Analysis of a Business Model

A friend of mine from college emailed me today with an update on the business he started six years ago. The idea, which I’m not going to reveal because it is so easy to duplicate, is brilliant. This year he’ll generate $5 million in revenue with Google-like net margins, and he bootstrapped the whole thing. And, yes, he even worked a day job for the first four years of the business.

Here are some general ideas behind his business:

  • Language-related service for people where English isn’t their first language
  • All work is done by highly educated native English speakers in the U.S.
  • Ordering is purely an e-commerce transaction on his site
  • Everything is done through contractors with a strong quality control focus
  • Contractors are on demand and don’t do work unless it has a corresponding contract associated with it

I’ll be the first to admit that when I heard about the idea, I had no idea if there was a need in the market. Even better, I didn’t think the market was very big. Wow, was I wrong.

This is another great example of how ideas look brilliant once they’ve been successfully executed. Most ideas are just that — ideas. The execution makes all the difference.

Mastering the Rockefeller Habits

This morning I had the opportunity to attend the Mastering the Rockefeller Habits workshop facilitated by Verne Harnish at the new St. Regis hotel in Buckhead. Put on by EO Atlanta, the event was over-subscribed and well received. As for the content, Verne does a great job synthesizing ideas from a variety of other well known authors into a cohesive plan for high growth companies to follow.

In the book, the general theme is centered around John D. Rockefeller’s focus on business rhythm, data, and priorities. My takeaway from the event is that when you implement this methodology, the business and corresponding team members have a process to follow that actually eliminates wasteful activities and focuses everything on what is needed to be successful.

In my company, we don’t follow all the steps recommended by the book, but we do do the following:

  • One page strategic plan with our mission, vision, values, BHAG (big hairy audacious goal), three year goals, annual goals, quarterly goals, and several other pieces of information
  • Scoreboard which, for us, is a large LCD TV in our lobby that has a Google Spreadsheet with key performance indicators related to revenue recognition and new customer wins
  • Rhythm of meetings with daily check-ins, weekly tacticals, monthly strategics, monthly all-hands, and quarterly off-sites

The book is well worth the time of any entrepreneur serious about building a high growth business.

Iterating in a Startup – Part Five

With a few sales under our belt, we saw our first sign of a trend with higher education. It was the one vertical where we were able to generate several leads using PPC ads. Additionally, the types of challenges higher ed was looking to solve was uniquely suited to our application.

Our product’s special sauce is the ability to manage multiple websites, that live on multiple servers and use different operating systems, from one single product instance. It’s a hard problem. In addition, we had a simple per-CPU pricing model with unlimited sites, users, groups, and content combined with a focus on XML — before XML really hit the mainstream.

Colleges and universities typically have a collection of independent websites with little or no consistency. As you might imagine, the development of these sites happened organically and in piecemeal fashion. Different technologies like PHP, Classic ASP, ASP.NET, and ColdFusion were used to power the dynamic portions while plain HTML was used for more static section. Our software can handle each of those situations and publish files as well as to remote databases. Our product flexibility was a key differentiator.

I wish I could say we planned it that way, but we didn’t. The reason we could publish to different servers and support all the major programming languages was because of the goal we had set out with in our first, failed SaaS CMS: support all small business shared hosting accounts. With our SaaS CMS focused on small businesses, the only way to get content to their server was through FTP or SFTP. There weren’t any other options.

With our new mid-market CMS, we set out to provide all the benefits of a dynamic, database driven website with the performance and flexibility of publishing flat files. It turned out, unbeknownst to us for a couple years, that that was perfect for higher education. We now had a robust product with reference customers in a specific vertical and it was time to grow a serious business. I had now been running the business on my own for over four years, barely scraping by, but it was at that point where I knew we were onto something special. It was the start of 2005.

