internet, in the startup space, I don’t know why they feel like they need to do that. I don’t believe that it’s an accident. I think it’s pretty intentional, but the thing is, is it’s not just crediting prior art and just saying, “Oh, yeah, that person came up with this idea, but here, I’m going to build on top of it,” or, “Here is how I implemented it,” or, “Here is how it impacted me.” It’s not negative to you to just say that, to just give the credit, but the other thing is not just crediting prior art, it’s learning from prior art, and I see so many folks trying to reinvent the wheel and justify it by saying, “Well, I’m going back to first principles,” or, “That’s rule of thumb, common wisdom, therefore, I’m going to go against that.”
Like the teenager in the family, every what, generation rebels against the prior generation, right? There’s an example of Ryan Breslow, Breslow. I don’t know how you pronounce his name, but he was the founder and CEO of Bolt, and he was the guy … I don’t know, he’s a 20-something who just thought he knew everything, basically, and he went on Twitter, and what, flame Stripe and Y Combinator as being some type of mafia, or a cabal or whatever. Anytime I hear this type of phrasing, I’m like, “Oh, boy, someone really wants some clicks rather than fighting the good fight.”
But anyways, Bolt was giving loans to their employees so that employees could buy stock options, and then Bolt lost 97% of its value, and so anyone who took out loans to buy their stock options now owes the company money, sometimes thousands, sometimes tens of thousands of dollars. At the same time, this founder, Ryan Breslow, sold millions of dollars of his shares in secondary, so he seems to walk away okay, but it’s kind of a disaster for employees who are now on the hook for these funds. The thing is, this was already attempted. If you listen to the All-In Podcast, you’ll hear David Sacks talk about this, where this had already been attempted in the ’90s, and it was proven to be a disaster, but he was touting it as this great new invention, this employee-friendly thing. A, did no one tell him this is a catastrophic idea, they tried this 30 years ago, and this same thing happened, or B, did people tell him, and he waved that off, right?
He said, “Well, no, I’m going back to first principles. They did it differently. They did it wrong in the past.” I’m not saying we should be tied to every mistake that everyone makes in the past and never try things that didn’t work, but you have to learn from that art and do it differently. You have to learn from the failures and not just try the same thing again and expect a different outcome.
If we are not as a community learning from prior art and reading books like Paul Graham’s Hackers & Painters, or the old blog post from Joel Spolsky, old posts from Peldi Guilizzoni, Patrick McKenzie, my books, my old blog posts and podcast episodes, if you just come on the scene and you don’t read any of that, then you can’t stand on the shoulders of giants. There’s a reason that in academics, you study and you go to school to learn what people before you have learned, so that you don’t have to reinvent everything from scratch every two weeks. If you come on the scene and you don’t read any of that, then prior to yesterday’s Twitter feed or Hacker News, do we just start over from zero every week or two, and we don’t drag anything along with us? Now, you could say, “Well, dragging things along is baggage,” and I want to, once again, go back to first principles, but at least know, “What’s been tried?” At least know, “What’s been talked about?”
And you can make a case to disagree with it, but even that, just knowing what the common wisdom is, and then zigging when everyone else is zagging, at least make that a deliberate decision, not just a decision of, “I’m going to do this because I didn’t educate myself that I need to actually market and sell this,” even though, every week on this podcast I’m saying that. You go and start a B2C business, it has high churn, and you’re surprised everyone is price sensitive, even though every other week, I talk about that. You go and start a B2C two-sided marketplace, try to bootstrap it with no audience, even though I’ve said it so much, it’s become part of the Startups For the Rest of Us drinking game. And look, I’m not saying just me. I’m not saying, “Oh, I should say things, and everyone on the internet should hear it.”
It’s not the case. There are so many smart people with experience that are talking about these things, and yet, there are so many people who are making the same mistakes over and over because they’re not doing any of the learning or the research on their own in order to stand on the shoulders of giants. As you start your journey, it’s hard enough already. Learn from the mistakes of others. You do not have to make every mistake yourself, and hopefully, if you’re a creator, if you’re recording videos, if you’re putting out podcasts, if you’re tweeting, that next time you mention someone else’s idea or framework, that you give them credit.
My next topic is a concept I mentioned on a podcast four or five years ago, and then poof, it just disappeared. I had forgotten it. I think it was during an interview, and the idea of it … I want to bring it back up today because I’ve realized that there’s a lot of value in this framework. It’s about early stage product validation, okay?
So if you’re a later stage founder, you may want to skip this section, but the framework I’m calling the 2-20-200 validation framework. So you know how I have the 1-9-90 rule, right? That’s where I think about 1% of tech companies should consider raising venture, about 9% should consider raising some type of funding, whether it’s angel, TinySeed, indie funding, whatever, and then about 90% should just bootstrap. It’s directionally correct. It’s directionally accurate.
As Braden Dennis said on the show a couple of weeks ago, “This 2-20-200 validation framework is similar, directionally accurate.” The idea here is that there are three steps, three stages that can happen in order as you try to validate or invalidate a startup idea, and the numbers stand for the approximate number of hours that I think you’re going to spend doing them. So two hours, 20 hours, 200 hours. And the idea here is the first stage of two hours is something you can do relatively quickly. So if you have five different ideas that you’re thinking about evaluating, well then, you spend two hours each to do this very first step.
And that first step really involves just implementing the 5 P.M. Idea Validation Framework that I’ve talked about on this podcast. You can Google that if you aren’t aware of it. I’ve recorded a YouTube video about it, and I am including it in my next book, which is about the earliest stages of building and launching a SaaS, and that book is already written, actually. I’m just going back and revising a few elements of it, but 5 P.M. Idea Validation Framework is something that, where you go through several steps and you can do it in literally a couple of hours. So if you have five ideas and you want to spend 10 hours over the course of a weekend, or a week, to just get a little better picture of which of these ideas might be the winner …
And when I say winner, I mean better than the others. You go through the two-hour stage of the 2-20-200 framework. 20 hours is where you take it to the next step, and this is where you either do landing page validation, or you speak one-on-one with potential customers, or you do both. I tend to do both when I’m thinking about building a product. The idea, of course, is that if you’re going to have a marketing funnel and a low-touch product, then you put up that landing page and you try to drive traffic, and the way that you’re going to ultimately market the product, and you see what kind of opt-in you get, and you see what kind of traffic you get, and you see how many emails you collect, versus if you’re going to do high-touch sales, and obviously you want to have more conversations, I think doing both is always better.
The idea behind 20 hours is, “How long does it take you to put up a landing page and/or reach out to your warm network for these conversations or reach out to your cold network for these conversations?” Set up ads. SEO takes a while, but cold outreach, whatever you’re going to do to start gathering qualitative and quantitative data around this. You’re not just sitting in a research modem like you are with a SEO keyword tool maybe within the two-hour section of this, but you’re getting out and spending more time. This is where, if you have five ideas, you probably don’t want to do all five ideas at the 20-hour mark.
It’s just a lot of time to invest, and that’s where the first stage, where it’s only two hours into each idea, is helpful to maybe narrow you down to one or two, and then you move on to this second stage, where you spend 20-ish hours. And then the third stage is the 200-hour stage, and that’s where you think about building an MVP. And, of course, an MVP can be a no-code MVP. It can be a human automation MVP, like I talk about in Start Small, Stay Small, or it can be a full-blown coded MVP, and whether we call it an MVP or a V1 or something to get into the hands of people to see if they like it, what parts of it resonate and what don’t? And honestly, I’m putting together a video course right now for MicroConf that’s going to be out in several months, and I dive more deeply into this because there’s a lot to say about it.
But the idea behind the 2-20-200 framework is to level-set in your mind that it’s not just this big amorphous cloud of “Validate.” It is there are specific stages that you can go through. I’m not saying this is the only way to do it. You can validate any way you want, but this is just a repeatable way to think about, “How am I going to go about being a little more confident?” This is the thing, right now, you’re probably 0% confident that this is a great idea.
After two hours, are you 10 or 20%? After 20 hours, are you 30, 40%? After 200 hours, do you get to 50, 60, 70%? If it works, maybe. That’s kind of the goal, is to get a little more confidence before you invest a ton of time, tens of hours, if not, hundreds.
You get a little more confidence, that the thing might work and that you might actually be building something people want, because that really is the hard part, right, building something people want and are willing to pay for. Credit to Paul Graham for saying, “Building something people want.” I added the and are willing to pay for, but doing that is really hard. I’m not saying everything else is simple, but there certainly is more of a playbook once you’ve done that, and my hope is that the 2-20-200 validation framework can be a sort of … It’s not a playbook per se, but sort of a compass or a guiding light as you think about validating your ideas.
All right, my next topic of today is about design by committee and why I have always believed that it is by far the least efficient way to do things and that you just get bland, crappy output. Your art or your product or whatever it is usually sucks if a bunch of people have input into it. One example I can think of is every school project I ever did, where it was a group project, the more people involved, just the worse the quality was, right? Unless it was like a hand-picked group of people who are all on the same page and had the same vision, it was like the vision just tore everybody in different directions. And even at larger companies that I’ve worked at, after Drip was acquired, or with TinySeed, which isn’t a huge company, I tend to keep input to a minimum of, that everybody around here is really smart and competent because that’s what we like to hire, that’s who I want to work with, but I bring in one, maybe two people even to make really big decisions because the moment that I have six, seven, eight, nine people weighing in on a decision, A, it grinds it to a halt, and B, I find the output is subpar.
And that two exceptional people who are on the same page with a similar shared vision can build incredible things, but the moment you get to three, four, five, it can often derail that vision. One example of this is a Metallica album called St. Anger. And if you’ve ever watched Some Kind of Monster … That is a documentary. It’s like two and a half hours. It’s actually pretty long, but it’s of Metallica almost breaking up.
Is it 20 years ago now? Yeah, it’s probably about 20 years ago, and they bring in basically a therapist, like a … It’s like a marriage counselor. No, he’s actually a sports counselor, but if I recall, they’re paying him at 40 grand a month to be on call, and he’s trying to keep the band together. One of the things that a couple of the bandmates had an issue with was that two of the members of Metallica, Lars Ulrich and James Hetfield, had pretty much written all the songs up until then, and the band’s been together since what, the ’80s, since the early ’80s?
So I mean, you’re talking 20 plus years, and these two guys had written almost all the songs and almost all the lyrics. Other people would come in with a riff or whatever, but then they would take it and they’d run with it, and there were some complaints, I think it was mostly from Kirk Hammett who’s one of the guitarists, that they wanted input. And so in this documentary, Some Kind of Monster, it’s pretty fascinating documentary, actually. If you’re at all into their music, it’s cool, but even if not, just seeing the dynamics and the craziness of trying to keep a band together, it’s a fun watch. I’ve seen it a few times, but one thing they do is they are writing the songs together as a group, and you can …
It’s just painful. It is just painful to watch them come up with a riff and to hear the song be like, “This is actually a cool song,” and then they’re like, “Cool, so throw out lyrics,” and people are just throwing out random sentences that have nothing to do with each other, and they string them together as the lyrics to these songs. And so if you listen to the lyrics of that album, they’re terrible. They’re terrible, compared to the cohesive … Look, I’m not saying Metallica are the best lyricists at all before that, but at least there’s a story there.
At least there’s poetry. At least there’s a cohesiveness to each song prior to that, but on this album, in particular, which … Look, a lot of people hate on this album, especially folks who really are into Metallica. I actually really enjoy the snare sound. It sounds like he’s banging on a beer keg, but kind of has this weird …
It’s a different sound, and it has kind of almost a punk-ish vibe, even though they’re playing metal, but I don’t dislike the album specifically about two or three songs that are good, and the rest I would pass on, but even then, the lyrics are awful, and I don’t typically pay attention to lyrics that much in Metallica songs, but it is noticeably cringe. And I think 99, if not 100% of the reason, that is the case, is because they designed this by committee. They didn’t collaborate. They didn’t get two people or three people together and all with the same vision. It was, “You said you wanted to write, and the therapist said that we have to let you write, so let’s sit here and just write stuff out on a sheet of paper. Just call things out.”
It almost feels half-hearted, and it certainly feels like they did not put out the best end product they could have because of this one or two people doing it could have done a much better job than the group doing it together. And so why do I bring this up, and why does it relate to startups? Well, back to my point earlier of, whether you’re on a big team or a small team, I feel like some folks are uncertain around what they’re doing and they feel like getting more opinions will add more certainty to that. And what I’ve found in rare exceptions is that the more people get involved, the more noise there is, and more chaos is created. Now, I will say that I’ve found it helpful to kind of semi-crowdsource some naming stuff recently, where I am trying to …
I mean, I’ve had to name three books in the past. I guess it’s like maybe year, is that right? Yeah, probably last year, I’ve had to name three books and I’ll have to name a course, and I always want those names to be really good and catchy. And so I do brainstorming and I talk to some people and I go to ChatGPT, and I come up with a list, and then I narrow it down, or I come back three days later when it’s cold, and I start narrowing and narrowing, and then I start asking opinions, but I don’t go and ask 20 people’s opinion. I go to like …
I’ll say my inner circle, and it’s like three or four people that I trust, that I know have taste and I know have an understanding of the space, and I say, “Hey, I have this handful of titles.” I don’t give them 50 titles to choose from, but maybe I’ll give them three or four, what I call short titles, which is like The SaaS Playbook, right? That’s the short title, and then I give them three or four subtitles. And with The SaaS Playbook, it’s build a multi-million dollar startup without venture capital. And so I have three or four of my tops that came out of like 50 plus, but it’s usually pretty obvious which of these I think are going to be great, and I get feedback there, and then I iterate, and I might even brainstorm again, then I go a little broader.
I might go into the TinySeed Slack, or I might go to a MicroConf Slack, and get some input, and it’s always noisy, right? It’s always fuzzy. You’re guessing like, “Oh, all right, more people like this.” That doesn’t necessarily mean it’s the best one, I’m going to use it, but there’s a signal there, right? And then maybe after that, I might wind up on Twitter, and at that point, I’m probably trying to more confirm my own favorite pick or have two that are so similar that it maybe doesn’t matter, but I certainly don’t want to go to Twitter with 10 different options because you’re going to get 10% of the people liking each of the 10 options, and then how much good does that actually do you?
So I do think that getting a lot of voices and input at a certain point can help, especially the further along it is, right? Let’s say you’re building a feature, you’re trying to figure out how it is complicated, how to build it, you get one or two people together, and you crank on this thing, and you put it out, and it’s art and it’s science, and you’ve got this amazing screenshot or this design that you’re using, then you bring it to some people who maybe kind of know how your product works, so they’re kind of in the space, right? And then you bring it to a few inner circle customers, and then you get broader and broader and broader, but you refine it as you go. So I’m not saying you can’t get other voices involved, but if you start with 10 people trying to design that same screen or that same idea, it is so difficult, so time-consuming to get everyone on the same page in a way that you can then be productive and actually move forward in a way that’s not just compromise. “Well, we all disagree, so let’s just do the thing in the middle,” and the mushy middle is like eating a mayonnaise sandwich.
It’s very bland. A note to the listeners, I put mayonnaise on my turkey sandwiches. I also put mustard, and cheese, and often lettuce, and guacamole. I don’t dislike mayonnaise. Last time I said a mayonnaise sandwich, several people thought that I was ragging on mayonnaise, when in fact, what I’m ragging on is a sandwich that is made up of two pieces of white bread and mayonnaise in it.
That is the analogy I’m going for when I say a mayonnaise sandwich. If it had turkey in it, I’d call it a turkey sandwich, but in this case, I’m saying, yeah, two pieces of bread with mayonnaise is just very bland. That’s the analogy. That’s all we have time for today. Hope you enjoyed this episode.
Thank you for coming back this and every week, listening to Startups For the Rest of Us. If you haven’t given a five-star rating in iTunes, Apple Podcasts, Google Podcasts, Spotify, wherever your greater podcasts are served, really appreciate it. If you have, could you please go to Amazon or Audible and rate The SaaS Playbook as a five-star? You don’t even have to leave a review, I believe, and it helps me continue to progress on my mission to multiply the world’s population of independent self-sustaining startups. I’ve been doing that since I’ve started blogging in 2005, so almost 20 years.
Yeah, next year it’ll be 20 years, and each year, as I’ve pushed that boulder up the hill, I’ve been able to increase momentum and grow the audience and grow the number of people that are impacted by this message. At this point, I do it because it changes people’s lives. I want everyone who wants to be an entrepreneur to have the same freedom, purpose, and healthy relationships that you and I do, so I always appreciate any effort you can put forth to help me continue on that mission. This is Rob Walling signing off from episode 706.
Episode 615 | Bootstrappable Businesses, Cargo Culting, and How Pricing Affects Growth (A Rob Solo Adventure)
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In episode 615, join Rob Walling for a solo adventure where he covers what makes a business bootstrappable (and things to avoid), cargo culting, and how large of a business you can build at different customer lifetime value levels.
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Topics we cover:
[1:51] What makes a business bootstrappable?
[14:15] Cargo culting
[20:05] How large of a business can you build at a specific annual contract value or lifetime value?
Links from the Show:
- Bootstrapper’s Guide to Outside Funding
- Episode 613 I Hacking Your Founder Psychology
- Episode 602 I Explaining SaaS Metrics to a Child
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.
Subscribe & Review: iTunes | Spotify | Stitcher
Rob Walling: According to our most recent State of Independent SaaS Survey and Report, nearly 30% of bootstrap founders said they were actively considering taking some outside funding this year. So at MicroConf, we put together a guide about the top five options that bootstrappers would consider. It’s called The Bootstrapper’s Guide to Outside Funding. We cover friends and family rounds, angel investors, recurring revenue financing, crowdfunding, and venture capital. If you want to check it out, the guide is completely free, head over to microconf.com/funding-guide.
Welcome back. It’s Startups For the Rest of Us. I’m Rob Walling. Thank you so much for joining me. Today, I’ll be talking through a couple topics inspired by listener questions, and then maybe one or two solo adventure topics that I’m going to bring in. So definitely going to hit on what makes a business bootstrappable versus not.
I want to talk about cargo culting in startups. I received a question about how large of a business can you build at specific levels of lifetime value or ACV. Depending on how long those take, I might add a fourth topic in as well.
Before I dive into that, it would be amazing, even if you’re subscribed to another tool, if you would go to Spotify right now type in Startups For the Rest of Us, give us a subscribe. If you’ve gotten value from this podcast and want to give a little bit back, I’d really appreciate it.
This episode is actually one of ‘the show must go on’ type episodes. I had a guest lined up and they had to postpone for a couple of weeks, and I hop on a plane to Scotland tomorrow. Not tomorrow when you’re hearing this but tomorrow when I recorded it. Since we ship every Tuesday morning for 600 and 15 episodes in 12 years, I want to get something out there. So I’m going to kick off.
The first topic is what makes a business bootstrappable versus not. This has come up a few times. There was a question, maybe six months ago about this. I listened back to that episode. I listened to the answer I gave and I felt like it was fine but it was not great. So I sat and actually gave it more thought. I wanted to revisit this topic. What I realized is that the default is bootstrapping, that I start by saying, every business is bootstrappable, except in these conditions.
These are seven or eight things where I think makes it a lot harder, or near impossible. The reason I start with the default is bootstrappable is traditionally if you just think about bootstrapping and venture funding, so you don’t take angel investments, or a TinySeed indie funding type thing. You just look at bootstrapping versus venture, even just in startups.
This is not in brick and mortar, not in dry cleaner car wash. You just think about software and tech, including hardware, biotech, just startups that are going to be high growth and become multimillion dollar businesses. I think somewhere in the neighborhood of 1% of those companies started each year or each decade or whatever you want to put it, are a fit for venture and should raise venture.
It’s a small number. Now maybe it’s 1.5% or maybe, I think the number is like 0.7% of companies that try to get venture funded, get it. Yeah, maybe the number is one or two, but it’s a small number. The rest have traditionally bootstrapped because that was what you did. It is the only option.
With indie funding coming out, where you have angel investors who are willing to put in money for a company that may throw off profits in the long term, and you have TinySeed willing to invest in smaller outcomes, if you sell for $10–$50 million, that is usually an abject failure for venture capitalists, but for TinySeed or for some angel investors, if you can invest at the right amount, then by the time you get to that $10, $20, $30 million, the return is ample enough that it that it works for you.
With the advent of that funding, I loosely think of it as this rule of 1-9-90, where around 1% should raise venture-backable businesses, around 9% should think about indie funding, and around 90% should probably still bootstrap. Again, maybe the indie funding number is 20%, but it’s not 50%. There are a lot more businesses that can and should be bootstrapped than there are should take any type of funding. There are a number of reasons for that.
But with that in mind, coming back to the question of what makes a business bootstrappable versus not, I’m going to say the default is that you should bootstrap unless, and then I’m going to walk through several points. The first one I thought of is revenue is pushed down the line, meaning think of Facebook, and how long they had to exist before they could monetize it. Google is similar, where they had to have servers and developers and build up these networks, and Facebook had to move from school to school.
A lot of expense there where they needed money for that because the ad model is way down the line. Usually, if a startup uses the ad revenue model, the revenue is pushed way down the line because they don’t run ads from the start. You need to get traction. As you start getting traction, you can raise money and as you raise money, you don’t need the ad revenue. Frankly, building ad tech is difficult. Also, if you have it too early, you don’t gain the traction and the momentum.
You need that critical mass. So if you imagine Google or Facebook having ads from day one, it could have changed the outcome. If your revenue is pushed way down the line, and this includes even Dropbox, where they’re free. They are freemium and you can get a lot of value out of Dropbox.
I don’t remember the exact number of megabytes you can get before you have to pay them. But I remember using it for quite a long time. It wasn’t until I started doing video and more audio that I needed to start paying for Dropbox. I think back in the day, Dropbox used to say, of all of our customers that sign up in a given year, it’s like 2%–3% convert to paid within a year.
Think about all that they have, the support and all costs of that hardware, of the storage, of customer support, and all that money is pushed on the line. But they built a pretty good business on it. Revenue is pushed down the line. If it is postponed and you can’t just monetize early that were SaaS, we charge $50 a month. First day, you’re a customer, right? That is the opposite.
The second thing that makes a business really hard to bootstrap is if the market is winner-takes-all, meaning something like Uber, where really Uber and Lyft are wanting to. And when I say winner-takes-all, you know what that phrase means. It doesn’t actually mean all, but it does mean most.
Uber is big, and it’s a lot bigger than Lyft. It’s because it needed to move very quickly. Because once everyone has that Uber app downloaded, both the drivers—two-sided marketplace—and the folks that need rides are unlikely to download another app unless Uber really makes big mistakes, which they did.
If you watch the growth of Lyft when Travis Kalanick was making his mistakes, getting ousted as the CEO, and Uber was talked about having such a toxic corporate work culture, if they hadn’t done that—it was a huge stumble—I think they would still be many, many, many times Lyft. Lyft played a big catch up because I know that a lot of people actually deleted Uber at that time.
With that said, if it’s a winner-takes-all market, you have to move really fast. Amazon was in another space like that where it’s like, yes, there are other online retailers. But who else? It’s like Walmart, aren’t they number two in e-commerce? But Walmart had 60 years and thousands and thousands of stores already. So that’s how they got in.
That’s not a bootstrap. They didn’t bootstrap that. They put tons of money behind it. Ecommerce on the internet. Again, winner takes all does not mean 100%, but Amazon has a huge chunk of that, and Jeff Bezos knew that and therefore did not try to bootstrap Amazon. He raised funding from the early days.
Another thing that makes a business hard to bootstrap is—similar to Uber—a two-sided marketplace. If you have reach into one or both of those sides—you already have an audience of drivers or of folks who want a ride or you already have an audience of people applying for jobs and employers who might hire folks—it’s a different story. But if you literally have zero audience in a space, and you’re trying to do a two-sided marketplace—no reach, no customer list—bootstrapping this is very, very difficult.
Even if it’s not winner-takes-all. Not all two-sided marketplaces are winner-takes-all. Elance, Upwork, guru.com, there are others. Now I would say that Upwork has certainly owned most of the market. I don’t even know if it’s the majority. But there are other two-sided marketplaces in that space. Bootstrapping them would be very difficult. I don’t know which of those three bootstrapped if any.
But if I were starting a two-sided marketplace, I would either want reach into one or two of the sides, or I would want buckets of money to be able to reach, because it’s like launching two SaaS products at once. Because you have to have two go-to-market strategies. I mean, it’s just such a headache. You’ve heard me say this before, please stop trying to bootstrap two-sided marketplaces, if you don’t have an advantage.
Another thing that makes it hard to bootstrap—it’s possible, but it’s hard—hardware. It’s just really expensive. I heard from a friend who ran a SaaS company, who then started a hardware company. He said, this is ridiculously hard, ridiculously expensive, and takes forever. So is it possible? Sure it is. Is it easy? No, it’s not. I would certainly think about raising funding if I was going to do it, if it’s a hardware biotech with big R&D expenses.
Another thing that makes bootstrapping hard is similar to that pushing revenue down the line, but it’s taking a percentage, a cut of processed revenue. A good example of this is Stripe. Stripe takes 2.9% plus a transaction fee. That would be very, very, very difficult to bootstrap that business. Because all the infrastructure you have to build upfront, in order to support that, then people just trickle in and you’re taking 3% of $1,000 the first few months, so you take in $30 off of that.
How do you pay for the servers? Even if you’re coding yourself, how do you keep yourself alive and everything, in terms of having money to live? That is why Stripe went through YC and then they obviously raised a kajillion dollars. Is it possible to have, let’s say, an ecommerce startup where it’s like an abandoned cart software or even start a shopping cart of your own or whatever to compete with Shopify, have a niche and take a cut of revenue? Sure it is.
I did notice when Shopify launched back in 2006 or 2007, they were purely a percentage of GMV (gross merchant value), a percentage of the revenue. They quickly switched that within six months to where they have subscriptions. Same thing with Gumroad. Gumroad originally just took a cut. I think it was like 8% total. So it was like 3%, whatever it was, it doesn’t really matter what it was. But now they’ve really been pushing their subscription plans since then.
Another thing that makes a business not bootstrappable or harder to bootstrap is having massive per user costs. Even if it’s not massive, not having monetization. So I guess this ties into the earlier one of really pushing revenue down the line, but it is having higher per user.
I come back to Dropbox. When they launched—which was over a decade ago—they couldn’t use AWS because it was too expensive. They rolled their own hardware in data centers. There’s an upfront cost to buy those and to store everything.
Then the last two are needing a network effect, which I guess really is like, mostly a two-sided marketplace. But you could have three sides and everything. So that relates to the two-sided marketplace.
Then the last one I was thinking of, which I don’t actually think should be included in this list but I wrote it down with a question mark. I was saying, bootstrappable businesses, I was thinking that it’s easier to bootstrap a business when the audience is online, the customer base is online. Then I looked at how many TinySeed companies are going after home improvement contractors, CAD engineers, lawyers, investment firms that invest in derivatives, there’s a whole list.
Yes, these people, it’s not that these customers are not sending email or using web browsers. But they are not hanging out on Twitter, in private Slack groups, on Facebook groups, on Stack Exchange, Hacker News, and Reddit in the way that developers, designers, founders, and some other groups are.
Everyone is “buying” anything that’s online. But what I mean is, are they really hanging out and easy to reach? Home improvement contractors, construction firms, architects, interior designers. There are some hunts where they hang out, but it’s not going to be at the level of technical folks.
Originally, I was thinking, I’ve always targeted folks who are online because I’m on online marketing. I’m not going to do a lot of cold calling and in-person events and stuff. But I actually think it is a great opportunity there.
I know there’s a great opportunity because I see the companies that we’ve funded and the companies in the MicroConf space that are actually going for audiences that are mostly not online. Is it more expensive to reach them? Yes. That’s why your price point is higher. Your ACV affords you the luxury of doing that. There’s often less competition. It’s more of that customer paying than it is the competitor paying.
So that was my list. It’s probably not exhaustive, but I wanted to put it down here because I felt like my last answer was shorter. I didn’t think I communicated it in the way that I wanted. So hopefully those seven points helped give you a frame of reference when you’re thinking about your next business.
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Alright, my next topic is cargo culting. If you haven’t heard that term, I’m going to read a little bit from the Wikipedia page that essentially defines it. A cargo cult is a belief system of indigenous people in Melanesia.
Basically during the Second World War, allied military forces used to airdrop supplies in large numbers, and technology and all that stuff. Then the soldiers who were on the ground in Melanesia would trade with the islanders.
After the war the soldiers leave, and this thing called a cargo cult arose. Cargo is what was being dropped and the indigenous people attempted to imitate the behaviors of the soldiers, thinking this would cause the soldiers and their cargo to return.
This included things like dressing like a soldier, performing parade ground drills with wooden or salvaged rifles. They misattributed what was bringing the cargo, which was completely unrelated to them being soldiers, and it was completely related to someone flying a plane over and dropping all the supplies. So that’s the definition of it.
