Statute of Limitations on Experience

Last week I was talking to an entrepreneur and she started asking me questions about recruiting best practices. How do I recruit engineers? Where do I find them? How do I build a high performance engineering culture? All great questions, but is my personal experience out of date?

This prompted me to think about the role of experience, more specifically recency of experience, in helping entrepreneurs. When an entrepreneur asks me for help, it’s most likely due to the success of Pardot. Only, Pardot was nearly seven years ago.

Since we sold Pardot, I’ve started several more startups but never got to product/market fit, making it feel like there wasn’t as much experience gained. Now, the investing and co-founding side has proved more successful than expected, but I’m a layer removed from the front line decision-making.

When does advice become stale?

When does the statute of limitations for experience occur?

Some of my recommendations should be timeless. Build regular simplified strategic plans. Be the best place to work and the best place to be a customer. Develop a meeting rhythm. Culture is the only sustainable competitive advantage completely in control of the entrepreneur.

Yet, my more specialized knowledge is dated. SEO? Marketing automation? DevOps? Agile? UI/UX? Recruiting? I’m feeling stale on a number of things that were stronger a few years back.

Now, my approach is to focus advice on high level startup and leadership strategies, and away from specific tactical things we employed at Pardot. Today, it’s more sharing personal experiences, mental frameworks, and startup strategies leaving tactical items to other practitioners with fresher knowledge.

General experience is invaluable, tactical best practices age over time.

Mind the Valuation Gap

Recently I was talking to an entrepreneur that’s raising a round and the topic of valuation came up. Valuation is always a sensitive issue. Entrepreneurs, rightly so, figure they should get the highest valuation possible. Investors, on the other side, want the lowest valuation possible that still wins the deal. Only, we’re in unusual times with valuations at or near their all-time highs (excluding the dot com days, of course).

Entrepreneurs need to mind the valuation gap.

The valuation gap is the delta between what the public market multiples currently support and the valuation private investors are willing to invest. For example, if super high growth SaaS companies trade at 8x run-rate on the public markets, and an entrepreneur raises money from an investor at 12x run-rate, there’s a 50% valuation gap.

Assuming superb execution, the startup will grow into the valuation and skip over the gap. For entrepreneurs, the risk is raising at too high a valuation and not growing into it. One of the worst possible outcomes for a venture-backed startup on the fundraising treadmill is to have a down round. Startups are essentially broken when they raise a new round of funding at a valuation lower than their last round.

The strategy for entrepreneurs: find a balance between the best valuation possible and the best valuation that ensures a strong likelihood of a higher valuation in the next round. There’s no right or wrong answer, but there’s often an answer that makes it easier to sleep well at night — find that one.

When the Opportunity is Bigger Than Expected

Three years into Pardot we were humming along and had just cracked the $1M annual recurring revenue milestone. Customers were loving the product and saying things like, “I don’t how I did my job before using Pardot” — a great sign we had a must-have product, not a nice-to-have. After listening to customers talk about the value they received, internally we started debating raising the price to match the value.

Then, of course, worries emerged:

  • Would prospects pay the higher price?
  • Would sales cycles lengthen?
  • Would sales velocity slow down?

And, naturally, the sales reps didn’t like the idea because they feared they’d make less money.

After getting internal feedback and input we made the call and doubled prices. What happened next was unexpected: sales and revenue grew even faster than planned.

At that point, it dawned on me the opportunity was bigger than expected.

Marketing automation was a billion dollar market in the making.

We were at the right place, at the right time, with the right team.

But, honestly, at the start of Pardot we thought it was a decent idea but didn’t know if it was good or great.

We didn’t know if the timing was right.

We didn’t know if the Great Recession would slow us down.

Three years into the business we knew we were on to something big — even bigger than expected.

Challenge the Inertia Around You

Back in 2012, I was frustrated with the lack of options for startup office space. Landlords, often with their institutional investors, had tremendous inertia to make any changes. Potential tenants had to sign 5+ year leases, show profitable operating history, and deliver letters of credit — all this just to get office space. Clearly, the commercial real estate industry had grown up around the traditional business as customer and was never going to provide a solution for high growth, high risk startups.

