Earlier today Derek Grant gave a great talk on building a sales department at The Ultimate Sales Conference. One of his recommendations was to use a written assessment during the hiring process, which has several benefits:
- Reveals level of interest by the potential recruit
- Demonstrates ability to research information and articulate a response
- Shows candidate’s responsiveness and turnaround time for an assignment
- Creates more valuable conversations throughout the interview process due to more background research
We first implemented the written assessment at Pardot after Adam and I had a debate about hiring a candidate with no experience. I thought the candidate really fit our corporate culture and had the right acumen to succeed on our services team. After going back and forth a few times, we decided to give a technical assessment and written assessment. He passed with flying colors.
Going forward, we’d ask each candidate to write short answers to the following types of questions:
- What do we do?
- How do we differ from Google Analytics?
- What are three trends in our industry?
- Who are our three main competitors and why?
- How do position ourselves in the market?
Candidates were expected to research the questions and provide short, thoughtful answers. Everything about it worked great. Once that first one worked out well, written assessments became a best practice for the hiring process.
What else? What are your thoughts on written assessments in the hiring process?
One of the financial questions investors are fond of asking, and entrepreneurs often struggle with, is that of bookings. Bookings are related to revenue but are at the front-end, before cash comes in. Bookings are best thought of as the amount of money committed to be paid to the company in the future, where the time frame can be any amount of time.
Let’s look at a few examples:
- A customer signs up for a one-year contract with $50,000 up front and $50,000 over the next twelve months but hasn’t paid anything yet — that’s $100,000 in bookings with no cash received and revenue to be recognized on a monthly basis as the solution is delivered
- A customer signs up for a two-year contract paying $2,000 per month with no up-front fees, making for $48,000 of bookings (the total contract value over the life of the arrangement)
- A customer is signs up paying $1,000 month with no contract and just pre-paid their first month, resulting in no change to bookings
Recurring revenue is the most important startup metric as it shows how much revenue the business will generate assuming no churn and no upgrades. Recurring revenue doesn’t take into account how much of the revenue is contractually obligated, whereas bookings is driven by contractually obligated revenue.
So, when an investor asks a question like “how much do you have in bookings”, be ready to answer it, especially for a specific timeframe (e.g. we have $500,000 booked for the next 12 months based on signed contracts).
What else? What are some other thoughts on bookings and how it relates to revenue?
Over the years I’ve been asked several times to be an advisor or mentor. While there are a number of good posts about the benefits of an advisory board (see Jeff’s great thoughts here), I want to focus on a little used technique that adds tremendous value: monthly advisor update emails. After you’ve built an advisory board and scheduled a nice recurring quarterly dinner, one of the best things to do is to keep everyone up-to-date on a regular basis. Monthly feels right as it’s enough time to make progress but not too frequent so as to become burdensome.
Here’s an example template for a monthly advisor update email borrowed from the format Kyle Porter uses for regular team and investor updates:
- Current quarter goals and progress towards goals
- Product update
- Sales update (New MRR, total MRR, and current weighted pipeline)
- Marketing update
- Quarterly priority projects update
- Culture stories
The next time you develop an advisor relationship, regardless of role, make sure a regular update email is incorporated.
What else? What would you add or change about the monthly advisor update email?
Andrew Chen has a guest post up from Christoph Janz regarding his spreadsheet for churn, MRR, and cohort analysis. Christoph is the author of the awesome SaaS metrics dashboard that I adapted to work with startups that have an inside sales team.
Cohort analysis is looking at groups of customers over time as opposed to all customers at a given point in time. As an example, on any given month 3% of all customers might churn (they leave and no longer pay for the service). Upon further inspection, after grouping customers based on the month they signed up, one might find that customers within 90 days of signing up are churning at a rate of 10% per month, but once they get past 90 days, they churn at a rate of 2% per month. This cohort analysis would lead to a variety of recommendations.
Here are a few thoughts on cohort analysis:
- Consider sample size and timeframe when evaluating usefulness (e.g. a startup with a small number of customers doesn’t need to spend time on it)
- Break customers into meaningful cohorts based on different factors (e.g. some startups should measure customer cohorts by the week whereas others should do it by the month)
- Monitor multiple customer data points beyond churn including average revenue per user, engagement, logins, up-sells, etc
- Look for anomalies that might influence the data including things like weather, seasonality, etc
Cohort analysis is an important part of the recurring revenue business model and should be incorporated into the standard startup metrics.
What else? What are your thoughts on Christoph’s spreadsheet for churn, MRR, and cohort analysis?
Recently I was talking to entrepreneur that had just purchased an office building for his small but growing company. His business is doing well in a hot market that is set to explode over the next few years. Only, by purchasing a building, he’s set an artificial upper limit of employees for the firm. Several years ago, when I was talking to another entrepreneur about buying a building, he described it this way:
A goldfish will grow to the size of the fishbowl, and no more. An entrepreneur’s company won’t grow larger than the building.
The company will over optimize the number of employees for the size of the building, and not for the needs of the business. Yes, space can be rented in nearby buildings and adjustments can be made, but owning a building results in unnatural acts to not expand beyond it. If an entrepreneur has ambitions for major growth, and major growth requires a significant increase in employees, buying a building is a bad idea.
What else? What are your thoughts on entrepreneurs owning office space?
One of the more common questions I get is around managing my schedule and coordinating different responsibilities. My response is that I work hard to build a consistent internal meeting rhythm and look to ensure that I’m not required for the business to operate (e.g. I’m not a bottleneck for any regular tasks). Per the internal meeting rhythm, it helps keep everyone aligned and communicating on a regular basis.
Here’s our startup’s internal meeting rhythm:
- Daily Check-in – A 10 minute scrum every morning with the entire company at 10:20am where we answer the following questions: what did you accomplish yesterday, what are you going to do today, and do you have any roadblocks.