I see this in startups where some startups are not successful because they did things. They’re successful in spite of the things that they did, in spite of the decisions they made. I brought this example before where it’s like Apple or Basecamp, or someone says, well, they just built great products, and they didn’t do marketing.
I do believe Jason Fried and David Heinemeier Hansson came out and said, yeah, we don’t do marketing. We don’t track metrics. We built a great product, that stuff. To be honest, Dave eased up on that (I think) on that narrative. When I interviewed Jason Fried a couple years ago at MicroConf, that’s not how it came across. Actually, he said, we did some things right. We also got lucky. And I appreciated that honesty from him.
But there are other examples of this of, you take 100 companies that do tracks or analytics. They are doing blocking and tackling marketing, whether that’s SEO content, pay per click, cold outreach, partnerships, integrations, whatever, all the things that we talked about on the show. The 100 companies that are doing those, from what I see, from my experience, the companies who succeed are doing those things.
If you took 100 companies who just said, well, I’m just going to deliver a great product, a couple of them would succeed. They will get lucky. I talk about hard work, luck, and skill. In this case, I’m basically saying blocking and tackling is having the skill to do it then putting in the hard work.
Could you feasibly have really little hard work and skill and just get really lucky? Absolutely. Out of 100–500, even bootstrapped startups, you’re going to have a few that do. That survivor bias pointing to them, and then saying, well, look, they made it work. They built this amazing business. All they did was build a great product. I say, no, that’s not all they did. They also got really lucky,
They were either super early to a space. They accidentally stumbled into just a huge vacuum of demand, which is unusual these days in software. Most demand has been satiated by some type of product. So there is some competition.
Let’s say a product was beloved by everyone, and then got hacked and was shut down or it got sold and shut down. Suddenly, there was a big vacuum there. You went in and realized, oh, I can build this product. You need to have some skill, and then put in the hard work to build a good or great product.
But if that demand was already existing, and you jumped right in, you can’t say, we didn’t need to do marketing so you don’t either. Because unless you—you being the other person listening to them—have the same situation where you’ve stumbled into this amazing demand, or super early to a space where it’s like, oh, my gosh, this tool or this ecosystem is taking off WordPress or Stripe or No-Code or you know something where you just hit it at just the right time.
Again, maybe it’s skill that you did that, or maybe it’s luck. But unless the other person also has that in place, you’ve succeeded, probably in spite of some of the things you didn’t do rather than because you didn’t market.
I’ve talked about being early and getting lucky for other reasons. I’ve heard some stories where the founder is almost acting coy, like they succeeded without working hard. Like yeah, we just made it. Either we’re that good or I don’t know, they don’t want to admit the hustle.
Again, except for a couple founders I know who have gotten exceptionally lucky, I can’t think of any founders I know who have not worked their ass off to build a great company. It is a lot of hard work in getting some things right and some things wrong. But it’s moving fast, it’s working on the right things, it’s being willing to make mistakes, and it’s being willing to put in the hard work.
By hard work, I don’t mean 80-hour weeks, I mean really focused time of executing on something and not being all over the place, not skipping from one thing to the next, not doing things half ass, like seeing them through and showing up every day. Whether it’s a podcast, or a SaaS app, or a book, showing up every day and shipping and getting something out into the world.
I think that’s all I have to say on cargo culting, I just wanted to bring it up as something to be aware of. I think it’s an anti-pattern, right? It’s an anti-pattern to look around and think that you don’t need a lot of the tools.
You know what? We want the world to be that way, don’t we? We want to just I’m a product person. I want to just build a great product. I really don’t want to have to market it. I want it to market itself. It just doesn’t happen that way very often. It’s very, very rare.
Sherry talks about this. She comes on the show periodically. The last time she came on the show, she talked about her new book that launched. She said she really just wanted her to get a book deal because the book is great. But in fact, without a social media presence, without an email list, without some type of audience and name, she said she couldn’t get a book deal, and that sucks.
I don’t want the world to be that way. But those are the facts. It’s just the way the world is and I feel similar about startups. It’s like it’s easy to want to think that the world is a certain way. But I think the reality is quite different.
All right, the last topic of the day is a question from Brian. He actually made a comment on the startupsfortherestofus.com website. He was talking about the episode where I explained SaaS metrics to my 11 year old at the time.
Brian says, “Great episode, extremely bright child.” Thanks, Brian. He says, “The example you used in this episode produced a lifetime customer value of $200, which you described as an amount that is ‘fine’ for a small business but really hard to grow a company.
Perhaps an idea for an upcoming episode could be to look at different lifetime value metrics in a bit more detail and map these on to different kinds or sizes of businesses. I know this is quite macro, and you would have to speak in general terms, but I personally would find this episode really helpful for loose mapping of future business product pathways in my own projects.”
I summarized this as, ‘how large of a business can you build at a specific level of ACV (annual contract value) or lifetime value?’ I think it’s a great question. I think there’s a pretty simple answer to it. Of course, podcast drinking game, it depends. Yes, I got it in there. But realistically, my rules of thumb or my mental generalizations are, let’s think about it as ACV because lifetime value can be misleading. Because if you have very, very low churn like 1% a month, then you’ll get your lifetime value from that customer over 8.33 years.
That’s not helpful when you’re bootstrapping because you’re going to run out of cash. I like to think about either average revenue per account (ARPA) per month, or we can say ACV, which is just how much you receive on average from each customer in a year. So one of those is much more relevant. Because as a bootstrapper, you need the short payback periods from your marketing.
If you’re doing pay per click ads, four months, six months, seven months, you get further out than that. You just need more cash in the bank and quite a bit in order to not go to zero before you pay that back.
Here are some general rules of thumb. Usually, in most cases and almost all the cases I see, the lower your price point, the higher your churn. The lower your price point, the lower your lifetime value, not only because of the numerator, but because of the denominator. If you remember, lifetime value is your average revenue per account per month divided by your churn percent.
So if it’s $50 a month of charging and 5%, churn then it’s 50 divided by 0.05, which is a $1000 lifetime value. If your churn is high, and your average revenue per account is low, it goes double really fast in terms of lifetime value. So that’s point one.
The hard part about saying how large of a business can you build at a specific revenue per month or annual contract value really depends on the size of the market. Because look at Netflix, or Spotify, or any of these subscription services aimed towards consumers where they’re charging $6–$15? That’s the big range, but they build nine-figure ARR businesses, is that right?
Yeah, that’s hundreds of millions? If not, do any of these get into the billions in revenue? I actually don’t know. But I wish there were textboxes on the Internet. I could type these questions into and just give me the answer instantly.
But you get my point. You can build a massive business, but you need massive scale. You need a huge total addressable market and total reachable market. That is not what most of us as bootstrappers are going to be able to do.
You can’t just think about how large of a business at a specific ACV. It doesn’t map. But I will say in general in the bootstrapped software space, the bootstrapped SaaS, you do have to think about the total reachable market.
Let’s say that you have podcast hosting or podcast editing software or something like that and your price points are a bit lower, because you have prosumers and others using it. Your price points are in the $10–$100 for most and then you do have some enterprise folks in a dual funnel. That space is large and it’s growing.
Versus if you are starting a business that serves construction firms, or that serves venture funds, venture firms, or accelerators, there aren’t that many. They actually are pretty easy to reach than construction firms, but there are not millions of those available.
There are tens of thousands. It’s not a huge number. Your ACV or your average revenue per account per month per year has to be pretty high. I’m thinking along lines of $5000, $10,000, $25,000, $50,000 a year in order to justify the work to sell and support if it’s construction firms or just the small market of accelerators or venture funds.
Versus you can build a multimillion-dollar or an eight figure business in podcasting with that probably not average revenue per account of 20—I would hope it would be more than that—but certainly it can be a lot lower.
Similar to email service providers, like Drip’s lowest pricing plan was $50. Average revenue per account depended on that at the time, but let’s say it was $70 to $100 for a certain period of time, but that email space is huge. The number of companies that need an email service provider, the expansion revenue, and the ease of marketing in that space means we can acquire customers for not very very much, basically.
The ACV could be a lot lower than someone selling into a space where everything is cold outreach. Where it’s like, I’m going to do LinkedIn, I’m going to do in-person events, I’m going to do cold calls.
These are the axes I’m looking at. How hard is it to find your customers? Are they online? Are they online all the time? It’s the Hacker News crowd and Reddit and just developers and that kind of thing? And you just build that audience and get it going? Or are they really hard to reach and you’re going to have to be doing the calls? The cold calling.
These are really the drivers of how big of a business you can grow, as well as that total reachable market term. No one says it that way. But TRM, I don’t know how else you would say that. The total reachable market of how many folks that you can actually reach that you could potentially convert, and then the average revenue per account in churn. Those are the things I would put into a blender.
Again, it can range. There have been businesses that have applied to TinySeed. I think one that got in there had 1500 potential customers. That’s it. There’s a way to expand beyond that, but it’s a very small number. As a result, for us to invest in that company thinking it gets into the millions of dollars in ARR, that company has to charge a lot more. Again, $25,000–50,000 per customer per year in order to justify that.
So I like this question, Brian. I appreciate you sending it in because I think it’s good for us to think about these rules of thumb and to think about the axes of it’s not just a CV, but it’s what’s the cost to acquire the customers, what’s the churn like, and what are our price points like? I hope me talking that through was helpful not only for Brian, but for you as a listener.
Thanks again for joining me this week. As a reminder, if you have Spotify, it would be amazing if you search for Startups For the Rest of Us, give us a subscribe, and a like. I don’t think it’s a like. It’s probably a thumbs up or a five star rating or something to really help us get just a little more traction, a few more listeners, and I’d really appreciate it. This is Rob Walling, signing off from episode 615.
Welcome back. It’s Startups For the Rest of Us. I’m Rob Walling. Thank you so much for joining me. Today, I’ll be talking through a couple topics inspired by listener questions, and then maybe one or two solo adventure topics that I’m going to bring in. So definitely going to hit on what makes a business bootstrappable versus not.
I want to talk about cargo culting in startups. I received a question about how large of a business can you build at specific levels of lifetime value or ACV. Depending on how long those take, I might add a fourth topic in as well.
Before I dive into that, it would be amazing, even if you’re subscribed to another tool, if you would go to Spotify right now type in Startups For the Rest of Us, give us a subscribe. If you’ve gotten value from this podcast and want to give a little bit back, I’d really appreciate it.
This episode is actually one of ‘the show must go on’ type episodes. I had a guest lined up and they had to postpone for a couple of weeks, and I hop on a plane to Scotland tomorrow. Not tomorrow when you’re hearing this but tomorrow when I recorded it. Since we ship every Tuesday morning for 600 and 15 episodes in 12 years, I want to get something out there. So I’m going to kick off.
The first topic is what makes a business bootstrappable versus not. This has come up a few times. There was a question, maybe six months ago about this. I listened back to that episode. I listened to the answer I gave and I felt like it was fine but it was not great. So I sat and actually gave it more thought. I wanted to revisit this topic. What I realized is that the default is bootstrapping, that I start by saying, every business is bootstrappable, except in these conditions.
These are seven or eight things where I think makes it a lot harder, or near impossible. The reason I start with the default is bootstrappable is traditionally if you just think about bootstrapping and venture funding, so you don’t take angel investments, or a TinySeed indie funding type thing. You just look at bootstrapping versus venture, even just in startups.
This is not in brick and mortar, not in dry cleaner car wash. You just think about software and tech, including hardware, biotech, just startups that are going to be high growth and become multimillion dollar businesses. I think somewhere in the neighborhood of 1% of those companies started each year or each decade or whatever you want to put it, are a fit for venture and should raise venture.
It’s a small number. Now maybe it’s 1.5% or maybe, I think the number is like 0.7% of companies that try to get venture funded, get it. Yeah, maybe the number is one or two, but it’s a small number. The rest have traditionally bootstrapped because that was what you did. It is the only option.
With indie funding coming out, where you have angel investors who are willing to put in money for a company that may throw off profits in the long term, and you have TinySeed willing to invest in smaller outcomes, if you sell for $10–$50 million, that is usually an abject failure for venture capitalists, but for TinySeed or for some angel investors, if you can invest at the right amount, then by the time you get to that $10, $20, $30 million, the return is ample enough that it that it works for you.
With the advent of that funding, I loosely think of it as this rule of 1-9-90, where around 1% should raise venture-backable businesses, around 9% should think about indie funding, and around 90% should probably still bootstrap. Again, maybe the indie funding number is 20%, but it’s not 50%. There are a lot more businesses that can and should be bootstrapped than there are should take any type of funding. There are a number of reasons for that.
But with that in mind, coming back to the question of what makes a business bootstrappable versus not, I’m going to say the default is that you should bootstrap unless, and then I’m going to walk through several points. The first one I thought of is revenue is pushed down the line, meaning think of Facebook, and how long they had to exist before they could monetize it. Google is similar, where they had to have servers and developers and build up these networks, and Facebook had to move from school to school.
A lot of expense there where they needed money for that because the ad model is way down the line. Usually, if a startup uses the ad revenue model, the revenue is pushed way down the line because they don’t run ads from the start. You need to get traction. As you start getting traction, you can raise money and as you raise money, you don’t need the ad revenue. Frankly, building ad tech is difficult. Also, if you have it too early, you don’t gain the traction and the momentum.
You need that critical mass. So if you imagine Google or Facebook having ads from day one, it could have changed the outcome. If your revenue is pushed way down the line, and this includes even Dropbox, where they’re free. They are freemium and you can get a lot of value out of Dropbox.
I don’t remember the exact number of megabytes you can get before you have to pay them. But I remember using it for quite a long time. It wasn’t until I started doing video and more audio that I needed to start paying for Dropbox. I think back in the day, Dropbox used to say, of all of our customers that sign up in a given year, it’s like 2%–3% convert to paid within a year.
Think about all that they have, the support and all costs of that hardware, of the storage, of customer support, and all that money is pushed on the line. But they built a pretty good business on it. Revenue is pushed down the line. If it is postponed and you can’t just monetize early that were SaaS, we charge $50 a month. First day, you’re a customer, right? That is the opposite.
The second thing that makes a business really hard to bootstrap is if the market is winner-takes-all, meaning something like Uber, where really Uber and Lyft are wanting to. And when I say winner-takes-all, you know what that phrase means. It doesn’t actually mean all, but it does mean most.
Uber is big, and it’s a lot bigger than Lyft. It’s because it needed to move very quickly. Because once everyone has that Uber app downloaded, both the drivers—two-sided marketplace—and the folks that need rides are unlikely to download another app unless Uber really makes big mistakes, which they did.
If you watch the growth of Lyft when Travis Kalanick was making his mistakes, getting ousted as the CEO, and Uber was talked about having such a toxic corporate work culture, if they hadn’t done that—it was a huge stumble—I think they would still be many, many, many times Lyft. Lyft played a big catch up because I know that a lot of people actually deleted Uber at that time.
With that said, if it’s a winner-takes-all market, you have to move really fast. Amazon was in another space like that where it’s like, yes, there are other online retailers. But who else? It’s like Walmart, aren’t they number two in e-commerce? But Walmart had 60 years and thousands and thousands of stores already. So that’s how they got in.
That’s not a bootstrap. They didn’t bootstrap that. They put tons of money behind it. Ecommerce on the internet. Again, winner takes all does not mean 100%, but Amazon has a huge chunk of that, and Jeff Bezos knew that and therefore did not try to bootstrap Amazon. He raised funding from the early days.
Another thing that makes a business hard to bootstrap is—similar to Uber—a two-sided marketplace. If you have reach into one or both of those sides—you already have an audience of drivers or of folks who want a ride or you already have an audience of people applying for jobs and employers who might hire folks—it’s a different story. But if you literally have zero audience in a space, and you’re trying to do a two-sided marketplace—no reach, no customer list—bootstrapping this is very, very difficult.
Even if it’s not winner-takes-all. Not all two-sided marketplaces are winner-takes-all. Elance, Upwork, guru.com, there are others. Now I would say that Upwork has certainly owned most of the market. I don’t even know if it’s the majority. But there are other two-sided marketplaces in that space. Bootstrapping them would be very difficult. I don’t know which of those three bootstrapped if any.
But if I were starting a two-sided marketplace, I would either want reach into one or two of the sides, or I would want buckets of money to be able to reach, because it’s like launching two SaaS products at once. Because you have to have two go-to-market strategies. I mean, it’s just such a headache. You’ve heard me say this before, please stop trying to bootstrap two-sided marketplaces, if you don’t have an advantage.
Another thing that makes it hard to bootstrap—it’s possible, but it’s hard—hardware. It’s just really expensive. I heard from a friend who ran a SaaS company, who then started a hardware company. He said, this is ridiculously hard, ridiculously expensive, and takes forever. So is it possible? Sure it is. Is it easy? No, it’s not. I would certainly think about raising funding if I was going to do it, if it’s a hardware biotech with big R&D expenses.
Another thing that makes bootstrapping hard is similar to that pushing revenue down the line, but it’s taking a percentage, a cut of processed revenue. A good example of this is Stripe. Stripe takes 2.9% plus a transaction fee. That would be very, very, very difficult to bootstrap that business. Because all the infrastructure you have to build upfront, in order to support that, then people just trickle in and you’re taking 3% of $1,000 the first few months, so you take in $30 off of that.
How do you pay for the servers? Even if you’re coding yourself, how do you keep yourself alive and everything, in terms of having money to live? That is why Stripe went through YC and then they obviously raised a kajillion dollars. Is it possible to have, let’s say, an ecommerce startup where it’s like an abandoned cart software or even start a shopping cart of your own or whatever to compete with Shopify, have a niche and take a cut of revenue? Sure it is.
I did notice when Shopify launched back in 2006 or 2007, they were purely a percentage of GMV (gross merchant value), a percentage of the revenue. They quickly switched that within six months to where they have subscriptions. Same thing with Gumroad. Gumroad originally just took a cut. I think it was like 8% total. So it was like 3%, whatever it was, it doesn’t really matter what it was. But now they’ve really been pushing their subscription plans since then.
Another thing that makes a business not bootstrappable or harder to bootstrap is having massive per user costs. Even if it’s not massive, not having monetization. So I guess this ties into the earlier one of really pushing revenue down the line, but it is having higher per user.
I come back to Dropbox. When they launched—which was over a decade ago—they couldn’t use AWS because it was too expensive. They rolled their own hardware in data centers. There’s an upfront cost to buy those and to store everything.
Then the last two are needing a network effect, which I guess really is like, mostly a two-sided marketplace. But you could have three sides and everything. So that relates to the two-sided marketplace.
Then the last one I was thinking of, which I don’t actually think should be included in this list but I wrote it down with a question mark. I was saying, bootstrappable businesses, I was thinking that it’s easier to bootstrap a business when the audience is online, the customer base is online. Then I looked at how many TinySeed companies are going after home improvement contractors, CAD engineers, lawyers, investment firms that invest in derivatives, there’s a whole list.
Yes, these people, it’s not that these customers are not sending email or using web browsers. But they are not hanging out on Twitter, in private Slack groups, on Facebook groups, on Stack Exchange, Hacker News, and Reddit in the way that developers, designers, founders, and some other groups are.
Everyone is “buying” anything that’s online. But what I mean is, are they really hanging out and easy to reach? Home improvement contractors, construction firms, architects, interior designers. There are some hunts where they hang out, but it’s not going to be at the level of technical folks.
Originally, I was thinking, I’ve always targeted folks who are online because I’m on online marketing. I’m not going to do a lot of cold calling and in-person events and stuff. But I actually think it is a great opportunity there.
I know there’s a great opportunity because I see the companies that we’ve funded and the companies in the MicroConf space that are actually going for audiences that are mostly not online. Is it more expensive to reach them? Yes. That’s why your price point is higher. Your ACV affords you the luxury of doing that. There’s often less competition. It’s more of that customer paying than it is the competitor paying.
So that was my list. It’s probably not exhaustive, but I wanted to put it down here because I felt like my last answer was shorter. I didn’t think I communicated it in the way that I wanted. So hopefully those seven points helped give you a frame of reference when you’re thinking about your next business.
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Alright, my next topic is cargo culting. If you haven’t heard that term, I’m going to read a little bit from the Wikipedia page that essentially defines it. A cargo cult is a belief system of indigenous people in Melanesia.
Basically during the Second World War, allied military forces used to airdrop supplies in large numbers, and technology and all that stuff. Then the soldiers who were on the ground in Melanesia would trade with the islanders.
After the war the soldiers leave, and this thing called a cargo cult arose. Cargo is what was being dropped and the indigenous people attempted to imitate the behaviors of the soldiers, thinking this would cause the soldiers and their cargo to return.
This included things like dressing like a soldier, performing parade ground drills with wooden or salvaged rifles. They misattributed what was bringing the cargo, which was completely unrelated to them being soldiers, and it was completely related to someone flying a plane over and dropping all the supplies. So that’s the definition of it.
I see this in startups where some startups are not successful because they did things. They’re successful in spite of the things that they did, in spite of the decisions they made. I brought this example before where it’s like Apple or Basecamp, or someone says, well, they just built great products, and they didn’t do marketing.
I do believe Jason Fried and David Heinemeier Hansson came out and said, yeah, we don’t do marketing. We don’t track metrics. We built a great product, that stuff. To be honest, Dave eased up on that (I think) on that narrative. When I interviewed Jason Fried a couple years ago at MicroConf, that’s not how it came across. Actually, he said, we did some things right. We also got lucky. And I appreciated that honesty from him.
But there are other examples of this of, you take 100 companies that do tracks or analytics. They are doing blocking and tackling marketing, whether that’s SEO content, pay per click, cold outreach, partnerships, integrations, whatever, all the things that we talked about on the show. The 100 companies that are doing those, from what I see, from my experience, the companies who succeed are doing those things.
If you took 100 companies who just said, well, I’m just going to deliver a great product, a couple of them would succeed. They will get lucky. I talk about hard work, luck, and skill. In this case, I’m basically saying blocking and tackling is having the skill to do it then putting in the hard work.
Could you feasibly have really little hard work and skill and just get really lucky? Absolutely. Out of 100–500, even bootstrapped startups, you’re going to have a few that do. That survivor bias pointing to them, and then saying, well, look, they made it work. They built this amazing business. All they did was build a great product. I say, no, that’s not all they did. They also got really lucky,
They were either super early to a space. They accidentally stumbled into just a huge vacuum of demand, which is unusual these days in software. Most demand has been satiated by some type of product. So there is some competition.
Let’s say a product was beloved by everyone, and then got hacked and was shut down or it got sold and shut down. Suddenly, there was a big vacuum there. You went in and realized, oh, I can build this product. You need to have some skill, and then put in the hard work to build a good or great product.
But if that demand was already existing, and you jumped right in, you can’t say, we didn’t need to do marketing so you don’t either. Because unless you—you being the other person listening to them—have the same situation where you’ve stumbled into this amazing demand, or super early to a space where it’s like, oh, my gosh, this tool or this ecosystem is taking off WordPress or Stripe or No-Code or you know something where you just hit it at just the right time.
Again, maybe it’s skill that you did that, or maybe it’s luck. But unless the other person also has that in place, you’ve succeeded, probably in spite of some of the things you didn’t do rather than because you didn’t market.
I’ve talked about being early and getting lucky for other reasons. I’ve heard some stories where the founder is almost acting coy, like they succeeded without working hard. Like yeah, we just made it. Either we’re that good or I don’t know, they don’t want to admit the hustle.
Again, except for a couple founders I know who have gotten exceptionally lucky, I can’t think of any founders I know who have not worked their ass off to build a great company. It is a lot of hard work in getting some things right and some things wrong. But it’s moving fast, it’s working on the right things, it’s being willing to make mistakes, and it’s being willing to put in the hard work.
By hard work, I don’t mean 80-hour weeks, I mean really focused time of executing on something and not being all over the place, not skipping from one thing to the next, not doing things half ass, like seeing them through and showing up every day. Whether it’s a podcast, or a SaaS app, or a book, showing up every day and shipping and getting something out into the world.
I think that’s all I have to say on cargo culting, I just wanted to bring it up as something to be aware of. I think it’s an anti-pattern, right? It’s an anti-pattern to look around and think that you don’t need a lot of the tools.
You know what? We want the world to be that way, don’t we? We want to just I’m a product person. I want to just build a great product. I really don’t want to have to market it. I want it to market itself. It just doesn’t happen that way very often. It’s very, very rare.
Sherry talks about this. She comes on the show periodically. The last time she came on the show, she talked about her new book that launched. She said she really just wanted her to get a book deal because the book is great. But in fact, without a social media presence, without an email list, without some type of audience and name, she said she couldn’t get a book deal, and that sucks.
I don’t want the world to be that way. But those are the facts. It’s just the way the world is and I feel similar about startups. It’s like it’s easy to want to think that the world is a certain way. But I think the reality is quite different.
All right, the last topic of the day is a question from Brian. He actually made a comment on the startupsfortherestofus.com website. He was talking about the episode where I explained SaaS metrics to my 11 year old at the time.
Brian says, “Great episode, extremely bright child.” Thanks, Brian. He says, “The example you used in this episode produced a lifetime customer value of $200, which you described as an amount that is ‘fine’ for a small business but really hard to grow a company.
Perhaps an idea for an upcoming episode could be to look at different lifetime value metrics in a bit more detail and map these on to different kinds or sizes of businesses. I know this is quite macro, and you would have to speak in general terms, but I personally would find this episode really helpful for loose mapping of future business product pathways in my own projects.”
I summarized this as, ‘how large of a business can you build at a specific level of ACV (annual contract value) or lifetime value?’ I think it’s a great question. I think there’s a pretty simple answer to it. Of course, podcast drinking game, it depends. Yes, I got it in there. But realistically, my rules of thumb or my mental generalizations are, let’s think about it as ACV because lifetime value can be misleading. Because if you have very, very low churn like 1% a month, then you’ll get your lifetime value from that customer over 8.33 years.
That’s not helpful when you’re bootstrapping because you’re going to run out of cash. I like to think about either average revenue per account (ARPA) per month, or we can say ACV, which is just how much you receive on average from each customer in a year. So one of those is much more relevant. Because as a bootstrapper, you need the short payback periods from your marketing.
If you’re doing pay per click ads, four months, six months, seven months, you get further out than that. You just need more cash in the bank and quite a bit in order to not go to zero before you pay that back.
Here are some general rules of thumb. Usually, in most cases and almost all the cases I see, the lower your price point, the higher your churn. The lower your price point, the lower your lifetime value, not only because of the numerator, but because of the denominator. If you remember, lifetime value is your average revenue per account per month divided by your churn percent.
So if it’s $50 a month of charging and 5%, churn then it’s 50 divided by 0.05, which is a $1000 lifetime value. If your churn is high, and your average revenue per account is low, it goes double really fast in terms of lifetime value. So that’s point one.
The hard part about saying how large of a business can you build at a specific revenue per month or annual contract value really depends on the size of the market. Because look at Netflix, or Spotify, or any of these subscription services aimed towards consumers where they’re charging $6–$15? That’s the big range, but they build nine-figure ARR businesses, is that right?
Yeah, that’s hundreds of millions? If not, do any of these get into the billions in revenue? I actually don’t know. But I wish there were textboxes on the Internet. I could type these questions into and just give me the answer instantly.
But you get my point. You can build a massive business, but you need massive scale. You need a huge total addressable market and total reachable market. That is not what most of us as bootstrappers are going to be able to do.
You can’t just think about how large of a business at a specific ACV. It doesn’t map. But I will say in general in the bootstrapped software space, the bootstrapped SaaS, you do have to think about the total reachable market.
Let’s say that you have podcast hosting or podcast editing software or something like that and your price points are a bit lower, because you have prosumers and others using it. Your price points are in the $10–$100 for most and then you do have some enterprise folks in a dual funnel. That space is large and it’s growing.
Versus if you are starting a business that serves construction firms, or that serves venture funds, venture firms, or accelerators, there aren’t that many. They actually are pretty easy to reach than construction firms, but there are not millions of those available.
There are tens of thousands. It’s not a huge number. Your ACV or your average revenue per account per month per year has to be pretty high. I’m thinking along lines of $5000, $10,000, $25,000, $50,000 a year in order to justify the work to sell and support if it’s construction firms or just the small market of accelerators or venture funds.
Versus you can build a multimillion-dollar or an eight figure business in podcasting with that probably not average revenue per account of 20—I would hope it would be more than that—but certainly it can be a lot lower.
Similar to email service providers, like Drip’s lowest pricing plan was $50. Average revenue per account depended on that at the time, but let’s say it was $70 to $100 for a certain period of time, but that email space is huge. The number of companies that need an email service provider, the expansion revenue, and the ease of marketing in that space means we can acquire customers for not very very much, basically.
The ACV could be a lot lower than someone selling into a space where everything is cold outreach. Where it’s like, I’m going to do LinkedIn, I’m going to do in-person events, I’m going to do cold calls.
These are the axes I’m looking at. How hard is it to find your customers? Are they online? Are they online all the time? It’s the Hacker News crowd and Reddit and just developers and that kind of thing? And you just build that audience and get it going? Or are they really hard to reach and you’re going to have to be doing the calls? The cold calling.