Now, and then, it was abundantly clear the market missed a segment of potential customers. Today, the combination of community and co-working is incredibly popular and we have great options like the Atlanta Tech Village and WeWork.

Challenging the inertia around you is often the most difficult, and rewarding, course of action.

I tried workarounds in the commercial real estate industry for years — special subleases, different term structures, etc. — and the inertia was too strong. My solution was to buy a building, recruit a team, and move forward without the industry. Sometimes it takes more dramatic approaches, sometimes there are more elegant approaches.

Embrace the inertia as a challenge. Recognize how and why it’s there. Fight through it.

When the industry insiders scoff at you, like they did with us and the Atlanta Tech Village, you know you’re on to something.

Challenge the inertia around you.

Competing Definitions of Product/Market Fit

One of my favorite questions to ask seed/early stage entrepreneurs is “do you have product/market fit?” Then, naturally, it’s followed up by “how do you know and what are the metrics?” Of course, the answers, and rationale, are all over the place. While there are a variety of ways to define product/market fit, here are the three most common:

  1. By Unaffiliated Customers
    A simple, easily quantifiable definition is product/market fit is achieved when you have 10 unaffiliated customers that are passionate about the product. Unaffiliated, in this definition, is key in that the customers need to have bought the product based on its merit, not based on being a friend of the founder or an old colleague. Passionate customers are another important component in that there has to be a positive indicator beyond just paying money that there is a real need, one with authentic demand, being solved.
  2. By Positive Momentum
    A looser definition of product/market fit is when instead of feeling like everything is an up hill slog in the startup, things get easier and there’s palpable momentum. Examples include customers signing with significantly shorter sales cycles, PR opportunities popping up, and potential employees actively reaching out to join.
  3. By Distribution Scalability
    A later stage definition of product/market fit is when the cost of customer acquisition is favorable relative to the lifetime value of the customer. Here, the idea is that the solution is valuable and customers are being acquired in way that makes the startup indefinitely scalable.

While there are a number of competing definitions, it’s clear that product/market fit represents good things happening in the startup and the foundation for a successful company.

Reforecasts and Communication

Two years ago I was sitting down with an entrepreneur debating what to do next. It was early in the hyper growth stage of the startup and things were growing fast. Only, with limited operating history, growth expectations were even greater than reality, and there was no way the annual forecast was going to be achieved.

Accountability was tied to the forecast.

Goals/OKRs were tied to the forecast.

Bonuses were tied to the forecast.

What to do?

This challenge is much more common than expected. Fast growing startups are inherently unpredictable. Even with bottoms-up and top-down forecasts, reality is different from the spreadsheet. At some point, trying to hit a forecast that is no longer possible is more demoralizing than motivating — it’s time for a reforecast.

A reforecast is simply redoing the budget and expectations after the year has already started to reflect new information. The key is to get all the stakeholders together, work to make the new forecast as accurate as possible, and then communicate it with the team.

Communication is the most important part.

By over-communicating, including why the reforecast was necessary, learnings from the experience, and go-forward expectations, team members are more bought in and more accepting of the changes. People don’t expect leaders to be perfect; people expect leaders to lead and be transparent.

Reforecasts are part of normal startup life. They shouldn’t happen yearly, but they do happen in the normal course of business. When a reforecast is necessary, make the changes and over-communicate with the team.

The Double Sale

Earlier this week I was talking to a successful software rep about what it was like selling the three different products he’s represented in his career. When discussing his current role, he said something that stuck with me: now, I don’t have to make the double sale.

So, what’s the double sale? The double sale is when you have to first sell the prospect on why they even need your product, and then the second sale is your actual product.

Double sales are required when it’s early in a market and there’s a lack of market awareness. This is the good double sale, assuming it’s not too early — with time, the double sale will go away in favor of a regular, single sale.

Double sales are also required for nice-to-have products that people don’t need but might purchase if there’s a strong sales person. These are the double sales to watch out for as startups can be built selling a vitamin, but selling pain-killers is much more valuable and capital efficient.

Pay attention to the sales process and recognize the potential for a double sale, and more importantly, whether or not the double sale is for a good reason. Work towards a future where a double sale isn’t required to achieve greater success.