The Hunt for Authentic Demand

There’s a never-ending debate in the entrepreneur world: build it and they will come or demonstrate authentic demand first before building it. The first approach — build it and they will come — a.k.a. the “Field of Dreams” approach is the most common. Inspiration for a new idea hits an entrepreneur and they work to bring it to life. Entrepreneurs that study the Lean Startup take a more modern approach whereby customer discovery is employed to truly uncover a meaningful pain or opportunity before building a solution. Customer discovery yields better outcomes but there are plenty of pros and cons with each approach.

Entrepreneurs should start with The Mom Test: How to talk to customers & learn if your business is a good idea when everyone is lying to you and unlearn their natural tendencies of leading the witness during customer discovery as well as being too broad with the initial idea. Entrepreneurs are naturally optimistic and eager to get to validation. Most people want to be supportive and say it’s a good idea regardless of whether they’re the ideal customer or having any expertise to back it up. Asking harder questions and seeking objective feedback takes more work, and delivers better results.

Once the basics are in place, it’s time to hunt for authentic demand. Authentic demand represents prospects that want to buy something but have no options — there’s an unfulfilled market need. The hunt for authentic demand is no different than a sales rep looking to build a pipeline, and that’s precisely how entrepreneurs should treat it. Here are a few sales tactics to use in the hunt for authentic demand:

  • Cold Calling – Pick up the phone. Call the people that fit the ideal customer profile. Ask great questions. Yes, most people don’t like answering the phone but there are still plenty that do, especially in certain industries.
  • Outbound Emails – Email is easy, fast, and effective. People respond to unwanted email when the message resonates and the pain is real.
  • LinkedIn InMails – More expensive than email but often more effective, LinkedIn InMail works. Tailor the message. Find the authentic demand.
  • Social Media – Follow the ideal buyers. Understand their view of the world. Find a connection point and make the ask.
  • Networking – Talk to anyone that’ll listen — friends, family, co-workers, etc. Share the story and ask for intros.

Treat the hunt for authentic demand like a sales process. Come up with a goal — say 100 activities a day — and develop a system. Then, work the system. The more experiments and activities, the more certainty that authentic demand is real (or non existent and it’s time to move on). If there’s authentic demand, and the hunt was a success, the greater the chance of the startup succeeding.

Start with the hunt for authentic demand.

Big Markets Continually Create Opportunities

Last week I was reading through the DigitalOcean S-1 IPO filing and seeing their cloud hosting business at $357M of recurring revenue growing 25% year-over-year reminded me how large, fast growing markets continually create opportunities.

At Pardot, for most of our run with the business, we used SoftLayer for our cloud hosting. At the time, SoftLayer was the up-and-comer that primarily did dedicated hosting with a strong price-to-feature ratio. Rackspace was the much larger player in the industry commanding a premium and differentiating via their customer service model.

Today, SoftLayer and Rackspace are much smaller players compared to the juggernauts of Amazon Web Services, Microsoft Azure, and Google Cloud. From the outside looking in, it felt like the market was wrapped up. How would a relatively new startup like DigitalOcean compete with three trillion dollar companies?

From the DigitalOcean S-1 (page ii):

DigitalOcean was founded with a focus on creating simple solutions that developers love. Our mission is to simplify cloud computing so developers and businesses can spend more time creating software that changes the world. We estimate there are approximately 100 million SMBs globally today and 14 million new businesses started each year across the globe. We believe DigitalOcean is the perfect place for them to start, get lift-off and build their businesses.

DigitalOcean S-1 page ii

For DigitalOcean, it was “simple solutions that developers love.” The early days of Amazon Web Services were focused on developers as well, but back then the technology was significantly more complicated and difficult to use. DigitalOcean nurtured a loyal community of developers with simpler tools and a stronger focus on community. Now, nine years later, it’s blossomed into an IPO-scale business.

Big markets continually create new opportunities. Even with major incumbents that seem to do it all, new areas of opportunity emerge, and the bigger the market, the more opportunity a small slice represents.

Startup Valuations in the Time of the Everything Bubble

Last week I was talking to a prominent investor and I asked about the current state of the investment climate. He said that startups a year ago raising money at 30-50x revenue were off limits to his firm and today they’re commonplace. Hearing this, it made me think of Fabrice Grinda’s excellent Welcome to the Everything Bubble.

Ten years ago, a hot, fast growing SaaS company would get a 6-8x run-rate valuation (see ExactTarget at IPO in 2012). Then, in the last 4-6 years, hot, fast growing SaaS companies moved to a 10-12x run-rate valuation (see Zoom raising $100M at a $1B valuation in 2017). Now, there are dozens of public SaaS companies trading north of 20x run-rate and plenty trading north of 30x run-rate (see BVP Cloud Index). What gives?