These are really the drivers of how big of a business you can grow, as well as that total reachable market term. No one says it that way. But TRM, I don’t know how else you would say that. The total reachable market of how many folks that you can actually reach that you could potentially convert, and then the average revenue per account in churn. Those are the things I would put into a blender.
Again, it can range. There have been businesses that have applied to TinySeed. I think one that got in there had 1500 potential customers. That’s it. There’s a way to expand beyond that, but it’s a very small number. As a result, for us to invest in that company thinking it gets into the millions of dollars in ARR, that company has to charge a lot more. Again, $25,000–50,000 per customer per year in order to justify that.
So I like this question, Brian. I appreciate you sending it in because I think it’s good for us to think about these rules of thumb and to think about the axes of it’s not just a CV, but it’s what’s the cost to acquire the customers, what’s the churn like, and what are our price points like? I hope me talking that through was helpful not only for Brian, but for you as a listener.
Thanks again for joining me this week. As a reminder, if you have Spotify, it would be amazing if you search for Startups For the Rest of Us, give us a subscribe, and a like. I don’t think it’s a like. It’s probably a thumbs up or a five star rating or something to really help us get just a little more traction, a few more listeners, and I’d really appreciate it. This is Rob Walling, signing off from episode 615.
Episode 602 | Explaining SaaS Metrics to a Child
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In episode 602, Rob Walling explains SaaS metrics to his kid. This is a great episode to listen to if you are unfamiliar or not well-versed in SaaS because we dig into from first principles, starting with dollars, revenue, and the purpose of businesses, all the way to SaaS metrics like MRR, ACV, and LTV. And, even if you are well-versed in SaaS metrics, you’ll likely learn a few things from this conversation.
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Topics we cover:
[1:55] MicroConf Local London tickets are on sale
[3:17] Starting with the basics: money, dollars, and businesses
[7:01] Revenue
[7:12] Expenses
[10:51] SaaS
[13:29] Recurring revenue
[13:58] Average revenue per account (ARPA)
[14:56] Monthly recurring revenue (MRR)
[15:08] Average revenue per customer
[17:08] Annual contract value (ACV)
[18:18] Churn
[19:30] Differences between Revenue Churn and Customer Churn
[21:18] Lifetime value
[22:10] Average customer lifetime value
[25:49] Customer Acquisition Cost (CAC)
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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Rob: You’re in the right place if you’re looking for another episode of Startups For the Rest of Us. This is episode 602, where I sit down with my 11-year old and I explain to him not only what SaaS is, but we start all the way at the beginning with what is money, what are dollars, and then we talk about businesses and their purpose. Then we talk about software and then about SaaS. Then we dive into SaaS metrics, the KPIs that you should be tracking, things like MRR, ACV, and LTV. We go through all the TLAs, the three letter acronyms.
I was inspired to do this episode by a quote that’s attributed to a bunch of different people. I think most often if you search for this quote, you find it attributed to Einstein. I don’t know if he actually said it, but it basically says, “If you can’t explain a concept to a child, then you don’t understand it deeply enough.” When I heard that, I thought SaaS metrics are so boring, convoluted, and complex.
What’s cool in this episode is actually certain metrics, I say monthly recurring revenue, what does that mean? Then he’s able to define it because the definition is in the three words, but then there are a couple of terms where it’s not obvious what they actually mean. You can hear him thinking about it, because he doesn’t speak the jargon like a lot of us do. You can hear him struggling to define it. I’m going to actually say, yeah, that’s a bad name for this thing but it’s just what is generally acceptable at this point. It’s what most of us use.
Anyway, I hope you enjoy this episode. It’s very different from a lot of the stuff that I do on the show. But I would say that if you are maybe unfamiliar or not super versed in SaaS metrics, this is a good episode for you, because we really do dig in from first principles, starting with dollars, then making it all the way to lifetime value and a few others.
I was also going to do expansion revenue, but it was running long so I decided not to do that. Even if you already know SaaS metrics, I still think you’ll learn something from this because I’ll be honest, I learned a few things from this conversation as well.
Before we dive into that, tickets to MicroConf Local in London are on sale. Actually, they are going fast. I think we’re going to sell out, if we haven’t already, because I’m recording this a week or two in advance. But if you go to microconf.com, you can go to our events menu and snag a ticket assuming they’re still available.
Local:London is a one-day event, May 18. We’re going to be hosting three or four amazing speakers. Asia Orangio will be there, and Brennan Dunn. I’m going to be there doing a talk. It’s just a fun get together. It’s a fun gathering to be able to hang out with other Microsoft bootstrapped and mostly bootstrapped founders. And we keep the ticket price really low. It’s around £200, depending on a few factors.
Hopefully, that’s something that you can make it too because I would love to see you and do a fist bump. I never fist bump before COVID, but now, unfortunately, that’s just a better way to do things than shaking people’s hands. Anyway, I would love to meet you face-to-face, if you’re listening to this, and you’re able to make it. With that, let’s dive in to me explaining SaaS metrics to my 11-year old.
Rob: So you know why we’re here today, right?
Fisher: Yes.
Rob: I want to start at the beginning with the basics. Do you know what a dollar is?
Fisher: Yes.
Rob: Of course Do you know that dollars can buy […]?
Fisher: Yes, they can also buy other things.
Rob: So dollars are our currency. Do you know that there are other currencies in other countries?
Fisher: Yes.
Rob: Can you name one?
Fisher: British Pounds.
Rob: There you go. You like the Brits, don’t you?
Fisher: Sure, why not?
Rob: So dollars are what make our economy go around and it’s what you would get paid if you get a job. Do you get paid dollars on any recurring basis?
Fisher: Yeah, I have an allowance for doing chores and such.
Rob: Cool. You get that money from us. Where do your mother and I get our dollars? How do we make our dollars?
Fisher: From your jobs being an entrepreneur.
Rob: Right. So we have jobs that are maybe a little different. I know you know different than most people. You and I know some folks who work as teachers, or who work as doctors. They are paid by a school or by a hospital. But your mother and I run our own companies.
You know what a business is, right? Can you summarize what a business or a company is? Why you might want to start one?
Fisher: I guess an organization of multiple people with what’s the defining factor of a business, like a pyramid of authority, hierarchy with someone at the top.
Rob: Oh, that’s interesting. You think about that. That’s the internal structure. Sometimes the business is just one person like your mom, really until the last six or eight months. It was just her in ZenFounder, so there wasn’t any need for that authority or internal structure. I think of a business as an organization that seeks to produce a profit by creating something that people value enough to pay for.
Fisher: Organization of people.
Rob: Yeah, one or more people. Here in the US, they’re called LLC, you can have a sole proprietorship, you can have a C-Corp. Then in Britain, they have a Limited Corp, I think, Private Limited. You’ll have to forgive me, I’m still just learning that stuff. But that business, because there are nonprofit organizations that are set up to do certain things, there are benefit corporations, but really what we’re talking about is a for profit company. What does a for profit company do, do you think?
Fisher: I don’t know. They give people stuff and people give them money.
Rob: Right. Examples of that, can you think of any companies that you buy things from with your dollars?
Fisher: I don’t know, Lego?
Rob: That’s a good example. Target.
Fisher: I sometimes buy stuff from Target.
Rob: Buy Lego from Target.
Fisher: Lego usually, as well. I don’t know. Amazon has better prices, but they’re a massive mega corporation. So is Target […].
Rob: So Amazon’s another business that you give your money to. Ultimately, there’s a lot of (I think) nuance around profit being the main motive of companies, or just one of several because there are these multiple bottom line-companies now that want to make a profit and also help people, which I think is good and noble; I’m actually invested in a couple of those.
Let’s say that you pay your money to a business like Target or Lego. For every dollar you give them, it costs them $1.20 to produce, market, ship, and provide you with that product.
Fisher: Then they’re losing money, though.
Rob: Okay, so does that work or not?
Fisher: No, they’ll bankrupt themselves.
Rob: Okay, good. So you’re already bringing in a term of bankruptcy. That’s great. When you give them money, do you know the term for that, what they call that inside their company?
Fisher: Revenue?
Rob: That’s right. Revenue is the dollar you give them. But what if it costs them 70 cents to manufacture and provide all the service or the product to you? Do you know what that’s called? That 70 cents.
Fisher: I don’t know. 70 cents relative to a hundred would be profit, but I don’t know it. Manufacturing costs, maybe?
Rob: Yeah. There are two things. You’re getting at it well, actually. The global term or high-level term is an expense. There’s revenue and expense. But you’re even going within expenses. There’s something called cost of goods sold. It’s also often summarized as COGS, that is manufacturing cost, shipping, and some basics.
We have revenue, which is the dollar. You want to say $100, that makes more sense to you because you never give Lego $1. Let’s give them $100 for a set. And all of their expenses, including their COGS and shipping and Target takes when they sell it to them is 70 cents. That’s their expense. Then the 30 cents that’s leftover for Lego.
Fisher: $30.
Rob: $30 that’s right. I’m still in the dollar. Yup. The $30 leftover is?
Fisher: The profit.
Rob: Yeah, there you go. Okay, so now we have business fundamentals. We have money, revenue, expenses, and profit. Okay. Now I want to switch up the business type and switch from Lego to (let’s say) that I started a software company or you started a software company. That’s now the product you’re selling. To get started, can you name a few pieces of software that you use on a daily or weekly basis?
Fisher: What software, like programs?
Rob: Yeah, just name a few. There are a bunch of them, right?
Fisher: Like apps, I suppose.
Rob: Include games.
Fisher: I play Rec Room and Minecraft sometimes.
Rob: I think we paid for Minecraft on the iPad. I think Rec Room is free, but there’s currency inside of it. That’s going to be their revenue stream. What else?
Fisher: What else? What other programs? I don’t know the Amazon App if I want to.
Rob: Yeah, that’s software, but realistically, so Amazon, you don’t pay for their software. That’s just a catalog to buy through them. How about, wasn’t there one called Kahoot!?
Fisher: That’s like a quizzing app.
Rob: Right. But didn’t we pay? You downloaded it for free then you could pay for a premium plan.
Fisher: That was Lookit for school. It’s like Kahoot!
Rob: They’re learning apps and we paid a subscription. You get some special stuff, right? Some upgrade. How about other software? Those software all download to your iPad, and it runs locally. You could turn off WiFi and it would work. What about software like Google Drive, Google Docs, and Google Sheets? Those run on the Internet, don’t they?
I know there’s an offline mode, but let’s just assume that there was no offline mode, because there was actually many, many years before they had that. Realistically, you need WiFi to access that, don’t you?
Fisher: To access a document?
Rob: Yeah, in Google Docs.
Fisher: Yeah. I guess.
Rob: Like to edit a document without offline mode.
Fisher: Assuming there’s no offline mode, yeah, you would need WiFi.
Rob: Do you use any online web-based video or photo editors or is it all app-based?
Fisher: I use Adobe Express Photoshop sometimes.
Rob: Is that downloaded onto your iPad? Is it an app or is it in a browser?
Fisher: It’s both.
Rob: Got it. It’s both. Okay. So that’s the thing. If it’s local, it’s downloaded to your iPad, then it’s just software or apps programs, as you said. If it’s any browser, there’s this term, and it’s Software as a Service. The term is terrible. So it’s SaaS, right?
Fisher: Wouldn’t it be a service, if it was an app?
Rob: There can be a money line where Google Drive or Google Docs, you can access it in the browser, and it goes out onto the Internet into their servers to retrieve your documents is what it is. But they also make an app. It’s the confusing part. They also make an app but that also goes out to the server, they call it in the cloud, right? You’ve heard this. It goes out to the Google servers to pull your docs back when you want to edit them.
Fisher: Docs also just redirects you to the app.
Rob: Got it. So the app versus browser thing maybe is not the best distinction. But I think the big thing is Software as a Service is where your data is usually not hosted locally. It’s hosted not locally on your machine, but it’s hosted on Google’s servers, or it’s hosted on Dropbox’s servers.
Think of Spotify, which is more of an entertainment app. I create playlists and those playlists live on the Spotify servers. I can access them from any device. Software as a service, terrible name, agree?
Fisher: Sure. It’s not like you build your company around it or anything.
Rob: What company are you referring to?
Fisher: I don’t know. You use that term a lot. It’s not like you build your life around that term.
Rob: Well, because Drip was Software as a Service.
Fisher: Not that not that much exaggeration, to be honest, but yeah.
Rob: Right, my life is built around it. Well, that’s the thing. It’s this very left brain nerdy term that I think is overly technical. I wish there was a better term for what we do. So you remember Drip, it was software that people could use to build their email list so they could communicate with their audience. Remember that?
Fisher: Yeah.
Rob: Okay. People paid monthly for Drip. That’s Software as a Service. That’s usually monthly or annual. It’s not a one time fee. Some of the apps that we buy that you pay for like Angry Birds, Plants vs. Zombies, where you pay $5 or $10. Then you don’t subscribe. You just get to play the game.
Fisher: Yeah, you did it yourself by using those two examples.
Rob: Yeah, you get it?
Fisher: Yeah. They’re good games, though. Yeah, that is the case. You buy the game and then you play it.
Rob: Right. Well, Software as a Service is different. You get what’s called recurring revenue. What do you think that means?
Fisher: Recurring revenue is revenue that reoccurs. So multiple payments in a month or a week.
Rob: Right. It’s standardized. It could be anything, but it’s kind of standardized in general on monthly payments or yearly payments. Those are usually the two options, I’d say in 80% of the cases. What if I were to give you this phrase, average revenue per account per month, average revenue per account? What do you think that means?
Fisher: Account?
Rob: Yeah. There’s a different way to say it, average revenue per customer.
Fisher: Okay, if an account is paying $5 for your service a month, that would be in fact, the average revenue per customer per month.
Rob: That’s exactly right. In this case, account and customer are interchangeable; ARPC or ARPA. What if I had 10 customers or 10 accounts paying me $5 a month, then I had 10 paying me $15 a month because they use the more premium version. What would my average revenue per account be?
Fisher: 10 paying you $5 and 10 paying you $15. $15 times 10 is $150 and $5 times 10 is $50. So you get $200 in revenue a month for your service.
Rob: Awesome. So that’s total revenue per month. That’s called MRR. Monthly recurring revenue. MRR is what you just defined. That is the total monthly revenue that I get from all of my customers. What is the average revenue per customer? Because I have 20 customers.
Fisher: 5 and 15, $10 per customer averaging?
Rob: That’s correct. Yup, exactly. You could get there one of two ways, the same amount are paying you $5 and $15 that it’s in the middle at $10. Or you could get your MRR, you went to MRR, which is $200. Then you said, I’m going to take my MRR, and I’m going to divide it by my number of customers. That’s the formula for average revenue per customer. So you came across $10. Now $10 would be very low and you’d have high churn, but we’re not going to do that today.
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So we have MRR, we have average revenue per customer or average revenue per account. What do you think I mean when I say annual contract value or ACV?
Fisher: The word that confuses me is contract. Annual is yearly, and value would be how much is worth relative to something else, but contract?
Rob: Yeah, it’s weird. It’s another clunky phrase that I wish was different. Maybe ACV stood for annual customer value, the value that I received from a customer in a given year.
Fisher: It would make more sense.
Rob: Yeah. And do you know what that means? Let’s say a customer pays me $10 a month, what do you think is their annual customer or contract value?
Fisher: 10 times 12 is $120.
Rob: Right. So that’s it. That’s ACV.
Fisher: $120 a year?
Rob: Yeah, but if you get a thousand of them, then you get $120,000 a year. With that, I want to cover just a couple of more things. This is all revenue. You notice that this is all money coming in. We haven’t talked in SaaS about anything going out. So we’ve talked about MRR, ARPA or ARFC, annual contract value.
One of the hardest parts about SaaS is that your customers can cancel anytime. What if a customer, if you say they’re going to pay me $10 a month, do they pay you that forever? What if someone decides they don’t need it after three months and they cancel? How much have they paid you?
Fisher: $10 a month that’d be $30. You’re expecting $120.
Rob: Right. So in that case, you expected them to pay you $120 in a year, but they only paid you $30 and they’re gone. Do you know the word for that when someone cancels that we use inside SaaS?
Fisher: Cancel? I don’t know.
Rob: Yeah, that’s called cancellation. But the way we represent it as a metric or as a number is we call it churn. Churn is the percentage of your customers who cancel in a given month. Churn with an N. Churn. You know, like churning butter. It’s that word. The reason it’s called that (I think) is because it’s like you’re churning butter. It’s you’re turning it over. You turn butter over and over to make cream, white milk. You turn cream over and over to make butter.
You can tell I’ve lived on a farm. But you’re turning customers over in this case. What if I had 100 customers at the start of a month, and then 10 customers canceled during that month? What do you think as a percentage? What do you think my churn would be?
Fisher: 10 out of 100 would be 10%. So you have 10% churn.
Rob: That’s correct. That’s called customer churn. There’s also something called revenue churn, which is, let’s say I had $10,000 a month in MRR (monthly recurring revenue) and $1000 worth of MRR canceled. It doesn’t matter if it’s one big customer, or if it’s a thousand $1 customers, but it’s that amount of MRR churn. So $1000 out of $10,000. What would that revenue churn be?
Fisher: $1000 out of $10,000. $1 out of $10 or $10 out of $100 revenue churn.
Rob: Right, 10%. It’s the same number because these are contrived examples. 10% churn, does that sound high to you or low to you?
Fisher: I don’t know.
Rob: Imagine that every month you turn 10% of your customer base. So you go from 100 down to 90.
Fisher: That’s quite high.
Rob: Then you churn nine that month, because it’s 10%. So now you’re at 81 then you churn 8.1.
Fisher: And then you bankrupt yourself.
Rob: Well, that’s what happens, right? 10%, churn, I believe you, you churn out 90% of your customers, and I forget what the number is, but it’s eight months or something. It’s the end. It’s expensive to find new customers. It’s the death of SaaS growth, it makes it hard to grow when people are canceling. That’s a more advanced topic to talk about, eliminating churn and why that happens and all this.
But I want to get to this concept called lifetime value, which is what do you think that means, lifetime value of a customer?
Fisher: The only thing I could guess is, how much money they could give you in their lifetime, I guess? I don’t know.
Rob: That is another one where lifetime is maybe not the best term for what it is. It’s like the relationship value of the customer.
Fisher: The lifetime is how long they use.
Rob: Yup. How long they use your software, how long they pay you for your software. That makes sense. We call it lifetime value. It should honestly be relationship value or something like that. Let’s say someone signs up, they pay you $10 a month, and they stick around for 20 months, and then they cancel, what was their lifetime value?
Fisher: Okay, they gave you $200.
Rob: That’s right. Usually you don’t look at it as an individual customer. You look at an aggregate because when you have a thousand customers, they’re all paying you different amounts. Some cancel at month 6, at 9, at 12. You have to average it out. To calculate the average lifetime value of your customer, first, you need to calculate the average lifetime of your customer, the average time a customer stays with you.
I want to name the formula for this and have you tell me if you think it’s intuitive or not. If you had 5% churn, for easy math, it would be 1 over 5% which is 1 over 0.05. How many months is that? One divided by 0.05 is the number of months, the average lifetime of your customer.
Fisher: 2?
Rob: Close to estimate, it’s zero.
Fisher: 20?
Rob: Yeah, if it was 0.5, that’d be 50%, and your average lifetime, it would be? So the lifetime average would be 10 months or 20 months with those numbers. The way you get your lifetime value of a customer— remember this is relationship value—is you take that lifetime, 10 months, 20 months, and you multiply it times your average revenue per customer. If we go back to our example earlier, average revenue per customer per month is $10. Remember, we did the average. If your average lifetime is 20 months, we take 20 times $10. Audio math is riveting, isn’t it?
Fisher: Equals $2000?
Rob: $200. That’s an average revenue over the lifetime of your customer. It’s called the lifetime value of a customer on average. And $200 is actually fine for a small business. It’s really, really hard to grow a company with a $200 lifetime value. I feel like that covers the revenue side, the money coming into the business.
I really want to talk about the two largest expenses. There are tons of expenses in any company, even in SaaS. There are the incorporation fees and there are legal fees and you have a payment processor like Stripe and you pay a small amount to them, but really the two biggest expenses, what do you think they are?
Fisher: I can see the document where you’ve listed these things.
Rob: Well done. Hacking the system.
Fisher: I can see it on the dock and I was going to guess salaries anyway, paying your employees.
Rob: That’s right. That is the number one expense.
Fisher: Other expense is how much the time was worth making the product.
Rob: Yes, that’s right. It’s different. Remember we talked about COGS or cost of goods sold with Lego and how they might have a lot of that because they have a huge manufacturing plant. They have people on the floor and they’re paid for the plastic. There are all those things. SaaS really just has time, doesn’t it? And time is money. You’ve heard this expression, right? Let’s say I hire five engineers, two support people, a customer success person, and a salesperson. What do I have to pay all of those people? Back to our first thing, dollars?
Fisher: I don’t know. I can’t estimate all those people.
Rob: I’m not asking how much but what do you think I pay them in? Do I give them granola bars to show up for work?
Fisher: No, no, you give them money.
Rob: Monies. Monies or salaries are your number one expense. The other one and it’s another SaaS metric, much like we talked about it, MRR and average revenue per customer, annual contract value. These are metrics that we track and pay attention to and try to improve. The last one I want to talk about is CAC.
Fisher: That’s funny. CAC.
Rob: Cost to acquire a customer. What do you think cost to acquire a customer means?
Fisher: I guess it’s an estimation, but you could estimate how much money you spend on the products you acquire. I don’t know.
Rob: You’re getting there. Yeah. It’s how much money you spend on marketing.
Fisher: Oh, it’s marketing. Okay.
Rob: And it’s averaged. So realistically, if you’re buying ads, it’s usually easy to calculate costs to acquire a customer. Because you know that if each click is $1, and 1 out of 10 clicks results in a customer, you’ve paid $10 to acquire each customer. That makes sense.
Fisher: Yeah.
Rob: Okay. It’s harder when you’re doing things like producing content, because really, what is the cost of your founder’s time? Sometimes I’ll see CAC estimated as all of our marketing expenses, divided by the number of new customers we receive in a month, and it’s across all of those things.
The hard part is, you do want to drill down further because you want to figure out where you’re low. Why would you want to figure out where your low CACs are? If I had three different marketing approaches, let’s say I was running ads, and it was $10 to acquire a customer.
I was creating content, meaning I have maybe videos on YouTube, and it’s costing me $50 to acquire a customer. Then I’m doing outbound sales, like reaching out to people on LinkedIn, Twitter and email, and it’s costing me $100 to acquire a customer. Well, which one of those is best? And why is that important?
Fisher: Well, LinkedIn and YouTube. The last two approaches I already forgot.
Rob: The first one was ads, it was $10, $50, and $100.
Fisher: Then reaching out for people for $100 bucks for a single customer would obviously be the weakest. You would probably eliminate that one and spend that money on salaries or more marketing.
Rob: Right, the other approaches that are working. You’d rather try to optimize.
Fisher: That’s why you need to know the weakest approach.
Rob: Very good, sir. That’s your SaaS metrics. Do you feel smarter for having had this conversation?
Fisher: I don’t know. I kind of already dealt with all of them.
Rob: You knew most of these things. All right. Well, we won’t tell the people that because the whole point is I was supposed to be explaining it to someone who didn’t already know these.
Fisher: Plot twist. Your editor doesn’t cut this part out.
Rob: I thought we were going to leave it. Do you have a YouTube channel you’d like to plug?
Fisher: Yeah. I know you’re not going to do it but subscribe to my YouTube channel.
Rob: How do they find it? They go to youtube.com and they search for what channel?
Fisher: This is going to cringe, I’m not going to lie. I haven’t played Among Us in 12 months and this is a reference to that.
Fisher: Yes. Because no one even spells it with a Y anymore, or else you’ll cringe. It’s just the laws of dignity now.
Rob: Laws of dignity thermodynamics. Am I right?
Fisher: Yeah, editor, editor, man, I’m sorry. You had to listen to 35 minutes of unsmart people talking. Thanks for editing stuff.
Rob: Thank you for joining me on the show today.
Fisher: Bye.
Rob: If you enjoyed that episode, let me know. I’m @robwalling on Twitter. Let’s connect there. If you haven’t downloaded our two free guides, these are never released podcast episodes plus PDF guides. First one is Eight Things You Must Know When Launching Your SaaS. The next one is 10 Things You Should Know As You Scale Your SaaS.
These are my learnings from 15–16 years-ish in SaaS as well as mentoring, advising, and starting companies. I put them all into these two episodes and these two guides. If you go to startupsfortherestofus.com, enter your email, and we will send those to you.
Thanks as always for joining me again this week. I look forward to being back in your ears again next Tuesday morning.
I was inspired to do this episode by a quote that’s attributed to a bunch of different people. I think most often if you search for this quote, you find it attributed to Einstein. I don’t know if he actually said it, but it basically says, “If you can’t explain a concept to a child, then you don’t understand it deeply enough.” When I heard that, I thought SaaS metrics are so boring, convoluted, and complex.
What’s cool in this episode is actually certain metrics, I say monthly recurring revenue, what does that mean? Then he’s able to define it because the definition is in the three words, but then there are a couple of terms where it’s not obvious what they actually mean. You can hear him thinking about it, because he doesn’t speak the jargon like a lot of us do. You can hear him struggling to define it. I’m going to actually say, yeah, that’s a bad name for this thing but it’s just what is generally acceptable at this point. It’s what most of us use.
Anyway, I hope you enjoy this episode. It’s very different from a lot of the stuff that I do on the show. But I would say that if you are maybe unfamiliar or not super versed in SaaS metrics, this is a good episode for you, because we really do dig in from first principles, starting with dollars, then making it all the way to lifetime value and a few others.
I was also going to do expansion revenue, but it was running long so I decided not to do that. Even if you already know SaaS metrics, I still think you’ll learn something from this because I’ll be honest, I learned a few things from this conversation as well.
Before we dive into that, tickets to MicroConf Local in London are on sale. Actually, they are going fast. I think we’re going to sell out, if we haven’t already, because I’m recording this a week or two in advance. But if you go to microconf.com, you can go to our events menu and snag a ticket assuming they’re still available.
Local:London is a one-day event, May 18. We’re going to be hosting three or four amazing speakers. Asia Orangio will be there, and Brennan Dunn. I’m going to be there doing a talk. It’s just a fun get together. It’s a fun gathering to be able to hang out with other Microsoft bootstrapped and mostly bootstrapped founders. And we keep the ticket price really low. It’s around £200, depending on a few factors.
Hopefully, that’s something that you can make it too because I would love to see you and do a fist bump. I never fist bump before COVID, but now, unfortunately, that’s just a better way to do things than shaking people’s hands. Anyway, I would love to meet you face-to-face, if you’re listening to this, and you’re able to make it. With that, let’s dive in to me explaining SaaS metrics to my 11-year old.
Rob: So you know why we’re here today, right?
Fisher: Yes.
Rob: I want to start at the beginning with the basics. Do you know what a dollar is?
Fisher: Yes.
Rob: Of course Do you know that dollars can buy […]?
Fisher: Yes, they can also buy other things.
Rob: So dollars are our currency. Do you know that there are other currencies in other countries?
Fisher: Yes.
Rob: Can you name one?
Fisher: British Pounds.
Rob: There you go. You like the Brits, don’t you?
Fisher: Sure, why not?
Rob: So dollars are what make our economy go around and it’s what you would get paid if you get a job. Do you get paid dollars on any recurring basis?
Fisher: Yeah, I have an allowance for doing chores and such.
Rob: Cool. You get that money from us. Where do your mother and I get our dollars? How do we make our dollars?
Fisher: From your jobs being an entrepreneur.
Rob: Right. So we have jobs that are maybe a little different. I know you know different than most people. You and I know some folks who work as teachers, or who work as doctors. They are paid by a school or by a hospital. But your mother and I run our own companies.
You know what a business is, right? Can you summarize what a business or a company is? Why you might want to start one?
Fisher: I guess an organization of multiple people with what’s the defining factor of a business, like a pyramid of authority, hierarchy with someone at the top.
Rob: Oh, that’s interesting. You think about that. That’s the internal structure. Sometimes the business is just one person like your mom, really until the last six or eight months. It was just her in ZenFounder, so there wasn’t any need for that authority or internal structure. I think of a business as an organization that seeks to produce a profit by creating something that people value enough to pay for.
Fisher: Organization of people.
Rob: Yeah, one or more people. Here in the US, they’re called LLC, you can have a sole proprietorship, you can have a C-Corp. Then in Britain, they have a Limited Corp, I think, Private Limited. You’ll have to forgive me, I’m still just learning that stuff. But that business, because there are nonprofit organizations that are set up to do certain things, there are benefit corporations, but really what we’re talking about is a for profit company. What does a for profit company do, do you think?
Fisher: I don’t know. They give people stuff and people give them money.
Rob: Right. Examples of that, can you think of any companies that you buy things from with your dollars?