- Weekly Sprint Review / Planning – Two week product sprints where every week we either review the status of the current sprint or wrap up the last sprint and plan the new one.
- Monthly Metrics Dashboard Review – Each month we review our Google Spreadsheet metrics dashboard, which has all the critical metrics for a Software-as-a-Service startup.
- Quarterly One Page Strategic Plan - A simplified one page strategic plan that we update and review with the team once every quarter.
- Quarterly Celebration – Each quarter we get out of the office and celebrate as a team (e.g. a baseball game, picnic, sailing, etc).
Eventually we’ll break out the daily check-ins into smaller groups, do monthly strategic meetings, and quarterly check-ins (lightweight reviews) once the startup matures. While there are a fair number of meetings, they are all specialized and add significant value.
What else? What are some other meetings you like for your internal startup rhythm?
A few weeks ago I was talking to an entrepreneur that has a couple different product lines with one product being installed software and the other product being Software-as-a-Service (SaaS). Naturally, the strategic focus is on the SaaS product but the installed product is still doing well replacing more expensive incumbents. The entrepreneur then said something that really stuck with me:
A one-time sale is a sugar high for the business.
Think about it for a minute. Selling an installed product that has a one-time fee is great for short-term revenue but, like a sugar high, it’s only temporary. The following year you have to sell the same amount as the previous year just to get back to the same level of annual revenue. Now, with recurring revenue, each new customer adds more revenue that layers on to the existing revenue making it much easier to grow and making cash flow more predictable (assuming a sticky product with a high renewal rate).
Businesses with one-time sales aren’t bad, but, if possible, recurring revenue is a much more desirable business model.
What else? What are your thoughts on the saying that a one-time sale is a sugar high for the business?
Several years ago we were playing the real estate roulette sublease game where every 18 – 24 months we’d go shopping around to find an affordable and flexible lease suitable for our startup. In the first seven years of my entrepreneurial journey, we were in five different offices (one of the reasons the Atlanta Tech Village was started).
Well, we were out in the market looking for a new office and there was an option across the street in a nice building. Looking at the floor plan and the existing layout, it was unlike ones I’d seen before in this part of town due to several large, open rooms. Perfect, I thought, as we wanted to have a more open, shared environment.
Excited, we headed over to review the space. We met the listing broker and he explained that this was a beautiful space previously used by a publicly traded pharmaceutical company. Oh, and it was their executive floor. Coming from the startup world, I hadn’t ever seen an “executive floor”, but I quickly understood what that meant.
Here are some characteristics of the executive floor:
- Massive private offices in the neighborhood of 300 – 500 square feet each
- Closets and fine built-in shelves in each of the excutive rooms
- Mahogany wood paneled walls in the main conference room
- Large reception area for the floor followed by smaller, private reception areas for each of the large offices
- Internal, over-the-top bathrooms that were much nicer that the standard building bathrooms
Basically, it was the antithesis of how startups operate. Ultimately, we were able to negotiate a sublease-type rate due to tough market conditions and stayed in our same space. It was an experience to tour an executive floor and see how some other companies operate.
What else? Have you seen an executive floor and what are your thoughts on them?
When talking about recent IPO filings and SaaS growth rates, there’s often a reaction that because XYZ company lost millions of dollars last year, it isn’t well run. Inherently, people understand having to lose money to get a startup off the ground as there’s a disconnect between expenses and revenue. Only, once the business has scale, say $50 million in revenue, it seems that the company should be profitable going forward. Often, the SaaS company is choosing to invest in sales and marketing to grow faster.
Losses in a single year are one-time while the recurring revenue added continues indefinitely.
Let’s look at a SaaS company with almost all revenue recurring. If, as an example, you could invest $10 million into a business, and then spend that $10 million on additional sales and marketing all at once (assume other costs like support, R&D, administration, etc wouldn’t go up), and that the additional sales and marketing would generate an incremental $5 million in new annual revenue, that’s a great deal. The $5 million in incremental recurring revenue would make the company $25 million more valuable (assume a 5x revenue multiple for a SaaS company with a good growth rate) and it would add $3 – $4 million of gross margin to the business each year (assume 60% – 80% gross margins and a 100% renewal rate).
When reading about heavy losses due to expanded sales and marketing, it’s important to remember that the losses are one-time, sales and marketing can be easily cut back, and that the recurring revenues generated are indefinite.
What else? What are your thoughts on the relationship between losses from heavily investing in sales and marketing vs the recurring revenues that are indefinite?
So, you’re about to close on a $300k seed round and investors are asking for a first-year budget. Not having started a company before, the $300k number seemed right since other startups were raising a similar amount. Time to allocate the $300k and come up with a plan.
Here’s an example $300k budget for the first 12 months of a startup:
- Two founders with $40k salaries = $80,000
- Lead engineer @ $70k salary = $70,000
- Employer taxes = $15,000
- High deductible health insurance for the individual only @ $200/month times three people = $7,200
- Help with closing, operating agreement, and other standard docs = $5,000
- Domain Name
- Great domain name = $5,000
- Logo and simple branding = $1,000
- Office Space
- Three team members plus an un-paid intern for a total of four people @ $300/month = $14,400
- Used MacBook Airs for four people @ $1,000/each = $4,000
- Web Hosting
- $1,000/month on Amazon Web Services = $12,000
- Web Apps (CRM, marketing automation, help desk, accounting, etc)
- $1,000/month = $12,000
Adding up each of these items comes to a total of ~$225,000. Thus, the $300k seed round pays for a small team to work 12 months to find product / market fit with a healthy cushion to experiment on more items or stretch the runway out six more months (things always take longer than expected).
What else? What are your thoughts on this $300k budget and how would you change it?