According to Steve Blank customer development is “the process startups use to quickly iterate and test each element of their business model.” The idea is that dreaming up features for your product is all well and good until faced with the reality of a customer: what you think the market needs and what the market actually needs are two different things. As an entrepreneur, the best way to build a product is in conjunction with potential customers whereby you have a tight feedback loop and short development cycle from the beginning.
Here are a few things to keep in my mind with customer development in startups:
- Start by casting a wide net of potential customers and talk to as many as you can with the goal of narrowing the focus dramatically within a short period of time
- Pick potential customers that best align with your opinion of the market and are willing to help give feedback and be part of the process
- Schedule calls at least monthly, if not every two weeks with these potential customers to show them new functionality and get input
- Ask for a commitment from the potential customer to use the product in their environment as soon as they see value (of course, they are helping guide the development of the product so they should naturally see value at some point)
Customer development is hard especially when you can spend time adding product features and get instant gratification seeing new functionality work. Stop, pick up the phone, and talk to potential customers before you add more functionality the market doesn’t want. Prioritize time for customer development and make it a critical part of the startup culture.
What else? What are some other thoughts on customer development in startups?
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At the end of each quarter we push hard to finish strong and win deals in the pipeline. Unlike many technology companies, we don’t discount and do end-of-the quarter specials to achieve a goal that pulls demand from future quarters. The success of any one quarter is determined well in advance of the quarter based on the hard work of the sales and marketing team to build a strong pipeline and on our ability to provide solid customer solutions.
Here are some ways we close out each quarter without making it a fire drill dependent on discounting product:
- Build bottom-up forecasts and goals for the quarter based on the number of quota bearing sales reps (as opposed to top down ones based on an arbitrary increase from the same quarter last year)
- Publish pricing online for anyone to see providing greater transparency and prospect understanding
- Stand by our pricing with pricing integrity so that customers know our other customers are paying the same price and that our sales team earns respect greater than that of a used car salesman
- Encourage our sales reps to be pleasantly persistent in their consultative approach such that prospects know we are good at what we do and are ready to move forward when they are
With these strategies in place we still push hard at the end of the quarter but do it standing true to our principles and values.
What else? What have you seen other companies do to meet their end of quarter financial goals?
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Casually, I’m helping out a local first-time entrepreneur that has been working full-time on his idea for the past two months and is now focusing on raising an angel round. Earlier today he sent over his investor slide deck that covers the executive summary information as well as product details and brief financials. There was only one glaring problem: he listed year three revenue at $50 million.
Now, this is a well educated guy with the best of intentions, but $50 million at year three based on organic growth in an unproven market is extremely suspect. Most companies don’t hit $1 million in year three let alone $50 million. Here are some thoughts on startup three year financial projections for investors:
- Keep the financial projections reasonable and err on the conservative side
- Investors want to see a path to an 8x – 10x return — they don’t need to see a 100x return
- A solid year three revenue range for a technology startup with recurring revenues and high gross margins would be $7 – $15 million (the number would be higher for lower margin businesses)
- Revenue growth from years one to three should be reasonable as well showing some acceleration (e.g. year 1 of $1M, year 2 of $4M, and year 3 of $10M)
Startup financial projections are simply educated guesses. They are meant to show investors that the entrepreneur has a decent understanding of the financial aspects of the business and that there will be a solid return on investment.
What else? What are your thoughts on startups and three year financial projections for investors?
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Earlier today a successful serial entrepreneur emailed me saying she was going to expand her sales team and to see if I had any recommendations. High quality sales reps, much like strong programmers, are always in short supply, regardless of the macroeconomic condition (and coincidentally are the two most complementary skills to have for startup cofounders). Finding great sales reps requires a methodical process and hard work.
Here are five steps for finding great sales reps:
- Engage with social networks like Twitter and Facebook using a service like TheResumator to manage applicants and broadcast job openings
- Pay for LinkedIn Jobs and target sales people at companies with similar corporate cultures to your own
- Offer a bounty or referral bonus to people inside and outside your company
- Participate in local college career fairs, especially if they have general business or management degrees and you are hiring entry-level reps
- Network at local sales executive organizations and ask for referrals to reps
- Bonus: talk to vendors are trade shows and use it as a form of interviewing to find reps you’d like to have on your team (I know one successful rep that was recruited in a Delta Crown Room at the airport because he did such a great job on a call)
Finding great sales reps, much like finding great employees, takes time and hard work. Participating in communities where the reps hang out as well as targeting specific companies through LinkedIn help increase the chances of finding strong candidates.
What else? What are some other tips for finding great sales reps?
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Hiring sales people is one of the more difficult things for startup founders, especially technical ones. Naturally, sales reps are great at selling themselves so they come across as being successful, even if they aren’t. Knowing that it’s considered good if 50% of new inside sales reps work out, it’s important to evaluate progress and results objectively as well as quickly.