Fisher: I don’t know, Lego?
Rob: That’s a good example. Target.
Fisher: I sometimes buy stuff from Target.
Rob: Buy Lego from Target.
Fisher: Lego usually, as well. I don’t know. Amazon has better prices, but they’re a massive mega corporation. So is Target […].
Rob: So Amazon’s another business that you give your money to. Ultimately, there’s a lot of (I think) nuance around profit being the main motive of companies, or just one of several because there are these multiple bottom line-companies now that want to make a profit and also help people, which I think is good and noble; I’m actually invested in a couple of those.
Let’s say that you pay your money to a business like Target or Lego. For every dollar you give them, it costs them $1.20 to produce, market, ship, and provide you with that product.
Fisher: Then they’re losing money, though.
Rob: Okay, so does that work or not?
Fisher: No, they’ll bankrupt themselves.
Rob: Okay, good. So you’re already bringing in a term of bankruptcy. That’s great. When you give them money, do you know the term for that, what they call that inside their company?
Fisher: Revenue?
Rob: That’s right. Revenue is the dollar you give them. But what if it costs them 70 cents to manufacture and provide all the service or the product to you? Do you know what that’s called? That 70 cents.
Fisher: I don’t know. 70 cents relative to a hundred would be profit, but I don’t know it. Manufacturing costs, maybe?
Rob: Yeah. There are two things. You’re getting at it well, actually. The global term or high-level term is an expense. There’s revenue and expense. But you’re even going within expenses. There’s something called cost of goods sold. It’s also often summarized as COGS, that is manufacturing cost, shipping, and some basics.
We have revenue, which is the dollar. You want to say $100, that makes more sense to you because you never give Lego $1. Let’s give them $100 for a set. And all of their expenses, including their COGS and shipping and Target takes when they sell it to them is 70 cents. That’s their expense. Then the 30 cents that’s leftover for Lego.
Fisher: $30.
Rob: $30 that’s right. I’m still in the dollar. Yup. The $30 leftover is?
Fisher: The profit.
Rob: Yeah, there you go. Okay, so now we have business fundamentals. We have money, revenue, expenses, and profit. Okay. Now I want to switch up the business type and switch from Lego to (let’s say) that I started a software company or you started a software company. That’s now the product you’re selling. To get started, can you name a few pieces of software that you use on a daily or weekly basis?
Fisher: What software, like programs?
Rob: Yeah, just name a few. There are a bunch of them, right?
Fisher: Like apps, I suppose.
Rob: Include games.
Fisher: I play Rec Room and Minecraft sometimes.
Rob: I think we paid for Minecraft on the iPad. I think Rec Room is free, but there’s currency inside of it. That’s going to be their revenue stream. What else?
Fisher: What else? What other programs? I don’t know the Amazon App if I want to.
Rob: Yeah, that’s software, but realistically, so Amazon, you don’t pay for their software. That’s just a catalog to buy through them. How about, wasn’t there one called Kahoot!?
Fisher: That’s like a quizzing app.
Rob: Right. But didn’t we pay? You downloaded it for free then you could pay for a premium plan.
Fisher: That was Lookit for school. It’s like Kahoot!
Rob: They’re learning apps and we paid a subscription. You get some special stuff, right? Some upgrade. How about other software? Those software all download to your iPad, and it runs locally. You could turn off WiFi and it would work. What about software like Google Drive, Google Docs, and Google Sheets? Those run on the Internet, don’t they?
I know there’s an offline mode, but let’s just assume that there was no offline mode, because there was actually many, many years before they had that. Realistically, you need WiFi to access that, don’t you?
Fisher: To access a document?
Rob: Yeah, in Google Docs.
Fisher: Yeah. I guess.
Rob: Like to edit a document without offline mode.
Fisher: Assuming there’s no offline mode, yeah, you would need WiFi.
Rob: Do you use any online web-based video or photo editors or is it all app-based?
Fisher: I use Adobe Express Photoshop sometimes.
Rob: Is that downloaded onto your iPad? Is it an app or is it in a browser?
Fisher: It’s both.
Rob: Got it. It’s both. Okay. So that’s the thing. If it’s local, it’s downloaded to your iPad, then it’s just software or apps programs, as you said. If it’s any browser, there’s this term, and it’s Software as a Service. The term is terrible. So it’s SaaS, right?
Fisher: Wouldn’t it be a service, if it was an app?
Rob: There can be a money line where Google Drive or Google Docs, you can access it in the browser, and it goes out onto the Internet into their servers to retrieve your documents is what it is. But they also make an app. It’s the confusing part. They also make an app but that also goes out to the server, they call it in the cloud, right? You’ve heard this. It goes out to the Google servers to pull your docs back when you want to edit them.
Fisher: Docs also just redirects you to the app.
Rob: Got it. So the app versus browser thing maybe is not the best distinction. But I think the big thing is Software as a Service is where your data is usually not hosted locally. It’s hosted not locally on your machine, but it’s hosted on Google’s servers, or it’s hosted on Dropbox’s servers.
Think of Spotify, which is more of an entertainment app. I create playlists and those playlists live on the Spotify servers. I can access them from any device. Software as a service, terrible name, agree?
Fisher: Sure. It’s not like you build your company around it or anything.
Rob: What company are you referring to?
Fisher: I don’t know. You use that term a lot. It’s not like you build your life around that term.
Rob: Well, because Drip was Software as a Service.
Fisher: Not that not that much exaggeration, to be honest, but yeah.
Rob: Right, my life is built around it. Well, that’s the thing. It’s this very left brain nerdy term that I think is overly technical. I wish there was a better term for what we do. So you remember Drip, it was software that people could use to build their email list so they could communicate with their audience. Remember that?
Fisher: Yeah.
Rob: Okay. People paid monthly for Drip. That’s Software as a Service. That’s usually monthly or annual. It’s not a one time fee. Some of the apps that we buy that you pay for like Angry Birds, Plants vs. Zombies, where you pay $5 or $10. Then you don’t subscribe. You just get to play the game.
Fisher: Yeah, you did it yourself by using those two examples.
Rob: Yeah, you get it?
Fisher: Yeah. They’re good games, though. Yeah, that is the case. You buy the game and then you play it.
Rob: Right. Well, Software as a Service is different. You get what’s called recurring revenue. What do you think that means?
Fisher: Recurring revenue is revenue that reoccurs. So multiple payments in a month or a week.
Rob: Right. It’s standardized. It could be anything, but it’s kind of standardized in general on monthly payments or yearly payments. Those are usually the two options, I’d say in 80% of the cases. What if I were to give you this phrase, average revenue per account per month, average revenue per account? What do you think that means?
Fisher: Account?
Rob: Yeah. There’s a different way to say it, average revenue per customer.
Fisher: Okay, if an account is paying $5 for your service a month, that would be in fact, the average revenue per customer per month.
Rob: That’s exactly right. In this case, account and customer are interchangeable; ARPC or ARPA. What if I had 10 customers or 10 accounts paying me $5 a month, then I had 10 paying me $15 a month because they use the more premium version. What would my average revenue per account be?
Fisher: 10 paying you $5 and 10 paying you $15. $15 times 10 is $150 and $5 times 10 is $50. So you get $200 in revenue a month for your service.
Rob: Awesome. So that’s total revenue per month. That’s called MRR. Monthly recurring revenue. MRR is what you just defined. That is the total monthly revenue that I get from all of my customers. What is the average revenue per customer? Because I have 20 customers.
Fisher: 5 and 15, $10 per customer averaging?
Rob: That’s correct. Yup, exactly. You could get there one of two ways, the same amount are paying you $5 and $15 that it’s in the middle at $10. Or you could get your MRR, you went to MRR, which is $200. Then you said, I’m going to take my MRR, and I’m going to divide it by my number of customers. That’s the formula for average revenue per customer. So you came across $10. Now $10 would be very low and you’d have high churn, but we’re not going to do that today.
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So we have MRR, we have average revenue per customer or average revenue per account. What do you think I mean when I say annual contract value or ACV?
Fisher: The word that confuses me is contract. Annual is yearly, and value would be how much is worth relative to something else, but contract?
Rob: Yeah, it’s weird. It’s another clunky phrase that I wish was different. Maybe ACV stood for annual customer value, the value that I received from a customer in a given year.
Fisher: It would make more sense.
Rob: Yeah. And do you know what that means? Let’s say a customer pays me $10 a month, what do you think is their annual customer or contract value?
Fisher: 10 times 12 is $120.
Rob: Right. So that’s it. That’s ACV.
Fisher: $120 a year?
Rob: Yeah, but if you get a thousand of them, then you get $120,000 a year. With that, I want to cover just a couple of more things. This is all revenue. You notice that this is all money coming in. We haven’t talked in SaaS about anything going out. So we’ve talked about MRR, ARPA or ARFC, annual contract value.
One of the hardest parts about SaaS is that your customers can cancel anytime. What if a customer, if you say they’re going to pay me $10 a month, do they pay you that forever? What if someone decides they don’t need it after three months and they cancel? How much have they paid you?
Fisher: $10 a month that’d be $30. You’re expecting $120.
Rob: Right. So in that case, you expected them to pay you $120 in a year, but they only paid you $30 and they’re gone. Do you know the word for that when someone cancels that we use inside SaaS?
Fisher: Cancel? I don’t know.
Rob: Yeah, that’s called cancellation. But the way we represent it as a metric or as a number is we call it churn. Churn is the percentage of your customers who cancel in a given month. Churn with an N. Churn. You know, like churning butter. It’s that word. The reason it’s called that (I think) is because it’s like you’re churning butter. It’s you’re turning it over. You turn butter over and over to make cream, white milk. You turn cream over and over to make butter.
You can tell I’ve lived on a farm. But you’re turning customers over in this case. What if I had 100 customers at the start of a month, and then 10 customers canceled during that month? What do you think as a percentage? What do you think my churn would be?
Fisher: 10 out of 100 would be 10%. So you have 10% churn.
Rob: That’s correct. That’s called customer churn. There’s also something called revenue churn, which is, let’s say I had $10,000 a month in MRR (monthly recurring revenue) and $1000 worth of MRR canceled. It doesn’t matter if it’s one big customer, or if it’s a thousand $1 customers, but it’s that amount of MRR churn. So $1000 out of $10,000. What would that revenue churn be?
Fisher: $1000 out of $10,000. $1 out of $10 or $10 out of $100 revenue churn.
Rob: Right, 10%. It’s the same number because these are contrived examples. 10% churn, does that sound high to you or low to you?
Fisher: I don’t know.
Rob: Imagine that every month you turn 10% of your customer base. So you go from 100 down to 90.
Fisher: That’s quite high.
Rob: Then you churn nine that month, because it’s 10%. So now you’re at 81 then you churn 8.1.
Fisher: And then you bankrupt yourself.
Rob: Well, that’s what happens, right? 10%, churn, I believe you, you churn out 90% of your customers, and I forget what the number is, but it’s eight months or something. It’s the end. It’s expensive to find new customers. It’s the death of SaaS growth, it makes it hard to grow when people are canceling. That’s a more advanced topic to talk about, eliminating churn and why that happens and all this.
But I want to get to this concept called lifetime value, which is what do you think that means, lifetime value of a customer?
Fisher: The only thing I could guess is, how much money they could give you in their lifetime, I guess? I don’t know.
Rob: That is another one where lifetime is maybe not the best term for what it is. It’s like the relationship value of the customer.
Fisher: The lifetime is how long they use.
Rob: Yup. How long they use your software, how long they pay you for your software. That makes sense. We call it lifetime value. It should honestly be relationship value or something like that. Let’s say someone signs up, they pay you $10 a month, and they stick around for 20 months, and then they cancel, what was their lifetime value?
Fisher: Okay, they gave you $200.
Rob: That’s right. Usually you don’t look at it as an individual customer. You look at an aggregate because when you have a thousand customers, they’re all paying you different amounts. Some cancel at month 6, at 9, at 12. You have to average it out. To calculate the average lifetime value of your customer, first, you need to calculate the average lifetime of your customer, the average time a customer stays with you.
I want to name the formula for this and have you tell me if you think it’s intuitive or not. If you had 5% churn, for easy math, it would be 1 over 5% which is 1 over 0.05. How many months is that? One divided by 0.05 is the number of months, the average lifetime of your customer.
Fisher: 2?
Rob: Close to estimate, it’s zero.
Fisher: 20?
Rob: Yeah, if it was 0.5, that’d be 50%, and your average lifetime, it would be? So the lifetime average would be 10 months or 20 months with those numbers. The way you get your lifetime value of a customer— remember this is relationship value—is you take that lifetime, 10 months, 20 months, and you multiply it times your average revenue per customer. If we go back to our example earlier, average revenue per customer per month is $10. Remember, we did the average. If your average lifetime is 20 months, we take 20 times $10. Audio math is riveting, isn’t it?
Fisher: Equals $2000?
Rob: $200. That’s an average revenue over the lifetime of your customer. It’s called the lifetime value of a customer on average. And $200 is actually fine for a small business. It’s really, really hard to grow a company with a $200 lifetime value. I feel like that covers the revenue side, the money coming into the business.
I really want to talk about the two largest expenses. There are tons of expenses in any company, even in SaaS. There are the incorporation fees and there are legal fees and you have a payment processor like Stripe and you pay a small amount to them, but really the two biggest expenses, what do you think they are?
Fisher: I can see the document where you’ve listed these things.
Rob: Well done. Hacking the system.
Fisher: I can see it on the dock and I was going to guess salaries anyway, paying your employees.
Rob: That’s right. That is the number one expense.
Fisher: Other expense is how much the time was worth making the product.
Rob: Yes, that’s right. It’s different. Remember we talked about COGS or cost of goods sold with Lego and how they might have a lot of that because they have a huge manufacturing plant. They have people on the floor and they’re paid for the plastic. There are all those things. SaaS really just has time, doesn’t it? And time is money. You’ve heard this expression, right? Let’s say I hire five engineers, two support people, a customer success person, and a salesperson. What do I have to pay all of those people? Back to our first thing, dollars?
Fisher: I don’t know. I can’t estimate all those people.
Rob: I’m not asking how much but what do you think I pay them in? Do I give them granola bars to show up for work?
Fisher: No, no, you give them money.
Rob: Monies. Monies or salaries are your number one expense. The other one and it’s another SaaS metric, much like we talked about it, MRR and average revenue per customer, annual contract value. These are metrics that we track and pay attention to and try to improve. The last one I want to talk about is CAC.
Fisher: That’s funny. CAC.
Rob: Cost to acquire a customer. What do you think cost to acquire a customer means?
Fisher: I guess it’s an estimation, but you could estimate how much money you spend on the products you acquire. I don’t know.
Rob: You’re getting there. Yeah. It’s how much money you spend on marketing.
Fisher: Oh, it’s marketing. Okay.
Rob: And it’s averaged. So realistically, if you’re buying ads, it’s usually easy to calculate costs to acquire a customer. Because you know that if each click is $1, and 1 out of 10 clicks results in a customer, you’ve paid $10 to acquire each customer. That makes sense.
Fisher: Yeah.
Rob: Okay. It’s harder when you’re doing things like producing content, because really, what is the cost of your founder’s time? Sometimes I’ll see CAC estimated as all of our marketing expenses, divided by the number of new customers we receive in a month, and it’s across all of those things.
The hard part is, you do want to drill down further because you want to figure out where you’re low. Why would you want to figure out where your low CACs are? If I had three different marketing approaches, let’s say I was running ads, and it was $10 to acquire a customer.
I was creating content, meaning I have maybe videos on YouTube, and it’s costing me $50 to acquire a customer. Then I’m doing outbound sales, like reaching out to people on LinkedIn, Twitter and email, and it’s costing me $100 to acquire a customer. Well, which one of those is best? And why is that important?
Fisher: Well, LinkedIn and YouTube. The last two approaches I already forgot.
Rob: The first one was ads, it was $10, $50, and $100.
Fisher: Then reaching out for people for $100 bucks for a single customer would obviously be the weakest. You would probably eliminate that one and spend that money on salaries or more marketing.
Rob: Right, the other approaches that are working. You’d rather try to optimize.
Fisher: That’s why you need to know the weakest approach.
Rob: Very good, sir. That’s your SaaS metrics. Do you feel smarter for having had this conversation?
Fisher: I don’t know. I kind of already dealt with all of them.
Rob: You knew most of these things. All right. Well, we won’t tell the people that because the whole point is I was supposed to be explaining it to someone who didn’t already know these.
Fisher: Plot twist. Your editor doesn’t cut this part out.
Rob: I thought we were going to leave it. Do you have a YouTube channel you’d like to plug?
Fisher: Yeah. I know you’re not going to do it but subscribe to my YouTube channel.
Rob: How do they find it? They go to youtube.com and they search for what channel?
Fisher: This is going to cringe, I’m not going to lie. I haven’t played Among Us in 12 months and this is a reference to that.
Fisher: Yes. Because no one even spells it with a Y anymore, or else you’ll cringe. It’s just the laws of dignity now.
Rob: Laws of dignity thermodynamics. Am I right?
Fisher: Yeah, editor, editor, man, I’m sorry. You had to listen to 35 minutes of unsmart people talking. Thanks for editing stuff.
Rob: Thank you for joining me on the show today.
Fisher: Bye.
Rob: If you enjoyed that episode, let me know. I’m @robwalling on Twitter. Let’s connect there. If you haven’t downloaded our two free guides, these are never released podcast episodes plus PDF guides. First one is Eight Things You Must Know When Launching Your SaaS. The next one is 10 Things You Should Know As You Scale Your SaaS.
These are my learnings from 15–16 years-ish in SaaS as well as mentoring, advising, and starting companies. I put them all into these two episodes and these two guides. If you go to startupsfortherestofus.com, enter your email, and we will send those to you.
Thanks as always for joining me again this week. I look forward to being back in your ears again next Tuesday morning.
Episode 600 | When to Hire Your First Manager + What You Should Be Focused On (A Rob Solo Adventure)
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In episode 600, join Rob Walling for a solo adventure as he dives into topics ranging from when to hire your first manager to a mental framework for deciding which things to work on vs. what to delegate to your team. He also shares his thought process behind when things take multiple iterations and how to know whether or not you are on the right track.
Episode Sponsor:
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Learn more aka.ms/startupsfortherestofus
Topics we cover:
[1:04] A mental framework for deciding what things you should focus on as a SaaS founder vs. what to delegate
[7:28] The importance of resting and taking proper breaks as a SaaS founder
[14:28] When to hire your first manager
[14:50] The two main components of management: supervising and leading
[18:45] The importance of continuous iterations
[26:21] Why you need to manage your own psychology as a founder
[28:11] Hitting a big podcast milestone: 600 episodes
Links from the Show:
- Strawberry Fields I Beatles
- Yesterday I Beatles
- Episode 200: Customer Acquisition Plans for Bootstrappers
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.
Subscribe & Review: iTunes | Spotify | Stitcher
Rob: How many founders do we know, myself included, who burned parts of ourselves mentally, physically, and emotionally to be more successful at an action or to be more successful at our company? It is taking aspects of yourself, grinding them down, and giving it to this other entity so that it can succeed.
Welcome back to yet another episode of Startups For the Rest of Us. I’m your host, Rob Walling. I’m doing a Rob solo adventure this week. I’m going to talk through some thoughts and mental frameworks about certainty versus uncertainty. Which things should I be working on versus delegating, supervising versus leading? Might even touch on a concept called spell burn and talk about thought processes behind when things take iterations and how to know if you’re on the right track.
The first topic I want to cover today is a question that I’m asked relatively frequently. It’s something that I’ve just written down in my book that I’m working on. I’m working on a book about building seven-figure SaaS companies, mostly bootstrapping. This question of, what should I be focused on versus which things should I delegate, which roles, which responsibilities, and which tasks. The framework that I have around this is certainty versus uncertainty.
There are so many tasks in a startup that you’re relatively certain what the outcome will be. Email support is a certainty. You’re going to get some emails, and it’s a certainty you’re going to have a response to those emails, right? There’s not so much creative work or big levels of, is this going to happen? Is this going to work? I need to try a bunch of different things before I figure out what works.
In the early days, the first month to three months, yes, there are new questions. You don’t know what’s coming, but eventually, you get your canned responses. You’ve seen 80% of the tickets that are going to come through and you figure out ways to put stuff into KB and to make support a repeatable process. This is similar even with software development without actually writing the code.
Unless you’re building something incredibly novel, incredibly difficult. AI, machine learning, or something maybe with VR—unless you’re doing that, the odds are that once you know which features to build, getting that feature built is pretty predictable. You know that you can build the page to have the checkbox with the setting that says whether people should send email or receive email. It’s a checkbox. You can build this.
You may be off on that time estimate, is it going to take a day or is it going to take three days? That’s a little uncertain, but getting that task done is pretty predictable. Thus, I would call it a certainty versus which features should we build in order to get closer to product-market fit or in order to satisfy more customers? Which features should we build next? How should we prioritize these? It’s uncertain, it’s kind of foggy. You do not have absolute data. You don’t know exactly which is going to work. Frankly, you’re probably going to have to make some mistakes along the way. You’re going to build some features that maybe you shouldn’t have built.
We did that. I’ve done that before. You build them and then you think a year or two later, no one ever uses that. Why did I build it? But you need to get enough successes when you’re doing that, that you keep pushing the product forward.
Another big area of uncertainty is in marketing. When you don’t have any marketing approaches that are working and sending constant consistent leads to your site, it’s going to be some uncertainty of, we don’t have any data on which approaches we should try. The first thing I would do is go to my rules of thumb like what are the five main B2B SaaS marketing approaches. I will reveal those in my upcoming book.
I would pick one of those, I would dive deep on it, and you try it. You go months, you go all in, and you spend the time. It may work and it may not. The uncertainty there is kind of unnerving. But being a founder is making hard decisions with incomplete information. As you think about these two paradigms of certain versus uncertain, realistically, as the founder, you should be diving into the things that are hard and that are uncertain because you’re the best equipped to figure those out.
There are some exceptions I’ll say. Could I just hire a marketing genius unicorn who can come in and take the uncertainty, try a bunch of marketing approaches, and figure them out? Is that possible? Yes. Is it likely? No, you are going to have to find the 1 in 10,000 marketers, someone in Asia […] or […]. There are a few other folks I’ve worked with who are that good that they can take the strategy, try a bunch of things, figure it out, and then make them more certain.
Once you’re six months into running ads and they’re working, once you’re six months into SEO and content and that’s generating leads and it’s growing your business, that becomes more of a certainty. At that point, that’s when you can start to think about handing it off. You hire someone, you bring somebody in who’s really good at that particular thing. You bring in an amazing content marketer and amazing SEO writer.
This is now a proven aspect of your business, just like your product is. Deciding what to build next is really, really hard before product-market fit because you’re flailing all over the place. You don’t really know. You see, I don’t have 80% of the features that I need. Flash forward to three years, you have product-market fit. You’re doing $2–3 million a year. It becomes a lot easier. From experience, it becomes a lot easier to look ahead almost a year and say, this is probably what we need over the next year.
There’s always going to be stuff that makes its way in that you didn’t hear about. By that time, you’ve heard so many suggestions. You’ve heard the gamut of what someone could possibly want in your product because there’s maturity and it’s become a more certain piece of your business. In fact, that’s at the point where we hired our first product manager, the first time that the two co-founders of Drip did not make every single product decision about what should be built.
You know a lot about how it should be built—although we had designers helping us with that—the first time was when we were doing a few million dollars. We could have possibly done it a little earlier. I’m going to be honest, there was a lot more uncertainty before that point.
The lesson I want you to take away as a founder or an aspiring founder is that the areas of uncertainty are going to be the ones that you don’t want to lean into. Your comfort zone is in areas of certainty because you know that you can do them. You can write the code and ship the code to make the app.
The uncertain piece is, do you know what to build to make the app viable, to make it into not just a hobby but a business? The answer is probably not. You need to lean into the uncertain. The riskier aspects of your business at the start because those are the ones that make you uncomfortable. Those are the ones that are going to help you. You’ll actually grow the business. You can use this as a guiding principle of the moment. I have enough money to hire someone, whether it’s a part time contractor, whether it’s a full time person. I would always be looking to essentially offload the areas of certainty.
Customer support is an early one. Software development, it is more of a certainty. I know there’s craft to it. I’m a developer myself. I really used to be a developer, but I know the craft that goes around development, and that as a founder, you care more than anyone else. That’s true, but honestly, if you want to grow this business and you want to build something that people want, get there fast, and be an ambitious startup founder, you are likely leaving growth on the table by hanging out in areas of certainty for too long.
My second topic is about as a founder, giving everything to your business without taking the proper breaks or the rest to recharge. It is a recipe for burnout. This is also a recipe for not operating at a high level, not operating at your peak productivity. For this, I want to use an analogy from a tabletop role-playing game. It’s called Dungeon Crawl Classics. If you’ve heard of Dungeons and Dragons, this is a game similar to that.
You roll the dice. It randomly decides if you hit or you don’t a creature and how much hit points you do. There’s solving the puzzles. There’s exploration. It’s an interactive game. It’s a fun game. You can play in person or some folks play it online. The thing that I like about Dungeon Crawl Classics, which I’ve never actually played.
I have the rulebook and I listen to some podcasts of people who talk about it, but one of my favorite elements of DCC is—it’s called Dungeon Crawl classics—this concept of spell burn. It’s this phrase they invented to define this mechanic of the game. What spell burn is, if you are a Magic user or a mage, follow me on this even if you don’t like role playing games, just follow me. I’ll get back to startups.
Spell burn is if you are a spellcaster, you can burn some of your stats to add to your die roll. When you go to hit or cast a spell to roll back your stats. You have things like strength and agility and I forgot what they’re called in DCC. The DND words are strength, dexterity, wisdom, intelligence, constitution, and charisma. Each of those defines something.
Strength is how strong you are. Dexterity is how agile you move around. Again, DCC has different names for them. I think it’s agility instead of dexterity, but with Dungeon Crawl Classics, you can burn points of strength, points of agility. I think maybe charisma is the third one. When I say burn, basically, these attributes range from 3 to 18. You can say, I’m going to take three of my strength points.
Let’s say, I have 15 strength points. I’m going to take three of my strength points, I’m going to add them to this die roll, and then your strength temporarily drops down to 12. That weakens you. It makes your attacks work less. It literally is taxing your physical form, but it’s like you’re pushing it into the spell you’re casting. Then you know you roll your die and if you hit it without the added three, then you made a bad choice.
If that three is the difference between hitting and missing, you only use this when you really, really need it. It’s going to be a total party kill or you’re going to get crushed. The concept here is that you are literally sacrificing part of your physical form in order to be successful at this action. I’m hoping you can see the obvious path to what I’m about to say about startup founders.
How many founders do we know, myself included, who burned parts of ourselves mentally, physically, and emotionally, to be more successful at an action or to be more successful at our company? How many of us sacrifice sleep, sacrifice exercise, sacrifice personal relationships, sacrifice alone time for emotional recharging? Startup burn, maybe that’s the term for it. I think of it as spell burn. It is taking aspects of yourself and grinding them down and giving it to this other entity so that it can succeed.
In the short term, it will work. In DCC, if you spell burn your points down too low, you eventually can die. You can sacrifice your life to die to cast this last spell. The way you recharge is you take rests. I think healing potions might also work. I actually don’t know. You can tell I like the concept but haven’t actually played the game. But long rests is what starts to recharge you. I think you recharge one point per day or whatever to give you an idea of how long if you sacrifice three, five, or eight points, it can take a long time to regain these back.
It’s the same with startups. It’s the same with your company. When you give all of your emotional energy and all of your time—your 40-, your 50-, maybe your 60-hour weeks if you’re doing that. You empty your bucket for your company or your product and you don’t have any left for the rest of your life, you have to eventually take a rest. You have to step away in a way that recharges those batteries.
Personally, we ran a tiny seed retreat about 10 days ago before I’m recording this and then we had MicroConf right after it. I always know for at least the first two or three days after a MicroConf, I’m going to get almost no work done. I’m going to barely be able to talk to any other human, my wife and children included. I basically strapped on a VR headset for two or three hours. I played a bunch of games. I read about tabletop RPGs. I listen to podcasts that have nothing to do with business.
I watch some TV shows. I don’t really watch TV but I needed to do something that I wasn’t thinking about, interacting with, or diving into the business because I had spell burned myself into a place of exhaustion, which is what happens and it’s okay. I know that going into it. In fact, I’ve talked to several people on my team, Producer Xander and others. Basically, it’s the same thing. We all felt that way because you put so much into it.
The lesson I want to say is, look, it’s okay to do that but know that you have to take this in seasons, and you need to recharge quite frequently, probably more frequently than you think you do. While you will have seasons of maybe working long hours and being really emotionally intense about it. If you do that for months or years, it will absolutely grind you down. It will lead you to burnout, it will lead you to unhappiness. It’s just not a long term sustainable approach. Anytime I can talk about tabletop RPGs and relate them to startups, I consider that a win.