The new strategy was pretty simple — cold call all 4,160 two year, four year, public, and private colleges and universities in the U.S. and Canada. We focused on calling people with the following job titles:

  • Webmaster
  • Director/VP of IT
  • Director of University Relations
  • Web Manager
  • Communications Director

I had three full-time sales people at the time and they would call and set up web demos for me. My role on the call was to be both the sales engineer and the passionate product manager that gave the demo. It worked beautifully. Sales tripled in 2005 and more than doubled in 2006. We had finally hit our stride.

Now, in 2009, we’re still growing and have over 120 colleges and universities as clients, making us one of the top higher education CMS vendors in the world. At the end of the day, it came down to the following:

  • Neverending determination to succeed
  • Making decisions quickly and figuring out what works and doesn’t work
  • Being passionate about the product and the market opportunity

Building a company is an amazing journey and is worth every minute. In addition, being able to iterate and learn quickly is one of the most important traits of the management team. Good luck!

Iterating in a Startup – Part Four

With a good product and several years of domain experience, we embarked on the next major iteration of the business: sales and marketing. I knew the technology aspects of the business inside and out, but my knowledge of B2B sales and marketing was severely lacking. Using Google, I identified three areas to focus on:

  • Cold calling
  • Partnerships
  • Pay-per-click ads

Cold Calling

The first idea for cold calling was to buy a list of all the CIOs in the Southeast with revenues between $100 million and $1 billion, which is often defined as mid-sized companies. We cold called 1,000 organizations and generated a measly four appointments. Our cold calling, while valiant, suffered from a lack of the following:

  • Compelling value proposition
  • Referenceable customers we could name drop
  • Product or company name recognition in the market

Cold calling would eventually become one of our most effective strategies, but it took us 12 months to figure out where to focus our efforts.

Partners

Finding implementation partners and resellers was always viewed as a logical strategy for the business. It never worked. Potential partners, like interactive agencies and ISVs, would provide the services and we’d provide the product. Ideally it would be a win-win situation.

We worked hard and over the course of several years we developed partnerships with 10 companies. Those 10 company relationships resulted in five total sales. That’s right, very few partners would sign on officially, and even fewer would result in actual revenue. It took me a long time to understand that introducing a mid-market CMS to a client would then reduce the amount of money the agency could bill for fees.

Agencies operate in a time and materials model, and tens of thousands of dollars in CMS costs would come right out of the same client budget as hourly fees. As an agency, building a custom client solution, even if it was more expensive and did less than an off-the-shelf CMS, was the right thing to do for their business model. It was a hard lesson for us to learn.

Pay-Per-Click Ads

Pay-per-click (PPC) ads are the sponsored ads that show up alongside search results in Google and other search engines. When we did our first PPC campaign in late 2003, it was much more affordable and cost effective compared to today. Fortuitously, PPC ads, combined with landing pages, allowed us to generate leads in a variety of industries. We would then methodically follow-up and move the prospect through the sales process. By the end of 2004, we had signed at least one client representing each of the following verticals:

  • Management consulting (1, from cold call)
  • Healthcare (1, from cold call)
  • Utilities (1, from partner)
  • Hospitality (1, from partner)
  • Technology (1, from PPC)
  • Higher education (2, from PPC)

Stay tuned for part five to learn how we took the one industry we’re we’d had slightly more success and became a market leader.

Iterating in a Startup – Part Three

After initially building a small business SaaS product and subsequently licensing it to a larger company, we had finally settled into building the product that would ultimately be successful — a mid-market web content management system. Of course, at the time, we had no idea if it would be successful. What we did know was that robust website management applications were complex and there was no clear winner in the mid-market.

We spent one year building the application in a vacuum — a luxury made possible by the pre-paid royalties we were receiving. Steve Blank and his book Four Steps to the Epiphany argue for customer-driven development whereby you build the product after you have customers telling you what they want. Not knowing any better, we didn’t operate according to his model.  However, we did have customers of our previous product and we knew some of the things they wanted. We also knew what functionality we wanted to manage our own site. I’m a big believer in eating your own dog food.

We launched our new content management system on April 15, 2003 at the Internet World trade show in San Jose, CA and promptly won the Best of Show award. The outlook for the new product was bright. Unfortunately, a good product launch doesn’t always equal sales.