The main factors:

  • Market Size – The total addressable market for SaaS is much larger now, providing more confidence that startups can grow to a scale even bigger than previously anticipated.
  • Digital Transformation – COVID has accelerated the adoption of many SaaS products as companies have been forced to work in a distributed fashion, driving up growth rates.
  • Interest Rates – With the Fed interest rate effectively at 0%, the bar for a quality rate of return has been dramatically lowered, making investors willing to pay a higher price to achieve the same outcome.
  • Money Supply – With so many stimulus dollars flooding the system, and not a corresponding drop in overall incomes, the money has to go somewhere, and many people have put it in the stock market, thereby driving up valuations.

Ultimately, I think about it as a function of startup growth rate and how many years of future growth an investor is willing to pay for now. Let’s say long term, in a normal financial environment, SaaS companies are worth 4-8x revenue because of great gross margins, ability to have high free cash flow margins, predictability of business, growth expectations, etc. If a SaaS company is expected to grow 100% top-line in the next 12 months, and grow 80% in the following 12 months (growth rates typically decline such that growth is 80-85% of the previous year’s growth, depending on a myriad of factors), there’s some basic modeling to look at potential valuations:

  • Year 1
    • $10M ARR
    • 100% expected growth rate
  • Year 2
    • $20M ARR
    • 80% expected growth rate
  • Year 3
    • $36M ARR
    • 60% expected growth rate
  • Year 4
    • $58M ARR

Assume at the end of 36 months, the $10M ARR SaaS startup will be at $58M ARR with a trailing twelve months growth rate of 60%. Assume, for simple math, it has a constant future valuation of 8x run-rate (growth rate will slow but economies of scale will expand). At the end of 36 months, it’ll be valued at $464M ($58M x 8).

Now, take different hypothetical valuation climates:

  • Ultra Hot – 30x run-rate representing a $300M valuation
  • Hot – 20x run-rate representation a $200M valuation
  • Great – 12x run-rate representing a $120M valuation
  • Good – 8x run-rate representing an $80M valuation

If you could predict the future, and know with certainty the outcome, whether investing at 8x run-rate or 30x run-rate, all scenarios generate quality returns. Reality is much more complicated, but as interest rates go down and availability of money goes up, there are still worthwhile returns even paying what appears to be exceptional valuations.

SaaS valuations are part art and part science. In the age of the Everything Bubble, as long as there are good returns to be made paying ultra hot valuations, looking for high multiples to persist.

Missed the Internet Wave

Last week I listened to Matt Mullenweg of Automattic/WordPress on The Past, Present, and Future of the Internet. In the interview he talks about how early in his career he felt like he missed the wave of the Internet revolution. Hearing his story brought back my own feelings of missing the Internet wave. For me, I was in college during the dot com boom and subsequent bust. Because there was so much startup activity — tens of thousands of ideas and billions of funding — it seemed like every concept worth trying was already played out.

I had missed the boat, or so I thought.

What I failed to understand was that while many of the first-order startup ideas like buying books online ( and bidding on online auctions (eBay) were immediately doable, the second-order startup ideas would take longer to be viable. Much longer.

Even when it’s obvious there’s a better way, inertia is an incredibly powerful force. People and infrastructure are static by default. Most people don’t wake up thinking how they’re going to make major changes to how they do things. Change is constant but generally avoided.

The biggest second-order wave I’ve been lucky enough to be part of is the Internet as enabler for significant productivity enhancements within sales and marketing. There’s no way I could have seen the wave in college as I had didn’t have any experience in sales and marketing. With time, it became apparent that the “normal” way of acquiring customers was cumbersome and inefficient compared to what the Internet enables. From Pardot (marketing automation) to SalesLoft (sales engagement) to Terminus (account-based marketing) to Calendly (scheduling), these only touch select areas of customer acquisition, but the market is so massive, that these are all meaningful fast-growing businesses.

I missed the first wave, but rode a second wave created from it.

Don’t assume all the opportunities are done and make sure you are in the arena.

Uncomfortably Narrow at Product Launch

Recently an entrepreneur was talking about his new startup and how they were “uncomfortably narrow” with the feature set at product launch. For years we’ve been talking about the minimum viable product and “if you weren’t embarrassed by your product at launch, you waited too long.” Both drive home the point that entrepreneurs often build too many features for too many people before launch, thereby reducing their chance of success (too much capital burned, code base slowing down development, failure fatigue, etc.)