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My next topic is around management. More specifically, it’s a question I received from a founder that was saying, when should I hire my first manager? As a startup founder, should your third hire be someone who manages other people? That was kind of the question we were getting at. To answer that question, I had to frame it with this framework that I have around management. I think there are two components to management, there’s supervising and there’s leading. They’re two very different things.
The supervision is more of a mechanical approach. It’s taking care of vacation requests, it’s being a liaison between them and HR, it’s doing monthly or weekly one on ones, it’s annual reviews, it’s worrying about pay in terms of their salary, and that they’re well compensated, that they’re happy. It’s the mechanics of interacting with that person on your team versus leadership or leading, which is the way I define it is guiding them, mentoring them, and overseeing their actual on-the-job actions.
I want to give an example to illuminate this. If you’re a developer, it’s often that you’ll have a tech lead who is not your manager. That tech lead is probably doing code reviews for you, mentoring you in terms of software development, making sure the code base is great, guiding architecture. There are all types of things happening, but the tech lead is often not your supervisor or your manager. That often is a director of engineering or a manager of engineering.
In the case of Drip where I was the co-founder, I supervise the entire team. Everyone reported to me. That was because we never got more than 10 people. Frankly, you shouldn’t have more than six direct reports, let me just put it that way. But that’s what made the most sense. I had the most management experience. I was handling all the day-to-day operation and mechanical supervision of everyone.
The leadership—the technical leadership—specifically, was much, much, much more on Derek’s plate. He knew Ruby, I didn’t. He and I would architect things. We would talk about things. We would guide it technically, but he was the tech lead. That was his role, right? All the engineers look to him for technical guidance. Then they look to me for, can I take time off, what’s going on with my health insurance?
Similarly, with customer success, once we had two customer successes, Anna became the head of customer success. She was the technical lead of our other customer success person, but everybody still reported to me. So supervising versus leading. That’s how I want you to think about it. You could have a 10-person company and you could be the supervisor or the manager of 10 people, they’re all reporting to you.
I think at that point, you can’t possibly be a subject matter expert in all the areas and you have to have someone leading at least a couple of those areas. Usually, it’s product/engineering, customer success. I can imagine there being a sales leader. If we were a heavy sales organization, that would have been the case. I didn’t have the skill set to do that.
The reason I make this differentiation is I think the technical leadership or the customer success leadership, that can happen really early. You can have someone who is a good individual contributor be a good leader, but being a supervisor and providing that, I’d say it’s more advanced or more in-depth like feedback and giving critical feedback about performance, that often takes a lot of work. It takes some practice or having worked with a manager that you respect who’s doing a really good job.
I think really early on in your company, delegating leadership of development, leadership of sales, or leadership of customer success I think is an absolute win. I think by the time you’re at three or four people, maybe five, you should start thinking about that. If you have anyone who is a little more senior, delegating that without delegating the supervision, if they don’t have the experience.
Then when you get to the point where you directly have about six direct reports, not including any founders, you should really start thinking about, okay, am I able to promote any of the leads that I have into a full-blown manager where they’re both supervising and leading? I hope that’s helpful for you in thinking through the concept of when should I hire managers for my company.
For the fourth and final topic of today, I want to talk about iterating. I want to talk about how sometimes things take a lot of iterations, sometimes they don’t, and sometimes you nail them from the start.
For this one, I’m going to have another analogy and not tabletop role playing games, but is another one of my favorite topics, The Beatles. So my youngest son and I listen to all the alternate takes of Strawberry Fields Forever. I’m sure you’ve heard this song. The cool thing about The Beatles is they have so many great songs but then they also have all this outtake footage where there are literally at least 26 takes of Strawberry Fields Forever that were recorded. Then there are a bunch more that they were just doing in practice and not recording.
This is an addition to the demo version that John Lennon recorded at his house. The crazy thing about it is they’ve released takes 1, 4, 7, and 26. They’re on Spotify. You can find them on YouTube. Then there’s the final version. Then there’s a demo version. So there are literally six or seven versions of the song.
My son took to this one version that is very different from the others, and of course, these aren’t just takes. When you think of a musician doing 20 takes of something you think, oh, they hit the wrong notes. They were offbeat. But this is The Beatles. They’re genius musicians and almost every take is a full take-through that could have been pressed to vinyl.
That’s not what they’re doing. It’s not that they’re taking it because they screwed up. They’re adapting the song and they’re changing the song over time. When you listen to take 1, it’s a very stripped down almost acoustic thing with kind of a keyboard behind it.
“Let me take you down ‘cause I’m going to strawberry fields. Nothing is real and nothing to get hung about. Strawberry fields forever.”
Then they take six or seven, they’re adding horns in.
“Let me take you down ‘cause I’m going to strawberry fields. Nothing is real and nothing to get hung about. Strawberry fields forever.”
Then there’s the take 26 that has cellos. It has backward drum beats playing in it, it’s way faster. It is just almost a completely different song. The melody and the words are still there but the feel of the song has evolved from John with his guitar into this, frankly, incredible work of art.
“Let me take you down ‘cause I’m going to strawberry fields. Nothing is real and nothing to get hung about. Strawberry fields forever.”
All that to say they didn’t do that with every song, but they were willing to put in the time and they were willing to follow their gut to get to a vision that they had in their head. You know John Lennon, Paul McCartney, or George Harrison that they had a vision in their head of what that song maybe should sound like, but they didn’t know exactly and they just had to work it and work it and work it and get there.
Then there were songs like Yesterday that Paul McCartney woke up and the melody was in his head and he thought that he had heard it somewhere else but he remembered it anyway. He’s playing the song with different lyrics. Originally, it was called scrambled eggs. Really bad words. Not like “yesterday, all my troubles seemed so far away” is a good song. But it was like “scrambled eggs, oh, how I love your legs.” I think that was the original lyrics.
It’s terrible but he’s playing this for people saying, have you ever heard this? Have you ever heard this? Because I think I’m ripping this off by accident because it was just in my head. That was it. He wrote the lyrics. My understanding is there are two takes, literally two takes, that’s it, of that song. Because the song was done. He knew it had hit the vision and he knew it was amazing. I think it’s my favorite Beatles song. I think it’s one of my favorite songs of all time, to be honest.
It is, I think, still the most covered song ever, that has the most cover versions of any song ever written by anyone is Yesterday. I think there’s a little testament to it’s probably a pretty good one. Here, on one hand, we have Strawberry Fields Forever, with all this iteration over days and days and days, getting not a full orchestra, but most of an orchestra involved and having all these versions, and then we have Yesterday that pops into a guy’s head that he does two takes of and then it’s done.
There are other examples of this, not just The Beatles. I’ve been to several Picasso museums. It’s funny, Picasso’s art is fine. It’s not like I’m enthralled with Picasso, but Picasso’s creative process is incredible. There’s a reason that I have a Picasso guitar tattooed on one of my arms because I’m enthralled with the fact that he would paint the same painting in different ways 20, 30, 40 times because he was iterating trying to figure out how am I going to get this to work? How does this fit together to where this finally lives up to my taste of what I want this to be.
That’s how he invented Cubism. You can google that, but it’s an entire branch of art. It’s a style of art that just didn’t exist. He learned the basics, he learned the fundamentals, and he painted paintings like everyone else. Then he just started iterating and iterating. You’ll see there’s one room—I believe it’s in Barcelona, the Picasso Museum in Barcelona—where there are 25–30 versions of the same painting with different colors from different perspectives, with different views, and it changes each time.
I’m so struck. I sat in that room for 10, 15 minutes and just stared at these works of art that any one of them is a work of art and could be hung in a museum, but they didn’t live up to his tastes. It wasn’t what he wanted. He knew he was not getting the results that he wanted so he kept iterating.
Similarly, Einstein spent how many years iterating and developing relativity, it did not hit him instantly. I think that’s a long way of saying that in startups, it’s the same thing. Sometimes you will start a marketing approach to content, say SEO. It kind of works from the start, but it doesn’t really. I think founders who aren’t long term successful, they throw their hands up and say, this doesn’t work. AdWords, Facebook ads, they just don’t work. But they do and they can.
They may not work in your space, that’s true, but did you think that maybe you didn’t iterate enough? Did you think the execution is off, that you need to play around with it more? Maybe you need to get better at Facebook ads, Google ads, content, SEO, maybe you need to give it more time. There’s a balance here. You don’t want to do something for a year and spend all that time and have it not work.
Also, I think, giving a marketing approach a month or giving a product three months to find the product-market fit is too short. There’s someplace in between where you need to see the progress along the way that as you iterate, there should be some progress made. You should be getting some traction with it slowly. You start to see that light at the end of the tunnel. You start to see take 26 on the horizon or painting number 30 where you think I’m getting there.
I’ve said before, so much of being a founder is managing your own psychology. Part of that is knowing yourself. If you’re the one who tends to just skip from one thing to the next and you don’t iterate, you don’t improve it, and you don’t put in the time to figure out these hard things, then you probably need to stick with things longer than feels rational, longer than you want to.
You need to get reinforcement from a mastermind group, from a co-founder, from someone else who has some insight in your business because oftentimes we have blind spots. We need a different perspective to help guide us or to help push us when we want to skip to the next thing.
Conversely, if you’re the person who sits and grinds on something for nine months—I tried Facebook ads for nine months and they didn’t work—probably too long then. You probably should have got some outside counsel before. Maybe you should have considered hiring a consultant. Maybe you should have just bailed on it and moved on to content SEO.
There’s this balance of knowing yourself and knowing what your tendencies are. But realizing that even geniuses, even the best there have ever been—people like Einstein, Picasso, and The Beatles, these names are synonymous, they are used as examples of geniuses. Even these inventors, artists, and musicians had to iterate over and over and over on their works to get them to be successful, to get them to live up to their taste.
I think to a lot of us, this is where we put our creative juices. This is how we get that feeling of building something. This is our dopamine rush. For some people, it’s writing a song or painting and for others, it’s shipping a feature or it’s building a multimillion-dollar company that changes your life. I hope that thought of sometimes needing many iterations, sometimes, though in rare cases, that kind of thought process or mental framework is helpful to you this week on your entrepreneurial journey.
Speaking of showing up every week for 12 years, this is episode 600. I debated whether to even bring it up because I’m just not sure how important that number is. It shouldn’t be any different than 599 or 601. It happens to have a couple of zeros at the end but you show up every week to build something like this. When these 100-episode milestones hit, I always think I should do something different and special. I should bring on these guests and we should reflect on things we’ve done and how we’ve done it.
We have done that, right? Mike and I had our wives on for an episode. That was probably episode 200. I’ve done reflection episodes, look back episodes, we’ve had people send in audio clips, we’ve had all that all the stuff. I think that’s great. Maybe at 700, I’ll do that again. I think it’s a good reminder to think about sometimes just showing up every week and putting in your time, whether it’s this podcast or whether it’s showing up every day to ship that next feature, celebrate your milestones, and I’ll be celebrating privately.
I’ll probably hang out with my wife and kids tonight and raise a glass to episode 600. But as you build your product, as you build your business, as you build your company, remember to think in terms of years, not months. Sometimes just showing up every day or every week and putting in the work is what you need to do to get to where you want to go.
Thank you so much for joining me this week and whether it’s for the last six or last 600 episodes, it’s been my absolute pleasure to get on the microphone and be able to think about these things and talk about them, and hopefully, these are helpful to you this week or this month or this year as you build and grow company. Signing off from episode 600. We’ll be back in your ears again next Tuesday morning.
Welcome back to yet another episode of Startups For the Rest of Us. I’m your host, Rob Walling. I’m doing a Rob solo adventure this week. I’m going to talk through some thoughts and mental frameworks about certainty versus uncertainty. Which things should I be working on versus delegating, supervising versus leading? Might even touch on a concept called spell burn and talk about thought processes behind when things take iterations and how to know if you’re on the right track.
The first topic I want to cover today is a question that I’m asked relatively frequently. It’s something that I’ve just written down in my book that I’m working on. I’m working on a book about building seven-figure SaaS companies, mostly bootstrapping. This question of, what should I be focused on versus which things should I delegate, which roles, which responsibilities, and which tasks. The framework that I have around this is certainty versus uncertainty.
There are so many tasks in a startup that you’re relatively certain what the outcome will be. Email support is a certainty. You’re going to get some emails, and it’s a certainty you’re going to have a response to those emails, right? There’s not so much creative work or big levels of, is this going to happen? Is this going to work? I need to try a bunch of different things before I figure out what works.
In the early days, the first month to three months, yes, there are new questions. You don’t know what’s coming, but eventually, you get your canned responses. You’ve seen 80% of the tickets that are going to come through and you figure out ways to put stuff into KB and to make support a repeatable process. This is similar even with software development without actually writing the code.
Unless you’re building something incredibly novel, incredibly difficult. AI, machine learning, or something maybe with VR—unless you’re doing that, the odds are that once you know which features to build, getting that feature built is pretty predictable. You know that you can build the page to have the checkbox with the setting that says whether people should send email or receive email. It’s a checkbox. You can build this.
You may be off on that time estimate, is it going to take a day or is it going to take three days? That’s a little uncertain, but getting that task done is pretty predictable. Thus, I would call it a certainty versus which features should we build in order to get closer to product-market fit or in order to satisfy more customers? Which features should we build next? How should we prioritize these? It’s uncertain, it’s kind of foggy. You do not have absolute data. You don’t know exactly which is going to work. Frankly, you’re probably going to have to make some mistakes along the way. You’re going to build some features that maybe you shouldn’t have built.
We did that. I’ve done that before. You build them and then you think a year or two later, no one ever uses that. Why did I build it? But you need to get enough successes when you’re doing that, that you keep pushing the product forward.
Another big area of uncertainty is in marketing. When you don’t have any marketing approaches that are working and sending constant consistent leads to your site, it’s going to be some uncertainty of, we don’t have any data on which approaches we should try. The first thing I would do is go to my rules of thumb like what are the five main B2B SaaS marketing approaches. I will reveal those in my upcoming book.
I would pick one of those, I would dive deep on it, and you try it. You go months, you go all in, and you spend the time. It may work and it may not. The uncertainty there is kind of unnerving. But being a founder is making hard decisions with incomplete information. As you think about these two paradigms of certain versus uncertain, realistically, as the founder, you should be diving into the things that are hard and that are uncertain because you’re the best equipped to figure those out.
There are some exceptions I’ll say. Could I just hire a marketing genius unicorn who can come in and take the uncertainty, try a bunch of marketing approaches, and figure them out? Is that possible? Yes. Is it likely? No, you are going to have to find the 1 in 10,000 marketers, someone in Asia […] or […]. There are a few other folks I’ve worked with who are that good that they can take the strategy, try a bunch of things, figure it out, and then make them more certain.
Once you’re six months into running ads and they’re working, once you’re six months into SEO and content and that’s generating leads and it’s growing your business, that becomes more of a certainty. At that point, that’s when you can start to think about handing it off. You hire someone, you bring somebody in who’s really good at that particular thing. You bring in an amazing content marketer and amazing SEO writer.
This is now a proven aspect of your business, just like your product is. Deciding what to build next is really, really hard before product-market fit because you’re flailing all over the place. You don’t really know. You see, I don’t have 80% of the features that I need. Flash forward to three years, you have product-market fit. You’re doing $2–3 million a year. It becomes a lot easier. From experience, it becomes a lot easier to look ahead almost a year and say, this is probably what we need over the next year.
There’s always going to be stuff that makes its way in that you didn’t hear about. By that time, you’ve heard so many suggestions. You’ve heard the gamut of what someone could possibly want in your product because there’s maturity and it’s become a more certain piece of your business. In fact, that’s at the point where we hired our first product manager, the first time that the two co-founders of Drip did not make every single product decision about what should be built.
You know a lot about how it should be built—although we had designers helping us with that—the first time was when we were doing a few million dollars. We could have possibly done it a little earlier. I’m going to be honest, there was a lot more uncertainty before that point.
The lesson I want you to take away as a founder or an aspiring founder is that the areas of uncertainty are going to be the ones that you don’t want to lean into. Your comfort zone is in areas of certainty because you know that you can do them. You can write the code and ship the code to make the app.
The uncertain piece is, do you know what to build to make the app viable, to make it into not just a hobby but a business? The answer is probably not. You need to lean into the uncertain. The riskier aspects of your business at the start because those are the ones that make you uncomfortable. Those are the ones that are going to help you. You’ll actually grow the business. You can use this as a guiding principle of the moment. I have enough money to hire someone, whether it’s a part time contractor, whether it’s a full time person. I would always be looking to essentially offload the areas of certainty.
Customer support is an early one. Software development, it is more of a certainty. I know there’s craft to it. I’m a developer myself. I really used to be a developer, but I know the craft that goes around development, and that as a founder, you care more than anyone else. That’s true, but honestly, if you want to grow this business and you want to build something that people want, get there fast, and be an ambitious startup founder, you are likely leaving growth on the table by hanging out in areas of certainty for too long.
My second topic is about as a founder, giving everything to your business without taking the proper breaks or the rest to recharge. It is a recipe for burnout. This is also a recipe for not operating at a high level, not operating at your peak productivity. For this, I want to use an analogy from a tabletop role-playing game. It’s called Dungeon Crawl Classics. If you’ve heard of Dungeons and Dragons, this is a game similar to that.
You roll the dice. It randomly decides if you hit or you don’t a creature and how much hit points you do. There’s solving the puzzles. There’s exploration. It’s an interactive game. It’s a fun game. You can play in person or some folks play it online. The thing that I like about Dungeon Crawl Classics, which I’ve never actually played.
I have the rulebook and I listen to some podcasts of people who talk about it, but one of my favorite elements of DCC is—it’s called Dungeon Crawl classics—this concept of spell burn. It’s this phrase they invented to define this mechanic of the game. What spell burn is, if you are a Magic user or a mage, follow me on this even if you don’t like role playing games, just follow me. I’ll get back to startups.
Spell burn is if you are a spellcaster, you can burn some of your stats to add to your die roll. When you go to hit or cast a spell to roll back your stats. You have things like strength and agility and I forgot what they’re called in DCC. The DND words are strength, dexterity, wisdom, intelligence, constitution, and charisma. Each of those defines something.
Strength is how strong you are. Dexterity is how agile you move around. Again, DCC has different names for them. I think it’s agility instead of dexterity, but with Dungeon Crawl Classics, you can burn points of strength, points of agility. I think maybe charisma is the third one. When I say burn, basically, these attributes range from 3 to 18. You can say, I’m going to take three of my strength points.
Let’s say, I have 15 strength points. I’m going to take three of my strength points, I’m going to add them to this die roll, and then your strength temporarily drops down to 12. That weakens you. It makes your attacks work less. It literally is taxing your physical form, but it’s like you’re pushing it into the spell you’re casting. Then you know you roll your die and if you hit it without the added three, then you made a bad choice.
If that three is the difference between hitting and missing, you only use this when you really, really need it. It’s going to be a total party kill or you’re going to get crushed. The concept here is that you are literally sacrificing part of your physical form in order to be successful at this action. I’m hoping you can see the obvious path to what I’m about to say about startup founders.
How many founders do we know, myself included, who burned parts of ourselves mentally, physically, and emotionally, to be more successful at an action or to be more successful at our company? How many of us sacrifice sleep, sacrifice exercise, sacrifice personal relationships, sacrifice alone time for emotional recharging? Startup burn, maybe that’s the term for it. I think of it as spell burn. It is taking aspects of yourself and grinding them down and giving it to this other entity so that it can succeed.
In the short term, it will work. In DCC, if you spell burn your points down too low, you eventually can die. You can sacrifice your life to die to cast this last spell. The way you recharge is you take rests. I think healing potions might also work. I actually don’t know. You can tell I like the concept but haven’t actually played the game. But long rests is what starts to recharge you. I think you recharge one point per day or whatever to give you an idea of how long if you sacrifice three, five, or eight points, it can take a long time to regain these back.
It’s the same with startups. It’s the same with your company. When you give all of your emotional energy and all of your time—your 40-, your 50-, maybe your 60-hour weeks if you’re doing that. You empty your bucket for your company or your product and you don’t have any left for the rest of your life, you have to eventually take a rest. You have to step away in a way that recharges those batteries.
Personally, we ran a tiny seed retreat about 10 days ago before I’m recording this and then we had MicroConf right after it. I always know for at least the first two or three days after a MicroConf, I’m going to get almost no work done. I’m going to barely be able to talk to any other human, my wife and children included. I basically strapped on a VR headset for two or three hours. I played a bunch of games. I read about tabletop RPGs. I listen to podcasts that have nothing to do with business.
I watch some TV shows. I don’t really watch TV but I needed to do something that I wasn’t thinking about, interacting with, or diving into the business because I had spell burned myself into a place of exhaustion, which is what happens and it’s okay. I know that going into it. In fact, I’ve talked to several people on my team, Producer Xander and others. Basically, it’s the same thing. We all felt that way because you put so much into it.
The lesson I want to say is, look, it’s okay to do that but know that you have to take this in seasons, and you need to recharge quite frequently, probably more frequently than you think you do. While you will have seasons of maybe working long hours and being really emotionally intense about it. If you do that for months or years, it will absolutely grind you down. It will lead you to burnout, it will lead you to unhappiness. It’s just not a long term sustainable approach. Anytime I can talk about tabletop RPGs and relate them to startups, I consider that a win.
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My next topic is around management. More specifically, it’s a question I received from a founder that was saying, when should I hire my first manager? As a startup founder, should your third hire be someone who manages other people? That was kind of the question we were getting at. To answer that question, I had to frame it with this framework that I have around management. I think there are two components to management, there’s supervising and there’s leading. They’re two very different things.
The supervision is more of a mechanical approach. It’s taking care of vacation requests, it’s being a liaison between them and HR, it’s doing monthly or weekly one on ones, it’s annual reviews, it’s worrying about pay in terms of their salary, and that they’re well compensated, that they’re happy. It’s the mechanics of interacting with that person on your team versus leadership or leading, which is the way I define it is guiding them, mentoring them, and overseeing their actual on-the-job actions.
I want to give an example to illuminate this. If you’re a developer, it’s often that you’ll have a tech lead who is not your manager. That tech lead is probably doing code reviews for you, mentoring you in terms of software development, making sure the code base is great, guiding architecture. There are all types of things happening, but the tech lead is often not your supervisor or your manager. That often is a director of engineering or a manager of engineering.
In the case of Drip where I was the co-founder, I supervise the entire team. Everyone reported to me. That was because we never got more than 10 people. Frankly, you shouldn’t have more than six direct reports, let me just put it that way. But that’s what made the most sense. I had the most management experience. I was handling all the day-to-day operation and mechanical supervision of everyone.
The leadership—the technical leadership—specifically, was much, much, much more on Derek’s plate. He knew Ruby, I didn’t. He and I would architect things. We would talk about things. We would guide it technically, but he was the tech lead. That was his role, right? All the engineers look to him for technical guidance. Then they look to me for, can I take time off, what’s going on with my health insurance?
Similarly, with customer success, once we had two customer successes, Anna became the head of customer success. She was the technical lead of our other customer success person, but everybody still reported to me. So supervising versus leading. That’s how I want you to think about it. You could have a 10-person company and you could be the supervisor or the manager of 10 people, they’re all reporting to you.
I think at that point, you can’t possibly be a subject matter expert in all the areas and you have to have someone leading at least a couple of those areas. Usually, it’s product/engineering, customer success. I can imagine there being a sales leader. If we were a heavy sales organization, that would have been the case. I didn’t have the skill set to do that.
The reason I make this differentiation is I think the technical leadership or the customer success leadership, that can happen really early. You can have someone who is a good individual contributor be a good leader, but being a supervisor and providing that, I’d say it’s more advanced or more in-depth like feedback and giving critical feedback about performance, that often takes a lot of work. It takes some practice or having worked with a manager that you respect who’s doing a really good job.
I think really early on in your company, delegating leadership of development, leadership of sales, or leadership of customer success I think is an absolute win. I think by the time you’re at three or four people, maybe five, you should start thinking about that. If you have anyone who is a little more senior, delegating that without delegating the supervision, if they don’t have the experience.
Then when you get to the point where you directly have about six direct reports, not including any founders, you should really start thinking about, okay, am I able to promote any of the leads that I have into a full-blown manager where they’re both supervising and leading? I hope that’s helpful for you in thinking through the concept of when should I hire managers for my company.
For the fourth and final topic of today, I want to talk about iterating. I want to talk about how sometimes things take a lot of iterations, sometimes they don’t, and sometimes you nail them from the start.
For this one, I’m going to have another analogy and not tabletop role playing games, but is another one of my favorite topics, The Beatles. So my youngest son and I listen to all the alternate takes of Strawberry Fields Forever. I’m sure you’ve heard this song. The cool thing about The Beatles is they have so many great songs but then they also have all this outtake footage where there are literally at least 26 takes of Strawberry Fields Forever that were recorded. Then there are a bunch more that they were just doing in practice and not recording.
This is an addition to the demo version that John Lennon recorded at his house. The crazy thing about it is they’ve released takes 1, 4, 7, and 26. They’re on Spotify. You can find them on YouTube. Then there’s the final version. Then there’s a demo version. So there are literally six or seven versions of the song.
My son took to this one version that is very different from the others, and of course, these aren’t just takes. When you think of a musician doing 20 takes of something you think, oh, they hit the wrong notes. They were offbeat. But this is The Beatles. They’re genius musicians and almost every take is a full take-through that could have been pressed to vinyl.
That’s not what they’re doing. It’s not that they’re taking it because they screwed up. They’re adapting the song and they’re changing the song over time. When you listen to take 1, it’s a very stripped down almost acoustic thing with kind of a keyboard behind it.
“Let me take you down ‘cause I’m going to strawberry fields. Nothing is real and nothing to get hung about. Strawberry fields forever.”
Then they take six or seven, they’re adding horns in.
“Let me take you down ‘cause I’m going to strawberry fields. Nothing is real and nothing to get hung about. Strawberry fields forever.”
Then there’s the take 26 that has cellos. It has backward drum beats playing in it, it’s way faster. It is just almost a completely different song. The melody and the words are still there but the feel of the song has evolved from John with his guitar into this, frankly, incredible work of art.
“Let me take you down ‘cause I’m going to strawberry fields. Nothing is real and nothing to get hung about. Strawberry fields forever.”
All that to say they didn’t do that with every song, but they were willing to put in the time and they were willing to follow their gut to get to a vision that they had in their head. You know John Lennon, Paul McCartney, or George Harrison that they had a vision in their head of what that song maybe should sound like, but they didn’t know exactly and they just had to work it and work it and work it and get there.
Then there were songs like Yesterday that Paul McCartney woke up and the melody was in his head and he thought that he had heard it somewhere else but he remembered it anyway. He’s playing the song with different lyrics. Originally, it was called scrambled eggs. Really bad words. Not like “yesterday, all my troubles seemed so far away” is a good song. But it was like “scrambled eggs, oh, how I love your legs.” I think that was the original lyrics.
It’s terrible but he’s playing this for people saying, have you ever heard this? Have you ever heard this? Because I think I’m ripping this off by accident because it was just in my head. That was it. He wrote the lyrics. My understanding is there are two takes, literally two takes, that’s it, of that song. Because the song was done. He knew it had hit the vision and he knew it was amazing. I think it’s my favorite Beatles song. I think it’s one of my favorite songs of all time, to be honest.
It is, I think, still the most covered song ever, that has the most cover versions of any song ever written by anyone is Yesterday. I think there’s a little testament to it’s probably a pretty good one. Here, on one hand, we have Strawberry Fields Forever, with all this iteration over days and days and days, getting not a full orchestra, but most of an orchestra involved and having all these versions, and then we have Yesterday that pops into a guy’s head that he does two takes of and then it’s done.
There are other examples of this, not just The Beatles. I’ve been to several Picasso museums. It’s funny, Picasso’s art is fine. It’s not like I’m enthralled with Picasso, but Picasso’s creative process is incredible. There’s a reason that I have a Picasso guitar tattooed on one of my arms because I’m enthralled with the fact that he would paint the same painting in different ways 20, 30, 40 times because he was iterating trying to figure out how am I going to get this to work? How does this fit together to where this finally lives up to my taste of what I want this to be.
That’s how he invented Cubism. You can google that, but it’s an entire branch of art. It’s a style of art that just didn’t exist. He learned the basics, he learned the fundamentals, and he painted paintings like everyone else. Then he just started iterating and iterating. You’ll see there’s one room—I believe it’s in Barcelona, the Picasso Museum in Barcelona—where there are 25–30 versions of the same painting with different colors from different perspectives, with different views, and it changes each time.
I’m so struck. I sat in that room for 10, 15 minutes and just stared at these works of art that any one of them is a work of art and could be hung in a museum, but they didn’t live up to his tastes. It wasn’t what he wanted. He knew he was not getting the results that he wanted so he kept iterating.