After working non-stop trying to sell the new application, we only managed to sell one license by the end of 2003. Now, selling one server license for $30,000 (the price for our new product) sure felt much better than selling many of the previous, smaller product. But selling only one over the course of six months was discouraging.

With version one of the product complete, an award under our belt, and our first full-price client (we had given several licenses away for free to get early users), the next major phase in the company was learning how to sell and market the product. Lead generation was the first area we focused on and continuously iterated. We tried these different tactics:

  • Cold calling
  • Channel development through partners
  • Pay-per-click ads

Stay tuned for part four to learn what worked and what didn’t work.

Iterating in a Startup – Part Two

In Part One, I outlined the first iteration of the Hannon Hill business model where we built a SaaS web content management system and launched it in the summer of 2001 for $30/month/website. After realizing there wasn’t a reachable market that was large enough for us to be successful, we quickly changed to an installed model of the same product. To our excitement, we sold our first $1,000 license by the end of August and thought we had a path to growth and profitability.

Over the next 24 months, representing the life of the application, we sold 25 licenses. That’s right, selling slightly more than $1,000/month worth of software doesn’t make for a good business. Our big break actually came in December 2001 at the Internet World trade show in New York City, and was a result of changing to an installed software model.

At the trade show, we serendipitously met another, much larger software company that was explicitly looking for a content management system to sell to their installed client base of over one million licensees. We had several rounds of discussions with their management team at the show and eventually consummated a deal in the Spring of 2002 to license our product for them to sell under their own brand name. They would pay us money up front along with a royalty for each license sold. We had our first big break.

Now came the next big iteration: we completely shelved our product that we had spent two-and-a-half years building in order to build The Next Big Thing. By the Summer of 2002, we knew we were never going to be successful selling installed PHP software to small businesses, and that a competitor with much greater resources would be selling a slightly modified version of our product to the same audience. It was a pretty easy decision to make.

Our next move was to make a completely new, mid-market Java-based web content management system using the expertise we’d gained over the past few years. The special sauce of our new product was a combination of XML, search engine optimization, and distributed server publishing. Of course, building a next generation product from scratch allowed us to address all the mistakes we made in architecting the first product.

Stay tuned for part three to learn how we made this new product successful, and the sales and marketing iterations that paid off.

Iterating in a Startup – Part One

I’ve been hearing a good bit of chatter lately about how important it is to iterate in a startup. This generally refers to figuring out a product, market, and business model that will result in success. Of course, success means different things to different startups. For some, it is a large, market-disrupting company. For others, it is a profitable, growing business large enough to sustain a nice lifestyle for those involved. Let’s drill into iterating in a startup.

Lance Weatherby values velocity and versatility in team members and has coined the term velocitile to label such a person. I believe that you need both a good market and flexible people to be successful in a startup. With both of those in place, iterating is a natural and healthy part of building a company.

My Inc. 500 software company, Hannon Hill, makes mid-market web content management solutions for higher education and other industry verticals. It wasn’t always this way. When I first started the company in December of 2000, the vision was to provide a software-as-a-service (SaaS) application that would make it easy to update a generic, small business website, for $30 per month.

The service worked with existing websites over FTP and provided a visual interface, similar to Windows Explorer, so that people could click on a file and edit it in a browser-based word processor. Upon saving the changes, the file would then be sent over FTP back to the web server, along with a backup version. The benefits of this model included:

  • No software to install on the web server or web browser
  • No up-front fee and a low monthly cost
  • Familiar file manager interface with word processor

The software was as easy to use as web-based email. The only problem is that it was a complete failure. I started out working on the company part-time and eventually went full-time within six months. I learned several lessons shortly after going full-time:

  • The market wasn’t accepting of SaaS
  • $30 per month per site was much too cheap to build a business
  • Customers needed significant hand holding to get up and running

At that point, I knew something had to change. By August 2001 we had retooled the product to be an installed server application (it was always a PHP/MySQL app) at the price point of $1,000 for a 10-user license.

Stay tuned for part two to learn if our iterating paid off.