Ever since hearing the term “uncomfortably narrow” it’s been rattling around in my head. Entrepreneurs by their very nature are optimists, ready to resourcefully will their ideas into the world. Something that is uncomfortable narrow is, by definition, less than what is desired.

Fewer features. Fewer modules. Fewer use cases.

Entrepreneurs want to build more. Hence the internal conflict around purposefully limiting the product and making it uncomfortably narrow.

Getting a potential customer to say “yes” is much harder than saying “no.” Thus, the thinking goes that more features are needed to overcome these sales objections. While that can be the case, in the early days that’s often code for “your product doesn’t solve my core issue.”

Instead of adding more features around something that doesn’t solve the core issue, which is the normal approach, the better route is to be uncomfortably narrow and just solve the core issue. Then, once the customer is happy, add new functionality around it. This might mean a modest iteration or a serious pivot to build a valuable core.

Entrepreneurs should be uncomfortably narrow at product launch, and stay that way until it’s clear their limited feature set has provided customers something truly valuable.

With happy customers, and the start of product/market fit, only then is it time to expand the functionality. Start uncomfortably narrow at product launch.

Calendly as the World’s Scheduling Platform

With last week’s news that Calendly raised a $350 million round at a $3 billion+ valuation, the largest venture round in Atlanta’s history, a number of people reached out to say congratulations. Of course, all credit goes to Tope Awotona and his team for building such an incredible business.

After the kudos, the most common question is, “How can the company possibly be so valuable?”

Easy, scheduling is a universal challenge.

Think of every job function that interacts with other people. Wait, that’s nearly every job function. Now, think of the last time it was a challenge to coordinate calendars for a meeting. Hmm, that’s all the time. Software is uniquely suited to make this problem go away. Calendly does this for more than 10 million people every month and that number is growing fast, super fast.

But, naturally, it wasn’t always this way. Every entrepreneur starts the same way — taking that first step. Tope shares his incredible personal and professional journey on How I Built This With Guy Roz — Calendly: Tope Awotona. Devastating family challenges. Lots of trial and error. Great vision. Amazing execution. Growth, growth, growth.

Congrats to Tope on building an iconic business and making millions of peoples’ lives easier.

Connecting Software Engineering to Revenue

After a startup has achieved product/market fit and a repeatable customer acquisition model, one of the common entrepreneur questions is “how do I connect software engineering initiatives to revenue?” Demand on the engineering team grows from sales (new features!), from support (fix bugs, make it easier!), from product (beat the competition!), and on and on.

Some questions arise:

  • Is our engineering team working on the most important things?
  • Do we have enough engineering output to meet our goals?
  • What new features will increase our win rate, generally? By how much?
  • What new features will increase our win rate against certain competitors? By how much?
  • What new features and bug fixes will increase our renewal rates? By how much?

Unfortunately, I haven’t found a solution to this challenge. What I have found is that connecting engineering to revenue goals is critical. Sure, everyone knows that adding certain functionality and fixing bugs makes the product better. Now, take it one step further.

We’re adding this feature to increase our win rate by X% to hit our revenue goal of Y this year.

We’re fixing this user experience to increase our renewal rate from X% to Y% to hit our recognized revenue goal of Z this year.

We’re doing _________ to achieve _________.

The more everyone is aligned, the more team members make micro, incremental decisions that help achieve the goals. While it’s hard to definitively guarantee engineering initiatives to revenue, it’s straightforward to tie goals to projects, and enhance the chance of success.

Finding a Startup Idea

Last week I was talking to an entrepreneur and the topic of finding a startup idea came up. It got me thinking about the different ventures I’ve been a part of and where the ideas originated. Let’s take a look at a few.

Freelance Consulting

When I was in high school and college the dot com boom was in full effect. As a self-taught programmer, I built dozens of websites and received a recurring question: how do I update my site? The aha moment was to solve this problem and build a web content management system — Hannon Hill.

Internal Business Opportunity

At Hannon Hill, it was a journey in scalable entrepreneurship with an emphasis on building, selling, and servicing a product. Eventually, I focused in on sales and marketing in an effort to accelerate growth and realized the B2B marketing tools were insufficient. This lead to the idea for Pardot and building a marketing automation platform.

Business Challenge

At Hannon Hill and Pardot, we’d move subleases every 18-24 months in an effort to save money and have short lease terms as we didn’t know how fast we’d grow. A desire for more community, plus the fact that moving offices is a huge headache, inspired the idea for the Atlanta Tech Village. The Tech Village has now been home to thousands of startups over the years.