Similarly, Einstein spent how many years iterating and developing relativity, it did not hit him instantly. I think that’s a long way of saying that in startups, it’s the same thing. Sometimes you will start a marketing approach to content, say SEO. It kind of works from the start, but it doesn’t really. I think founders who aren’t long term successful, they throw their hands up and say, this doesn’t work. AdWords, Facebook ads, they just don’t work. But they do and they can.
They may not work in your space, that’s true, but did you think that maybe you didn’t iterate enough? Did you think the execution is off, that you need to play around with it more? Maybe you need to get better at Facebook ads, Google ads, content, SEO, maybe you need to give it more time. There’s a balance here. You don’t want to do something for a year and spend all that time and have it not work.
Also, I think, giving a marketing approach a month or giving a product three months to find the product-market fit is too short. There’s someplace in between where you need to see the progress along the way that as you iterate, there should be some progress made. You should be getting some traction with it slowly. You start to see that light at the end of the tunnel. You start to see take 26 on the horizon or painting number 30 where you think I’m getting there.
I’ve said before, so much of being a founder is managing your own psychology. Part of that is knowing yourself. If you’re the one who tends to just skip from one thing to the next and you don’t iterate, you don’t improve it, and you don’t put in the time to figure out these hard things, then you probably need to stick with things longer than feels rational, longer than you want to.
You need to get reinforcement from a mastermind group, from a co-founder, from someone else who has some insight in your business because oftentimes we have blind spots. We need a different perspective to help guide us or to help push us when we want to skip to the next thing.
Conversely, if you’re the person who sits and grinds on something for nine months—I tried Facebook ads for nine months and they didn’t work—probably too long then. You probably should have got some outside counsel before. Maybe you should have considered hiring a consultant. Maybe you should have just bailed on it and moved on to content SEO.
There’s this balance of knowing yourself and knowing what your tendencies are. But realizing that even geniuses, even the best there have ever been—people like Einstein, Picasso, and The Beatles, these names are synonymous, they are used as examples of geniuses. Even these inventors, artists, and musicians had to iterate over and over and over on their works to get them to be successful, to get them to live up to their taste.
I think to a lot of us, this is where we put our creative juices. This is how we get that feeling of building something. This is our dopamine rush. For some people, it’s writing a song or painting and for others, it’s shipping a feature or it’s building a multimillion-dollar company that changes your life. I hope that thought of sometimes needing many iterations, sometimes, though in rare cases, that kind of thought process or mental framework is helpful to you this week on your entrepreneurial journey.
Speaking of showing up every week for 12 years, this is episode 600. I debated whether to even bring it up because I’m just not sure how important that number is. It shouldn’t be any different than 599 or 601. It happens to have a couple of zeros at the end but you show up every week to build something like this. When these 100-episode milestones hit, I always think I should do something different and special. I should bring on these guests and we should reflect on things we’ve done and how we’ve done it.
We have done that, right? Mike and I had our wives on for an episode. That was probably episode 200. I’ve done reflection episodes, look back episodes, we’ve had people send in audio clips, we’ve had all that all the stuff. I think that’s great. Maybe at 700, I’ll do that again. I think it’s a good reminder to think about sometimes just showing up every week and putting in your time, whether it’s this podcast or whether it’s showing up every day to ship that next feature, celebrate your milestones, and I’ll be celebrating privately.
I’ll probably hang out with my wife and kids tonight and raise a glass to episode 600. But as you build your product, as you build your business, as you build your company, remember to think in terms of years, not months. Sometimes just showing up every day or every week and putting in the work is what you need to do to get to where you want to go.
Thank you so much for joining me this week and whether it’s for the last six or last 600 episodes, it’s been my absolute pleasure to get on the microphone and be able to think about these things and talk about them, and hopefully, these are helpful to you this week or this month or this year as you build and grow company. Signing off from episode 600. We’ll be back in your ears again next Tuesday morning.
Episode 593 | Retaining Employees + The Ideal SaaS Business (A Rob Solo Adventure)
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In Episode 593, join Rob Walling for a Solo Adventure as he chats about accidentally deleting all of his old tweets, retaining talent, the ideal market for a SaaS business, and more.
The topics we cover
[3:10] Deleting old tweets
[8:43] Retaining talent
[12:39] Ideal market for a SaaS business
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!
Subscribe & Review: iTunes | Spotify | Stitcher
Rob: Welcome back to Startups for the Rest of Us. I’m Rob Walling. This is a show for ambitious startup founders who want to grow incredible companies and maybe not change the whole world, but just our little corner of it. We do this for freedom, purpose, and relationships.
I had a fun episode this week. It’s a Rob solo adventure. I’m going to talk through a couple of listener questions, tell a story or two to kick us off. There are first stories that still kind of pain me. It goes under #toosoon, but it reminds me of those times where if you have written a database query, and you forgot the WHERE clause, where you write, update this column in the database to XYZ, then you forget to hit WHERE, you submit that clause, and you wipe out a whole column in a table and you have to go back to a backup.
It also reminds me of the time, Derek will be fine with me sharing this, but this is probably 2014, maybe even late 2013, we’re like a year into Drip. Sunday night, my phone rings, the first problem is we didn’t call each other, it’s all texting. If someone calls me, I consider that they are being held hostage in an overseas prison somewhere or that something’s on fire, their house or our servers are on fire. I literally picked up the phone. I said uh oh, that’s how I answered it, and it was Derek just sweating bullets. He said do we have a backup of the database? I said yes, we have a backup. What happened?
He had done something like that where I think he forgot the WHERE clause, it was in the credit card table. I think we had a hundred customers at the time so it would have been bad but not the end of the world. Basically, I think it had overwritten all the credit card numbers in the table or something like that. We didn’t even store the full credit card. Maybe it was the Stripe customer ID that allowed us to charge it, it was easily fixed, and we lost no data.
I remember that feeling when I did that, I did it to an ecommerce website back in, it must have been 2001. This is before Shopify. We had built a custom ecommerce shopping cart and the whole website was all custom. I did that to the order’s table or the order in progress table or something, and it’s just the worst feeling because I hit this update, I forgot to say which row to update, and it’s taking way longer than I think it should to execute. Why is this going? About 10 seconds in I’m like oh, good Lord, how do I cancel this command? Of course, it’s already done tens of thousands of rows of damage.
That was another one. We had a database backup and refreshed it. The reason I’m telling all these stories is that a couple of friends of mine over the past year or so have started deleting old tweets and I didn’t really understand that. They set up a service that recurring go back x months and just deletes anything before that in their account. I was asking one friend about it. I said, why do you do that? He said people will go back through your tweets, they’ll go back 10 years, 12 years, and they’ll dig something up like quoted out of context, basically. I just never wanted that to happen.
When he said it I was like yeah, I guess it could happen but it feels a little overly paranoid. Then of course, in the past three months, I’ve seen this happen twice to notable people where someone just comes back through and says something, well, that’s not really what I meant or cultural norms have changed. There are all different types of things that can happen.
The most recent one was someone built a copy of Wordle on iOS and just duplicated it. Wordle wasn’t even original to the guy who built the web. Is there a web version? I don’t play Wordle, I don’t know. Who built the version that’s popular right now, it’s actually from some game show in the ’70s or the ’80s.
Anyway, this guy builds a copy and there’s this big hubbub. They go back through his tweets and they just roast this guy. There’s a big pile on because it’s Twitter, of course, and there’s a certain group of people who kind of just want to be angry about stuff all the time.
Anyway, I’ve sat, watched these, and kind of listened to […]. I think, you know what, I don’t say controversial things in general, that’s just not that’s not my bag. That’s not how I built my personality or my brand. That’s just not really who I am so I’ve always been careful. I have nothing that I’m worried about in particular, but I started tweeting in I believe it was 2009, so we’re talking 13 years.
Over that time, I found out because I signed up for some software and it said I had 9300 tweets, likes, and retweets. Not actually that many, which I think shows a little self-restraint and also a few years where I completely quit Twitter while I was building Drip.
All that said, I thought, what does it hurt if I go back and I delete even the first 8 years, 10 years of my tweets. I don’t need them. They’re these super ephemeral things anyway. These aren’t like blog posts.
I went back through robwalling.com and I had a couple of hundred essays there. I read through a bunch of them and I was like these don’t hold up. These were really a point in time where Digg was a big thing, social media, or social news websites, it’s not relevant anymore. I even had to prune some of those a while for both for SEO purposes, but just to get the old thinking off of the site.
I was like yeah, I’m going to delete 6000, 7000 of these. I think it was the first 10 years basically in my history. I feel like since 2018, 2019, I’ve been tweeting more, and I’ve been more consistent about it, really giving more thoughtful tweets, doing threads, and that kind of stuff. I figured, hey, I’m going to keep that and delete the rest. I don’t see any downside to doing it.
I went into the software, it was recommended, and it was good, it was fine to sign up. It’s relatively inexpensive. I started using it and their date picker is a little finicky. I really struggled to get the first 10 years, 8 ½ years, or something, and eventually, I did. It’s like cool, those are all the tweets. You have to go through this whole process of downloading an archive and uploading it into the software.
I took a deep breath, it was a Sunday afternoon, and I hit submit. I sat back and it said deleting 9300 tweets, likes, and retweets. My eyes got wide. I was like what? It is that hair stands up on the back of the neck, all the blood rushes out your face, and I’m like it’s deleting everything, everything I’ve ever tweeted.
I get this mini panic attack. I knew the date thing was finicky, but it’s deleting everything. I like to go and look for a pause or stop button. I emailed their live chat. Of course, they’re in Eastern Europe so it’s midnight, 2:00 AM, or whatever it was. I hope that your bug is not deleting my entire Twitter stream, all my tweets forever. Of course, it did.
For hours, I was in shock that all my tweets, they’re gone. Before long, I realized it doesn’t matter and that’s the shocking revelation is it just doesn’t matter. That’s how ephemeral these things are. No one noticed, not a single person pinged me, asked me about it, mentioned it, called it out. I deleted a tweet I think from less than 48 hours prior and it just doesn’t matter.
There are a couple of things. The interesting thing is that man, it sucked and it’s kind of a funny story to tell in retrospect. The other interesting thing is that I feel like if I deleted all my essays or all my podcast episodes, that would matter because people go back, they listen to them, and there’s still value. If I deleted my book, pulled it down from the internet, people would still buy and read that book, my first book Start Small, Stay Small.
It continues to reinforce this idea in my mind of ephemeral things like social media and I guess the questionable value that I see in them. Of course, you’re going to still see me on Twitter because that’s what we do and that’s where we hang out.
All that to say, I don’t know if there’s a great lesson to take away from this other than it definitely made me continue to think about social media, what is the value of it, and knowing that the value is probably not in any type of long term staying power. It’s much more about that at the moment part of the conversation.
My next topic before I get into some listener questions and comments is from a conversation I had with a founder who was asking me how I can retain this person? It is a senior dev at his company, who I think is working part-time, half-time as a contractor, and works on other projects as well. The founder was asking me, how can I motivate this person to come and work with me full time? He has a lot of options. This is the gist of the message that I sent back to him.
I said, I would ask what he was looking for. Some people are less motivated by money and they might want one of the following: control over what they work on, to have a big impact on the app they’re working on, to know for sure the job is stable, to not have their spouse/family be suspect that they’re making a bad choice taking the job, more money, flexible working hours, to manage or not manage people, remote work, autonomy, the potential for advancement, ownership along the lines of stock options or profit-sharing. I would just ask him what’s important and try to give that to him.
The reason I’m reading that here is when you’re hiring or retaining, keep in mind that not everyone is motivated by money. I think in sales and on Wall Street like in finance, traditionally, people are motivated by money and that’s why they gravitate towards those things. I don’t think it’s a stereotype as much as it’s mostly the way things are done. In a lot of other roles, money is lower on the totem pole than that list of things that I just mentioned.
In particular, I think in this competitive job market where everyone can be remote, anyone can now get a job at Google or Facebook and get these really high salaries because they basically pay above market. If you’re qualified, they pay above the market rate in your city or town. Think as a founder of other ways to motivate. It’s harder to do when you’re first hiring because you don’t know the person and it can be awkward to figure it out or ask.
Retaining is different because oftentimes, you’ve worked with that person and you kind of learn what their personal life looks like. You realize that, wow, for this person, maybe working four days a week, just working 80% of the time is actually a huge benefit to them. They will stick around a long time, a lot longer, if you are able to give them that flexibility, or as I said, to know that their job is stable, to have a huge impact on the app that they are working on, and have more control to manage or not manage people.
There are all types of things. I think we often get stuck on this transactionality of it where it’s salary and benefits and it’s kind of those things. As startups, we still have advantages over these larger companies. It’s not just remote work like it has been for the past decade, but it’s several of these other things. It’s the flexibility to be able to meet people where they are, where they want to be met, and potentially retain some people who might otherwise leave even if you don’t have the money to pay them top dollar.
My next topic is a topic submitted by a listener, and actually, I want to go back on what I said earlier about not losing anything by having my tweets deleted. The one thing that I lost is I tweeted a question. I said Courtland Allen’s come on the podcast, what should we talk about? There were about 25 or 30 pretty interesting topics and we only covered maybe five of them in that. Then I’ve covered I think four or five since then. There were still 15 or 20 topics that I think could have made great conversations and of course, they’re gone now.
This was from that. I had already copied it into our Questions Trello board. A question is if you had to start a new SaaS today, what are all the criteria that the market or the app would need to have? There’s a lot and this varies by person.
I remember sitting down with Derek Reimer before he’s going to start starting SavvyCal and he had his list of personal requirements. I think some people, if you’re a true lifestyle bootstrapper and you just want to build $100,000, $200,000 a year app and live the amazing four-hour workweek life, then your criteria will be different than someone who wants to build seven- or eight-figure business and sell it for $30 million or $40 million and get there in three or five years. The markets are different, the problems that you’re going to tackle have to be different to have those different velocities.
My list is from someone who has stair-stepped his way up into a place where I’m not going to build a small app anymore. If I were ever to build a SaaS again, I would not want it to be a six-figure ARR company because I’ve been there, I’ve done that, and it just wouldn’t be interesting. It wouldn’t be learning for me at this point. Even building a low seven-figure SaaS app would be retreading old ground.
My criteria come down to several of the following. I don’t know if this was an exhaustive list, but I jotted a few down coming in because there are a lot of things to be thinking about. The first thing, of course, is business to business. I wouldn’t go to consumers and I frankly wouldn’t want to be marketing to aspirational folks or prosumers. There’s just too much price sensitivity and the churn is too high.
The next thing though and what’s super important to me is that it has some organic reach, meaning that people are searching for it. This goes all the way back to the Start Small, Stay Small days, but not just that they’re searching Google for it but there just is a market-proven out for it because inventing a category or building out a market is not something I’m particularly interested in.
If you think of Drip and how it started, before it was an email service provider. It was actually an email capture widget and there were no other apps doing that. There was no sumo.com. There was no OptinMonster when we launched, or maybe OptinMonster was WordPress, and it launched within a few months of us. It was really right around the same time.
We were moving into this new category and then what I realized was there was so much demand in this existing category of email service providers and that the big ones weren’t able to provide for their customers and that’s why we basically moved into that space. Within months of launching in 2013, we moved into that space. It was very fast. I would want there to be an organic reach because I have the experience and the resources to be able to get in front of whether it’s search volume or wherever else that reach is playing out.
Another thing I’d be looking for is some kind of virality. It doesn’t need to have this incredible built-in viral loop like a social network, but when I look at SignWell which is e-signature from Ruben Gamez, when I look at SavvyCal which is a scheduling link software from Derek Reimer, they both have pretty neat viral loops of when I go to sign a document and I invite other people, they see this neat app that’s easy to use and better than the other products on the market.
Even that little bit of virality that is a natural spread, that’s a really nice flywheel. In the early days, it wasn’t that important but when you get to 100 customers, you get to 1000, you get to 10,000, suddenly that loop becomes a chunk of growth.
The next thing I would think about is I would not enter a space that didn’t have notable expansion revenue because I want net negative churn in any app. After building Drip and having that negative churn in that app, you get spoiled, frankly. I call it the golden ticket. I called it the cheat code of SaaS, but net negative churn is 100% an incredible lever in SaaS companies.
Everyone else who’s not SaaS is trying to get to recurring revenue and SaaS has built-in recurring revenue. We get that cheat code for free, but net negative churn is then the next level. It’s where if I had zero customers this month, my company still grows, -1%, -2% churn. It means you grow by 1% or 2% even if no one signs up, it’s incredible. That would definitely be something I’d be looking at.
The other thing is I would, at this point in my career, only leverage an existing asset that I had. Whether that’s an audience, my network, something to that effect, or something I’ve built, I wouldn’t start from scratch in just a brand new space like I’m going to go build software for construction managers these days because I have advantages that I can and should use. In fact, all of my apps up until Drip pretty much didn’t use any of my advantages. Maybe you could say HitTail did, but I remember having tens of paying customers for my audience at the time, which is not huge.
Everything before that was things like I had an ebook for bonsai trees, I had software for .NET developers, I had no .NET audience, wedding website, SaaS, have any reach into the wedding industry, printers, lineman jobs, which was jobs for powerline electricians. I was grinding it on the marketing approaches. It was SEO, the pay-per-click, the display ads, content marketing, some partnerships, integrations, and affiliate. I am doing the left brain like knowing your funnel and crack on these apps not using the audience, it was a personal brand.
Drip was really the first one that my audience I think had leveraged well. It obviously was in a different space and a more ambitious project, but it definitely showed in the early days with the growth that I had an asset to leverage. Again, I want to reiterate, if I was on step one of the stair-step approach, some of these wouldn’t apply. Maybe I don’t have any assets to leverage, maybe I don’t need net negative churn because I’m just looking to build something that’s going to make my house payment.
Two more things that I would want in a SaaS if I were to enter a space. One is little or no platform risk, ideally no platform risk. What I learned is that almost everything has platform risk to some extent. You have a web hosting provider and you’re kind of on their platform if you think about it.
Sending email, I remember thinking that email is essentially this open-source protocol and that Drip would have no platform risk. Then you send 100 million emails a month through SendGrid and people start marking them as spam, so now SendGrid says, hey, maybe we need to shut down your account.
You have platform risk there or SendGrid is cool with it and the email blacklists were like these bizarre, archaic 25-, 30-year-old things run by these curmudgeonly people who kind of could just add you if they felt like it. It was really this bizarre look into that whole space and it’s one I don’t care to go back to. If they put you on the blacklist, now your IPs are blacklisted and your deliverability goes in the tank.
That’s where I’m saying it’s tough to have a business with really no platform risk, but as small as possible is something that I would want because I don’t want someone else in charge of my destiny. If I want to build a several million dollar company and have a lot of folks relying on it for their livelihood. It’s just not cool to wake up at night and think, can this be put out of business overnight?
Lastly, it’s kind of a two-parter. I would enter a space where there’s not a ton of price sensitivity and that would probably mean having a dual funnel where on the higher end, you can charge $500, $1000, $5000 a month to big players who come through, Fortune 5000 companies who are real enterprise or mid-market.
Also, you have inexpensive entry-level plans, whether you have a free plan or whether you have that $20–$50 entry plan much like an email service provider could have, much like Percy Pricing works if you have an electronic signature or if you have a CRM. People can come in on a small team and hey, it’s $15 a user, $30 to get started. By the time you have 10, 20, 30 people on that team, you get both expansion revenue but you also have that lower-end funnel where you can have a lot of customers.
We see a lot of TinySeed companies come through and they are purely mid-market and enterprise where they only have high price plans. Those are great businesses too and they can grow really fast because the contracts are so big. The ones that I see growing fastest have two funnels and they have the self-service low price funnel.
Squadcast is a great example of this. They are studio quality podcast recording software in your browser. You can think about the avatars that they have where they have the fly fisherman on the low end who’s really a hobbyist, Dungeons and Dragons podcast who $5–$10 a month is kind of where they want to be.
Then you can think about Startups for the Rest of Us, Tropical MBA, any type of business, or any podcast. Certainly paying $50, $100, even $150 a month for my recording software is not that big of a deal. Then you have massive podcasts studios or even radio stations who need to record remotely due to COVID and they can and should pay $500–$5000 a month. You think about that as that dual funnel is having the high end and then those low end plans.
The nice part about both of them together is, (a) your revenue can keep growing each month even if you’re not landing these huge deals because you do have the influx of the lower priced plans kind of like a more self-service model, but (b) the more people you have using your product, the more chatter is, the more of a brand you have.
The difference between having 1000 and 20,000 users/customers like active users is in the Facebook groups, in the Slack groups, on social media, on Reddit, or on Hacker News, people are like, yeah, I’m familiar with that, it’s a great product, you just have so many more. If you had 10,000 customers paying you $10 a month, aside from the obvious price sensitivity that I think would happen as well as the high churn, 10,000 customers are kind of an army, especially if you build a great product. That’s where these dual funnels are quite exceptional.
Those are several criteria I’d be looking at if I was building a new SaaS. Yours may be different or maybe you can borrow a few of mine.
My next topic is actually a thank you email from a listener Pawel Brzeminski who has actually offered some good advice and corrections on my Episode 581, inflation for founders. He wanted to send in some kind words. He says, “I should have included some nice words about your podcast. Startups to the Rest of Us have been absolutely transformational to my entrepreneurial journey. You may not remember, but I came to MicroConf back in 2015 and did a short attendee talk.” I actually do remember.
“The talk was about how I was starting Snap Projections from zero, then grew it to high six figures in a very competitive space, and sold it to a public company within four and a half years for a life-changing sum of money. This would not have been possible without your podcast and the additional resources you’ve created. I’ve always had tremendous respect for everything you do to support young entrepreneurs and enable them to succeed, so big thank you to you.” Cheers, Pawel.
Thanks for the comments. As I say, I put these in a label in Gmail and they mean the world to me. A huge amount of my satisfaction these days comes from emails and stories like these of folks who say your podcast got me through a hard time, whether it was a hard time in business or just a hard time personally. I have podcasts and virtual mentors who don’t know who I am, personally, and I listened to them and they get me through these hard times. If I can be that for you, if I have done that for you, I consider it an honor and I consider it my life’s work. It’s my legacy at this point.
My mission, which is now the mission of this podcast, MicroConf and TinySeed, is to multiply the world’s population of self-sustaining independent startups. I hadn’t realized that I started doing that in 2005, 17 years ago. I just kind of started writing a blog and writing about entrepreneurship. I hadn’t realized it when I wrote my book in 2010, started the podcast in 2010, and started MicroConf in 2011.
These are just steps along the way, you just take the next step, and there is no strategy behind it. It was just something that I was doing to meet other people and to hopefully help folks but also just to get thoughts and ideas off my chest because I come up with these frameworks, I see mental models, I see what worked for me, and it just seemed the right thing to do to share them with people. It would be boring if I didn’t. Just running businesses for me is fine, but it’s not as interesting as interacting with other interesting people.
It wasn’t until probably right around the time I was leaving Drip. It was three, four years ago, where I was like you know what? This is the mission now. This is my legacy and what I’m going to do for the rest of my life is to multiply the world’s population of self-sustaining independent startups. Thanks, Pawel.
If you have a success story and you want to mail it in at questions@startupsfortherestofus.com, as well as if you have any questions or any topics that you’d love to see discussed on the show, even just random little topic ideas or specific questions about your business. I’m actually running very low on questions at this point and so that would likely be covered relatively quickly in our next listener question episode or two. That’s going to wrap us up for today. Thanks, as always, for joining me this week and I’ll be back on your earbuds again next Tuesday morning.
I had a fun episode this week. It’s a Rob solo adventure. I’m going to talk through a couple of listener questions, tell a story or two to kick us off. There are first stories that still kind of pain me. It goes under #toosoon, but it reminds me of those times where if you have written a database query, and you forgot the WHERE clause, where you write, update this column in the database to XYZ, then you forget to hit WHERE, you submit that clause, and you wipe out a whole column in a table and you have to go back to a backup.
It also reminds me of the time, Derek will be fine with me sharing this, but this is probably 2014, maybe even late 2013, we’re like a year into Drip. Sunday night, my phone rings, the first problem is we didn’t call each other, it’s all texting. If someone calls me, I consider that they are being held hostage in an overseas prison somewhere or that something’s on fire, their house or our servers are on fire. I literally picked up the phone. I said uh oh, that’s how I answered it, and it was Derek just sweating bullets. He said do we have a backup of the database? I said yes, we have a backup. What happened?
He had done something like that where I think he forgot the WHERE clause, it was in the credit card table. I think we had a hundred customers at the time so it would have been bad but not the end of the world. Basically, I think it had overwritten all the credit card numbers in the table or something like that. We didn’t even store the full credit card. Maybe it was the Stripe customer ID that allowed us to charge it, it was easily fixed, and we lost no data.
I remember that feeling when I did that, I did it to an ecommerce website back in, it must have been 2001. This is before Shopify. We had built a custom ecommerce shopping cart and the whole website was all custom. I did that to the order’s table or the order in progress table or something, and it’s just the worst feeling because I hit this update, I forgot to say which row to update, and it’s taking way longer than I think it should to execute. Why is this going? About 10 seconds in I’m like oh, good Lord, how do I cancel this command? Of course, it’s already done tens of thousands of rows of damage.
That was another one. We had a database backup and refreshed it. The reason I’m telling all these stories is that a couple of friends of mine over the past year or so have started deleting old tweets and I didn’t really understand that. They set up a service that recurring go back x months and just deletes anything before that in their account. I was asking one friend about it. I said, why do you do that? He said people will go back through your tweets, they’ll go back 10 years, 12 years, and they’ll dig something up like quoted out of context, basically. I just never wanted that to happen.
When he said it I was like yeah, I guess it could happen but it feels a little overly paranoid. Then of course, in the past three months, I’ve seen this happen twice to notable people where someone just comes back through and says something, well, that’s not really what I meant or cultural norms have changed. There are all different types of things that can happen.
The most recent one was someone built a copy of Wordle on iOS and just duplicated it. Wordle wasn’t even original to the guy who built the web. Is there a web version? I don’t play Wordle, I don’t know. Who built the version that’s popular right now, it’s actually from some game show in the ’70s or the ’80s.
Anyway, this guy builds a copy and there’s this big hubbub. They go back through his tweets and they just roast this guy. There’s a big pile on because it’s Twitter, of course, and there’s a certain group of people who kind of just want to be angry about stuff all the time.
Anyway, I’ve sat, watched these, and kind of listened to […]. I think, you know what, I don’t say controversial things in general, that’s just not that’s not my bag. That’s not how I built my personality or my brand. That’s just not really who I am so I’ve always been careful. I have nothing that I’m worried about in particular, but I started tweeting in I believe it was 2009, so we’re talking 13 years.
Over that time, I found out because I signed up for some software and it said I had 9300 tweets, likes, and retweets. Not actually that many, which I think shows a little self-restraint and also a few years where I completely quit Twitter while I was building Drip.
All that said, I thought, what does it hurt if I go back and I delete even the first 8 years, 10 years of my tweets. I don’t need them. They’re these super ephemeral things anyway. These aren’t like blog posts.
I went back through robwalling.com and I had a couple of hundred essays there. I read through a bunch of them and I was like these don’t hold up. These were really a point in time where Digg was a big thing, social media, or social news websites, it’s not relevant anymore. I even had to prune some of those a while for both for SEO purposes, but just to get the old thinking off of the site.
I was like yeah, I’m going to delete 6000, 7000 of these. I think it was the first 10 years basically in my history. I feel like since 2018, 2019, I’ve been tweeting more, and I’ve been more consistent about it, really giving more thoughtful tweets, doing threads, and that kind of stuff. I figured, hey, I’m going to keep that and delete the rest. I don’t see any downside to doing it.
I went into the software, it was recommended, and it was good, it was fine to sign up. It’s relatively inexpensive. I started using it and their date picker is a little finicky. I really struggled to get the first 10 years, 8 ½ years, or something, and eventually, I did. It’s like cool, those are all the tweets. You have to go through this whole process of downloading an archive and uploading it into the software.
I took a deep breath, it was a Sunday afternoon, and I hit submit. I sat back and it said deleting 9300 tweets, likes, and retweets. My eyes got wide. I was like what? It is that hair stands up on the back of the neck, all the blood rushes out your face, and I’m like it’s deleting everything, everything I’ve ever tweeted.
I get this mini panic attack. I knew the date thing was finicky, but it’s deleting everything. I like to go and look for a pause or stop button. I emailed their live chat. Of course, they’re in Eastern Europe so it’s midnight, 2:00 AM, or whatever it was. I hope that your bug is not deleting my entire Twitter stream, all my tweets forever. Of course, it did.
For hours, I was in shock that all my tweets, they’re gone. Before long, I realized it doesn’t matter and that’s the shocking revelation is it just doesn’t matter. That’s how ephemeral these things are. No one noticed, not a single person pinged me, asked me about it, mentioned it, called it out. I deleted a tweet I think from less than 48 hours prior and it just doesn’t matter.
There are a couple of things. The interesting thing is that man, it sucked and it’s kind of a funny story to tell in retrospect. The other interesting thing is that I feel like if I deleted all my essays or all my podcast episodes, that would matter because people go back, they listen to them, and there’s still value. If I deleted my book, pulled it down from the internet, people would still buy and read that book, my first book Start Small, Stay Small.
