A few weeks ago I was having lunch with a successful entrepreneur that had sold his business for a large sum of money over a year ago. During the conversation I asked him why he started the company and what were some of the reasons for being. He cited some of the more common ones like being his own boss and financial independence by age 45, but then he mentioned one of his top five purposes as a business was to build community leaders.
As I hadn’t heard this community leaders example before I drilled in to collect more information. Here are some reasons building community leaders was important to him:
- Every person has leadership abilities at some level and their internal programs to train their people to be leaders helped their business
- The startup can only grow as fast as the leaders in the company grow
- Leadership training helps people be better leaders at home, their children’s schools, church, non-profits, and more, making for a better community
- Career development happens faster with more leadership training, making for an even greater positive impact on people’s lives
Like self-actualization of a person, I now view self-actualization of a startup as one of the important goals and growing team members is tightly related.
What else? What are your thoughts on startups as a way to build community leaders?
Software-as-a-Service (SaaS) as a business model has a number of advantages including alignment of value between customer and vendor, strong cash flows, high gross margins, and great economies of scale. As with any growing startup, one of the most limiting factors is cash — the faster the business grows, the more cash it eats. Another benefit of SaaS that should be mentioned more often is that of pre-paid contracts.
With pre-paid contracts, like Salesforce.com requires, payments are made in advance of service being rendered. These contracts are often pre-paid quarterly or pre-paid annually with a discount (e.g. pay for the full year and get 10% off). For the startup this results in free working capital to grow the business. Yes, there’s an unearned income liability and an obligation to fulfill the service, but with the money in the bank, many startups use it to grow the business even faster than if they didn’t have pre-payments.
There’s another secondary benefit of pre-paid SaaS contracts: potential profits in the bank aren’t taxed until revenue is recognized and profit earned. Say it is December 31st and the startup’s bank account has $100,000 more than it started the year. Normally, if that’s profit it would be taxed around 30% leaving only $70,000 left to invest and grow the business. Well, with accrual accounting and $100,000 of unearned income due to pre-paid contracts, that money isn’t taxed until the revenue is recognized resulting in more capital to grow the business on January 1st.
Pre-paid SaaS contracts provide free working capital for startups and should be considered when thinking through business ideas (e.g. can we get customers to pre-pay us to help fund the business?).
What else? What are your thoughts on pre-paid SaaS contracts as free working capital for startups?
When having lunch with the CEO of a prominent Atlanta software company five years ago, I asked for advice about marketing. One of his suggestions was to do primary research and publish it. Journalists, prospects, customers, and partners love to read new information, especially if isn’t something recycled.
Earlier today David Skok, a VC with one of the best blogs out there for entrepreneurs (ForEntrepreneurs.com) tweeted that ZenDesk’s new Satisfaction Index is a great marketing idea:
Startups, especially successful ones, have an abundance of valuable data that is confidential to each customer. In many cases, this data can be aggregated and anonymized in order to provide benchmarking information to help customers compare their results with the average as well as for marketing purposes to generate awareness for the startup.
Startups should provide benchmarking data as part of their marketing strategy.
What else? What are your thoughts on benchmarking data for startup marketing?
In the software business not all revenues are created equally. Revenue from subscriptions or licenses is significantly more profitable and scalable compared to revenue from professional services. When talking to entrepreneurs I like to get a feel for the mix of revenue from subscription/license vs professional services. One of the simple proxies for this is the number of employees they have in professional services.
Here are some notes on professional services revenue for software startups:
- Professional services revenue as a percent of total revenue is often super high for early stage startups still looking for product/market fit (e.g. they are doing consulting work to pay the bills)
- Once a product takes off services revenue is typically a small percentage of overall revenue, especially if channel partners (value added resellers) are used
- As the core business and market matures, many software companies add more services as a way to grow even though margins decline
- Some services companies masquerade as software companies when in reality the software is for lead generation for their consulting work or their product requires so much customization it doesn’t get much in the way of economies of scale
When thinking through startup opportunities, and evaluating companies, it’s important to understand how the services component fits in.
What else? What are some other thoughts on professional services revenue as it relates to software startups?
One of the reason’s startups are successful with limited capital is taking the Moneyball startup approach and being scrappy with resources. When I think of scrappy an example from Ted Turner’s autobiography Call Me Ted comes to mind. Turner was in the process of getting the TBS Superstation off the ground and it was novel to have a local station broadcasted nationally.
Without having the brand recognition of a CBS or NBC, traditional advertisers balked at advertising so he had to do direct response marketing on his own dime. As an example, a company would pay $20 per widget sold, so he’d make the ad and sell the widgets, even doing the payment collections.
Many payments were by individuals sending checks in the mail. Oddly enough at the time, the postal service didn’t always cancel the stamps on the envelopes (e.g. the little black ink lines on top of the stamp to designate that it has been used). To save money, they’d take the non-cancelled stamps off the letters and re-use them for their letters. Now, there are some ethical questions about that but it captures the spirit of a startup being scrappy.
