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!
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.