It continues to reinforce this idea in my mind of ephemeral things like social media and I guess the questionable value that I see in them. Of course, you’re going to still see me on Twitter because that’s what we do and that’s where we hang out.
All that to say, I don’t know if there’s a great lesson to take away from this other than it definitely made me continue to think about social media, what is the value of it, and knowing that the value is probably not in any type of long term staying power. It’s much more about that at the moment part of the conversation.
My next topic before I get into some listener questions and comments is from a conversation I had with a founder who was asking me how I can retain this person? It is a senior dev at his company, who I think is working part-time, half-time as a contractor, and works on other projects as well. The founder was asking me, how can I motivate this person to come and work with me full time? He has a lot of options. This is the gist of the message that I sent back to him.
I said, I would ask what he was looking for. Some people are less motivated by money and they might want one of the following: control over what they work on, to have a big impact on the app they’re working on, to know for sure the job is stable, to not have their spouse/family be suspect that they’re making a bad choice taking the job, more money, flexible working hours, to manage or not manage people, remote work, autonomy, the potential for advancement, ownership along the lines of stock options or profit-sharing. I would just ask him what’s important and try to give that to him.
The reason I’m reading that here is when you’re hiring or retaining, keep in mind that not everyone is motivated by money. I think in sales and on Wall Street like in finance, traditionally, people are motivated by money and that’s why they gravitate towards those things. I don’t think it’s a stereotype as much as it’s mostly the way things are done. In a lot of other roles, money is lower on the totem pole than that list of things that I just mentioned.
In particular, I think in this competitive job market where everyone can be remote, anyone can now get a job at Google or Facebook and get these really high salaries because they basically pay above market. If you’re qualified, they pay above the market rate in your city or town. Think as a founder of other ways to motivate. It’s harder to do when you’re first hiring because you don’t know the person and it can be awkward to figure it out or ask.
Retaining is different because oftentimes, you’ve worked with that person and you kind of learn what their personal life looks like. You realize that, wow, for this person, maybe working four days a week, just working 80% of the time is actually a huge benefit to them. They will stick around a long time, a lot longer, if you are able to give them that flexibility, or as I said, to know that their job is stable, to have a huge impact on the app that they are working on, and have more control to manage or not manage people.
There are all types of things. I think we often get stuck on this transactionality of it where it’s salary and benefits and it’s kind of those things. As startups, we still have advantages over these larger companies. It’s not just remote work like it has been for the past decade, but it’s several of these other things. It’s the flexibility to be able to meet people where they are, where they want to be met, and potentially retain some people who might otherwise leave even if you don’t have the money to pay them top dollar.
My next topic is a topic submitted by a listener, and actually, I want to go back on what I said earlier about not losing anything by having my tweets deleted. The one thing that I lost is I tweeted a question. I said Courtland Allen’s come on the podcast, what should we talk about? There were about 25 or 30 pretty interesting topics and we only covered maybe five of them in that. Then I’ve covered I think four or five since then. There were still 15 or 20 topics that I think could have made great conversations and of course, they’re gone now.
This was from that. I had already copied it into our Questions Trello board. A question is if you had to start a new SaaS today, what are all the criteria that the market or the app would need to have? There’s a lot and this varies by person.
I remember sitting down with Derek Reimer before he’s going to start starting SavvyCal and he had his list of personal requirements. I think some people, if you’re a true lifestyle bootstrapper and you just want to build $100,000, $200,000 a year app and live the amazing four-hour workweek life, then your criteria will be different than someone who wants to build seven- or eight-figure business and sell it for $30 million or $40 million and get there in three or five years. The markets are different, the problems that you’re going to tackle have to be different to have those different velocities.
My list is from someone who has stair-stepped his way up into a place where I’m not going to build a small app anymore. If I were ever to build a SaaS again, I would not want it to be a six-figure ARR company because I’ve been there, I’ve done that, and it just wouldn’t be interesting. It wouldn’t be learning for me at this point. Even building a low seven-figure SaaS app would be retreading old ground.
My criteria come down to several of the following. I don’t know if this was an exhaustive list, but I jotted a few down coming in because there are a lot of things to be thinking about. The first thing, of course, is business to business. I wouldn’t go to consumers and I frankly wouldn’t want to be marketing to aspirational folks or prosumers. There’s just too much price sensitivity and the churn is too high.
The next thing though and what’s super important to me is that it has some organic reach, meaning that people are searching for it. This goes all the way back to the Start Small, Stay Small days, but not just that they’re searching Google for it but there just is a market-proven out for it because inventing a category or building out a market is not something I’m particularly interested in.
If you think of Drip and how it started, before it was an email service provider. It was actually an email capture widget and there were no other apps doing that. There was no sumo.com. There was no OptinMonster when we launched, or maybe OptinMonster was WordPress, and it launched within a few months of us. It was really right around the same time.
We were moving into this new category and then what I realized was there was so much demand in this existing category of email service providers and that the big ones weren’t able to provide for their customers and that’s why we basically moved into that space. Within months of launching in 2013, we moved into that space. It was very fast. I would want there to be an organic reach because I have the experience and the resources to be able to get in front of whether it’s search volume or wherever else that reach is playing out.
Another thing I’d be looking for is some kind of virality. It doesn’t need to have this incredible built-in viral loop like a social network, but when I look at SignWell which is e-signature from Ruben Gamez, when I look at SavvyCal which is a scheduling link software from Derek Reimer, they both have pretty neat viral loops of when I go to sign a document and I invite other people, they see this neat app that’s easy to use and better than the other products on the market.
Even that little bit of virality that is a natural spread, that’s a really nice flywheel. In the early days, it wasn’t that important but when you get to 100 customers, you get to 1000, you get to 10,000, suddenly that loop becomes a chunk of growth.
The next thing I would think about is I would not enter a space that didn’t have notable expansion revenue because I want net negative churn in any app. After building Drip and having that negative churn in that app, you get spoiled, frankly. I call it the golden ticket. I called it the cheat code of SaaS, but net negative churn is 100% an incredible lever in SaaS companies.
Everyone else who’s not SaaS is trying to get to recurring revenue and SaaS has built-in recurring revenue. We get that cheat code for free, but net negative churn is then the next level. It’s where if I had zero customers this month, my company still grows, -1%, -2% churn. It means you grow by 1% or 2% even if no one signs up, it’s incredible. That would definitely be something I’d be looking at.
The other thing is I would, at this point in my career, only leverage an existing asset that I had. Whether that’s an audience, my network, something to that effect, or something I’ve built, I wouldn’t start from scratch in just a brand new space like I’m going to go build software for construction managers these days because I have advantages that I can and should use. In fact, all of my apps up until Drip pretty much didn’t use any of my advantages. Maybe you could say HitTail did, but I remember having tens of paying customers for my audience at the time, which is not huge.
Everything before that was things like I had an ebook for bonsai trees, I had software for .NET developers, I had no .NET audience, wedding website, SaaS, have any reach into the wedding industry, printers, lineman jobs, which was jobs for powerline electricians. I was grinding it on the marketing approaches. It was SEO, the pay-per-click, the display ads, content marketing, some partnerships, integrations, and affiliate. I am doing the left brain like knowing your funnel and crack on these apps not using the audience, it was a personal brand.
Drip was really the first one that my audience I think had leveraged well. It obviously was in a different space and a more ambitious project, but it definitely showed in the early days with the growth that I had an asset to leverage. Again, I want to reiterate, if I was on step one of the stair-step approach, some of these wouldn’t apply. Maybe I don’t have any assets to leverage, maybe I don’t need net negative churn because I’m just looking to build something that’s going to make my house payment.
Two more things that I would want in a SaaS if I were to enter a space. One is little or no platform risk, ideally no platform risk. What I learned is that almost everything has platform risk to some extent. You have a web hosting provider and you’re kind of on their platform if you think about it.
Sending email, I remember thinking that email is essentially this open-source protocol and that Drip would have no platform risk. Then you send 100 million emails a month through SendGrid and people start marking them as spam, so now SendGrid says, hey, maybe we need to shut down your account.
You have platform risk there or SendGrid is cool with it and the email blacklists were like these bizarre, archaic 25-, 30-year-old things run by these curmudgeonly people who kind of could just add you if they felt like it. It was really this bizarre look into that whole space and it’s one I don’t care to go back to. If they put you on the blacklist, now your IPs are blacklisted and your deliverability goes in the tank.
That’s where I’m saying it’s tough to have a business with really no platform risk, but as small as possible is something that I would want because I don’t want someone else in charge of my destiny. If I want to build a several million dollar company and have a lot of folks relying on it for their livelihood. It’s just not cool to wake up at night and think, can this be put out of business overnight?
Lastly, it’s kind of a two-parter. I would enter a space where there’s not a ton of price sensitivity and that would probably mean having a dual funnel where on the higher end, you can charge $500, $1000, $5000 a month to big players who come through, Fortune 5000 companies who are real enterprise or mid-market.
Also, you have inexpensive entry-level plans, whether you have a free plan or whether you have that $20–$50 entry plan much like an email service provider could have, much like Percy Pricing works if you have an electronic signature or if you have a CRM. People can come in on a small team and hey, it’s $15 a user, $30 to get started. By the time you have 10, 20, 30 people on that team, you get both expansion revenue but you also have that lower-end funnel where you can have a lot of customers.
We see a lot of TinySeed companies come through and they are purely mid-market and enterprise where they only have high price plans. Those are great businesses too and they can grow really fast because the contracts are so big. The ones that I see growing fastest have two funnels and they have the self-service low price funnel.
Squadcast is a great example of this. They are studio quality podcast recording software in your browser. You can think about the avatars that they have where they have the fly fisherman on the low end who’s really a hobbyist, Dungeons and Dragons podcast who $5–$10 a month is kind of where they want to be.
Then you can think about Startups for the Rest of Us, Tropical MBA, any type of business, or any podcast. Certainly paying $50, $100, even $150 a month for my recording software is not that big of a deal. Then you have massive podcasts studios or even radio stations who need to record remotely due to COVID and they can and should pay $500–$5000 a month. You think about that as that dual funnel is having the high end and then those low end plans.
The nice part about both of them together is, (a) your revenue can keep growing each month even if you’re not landing these huge deals because you do have the influx of the lower priced plans kind of like a more self-service model, but (b) the more people you have using your product, the more chatter is, the more of a brand you have.
The difference between having 1000 and 20,000 users/customers like active users is in the Facebook groups, in the Slack groups, on social media, on Reddit, or on Hacker News, people are like, yeah, I’m familiar with that, it’s a great product, you just have so many more. If you had 10,000 customers paying you $10 a month, aside from the obvious price sensitivity that I think would happen as well as the high churn, 10,000 customers are kind of an army, especially if you build a great product. That’s where these dual funnels are quite exceptional.
Those are several criteria I’d be looking at if I was building a new SaaS. Yours may be different or maybe you can borrow a few of mine.
My next topic is actually a thank you email from a listener Pawel Brzeminski who has actually offered some good advice and corrections on my Episode 581, inflation for founders. He wanted to send in some kind words. He says, “I should have included some nice words about your podcast. Startups to the Rest of Us have been absolutely transformational to my entrepreneurial journey. You may not remember, but I came to MicroConf back in 2015 and did a short attendee talk.” I actually do remember.
“The talk was about how I was starting Snap Projections from zero, then grew it to high six figures in a very competitive space, and sold it to a public company within four and a half years for a life-changing sum of money. This would not have been possible without your podcast and the additional resources you’ve created. I’ve always had tremendous respect for everything you do to support young entrepreneurs and enable them to succeed, so big thank you to you.” Cheers, Pawel.
Thanks for the comments. As I say, I put these in a label in Gmail and they mean the world to me. A huge amount of my satisfaction these days comes from emails and stories like these of folks who say your podcast got me through a hard time, whether it was a hard time in business or just a hard time personally. I have podcasts and virtual mentors who don’t know who I am, personally, and I listened to them and they get me through these hard times. If I can be that for you, if I have done that for you, I consider it an honor and I consider it my life’s work. It’s my legacy at this point.
My mission, which is now the mission of this podcast, MicroConf and TinySeed, is to multiply the world’s population of self-sustaining independent startups. I hadn’t realized that I started doing that in 2005, 17 years ago. I just kind of started writing a blog and writing about entrepreneurship. I hadn’t realized it when I wrote my book in 2010, started the podcast in 2010, and started MicroConf in 2011.
These are just steps along the way, you just take the next step, and there is no strategy behind it. It was just something that I was doing to meet other people and to hopefully help folks but also just to get thoughts and ideas off my chest because I come up with these frameworks, I see mental models, I see what worked for me, and it just seemed the right thing to do to share them with people. It would be boring if I didn’t. Just running businesses for me is fine, but it’s not as interesting as interacting with other interesting people.
It wasn’t until probably right around the time I was leaving Drip. It was three, four years ago, where I was like you know what? This is the mission now. This is my legacy and what I’m going to do for the rest of my life is to multiply the world’s population of self-sustaining independent startups. Thanks, Pawel.
If you have a success story and you want to mail it in at questions@startupsfortherestofus.com, as well as if you have any questions or any topics that you’d love to see discussed on the show, even just random little topic ideas or specific questions about your business. I’m actually running very low on questions at this point and so that would likely be covered relatively quickly in our next listener question episode or two. That’s going to wrap us up for today. Thanks, as always, for joining me this week and I’ll be back on your earbuds again next Tuesday morning.
Episode 568 | MailChimp Sells for $12 billion
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In Episode 568, Rob Walling talks about MailChimp selling for $12 billion to Intuit, the largest exit for a bootstrap company, ever. Not that all founders aspire to grow to this scale, but it’s truly an incredible day for bootstrapped founders to know that we have the potential to get to this level without raising institutional funding.
The topics we cover
[1:41] $800 million in ARR without outside funding
[4:14] Acquisition multiple
[7:42] Everyone sells, eventually
[9:31] Respect for MailChimp
[11:49] Disappointed with the UX
[13:21] Equity vs higher salaries and bonuses
[18:00] Long term outlook for existing Mailchimp customers
[21:21] Never say you’re never going to sell
[21:42] Being an email service provider today is hard
Links from the show
- Episode 519 | Profit Sharing, Stock Options, and Equity (A Rob Solo Adventure)
- Rob Walling (@robwalling) | Twitter
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!
Subscribe & Review: iTunes | Spotify | Stitcher
Welcome back to Startups For The Rest of Us. I’m your host, Rob Walling. This week, I’m talking about Mailchimp selling for $12 billion to Intuit. It’s the largest exit for a bootstrapped company ever—at least from what I can find. My understanding is it’s a 50-50 breakdown of stock and cash.
This is truly an incredible day for not only bootstrap founders. Not that we aspire to grow to this level, but to know that we have potential to get to this level without raising institutional funding.
I saw it mentioned in several places that the cofounders of Mailchimp, Ben and Dan, didn’t raise any institutional funding. I am curious about the stories behind that. Did they raise friends and family? Did they raise a fund-strapped round? Certainly, they didn’t take money from accelerators because they launched before accelerators existed. Y Combinator was the first one of course in 2005 or 2006, and Mailchimp was born in 2001.
This is such a testament to the profitability and the scalability of not only software but subscription software because software before—let’s say Mailchimp, Basecamp, the other SaaS models that we see today—was a really expensive on-prem software. The companies that grew big selling these contracts were Oracle, Microsoft, Adobe, and other companies that charged literally seven figures or eight figures for multiyear contracts. Companies like Mailchimp were really the early drivers of this lower monthly subscription fee software.
No fewer than a half dozen people have reached out to me over the past few days asking for my opinion, not only because I’ve been a long-time fan of Mailchimp, but because I started Drip and entered the ESP (email service provider) space.
Essentially, people say Mailchimp is a competitor of Drip, and I would always say that Drip is a competitor of Mailchimp because let’s be honest, Mailchimp was sending a billion emails every weekday. While I had thought that they crossed $1 billion in annual recurring revenue, it turns out the most recent numbers—I believe—from Forbes are $800 million in revenue.
I just want to pause there for a moment and think about that. This is not $800 million in valuation. As many startups we hear about these days, growth of $800 million, $1 billion in valuation, and still doing literally $10 million, $20 million, and $30 million in ARR, what an incredible feat to reach that level of revenue without taking any substantial outside funding. It’s just really unheard of.
There are no confirmed numbers on this, but the best estimates I’ve heard on Basecamp’s revenues is that they are low nine figures, that they’re $100 million, $150 million, and highly profitable because they only have 50 employees. They’re throwing off—Jason Fried said from the MicroConf stage—tens of millions of dollars in net profit per year. That’s an amazing business.
If all of that is true or in the ballpark, Mailchimp is the next level. It’s almost another order of magnitude larger. If you say Mailchimp’s revenue is around $800 million and they sold at $12 billion, that’s a 15 times ARR multiple, which is good. That’s a nice, healthy multiple, I would say. Obviously, it’s higher than the 4–6 or 4–10 multiple you might commonly see in SaaS apps that are growing and doubling each year in between $130 million and $140 million.
As you get bigger, the multiples tend to increase. You can ask my co-founder of TinySeed, Einar Vollset, who is in that space and knows so much about SaaS exits because he’s been part of advising so many SaaS founders in exiting. A 15X ARR multiple at this level is high but not unheard of. This is realistic.
Someone wrote into this very podcast. I forget if they were at $500,000 or may even have been just a couple $100,000 in ARR. They sold for a 30 times ARR multiple. At that point, it’s more of a strategic acquisition and the multiples become meaningless at small numbers, but this is quite an exit.
I’m going to start with my first thought on this. I think the multiple is good. They could have gotten more on the public markets probably, but in their shoes, going public is not an exit.
A lot of people don’t understand that going public is just another funding event. It is a liquidity event for a portion of your shares. You can sell some of your shares once you’re public, but that doesn’t mean that as founders, you get liquidity on all your shares. It doesn’t mean that you’re bought out. It doesn’t mean that you walk away. Usually, you’re then running the company.
So even if they could have made $5 billion or $6 billion each and they could have made $7 billion or $8 billion each doing an IPO, if you don’t want to deal with Sarbanes-Oxley and all the craziness around being a public company, then why would you do that?
I heard some people commenting on that, of why wouldn’t they just go public. It’s just a different animal. I’m going to be honest, I’m surprised that Mailchimp sold. In my head, I never thought that they would sell or IPO. Not because anyone told me that, it was just the impression I had.
I used to use Basecamp and Mailchimp as the examples of (I would say) the statement everyone exits eventually. Everyone sells eventually. That’s usually the case. Then, I would bring up the counter examples except for Basecamp and Mailchimp really. Those two have been around a long time and haven’t sold.
Usually, founders—whether they bootstrapped or raised funding—eventually get tired of what they’re doing, and they want to move on to the next thing. The millions of dollars in liquidity from these assets we build is so much better oftentimes in cash in your pocket.
I also used Drip and Baremetrics. These were two others that I remember saying probably are never going to sell, and yet both have sold at a certain point whether it’s getting burned out, whether it’s getting tired of it, or whether it’s seeing a number in front of you that can pay for both your kids’ college funds and mean you never have to work a day in your life again. Even if you know you’re going to work, you don’t have to. You have the freedom to work on what you want.
When you see that number on a piece of paper, it’s a really interesting choice. That was my first reaction when I heard it. I was surprised that they were considering it.
I actually saw an article of a rumor that they were considering selling a few weeks back. At first, I didn’t believe it. Then, I thought, you know what, something must have changed for the founders because if you think about it, let’s say they were operating at $800 million ARR.
I just chuckle because it’s just so crazy. They only had 1200 employees. If we do even lose math and just say $200,000 or $300,000 a year was the cost for each of those employees, you’re talking $240 million–$360 million. We throw a server cost and we throw whatever other costs on, but SaaS at scale can be 30%–50% net profit margins. If we say $800 million, we’re talking $240 million–$400 million a year being thrown off. It’s mostly bootstrapped as I often say on the show.
The founders certainly are not hurting for money. I don’t feel like they sold for the money. My guess is they each have enough in the bank that they never have to work again. They probably had that a decade ago or more, so something must have changed.
Obviously, they haven’t talked about it, and they can’t right now. They have to make the employees feel okay. We’ll get into that a little later. There is some anger and outrage around that that I’ve seen reported. They have to make customers feel okay. They have to make Intuit feel okay. I think the deal doesn’t close for six or nine months. That’s par for the course.
Realistically, when I read the article or the rumor, I thought, you know what, this is right. Everyone sells eventually. I’m not saying that to say everyone should sell. I’m not saying if you run a great business that you should sell, but the pattern that I see is that at a certain point, ambitious, creative, and motivated startup founders want to move on to their next thing having that liquidity or not having the thing that they have to manage.
Maybe they’re bored of it. Maybe they just want to get onto the new phase of their life. It’s incredibly hard to build these companies—that’s what we talk about here every week on this show—to be able to cash out, and then move on to the next phase of your life.
Whether that next phase is starting another app, starting a nonprofit, instituting worldwide change, trying to beat malaria like Bill Gates, or whatever it is, in my opinion, founders who have worked hard on their businesses, who have taken care of their employees hopefully—again, we’ll talk a little bit about that—who have given back to their community like I know the Mailchimp founders have, who have built an incredible business, and worked hard for 20+ years on it, for me, I don’t begrudge them as a thing.
I’ve had limited interactions with Ben Chestnut. I think he’s a stand-up guy. I respected him when he was a blogger. Somehow, he, I, Dharmesh, patio11, and Peldi were all blogging at the same time. This is 2005 to (say) 2009.
I noticed them. Somehow, I’m on their radar. I’ve emailed Ben Chestnut a dozen times in the past 10 years. Oftentimes, it’s to invite him to speak at MicroConf which he gracefully declines. But he has entertained the idea and said, look, I’d be interested, but I have this thing that is at that time.
I also emailed him around the time that Drip was going to be acquired because we had inbound interest from several parties. I did email him, essentially let him know that, and said, hey, if this is something that’s on your radar, if you’re interested in talking about it, let’s do it. He said, do you know what? We’re not interested right now, but we’ve had a lot of inbound acquisition over our lifetime. I’d be happy to give you advice if you have any questions.
Again, to me, my impression and all of my interactions is that he’s a stand-up guy. He takes care of his employees. I know that they get back to the community in Atlanta. I have a lot of respect for what they built, and I always did.
There were competitors that we had with Drip where I thought their product was […]. I thought they ran […] businesses. I thought they took advantage of their customers, auto-upgrading and not auto-downgrading. Just doing otherwise shady things—copying competitors, claiming it their own, whatever. I never thought Mailchimp did that. I had respect for them as competitors and just respect for them as a business.
As with any big change like this, anytime a lot of money changes hands or someone gets rich suddenly, someone’s going to be angry. Someone’s going to blame that person or find out perhaps why they don’t deserve it.
I don’t know if it’s jealousy. Maybe it really is, but I’m going to be honest, the anger and outrage that I saw around this made me a little bit angry and a little bit outraged. I think people on social media oftentimes go there to vent.
I get it. Again, Mailchimp is a great company to work for. I’ve had a couple friends I know who work there. They love it.
If suddenly I found out I was going to work for Intuit, I would be upset too because I don’t like Intuit. I don’t like that they lobby the US government to keep us from having easy, free tax filings. I think QuickBooks is a really crappy piece of software. I think most of what Intuit makes is pretty crappy.
Mailchimp, I’ll agree, has gone a bit off-brand in the past few years. Freddie is chimp himself. I don’t see him as much. I feel like the software got more complicated. I feel like the UX got much more difficult to use. I haven’t logged in in years because I use Drip. I haven’t used Mailchimp in years.
I logged in a few months ago. I believe it was to export some subscribers. I was disappointed with the UX. I always thought that they were pretty good with UX before then. They had some mixed bags. They did try to bolt on automations around the time as automations came up and Drip became a thing.
It hasn’t all been sunshine and rainbows, but I’ll admit that the last few years, I’ve stopped recommending Mailchimp to people just getting started because of the complexity of it. But I think that’s where they wanted to go. I have no inside information, but I’m guessing they topped out.
You can only get so big. You just have to start […] and get other pieces of the market because they added landing pages and they added a Facebook ad builder. They just kept going pre email and after email in terms of marketers and what they needed. Instead of acquiring it, they built a lot of it in-house and kept adding bolted things on.
That feels a little more pejorative than I want it to, but I definitely felt Mailchimp being different over the past 3 or 4 years than it was the prior 15 years in terms of the quality of the product and the complexity of it.
The bottom line is they built a great and incredible business. How many other bootstrap businesses have reached this amount of revenue and zero others have sold for this level of purchase price? It’s my understanding.
If I worked for Mailchimp and then suddenly, I learned I was working for Intuit, I would feel bad. I understand that. I can understand being angry and wanting to vent.
From the other side, it kind of becomes cool or popular to hate rich people or to hate when people get rich. It’s not like Ben Chestnut and his co-founder inherited a bunch of money like they won. They built an incredible business and they were the folks who figured out free. They figured out how to do freemium in ESPs and no one else was able to do that before them. A few were able to do it afterwards, but not to the same degree.
One of the complaints I heard from employees or I heard people quoting—this is second or third hand—said, when I was hired, we didn’t get stock options. We didn’t get equity because they said we will never sell or go public.
I’m going to guess that that isn’t what they actually said. My guess is if I were in their shoes, pretty calculated, and pretty careful with words, I could see saying I have no plans to sell. We have no plans to sell this company, so equity doesn’t make sense.
Because if you start giving folks equity, they do want a return on that eventually. Usually, it’s 4 years, 5 years, 7 years, or 10 years. There’s a number. A lot of people don’t want to wait 20 years to cash out on some equity that they got 20 years ago. Usually, once you start giving equity, that is a signal that you’re going to sell. If they didn’t plan to sell, then profit-sharing, bonuses, higher salaries—which is what Mailchimp did—is what I would be doing.
I don’t plan to sell. Plans can change. In startups and in business, any of us know the flexibility and the willingness to not hold onto something. I’m not of the fixed mindset in this. Well, I said that once so we can never change it, I think, is a naive perspective.
I know that folks working at Mailchimp—this is according to news reports—got really good salaries, got really hefty bonuses (15%–30% annually of their annual pay), and the working conditions were good. It wasn’t the craziness of a startup in terms of working long hours and low pay for equity.
As someone pointed out in a Slack group that I’m in—it’s a private founder Slack group—he said, I see enough of these articles that talk about the downside of equity, how Silicon Valley companies issue equity, and then pay people lower than they otherwise should. Then, it goes bust and it’s a big trick, so equity sucks.
In this case, everyone is getting cashed out all the time. People were getting (again) these above-market salaries, plus a bonus, plus whatever other money flowed their way. There was a really generous 401(k) matching. This is the kind of stuff you expect from Fortune 500 companies. They were doing that. They were putting out the cash as it came in. They had the profit so it’s cool that they did it, but I think of that as being in lieu of having stock options.
I also read that $300 million in stock will go to the employees. While I don’t know how that will be divided, that’s $250,000 per employee. Obviously, I’m imagining that some will get more and some will get less.
It’s a non-trivial amount of money. If I were a naysayer, I would instantly say, well, $300 million is nothing compared to the $12 billion that the founders got. You’re right. It’s not. They built the company. It’s the way it goes with startups. Everything is not equal and fair. There was more risk, more years put in, more work—whatever you want to call it.
I do see that side of the argument, but I think if you’re working there, that’s what you’re onboard for. I can imagine being disappointed that it’s sold and that you don’t want to work for Intuit, but I don’t think you can then go back and say, oh, I really wanted equity. It just doesn’t work for me. To be honest though, the real bummer is folks who maybe worked there and then left.
Let’s say you left 10 years ago, 5 years ago, or 2 months ago. You walked away with nothing. That is one of the trade-offs with granting equity, granting stock options, or profit-sharing.
I talked about this in an episode. Just go to startupsfortherestofus.com, type in profit-sharing, and that episode will come up. It was maybe six months ago. It’s actually become one of the more popular episodes where I walk through the pros and cons of each of these.
One of the pros of profit-sharing is that people get cash. They don’t have to sit around and wait for this funny money. Realizing equity in a private company is illiquid. It means nothing until there’s an exit or liquidity event versus here, there’s some cash. But the downside of that is if you leave and then the company sells later, you don’t get any more money because you got your money out as it was going. That is one of the downsides of it. That’s the trade-off.
Again, I do feel for some folks. I can imagine being someone who worked there for 10 or 15 years, got their pay while they were doing it, left, and then didn’t get any rewards at the sale. That’s tough. Also, I guess I keep coming back to the same thing. You can tell how I feel about it. I feel like I’m saying my same opinion over and over.
I get it. I don’t think the founders did anything wrong. Knowing what I know of the founders, I think they will do great things with the money. I think they will make sure the employees are taken care of. I think to the best of their ability, they will make sure the customers are taken care of. I think that they’re not going to sit on this money and go sit on a beach in Tahiti.