Here are five steps to evaluating new inside sales reps after they are hired:
- Set a required number of logged weekly calls and demos with self-reporting of the CRM values in a Google Spreadsheet
- Establish activity-based metrics for months one through six around call conversations, demos, pipeline opportunities, and deals won so that it is black and white to continue employment each month
- Review calls and demos by using a phone system that provides for recording calls (with the permission of all parties involved)
- Compare performance of the new inside sales reps to existing, proven reps and share how they compare on a weekly basis
- Continually ask questions and drill into things the rep should know about the company, product, and market on a weekly basis
Evaluating the performance of inside sales reps after they’ve been hired is easier than picking the right people to hire. Even then, it’s important to clearly lay out the required goals and track the metrics so that the sales rep know exactly where they stand with respect to expectations.
What else? What do you think of these five steps to evaluating new inside sales reps?
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Finding great employees is hard. Very hard. As a startup CEO, recruiting great talent is one of the three most important functions. In addition, a strong corporate culture is the only sustainable competitive advantage, and it starts with the team members.
Here are some quick tips for finding employees:
- Referrals – referrals from employees, friends, and family should be at the top of your list. Offer referral bonuses, even ones to people not associated with your company.
- Job Boards – look to specialty boards like ones for software engineers, sales reps, etc. Go to online communities where your type of team member hangs out and participate.
- Craigslist – great for entry-level jobs and interns. Yes, there is tons of noise but it is still worthwhile.
- Career Fairs – local college and university career fairs are often designed for students about to graduate, but also look for career fairs the cater to experienced graduates looking to make a change.
- Recruiters – work hard to find recruiters that align with your values, and make it a collaborative relationship
Finding great employees is hard. Use these five quick tips to cast a wide net.
What else? What are some other tips for finding employees?
I know of at least three successful email marketing companies that started out as web design firms doing custom web app development. As with most startups, the ideas that result in success come from trying something first that didn’t work out (from personal experience, my original business idea has never been what resulted in success). My question today is as follows: why is there a pattern of successful email marketing companies that originated as web development companies? Entrepreneurs continually ask me how to make the transition from consulting services to product-oriented businesses and I don’t have any silver bullets. Email marketing has some interesting aspects that made it more attainable before the market became commoditized.
Here are some thoughts on why email marketing was especially suitable for consulting companies that transitioned into a products business:
- Web application consulting lent itself well to building a SaaS web app for email marketing
- Email marketing, like any SaaS offering, is difficult to get going but once a modest amount of revenue is recurring the ability to scale it out becomes more apparent
- Customer acquisition is the most difficult part of any product-based business and many web development companies developed areas of expertise in lead generation, search engine optimization, and search engine marketing through client work
Converting from a services company to a products company is extremely difficult. Email marketing is one of the few SaaS product markets that has several successful companies that made the switch from services to products.
What else? Why do you think so many email marketing companies started out as web development companies?
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Tonight I had the opportunity to judge the business plan competition for the MBA program at GA Tech (the site is powered by Hannon Hill). Personally, I’m against doing business plans as the time and effort required to do a quality one is better spent on a two page executive summary combined with talking to 50 potential customers. There is value in thinking through the different sections but I’ve never seen a business become successful by doing exactly what they set out to do with their original plan. Unfortunately, too many people start believing what they wrote in the plan and not spending time finding out what the market needs.
Here are the common mistakes we saw tonight while judging the business plan competition:
- Not clearly articulating the pain or problem being solved
- Not providing a memorable anecdote or hook for the idea
- Not painting a clear picture as to what they wanted from the presentation (e.g. a second meeting with investors)
- Using slides with too many words and too small of a font (the slides were designed as handouts and not for presenting)
Writing and presenting a comprehensive business plan is difficult. The students did a good job, the event was well done, and I was honored to be invited.
What else? What other problems do you commonly see in business plans?
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Spreading FUD is a common tactic from traditional, old fashioned enterprise technology companies. Fear, uncertainty, and doubt (FUD) combined with patently false claims (e.g. the product doesn’t do X when it clearly does) are a way for companies to try and persuade a prospect that the other product and company are inferior. Startups with integrity and strong values don’t participate in slinging mud and prefer to stay above-board by focusing on solving customer problems instead of putting down the competition.
Here are some ways companies spread FUD about their competition:
- Cite things the product does or doesn’t do when two minutes of web research show the truth
- Talk about lack of funding or institutional investors in an attempt to imply that money makes a company successful (what happened to Webvan?)
- Provide anonymous quotes claiming to be from customers that switched products
Sales reps that spread FUD act like used car salesman in the worst of ways. Startups and sales reps should focus on solving customer problems and not putting down competitors.
What else? What do you think about startups that spread FUD?
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Recently I talked to two companies that said they were Software-as-a-Service (SaaS). After asking more questions and drilling into details for a bit I came to the realization that what they were referring to as SaaS was independent virtualized instances of their product in the cloud. SaaS, to me, is very different.
Here’s how I define multi-tenant SaaS:
- Application servers that support multiple clients
- Databases that support multiple clients in the same tables
- Infrastructure (load balancers, fail-overs, etc) to support many customers
Virtualization of the application delivered via the cloud is essentially a more manageable version of the late 1990s Application Service Provider (ASP) model, and not SaaS. A major benefit of SaaS is the engineering efficiencies and scalability of multi-tenant application services and multi-tenant database instances. Multi-tenant SaaS and virtualization are two different things.
What else? What do you think of people calling their business model SaaS when it isn’t multi-tenant?