Customer Request

At SalesLoft, Kyle’s first product was lead intelligence whereby the system provided information about contacts changing jobs. While this product didn’t work out, customers said they really wanted leads, and then a way to authentically communicate. This feedback lead to the current SalesLoft Platform, and, eventually raising a $100M round at a $1.1 billion valuation.

Personal Friction

In the How I Built This interview about Calendly, Tope shares his personal story and frustration scheduling appointments with prospects as an enterprise software sales rep. This personal friction around meetings sparked the idea for Calendly, and now it’s one of the most widely used scheduling tools in the world.


Clearly, startup ideas come from many different places. Ultimately, the best ideas come from simply listening and looking at friction personally and professionally. Opportunities are all around us. Quality selection, and excellent execution, are the most difficult challenges.

High Growth Startup, 0 Employees

An area I’m especially fascinated with is the future of work. Of course, the pandemic significantly broadened that interest through forced remote/virtual work and many discussions of how the office will change going forward. Last week I read one of the most incredible examples of a high growth startup scaling successfully with zero employees. Yes, no employees, eight figures of revenue, and almost a triple digit growth rate. So, how does it work? Let’s dive in.

No Meetings, No Deadlines, No Full-Time Employees by Sahil Lavingia, founder of Gum Road, is fascinating. A few of the highlights:

  • Overarching personal goal for the founder is “freedom at all costs”, meaning he runs the business, the business doesn’t run him
  • No meetings — everything is done via extensive writing in tools like GitHub and Notion
  • Everything is managed as Tasks in Notion
  • No goals or OKRS, just a single North Star: maximizing how much creators earn (Gumroad is a platform for creators to get paid)
  • Product roadmap is public
  • Minimum viable culture with no “forced” socializing
  • Everyone is a contractor paid highly competitive hourly rates ($50/hr – $250/hr)
  • Hiring is done via a form, multi-hour unpaid assessment doing a hypothetical project, then a paid few-week trial
  • Internal document for all employees that shows hourly pay and hours worked
  • No perks — just cash and flexibility (no healthcare, no technology stipend, etc.)
  • Many of the contractors were found as they were already Gumroad users and part of the creator economy
  • “Anti-overtime” rate of 50% of the hourly rate if a person works over 20 hours in a week (goal is for everyone to work 20 hours a week or less)

Reading the post, several questions come to mind:

  • How doable is this without the amazing pipeline of potential contractors that are already in the community of customers?
  • What type of person values flexibility above all else? What approximate percentage of the population?
  • Does a digital, asynchronous-only culture matter over the long haul for continued success?
  • What does contractor turnover look like? How similar or different is turnover to normal tech startups at a similar stage?

The “anti-overtime” rate really gets me thinking as it’s a catalytic mechanism to align the internal expectations with the contractor‘s wallet. We’re here to work no more than 20 hours/week. If you need more time to do whatever, go for it, but it’s at your discretion and at a significantly reduced rate.

Thinking about contractors working no more than 20 hours week, it likely aligns with how much “real” work gets done in a normal 40 hour week. Time spent in meetings, going to lunch, socializing at the water cooler (virtual or otherwise), etc. likely isn’t “creator” time but does have social value and cultural importance. When it’s stripped away and time is only spent on the desired output, what changes?

Overall, No Meetings, No Deadlines, No Full-Time Employees is an incredible read that feels like a new type of business where the working style fills an unmet need for some (many?) people. I believe the trend of contractors, freelancers, gig workers is only accelerating and a company like Gumroad is the logical extreme. The big question: when does something that seems extreme today become commonplace?

The Top Resource for Virtual/Remote Startups

Most conversations I have these days with entrepreneurs has some component about virtual teams, remote employees, return to the office timeline, etc. While great work is getting done virtually, there’s still a strong desire to have an in-person element, whether it’s a few days a week or a few days a year, humans crave face-to-face with other humans.

Personally, I don’t believe there’s one right answer. I believe most startups will have both people working in offices (some dedicated, some co-working) and people working from anywhere they choose (virtual). The big difference now is that the in-office aspect of the future will be a much smaller number of weekly hours, on average, and much greater worker flexibility. Overall, a huge net benefit to society.

As entrepreneurs continue to navigate this new approach, there’s one resource for virtual/remote startups that stands out:

GitLab Team Handbook

  • 8,400 pages of text
  • Open and usable by anyone
  • Incredibly detailed and thoughtful

While it is geared towards an all-remote business, there are a number of excellent resources applicable to all businesses like managing KPIs and doing OKRs.

Every entrepreneur should bookmark the GitLab Team Handbook and know that whatever scenario they’re contemplating, it’s likely been addressed in the handbook.