What else? What are some other ways startups are scrappy?
At today’s MIT Enterprise Forum Atlanta Entrepreneurs Uncensored Sanjay and I were asked if there were things that kept us up at night. Being the first to respond, I quickly said that I sleep great at night (unrelated to my Tempur-Pedic bed but that’s nice as well) for one simple reason: recurring revenue.
Recurring revenue with high gross margins is the holy grail of business models.
Here are some reasons recurring revenue is so powerful for startups:
- Recurring revenue makes cash flow forecasting very easy (running out of cash is the #1 reason startups fail)
- Recurring revenue makes predicting hiring needs straightforward so that you can recruit well in advance
- Recurring revenue is often indicative of a business model that has strong economies of scale
- Recurring revenue makes banks more comfortable with providing debt to finance growth (most businesses won’t qualify for debut unless the entrepreneurs have significant personal assets and are willing to do personal guarantees)
Recurring revenue businesses are more difficult to get off the ground but once they’re going they’re easier to manage. Recurring revenue helps entrepreneurs sleep better at night.
What else? What are some other reasons recurring revenue is so powerful for startups?
One of the approaches I like about Warren Bennis and his theories in the book On Becoming a Leader is that he puts the impetus on the leader to go out and better himself. There’s nothing handed to you — whether it’s proactively finding a mentor, reading books, or learning from peers, the onus is on you.
In the book the author offers up four lessons of self-knowledge for leaders (pg 52):
- One: You are your own best teacher.
- Two: Accept responsibility. Blame no one.
- Three: You can learn anything you want to learn.
- Four: True understanding comes from reflecting on your experience.
The best leaders I know are the ones who are constantly engaged in learning. And the learning doesn’t have to be specific to their industry, rather they are passionate learners about a multitude of things, of which they draw parallels and patterns in their efforts to be a better leader.
What else? What do you think of these four lessons of self-knowledge for leaders?
Internal communication has been a hot topic lately. As a startup grows the amount of in-person communication needs to grow even faster. But, what’s the right amount of in-person communication in a startup? How do you know when there’s enough? As a general rule it’s better to have too much communication rather than too little.
Here are some of the in-person communication processes we use:
- Daily check-in – Quick stand-up meeting for 10 minutes each day answering the questions what did you accomplish yesterday, what are you going to do today, and do you have any roadblocks
- Weekly all hands meeting – 20 minute meeting with everyone talking about good news and answering town hall questions
- Bi-weekly or monthly catch-up – Status update on top three projects, what’s working, what needs to change
- Quarterly check-in – Lightweight performance review answering questions what did you accomplish last quarter, what are you going to do this quarter, how can you improve, and how are you following the values
- Quarterly simplified one-page strategic plan – A one page document with S.W.O.T. analysis, vision, goals, elevator pitch, and more talked about at the first all hands meeting of the quarter
In-person communication and alignment is tough. As a startup grows it becomes even tougher. The fine balance between extensive communication and death-by-meeting needs to constantly be evaluated.
What else? What are some other in-person communication processes that you’d recommend?
In the Software-as-a-Service (SaaS) world one of the questions investors love to ask is, “what’s your annual renewal rate?” The idea is that products with a higher renewal rate, and thus a lower churn, are more desirable, everything else being equal. After the renewal rate question comes questions around why customers leave and under what circumstances. Not all products and markets are created equally — there’s a product stickiness spectrum for SaaS products.
Here are some example SaaS product categories with levels of stickiness:
Ecommerce (switching costs, SEO, payment gateways, product catalogs, etc result in many moving parts)
Content management (especially with a high number of pages integrated and users trained)
Marketing automation (CRM integration, scoring + grading rules, email templates, landing page templates, tracking code, etc)
Payroll (the nuances of electronic deposit, vacation days, risk of error, etc make people less likely to switch)
Email marketing (CSV file of contacts, email templates, DNS changes, etc)
Virtual meetings / webinars (event sign-up form, URLs, etc)
As with anything there are tradeoffs. Typically, categories with higher levels of stickiness have higher integration and consulting costs to make the system work, so there’s going to be a heavier people component, and lower economies of scale.
What else? What are some other SaaS categories and where do they fit on the stickiness spectrum?
Recently I started reading On Becoming a Leader by Warren Bennis as several people have mentioned it as a classic. After getting through his Hollywood-style political leanings in the intro he does a good job of describing characteristics and examples of good and bad leaders.
Here are the four essential competencies of a leader according to Warren Bennis (pg. xxv)
- Leaders are able to engage others by creating shared meaning
- All authentic leaders have a distinctive voice
- All true leaders have integrity
- The most important competency is adaptive capacity — this is what allows leaders to respond quickly and intelligently to relentless change
Most of the leaders interviewed are somewhat dated now as the book is over 20 years old but the concepts and ideas still ring true. For leaders looking to learn and grow in their skills, this book is a quality read.
What else? Do you agree with these four essential competencies of a leader?