My guess is they will invest in their community. They will invest in causes that can change things. Whether it changes things in their city, their state, their country, or the world, it’s a lot of money and you can make a huge difference with that type of money. I think they will.
As with most exits, in the short-term, it won’t make a huge difference. In the long-term, it will probably not be a net win for Mailchimp’s customers. I haven’t seen Intuit treat its customers particularly well over the years. I don’t think their software’s that great. They just happen to be mostly in a monopoly position.
Mailchimp has always competed well and like I said, had good software. With some changes over the past three, four, or five years, I think they deviated from that initial vision, but I don’t see how this makes Mailchimp a better product. I don’t see how long-term it’s going to be a win for its customers, which is unfortunate, but this cycle of business or software.
You build software, you can move fast, and add all these great new features in the early days. Then, as it becomes more mature, it becomes a teenager, it becomes an adult, and then (frankly) a software. By the time it’s even 10 or 15 years old basically, it’s like dog years, it just gets old. It gets hard to make changes, especially as a team grows, as the code base grows, and that legacy. You can’t undo that technical debt. You can’t change winds up tying you to a specific way of doing it. That is a cycle of business.
Then, a new wave of products comes along that is able to do a little better. They’re able to move faster because they’re nimble in their early days, and then those products age over time. That’s just the cycle of business.
I don’t feel like this is catastrophic certainly for the space. I’m glad that there are a lot of competitors in the space. It’s a very large space—email marketing and marketing automation—but that’s my thought. If I was a Mailchimp customer right now, I’d be thinking, I’m going to stick around for a bit but obviously, as time goes on, we’ll be able to see the impacts that this has on it.
A couple more points and then I will wrap. One thing that I’ll say is if you’re starting a company, never tell people that you’re never going to sell or go public. I’m not saying they did that. Other people and employees said they were under the impression they would never sell and go public. My guess is they didn’t say that.
That would be a mistake if you were to do that because do you know what? Everyone sells eventually. I don’t mean everyone in terms of 100%, but 95% or 99%. We just sell. We want to move on. I think I’ve already covered that.
Don’t make a promise or don’t make an implicit commitment that you don’t want to live up to. You can say, I’m growing this business for the long-term. You’re going to get asked in an interview, what do you plan to do with the XYZ Company you’re starting? It’s a plan to grow for the long-term. I want to work on it for a decade or more. That’s what you say because that’s usually what you believe and that’s the way to build a great business.
You don’t build a business to flip it but also, you don’t want to promise someone internally or employees as you hire them that they’re not getting stock options because we’re never going to sell. It’s just not a smart thing to say. Take that as a lesson and be careful with that type of verbiage.
My final thought is that being an email service provider these days is getting hard with inboxes looking more and more at privacy, blocking, and open pixels. The effectiveness of email marketing will continue. It’s certainly better than social media, but it’s not as effective as it used to be. It’s like doing SEO and having Google Analytics. It used to tell you which keywords people were using to find your site, and it doesn’t anymore.
Similarly, email marketing is going to have less and less data to go on. You can always track clicks because they click through to your website, but a lot of things are being blocked. Spam filters are getting better and in fact are getting so good that they’re actually getting bad. These days, some of my emails are going to spam and that hasn’t happened in a long time.
There’s a promotions tab. There are all these things that are creating an uphill battle for email marketing so I do wonder—again, I have no inside information—if I were them running it. I believe the founders are in their late 40s. They’d be thinking about their next act after having worked on something for 20 years.
I have not worked on anything for 20 years aside from my marriage. That’s it. MicroConf is 11 years. Drip was 5 ½ from start to finish. I don’t know if many of you in the audience have worked on anything for 20 years. It’s a long time and it’s a hard problem.
Being an ESP is a non-trivial thing. At one point, after Derek and I had sold Drip, I told him I’m never doing something that sends email again. There were just a lot of headaches with it and I can’t imagine what it would be like at that scale that Mailchimp is out with those billion emails a day during the week.
What I can imagine is that in their shoes, maybe there’s just a major life change that one of them is going through. Who knows? But I can see market forces being in the thought process of what is the future? What does it look like in 5, 10, or 15 years? If anyone can see it coming, they can. They’re right at the bleeding edge of the President being able to see the effectiveness. Maybe they’re seeing across the entire company—all the emails being sent, lower open rates, lower click rates, whatever.
But the bottom line is it’s a tough business to be in, I will admit. I can imagine that that could play a part in it. Possibly, they’ve taken the business as far as they can or want to. Into its market cap, I believe, is $120 billion maybe or $110 billion. Being able to go under the wing of that does give you more resources and a much larger customer base. I know Mailchimp has a big customer base, but I believe Intuit companies have quite a bit more than that.
Honestly, I remember when we sold Drip thinking that the leadpage’s customer base was substantially larger and we’d have a lot more resources. I was actually motivated by that. It was super interesting. Obviously, the liquidity for the founders was great, but I was also interested to learn more things and to be on a bigger playing field. Maybe that could potentially have been appealing as well.
I think it’s a story that will unfold in the coming years honestly. My guess is we’ll hear from Ben or his co-founder, whether it’s through a talk at an event that we attend, podcast interviews, or elsewhere. I think the story will come out ultimately, and it’ll shed more light on why this all went down at this time.
That’s it. Those are my thoughts. Congratulations to the Mailchimp team. Props to them and frankly to everyone who’s involved in building such an incredible business.
Again, it continues to show you the power of B2B SaaS, the power of building an incredible business with not that much cash, and then the value of those businesses because of the subscription revenue, the repeatability of the sales process, and the momentum as you build that brand. We really are in the golden age of entrepreneurship, especially if you can figure out a way to build software. You build it once and you sell it over and over. It’s just a matter of scaling things. There’s never been a better time in history to be an entrepreneur.
That’s it for this week. Thanks again for joining me. I’ll be back in your ears again next Tuesday morning.
This is truly an incredible day for not only bootstrap founders. Not that we aspire to grow to this level, but to know that we have potential to get to this level without raising institutional funding.
I saw it mentioned in several places that the cofounders of Mailchimp, Ben and Dan, didn’t raise any institutional funding. I am curious about the stories behind that. Did they raise friends and family? Did they raise a fund-strapped round? Certainly, they didn’t take money from accelerators because they launched before accelerators existed. Y Combinator was the first one of course in 2005 or 2006, and Mailchimp was born in 2001.
This is such a testament to the profitability and the scalability of not only software but subscription software because software before—let’s say Mailchimp, Basecamp, the other SaaS models that we see today—was a really expensive on-prem software. The companies that grew big selling these contracts were Oracle, Microsoft, Adobe, and other companies that charged literally seven figures or eight figures for multiyear contracts. Companies like Mailchimp were really the early drivers of this lower monthly subscription fee software.
No fewer than a half dozen people have reached out to me over the past few days asking for my opinion, not only because I’ve been a long-time fan of Mailchimp, but because I started Drip and entered the ESP (email service provider) space.
Essentially, people say Mailchimp is a competitor of Drip, and I would always say that Drip is a competitor of Mailchimp because let’s be honest, Mailchimp was sending a billion emails every weekday. While I had thought that they crossed $1 billion in annual recurring revenue, it turns out the most recent numbers—I believe—from Forbes are $800 million in revenue.
I just want to pause there for a moment and think about that. This is not $800 million in valuation. As many startups we hear about these days, growth of $800 million, $1 billion in valuation, and still doing literally $10 million, $20 million, and $30 million in ARR, what an incredible feat to reach that level of revenue without taking any substantial outside funding. It’s just really unheard of.
There are no confirmed numbers on this, but the best estimates I’ve heard on Basecamp’s revenues is that they are low nine figures, that they’re $100 million, $150 million, and highly profitable because they only have 50 employees. They’re throwing off—Jason Fried said from the MicroConf stage—tens of millions of dollars in net profit per year. That’s an amazing business.
If all of that is true or in the ballpark, Mailchimp is the next level. It’s almost another order of magnitude larger. If you say Mailchimp’s revenue is around $800 million and they sold at $12 billion, that’s a 15 times ARR multiple, which is good. That’s a nice, healthy multiple, I would say. Obviously, it’s higher than the 4–6 or 4–10 multiple you might commonly see in SaaS apps that are growing and doubling each year in between $130 million and $140 million.
As you get bigger, the multiples tend to increase. You can ask my co-founder of TinySeed, Einar Vollset, who is in that space and knows so much about SaaS exits because he’s been part of advising so many SaaS founders in exiting. A 15X ARR multiple at this level is high but not unheard of. This is realistic.
Someone wrote into this very podcast. I forget if they were at $500,000 or may even have been just a couple $100,000 in ARR. They sold for a 30 times ARR multiple. At that point, it’s more of a strategic acquisition and the multiples become meaningless at small numbers, but this is quite an exit.
I’m going to start with my first thought on this. I think the multiple is good. They could have gotten more on the public markets probably, but in their shoes, going public is not an exit.
A lot of people don’t understand that going public is just another funding event. It is a liquidity event for a portion of your shares. You can sell some of your shares once you’re public, but that doesn’t mean that as founders, you get liquidity on all your shares. It doesn’t mean that you’re bought out. It doesn’t mean that you walk away. Usually, you’re then running the company.
So even if they could have made $5 billion or $6 billion each and they could have made $7 billion or $8 billion each doing an IPO, if you don’t want to deal with Sarbanes-Oxley and all the craziness around being a public company, then why would you do that?
I heard some people commenting on that, of why wouldn’t they just go public. It’s just a different animal. I’m going to be honest, I’m surprised that Mailchimp sold. In my head, I never thought that they would sell or IPO. Not because anyone told me that, it was just the impression I had.
I used to use Basecamp and Mailchimp as the examples of (I would say) the statement everyone exits eventually. Everyone sells eventually. That’s usually the case. Then, I would bring up the counter examples except for Basecamp and Mailchimp really. Those two have been around a long time and haven’t sold.
Usually, founders—whether they bootstrapped or raised funding—eventually get tired of what they’re doing, and they want to move on to the next thing. The millions of dollars in liquidity from these assets we build is so much better oftentimes in cash in your pocket.
I also used Drip and Baremetrics. These were two others that I remember saying probably are never going to sell, and yet both have sold at a certain point whether it’s getting burned out, whether it’s getting tired of it, or whether it’s seeing a number in front of you that can pay for both your kids’ college funds and mean you never have to work a day in your life again. Even if you know you’re going to work, you don’t have to. You have the freedom to work on what you want.
When you see that number on a piece of paper, it’s a really interesting choice. That was my first reaction when I heard it. I was surprised that they were considering it.
I actually saw an article of a rumor that they were considering selling a few weeks back. At first, I didn’t believe it. Then, I thought, you know what, something must have changed for the founders because if you think about it, let’s say they were operating at $800 million ARR.
I just chuckle because it’s just so crazy. They only had 1200 employees. If we do even lose math and just say $200,000 or $300,000 a year was the cost for each of those employees, you’re talking $240 million–$360 million. We throw a server cost and we throw whatever other costs on, but SaaS at scale can be 30%–50% net profit margins. If we say $800 million, we’re talking $240 million–$400 million a year being thrown off. It’s mostly bootstrapped as I often say on the show.
The founders certainly are not hurting for money. I don’t feel like they sold for the money. My guess is they each have enough in the bank that they never have to work again. They probably had that a decade ago or more, so something must have changed.
Obviously, they haven’t talked about it, and they can’t right now. They have to make the employees feel okay. We’ll get into that a little later. There is some anger and outrage around that that I’ve seen reported. They have to make customers feel okay. They have to make Intuit feel okay. I think the deal doesn’t close for six or nine months. That’s par for the course.
Realistically, when I read the article or the rumor, I thought, you know what, this is right. Everyone sells eventually. I’m not saying that to say everyone should sell. I’m not saying if you run a great business that you should sell, but the pattern that I see is that at a certain point, ambitious, creative, and motivated startup founders want to move on to their next thing having that liquidity or not having the thing that they have to manage.
Maybe they’re bored of it. Maybe they just want to get onto the new phase of their life. It’s incredibly hard to build these companies—that’s what we talk about here every week on this show—to be able to cash out, and then move on to the next phase of your life.
Whether that next phase is starting another app, starting a nonprofit, instituting worldwide change, trying to beat malaria like Bill Gates, or whatever it is, in my opinion, founders who have worked hard on their businesses, who have taken care of their employees hopefully—again, we’ll talk a little bit about that—who have given back to their community like I know the Mailchimp founders have, who have built an incredible business, and worked hard for 20+ years on it, for me, I don’t begrudge them as a thing.
I’ve had limited interactions with Ben Chestnut. I think he’s a stand-up guy. I respected him when he was a blogger. Somehow, he, I, Dharmesh, patio11, and Peldi were all blogging at the same time. This is 2005 to (say) 2009.
I noticed them. Somehow, I’m on their radar. I’ve emailed Ben Chestnut a dozen times in the past 10 years. Oftentimes, it’s to invite him to speak at MicroConf which he gracefully declines. But he has entertained the idea and said, look, I’d be interested, but I have this thing that is at that time.
I also emailed him around the time that Drip was going to be acquired because we had inbound interest from several parties. I did email him, essentially let him know that, and said, hey, if this is something that’s on your radar, if you’re interested in talking about it, let’s do it. He said, do you know what? We’re not interested right now, but we’ve had a lot of inbound acquisition over our lifetime. I’d be happy to give you advice if you have any questions.
Again, to me, my impression and all of my interactions is that he’s a stand-up guy. He takes care of his employees. I know that they get back to the community in Atlanta. I have a lot of respect for what they built, and I always did.
There were competitors that we had with Drip where I thought their product was […]. I thought they ran […] businesses. I thought they took advantage of their customers, auto-upgrading and not auto-downgrading. Just doing otherwise shady things—copying competitors, claiming it their own, whatever. I never thought Mailchimp did that. I had respect for them as competitors and just respect for them as a business.
As with any big change like this, anytime a lot of money changes hands or someone gets rich suddenly, someone’s going to be angry. Someone’s going to blame that person or find out perhaps why they don’t deserve it.
I don’t know if it’s jealousy. Maybe it really is, but I’m going to be honest, the anger and outrage that I saw around this made me a little bit angry and a little bit outraged. I think people on social media oftentimes go there to vent.
I get it. Again, Mailchimp is a great company to work for. I’ve had a couple friends I know who work there. They love it.
If suddenly I found out I was going to work for Intuit, I would be upset too because I don’t like Intuit. I don’t like that they lobby the US government to keep us from having easy, free tax filings. I think QuickBooks is a really crappy piece of software. I think most of what Intuit makes is pretty crappy.
Mailchimp, I’ll agree, has gone a bit off-brand in the past few years. Freddie is chimp himself. I don’t see him as much. I feel like the software got more complicated. I feel like the UX got much more difficult to use. I haven’t logged in in years because I use Drip. I haven’t used Mailchimp in years.
I logged in a few months ago. I believe it was to export some subscribers. I was disappointed with the UX. I always thought that they were pretty good with UX before then. They had some mixed bags. They did try to bolt on automations around the time as automations came up and Drip became a thing.
It hasn’t all been sunshine and rainbows, but I’ll admit that the last few years, I’ve stopped recommending Mailchimp to people just getting started because of the complexity of it. But I think that’s where they wanted to go. I have no inside information, but I’m guessing they topped out.
You can only get so big. You just have to start […] and get other pieces of the market because they added landing pages and they added a Facebook ad builder. They just kept going pre email and after email in terms of marketers and what they needed. Instead of acquiring it, they built a lot of it in-house and kept adding bolted things on.
That feels a little more pejorative than I want it to, but I definitely felt Mailchimp being different over the past 3 or 4 years than it was the prior 15 years in terms of the quality of the product and the complexity of it.
The bottom line is they built a great and incredible business. How many other bootstrap businesses have reached this amount of revenue and zero others have sold for this level of purchase price? It’s my understanding.
If I worked for Mailchimp and then suddenly, I learned I was working for Intuit, I would feel bad. I understand that. I can understand being angry and wanting to vent.
From the other side, it kind of becomes cool or popular to hate rich people or to hate when people get rich. It’s not like Ben Chestnut and his co-founder inherited a bunch of money like they won. They built an incredible business and they were the folks who figured out free. They figured out how to do freemium in ESPs and no one else was able to do that before them. A few were able to do it afterwards, but not to the same degree.
One of the complaints I heard from employees or I heard people quoting—this is second or third hand—said, when I was hired, we didn’t get stock options. We didn’t get equity because they said we will never sell or go public.
I’m going to guess that that isn’t what they actually said. My guess is if I were in their shoes, pretty calculated, and pretty careful with words, I could see saying I have no plans to sell. We have no plans to sell this company, so equity doesn’t make sense.
Because if you start giving folks equity, they do want a return on that eventually. Usually, it’s 4 years, 5 years, 7 years, or 10 years. There’s a number. A lot of people don’t want to wait 20 years to cash out on some equity that they got 20 years ago. Usually, once you start giving equity, that is a signal that you’re going to sell. If they didn’t plan to sell, then profit-sharing, bonuses, higher salaries—which is what Mailchimp did—is what I would be doing.
I don’t plan to sell. Plans can change. In startups and in business, any of us know the flexibility and the willingness to not hold onto something. I’m not of the fixed mindset in this. Well, I said that once so we can never change it, I think, is a naive perspective.
I know that folks working at Mailchimp—this is according to news reports—got really good salaries, got really hefty bonuses (15%–30% annually of their annual pay), and the working conditions were good. It wasn’t the craziness of a startup in terms of working long hours and low pay for equity.
As someone pointed out in a Slack group that I’m in—it’s a private founder Slack group—he said, I see enough of these articles that talk about the downside of equity, how Silicon Valley companies issue equity, and then pay people lower than they otherwise should. Then, it goes bust and it’s a big trick, so equity sucks.
In this case, everyone is getting cashed out all the time. People were getting (again) these above-market salaries, plus a bonus, plus whatever other money flowed their way. There was a really generous 401(k) matching. This is the kind of stuff you expect from Fortune 500 companies. They were doing that. They were putting out the cash as it came in. They had the profit so it’s cool that they did it, but I think of that as being in lieu of having stock options.
I also read that $300 million in stock will go to the employees. While I don’t know how that will be divided, that’s $250,000 per employee. Obviously, I’m imagining that some will get more and some will get less.
It’s a non-trivial amount of money. If I were a naysayer, I would instantly say, well, $300 million is nothing compared to the $12 billion that the founders got. You’re right. It’s not. They built the company. It’s the way it goes with startups. Everything is not equal and fair. There was more risk, more years put in, more work—whatever you want to call it.
I do see that side of the argument, but I think if you’re working there, that’s what you’re onboard for. I can imagine being disappointed that it’s sold and that you don’t want to work for Intuit, but I don’t think you can then go back and say, oh, I really wanted equity. It just doesn’t work for me. To be honest though, the real bummer is folks who maybe worked there and then left.
Let’s say you left 10 years ago, 5 years ago, or 2 months ago. You walked away with nothing. That is one of the trade-offs with granting equity, granting stock options, or profit-sharing.
I talked about this in an episode. Just go to startupsfortherestofus.com, type in profit-sharing, and that episode will come up. It was maybe six months ago. It’s actually become one of the more popular episodes where I walk through the pros and cons of each of these.
One of the pros of profit-sharing is that people get cash. They don’t have to sit around and wait for this funny money. Realizing equity in a private company is illiquid. It means nothing until there’s an exit or liquidity event versus here, there’s some cash. But the downside of that is if you leave and then the company sells later, you don’t get any more money because you got your money out as it was going. That is one of the downsides of it. That’s the trade-off.
Again, I do feel for some folks. I can imagine being someone who worked there for 10 or 15 years, got their pay while they were doing it, left, and then didn’t get any rewards at the sale. That’s tough. Also, I guess I keep coming back to the same thing. You can tell how I feel about it. I feel like I’m saying my same opinion over and over.
I get it. I don’t think the founders did anything wrong. Knowing what I know of the founders, I think they will do great things with the money. I think they will make sure the employees are taken care of. I think to the best of their ability, they will make sure the customers are taken care of. I think that they’re not going to sit on this money and go sit on a beach in Tahiti.
My guess is they will invest in their community. They will invest in causes that can change things. Whether it changes things in their city, their state, their country, or the world, it’s a lot of money and you can make a huge difference with that type of money. I think they will.
As with most exits, in the short-term, it won’t make a huge difference. In the long-term, it will probably not be a net win for Mailchimp’s customers. I haven’t seen Intuit treat its customers particularly well over the years. I don’t think their software’s that great. They just happen to be mostly in a monopoly position.
Mailchimp has always competed well and like I said, had good software. With some changes over the past three, four, or five years, I think they deviated from that initial vision, but I don’t see how this makes Mailchimp a better product. I don’t see how long-term it’s going to be a win for its customers, which is unfortunate, but this cycle of business or software.
You build software, you can move fast, and add all these great new features in the early days. Then, as it becomes more mature, it becomes a teenager, it becomes an adult, and then (frankly) a software. By the time it’s even 10 or 15 years old basically, it’s like dog years, it just gets old. It gets hard to make changes, especially as a team grows, as the code base grows, and that legacy. You can’t undo that technical debt. You can’t change winds up tying you to a specific way of doing it. That is a cycle of business.
Then, a new wave of products comes along that is able to do a little better. They’re able to move faster because they’re nimble in their early days, and then those products age over time. That’s just the cycle of business.
I don’t feel like this is catastrophic certainly for the space. I’m glad that there are a lot of competitors in the space. It’s a very large space—email marketing and marketing automation—but that’s my thought. If I was a Mailchimp customer right now, I’d be thinking, I’m going to stick around for a bit but obviously, as time goes on, we’ll be able to see the impacts that this has on it.
A couple more points and then I will wrap. One thing that I’ll say is if you’re starting a company, never tell people that you’re never going to sell or go public. I’m not saying they did that. Other people and employees said they were under the impression they would never sell and go public. My guess is they didn’t say that.
That would be a mistake if you were to do that because do you know what? Everyone sells eventually. I don’t mean everyone in terms of 100%, but 95% or 99%. We just sell. We want to move on. I think I’ve already covered that.
Don’t make a promise or don’t make an implicit commitment that you don’t want to live up to. You can say, I’m growing this business for the long-term. You’re going to get asked in an interview, what do you plan to do with the XYZ Company you’re starting? It’s a plan to grow for the long-term. I want to work on it for a decade or more. That’s what you say because that’s usually what you believe and that’s the way to build a great business.
You don’t build a business to flip it but also, you don’t want to promise someone internally or employees as you hire them that they’re not getting stock options because we’re never going to sell. It’s just not a smart thing to say. Take that as a lesson and be careful with that type of verbiage.
My final thought is that being an email service provider these days is getting hard with inboxes looking more and more at privacy, blocking, and open pixels. The effectiveness of email marketing will continue. It’s certainly better than social media, but it’s not as effective as it used to be. It’s like doing SEO and having Google Analytics. It used to tell you which keywords people were using to find your site, and it doesn’t anymore.
Similarly, email marketing is going to have less and less data to go on. You can always track clicks because they click through to your website, but a lot of things are being blocked. Spam filters are getting better and in fact are getting so good that they’re actually getting bad. These days, some of my emails are going to spam and that hasn’t happened in a long time.
There’s a promotions tab. There are all these things that are creating an uphill battle for email marketing so I do wonder—again, I have no inside information—if I were them running it. I believe the founders are in their late 40s. They’d be thinking about their next act after having worked on something for 20 years.
I have not worked on anything for 20 years aside from my marriage. That’s it. MicroConf is 11 years. Drip was 5 ½ from start to finish. I don’t know if many of you in the audience have worked on anything for 20 years. It’s a long time and it’s a hard problem.
Being an ESP is a non-trivial thing. At one point, after Derek and I had sold Drip, I told him I’m never doing something that sends email again. There were just a lot of headaches with it and I can’t imagine what it would be like at that scale that Mailchimp is out with those billion emails a day during the week.
What I can imagine is that in their shoes, maybe there’s just a major life change that one of them is going through. Who knows? But I can see market forces being in the thought process of what is the future? What does it look like in 5, 10, or 15 years? If anyone can see it coming, they can. They’re right at the bleeding edge of the President being able to see the effectiveness. Maybe they’re seeing across the entire company—all the emails being sent, lower open rates, lower click rates, whatever.
But the bottom line is it’s a tough business to be in, I will admit. I can imagine that that could play a part in it. Possibly, they’ve taken the business as far as they can or want to. Into its market cap, I believe, is $120 billion maybe or $110 billion. Being able to go under the wing of that does give you more resources and a much larger customer base. I know Mailchimp has a big customer base, but I believe Intuit companies have quite a bit more than that.
Honestly, I remember when we sold Drip thinking that the leadpage’s customer base was substantially larger and we’d have a lot more resources. I was actually motivated by that. It was super interesting. Obviously, the liquidity for the founders was great, but I was also interested to learn more things and to be on a bigger playing field. Maybe that could potentially have been appealing as well.
I think it’s a story that will unfold in the coming years honestly. My guess is we’ll hear from Ben or his co-founder, whether it’s through a talk at an event that we attend, podcast interviews, or elsewhere. I think the story will come out ultimately, and it’ll shed more light on why this all went down at this time.
That’s it. Those are my thoughts. Congratulations to the Mailchimp team. Props to them and frankly to everyone who’s involved in building such an incredible business.
Again, it continues to show you the power of B2B SaaS, the power of building an incredible business with not that much cash, and then the value of those businesses because of the subscription revenue, the repeatability of the sales process, and the momentum as you build that brand. We really are in the golden age of entrepreneurship, especially if you can figure out a way to build software. You build it once and you sell it over and over. It’s just a matter of scaling things. There’s never been a better time in history to be an entrepreneur.
That’s it for this week. Thanks again for joining me. I’ll be back in your ears again next Tuesday morning.
Episode 562 | “Measure Twice, Cut Once” + SaaS Holy Grails (A Rob Solo Adventure)
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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!
Subscribe & Review: iTunes | Spotify | Stitcher
Rob: 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.
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.
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)
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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!
Subscribe & Review: iTunes | Spotify | Stitcher
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Welcome back to Startups For the Rest of Us. This week, I’m your host, Rob Walling. In fact, every week on the show, I walk through topics related to building and growing startups, using an ambitious yet a sustainable approach. We’re not willing to sacrifice our health or relationships to grow our companies, but at the same time we want to build real businesses with real customers who pay us real money.
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.
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?
This is where Rewardful comes in. Rewardful has everything you need to start referral marketing for your SaaS, membership, or ecommerce business. Reward your advocates whenever they send you paying customers. Rewardful is specifically built to work with Stripe, and automatically handles one-time charges, free trials, upgrades, downgrades, cancellations, and refunds. They can even help you find and recruit relevant affiliates for your industry.
Companies like Transistor, Podia, and Baremetrics trust Rewardful to power their affiliate programs and scale with their growth. Spencer Fry from Podia says, “Every other affiliate platform we look at was either insanely expensive or full of bugs, and sometimes both. Rewardful has been rock solid, and took less than 15 minutes to install. It’s the perfect affiliate solution for SaaS companies using Stripe.”
So whether you’re looking to start an affiliate program, partner program, customer referral program, or all the above, Rewardful lets you manage everything under one roof with a simple 15-minute integration. Get 30% off your first 3 months by heading to getrewardful.com/startups. Offer expires May 31st.
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.
As a reminder, today’s episode was brought to you by Rewardful. Rewardful is quickly becoming the go-to platform to set up affiliate, referral, and partner programs for your SaaS membership or subscription business. Rewardful handles all subscription billing scenarios such as free trials, upgrades, downgrades, cancellations, refunds, and prorated charges out of the box with their simple 15 minute set up.
They’re the only platform that has a built-in affiliate finder that crawls the web and surfaces high-quality relevant affiliates for your program. Simply search by keyword, competitor, or alternative names, and reach out to the best affiliates in your market to take your program to the next level. Check them out at getrewardful.com/startups to get 30% off your first 3 months. Offer expires May 31st.
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)
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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 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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Turns out, the rumors are true. This is Startups For the Rest of Us episode 519. Thanks for joining me again this week. I’m going to be running a solo adventure today, talking through profit sharing, stock options, and equity, and doing a comparison of those various with the thought of incentivizing employees and team members in mind. This is the conversation I have had at least five times and maybe six in the past three months, so I figured it was time to put some thoughts to tape so it’s a resource I can use to point people in the future.
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.
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.
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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.”
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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
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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.
Click here to share your number one takeaway from the episode.
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Rob: Welcome to the special bonus part two episode of Startups for the Rest of Us, this week. If you haven’t heard the episode that came out on Tuesday, Jordan Gal and I got into such a good conversation, we ran really long. I just let it go. I didn’t want to cut it off because we were talking through our journeys. I wanted to cover the first six stages of SaaS growth. It took us longer than I thought it would to get through everything, given the anecdotes and deep-diving into what it looked like to grow Drip and CartHook.
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.
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.
