The Canada Rule in Startups

Yesterday I finished reading That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea by Marc Randolph, the founder of Netflix. Told through the format of a live narrative, Marc does a great job capturing the ups and downs of the first five years of the Netflix journey. One of the recurring themes throughout the book is the importance of the Canada Rule.

The Canada Rule was originally introduced by Marc when they debated at Netflix whether or not to expand to Canada. Netflix was small, but growing fast domestically. Canada, at roughly 10% of the size of the United States, was obvious for geographic expansion, but would add significant complexity. The Canada Rule, simply, is to focus on the core business and not get distracted by expansion ideas. Do one thing, and do it well.

The old adage still rings true: many more startups died of indigestion than starvation. 

The next time someone brings up a great expansion idea, but takes away from continuing to improve and optimize the core business, invoke the Canada Rule. Focus, focus, focus.

SaaS Valuations Holding Strong

While SaaS valuations have gone down a bit from their all-time highs, they have held up well in this era of global pandemic. According to the BVP NASDAQ Emerging Cloud Index, the average public SaaS company is trading at 12.7x their enterprise value to revenue. What gives?

Talking to a variety of SaaS entrepreneurs, I’ve heard everything from the pandemic isn’t going to affect our growth rate to we’re expecting a 50%+ reduction in bookings this year and a 30%+ increase in churn. One SaaS entrepreneur in the ecommerce area said while many customers had sales fall off a cliff, other customers are seeing Black Friday-like volumes making the overall sales across the customer base even better than forecast. This gives a hint as to why SaaS valuations have held up so well.

The global pandemic, while hurting growth for many SaaS businesses in the near-term, is believed to have accelerated the growth of SaaS over the mid and long-term. With so many layoffs across the entire economy, and a tremendous amount of working from home, companies are going to invest in making their current workforce more productive with greater urgency than before. Now, companies are more focused on metrics like revenue and profit per employee. Investing in SaaS is one of the best ways to improve a business.

Just look at how fast people adopted SaaS products like Zoom and Calendly as the pandemic spread. Virtual meetings were steadily growing, and now without in-person meetings, they’ve become the norm. Fully 25% of meetings scheduled on Calendly are for Zoom meetings.

Of course, SaaS adoption is going to take time. There’s too much uncertainty in the world, too much expense cutting, and tremendous fighting to hold onto customers. But, this too shall pass, and when it does, upgrading systems and tools is going to be high on the list.

SaaS is well positioned for long-term growth and the pandemic accelerates the shift to the cloud. SaaS valuations have held up well and should continue to do so, especially with a variety of government programs propping up the economy.

Strategies in Our Control and Scenarios Outside Our Control

While many startups have already done brutal layoffs and expense cutting, there’s still the same amount of uncertainty, if not more, in the world. Sequoia Capital has an excellent post up titled The Matrix for COVID-19 with a visual way to think through potential strategies in the control of the entrepreneur vs macro scenarios outside the control of the entrepreneur.

Entrepreneurs generally have a strong locus of control and extreme uncertainty exacerbates the desire to control things. The best course of action? Develop multiple plans to address potential scenarios. In the example matrix above, it references three scenarios with lockdowns ranging from three months to 12 months along with three plans range from no change in operating expenses to cutting operating expenses by 25%. For many startups, cutting expenses by 25% won’t be enough, and a more aggressive plan is necessary.

Entrepreneurs should develop multiple plans under different scenarios and do their best to control what they can control.

Digital Simplification in Time of Crisis

As the crisis continues with an indefinite timeline, I’ve been looking for ways to simplify digitally. Now that I’m doing multiple Zoom calls per day, and not getting the same variety of face-to-face interactions, I’ve been more conscious of regular screen time outside the professional context.

Here are a few of my changes:

  • Turn off all iPhone notifications, including the Lock Screen, Notification Center, Banners, and Badges for all apps. The only notifications allowed? Texts and calls. That’s it. Removing my Slack and Gmail notifications greatly simplified things.
  • Turn on Do Not Disturb for all hours outside normal working hours and enable Allow Calls from Favorites. Shut everything down when you aren’t working. Everything. We don’t need more interruptions.
  • Remove distracting apps like the News app. I found myself constantly reading the news, and with much of it was about the crisis, I was hurting my focus even more. Eliminate noise. 
  • Combine the email inbox and to do list into one. I use my Gmail Inbox and the excellent Snooze function to constantly prioritize what’s important, and when. New to do list item? I email it to myself and then Snooze it to when I focus on it. If I have extra time, I visit the Snoozed folder in Gmail and look at the outstanding items. Constant reprioritization.

With time, I’m sure more ideas to simplify digitally with emerge. I’m pleased with the progress so far and recommend these easy changes. And, of course, these changes should have been done prior to the crisis.

What else? What are some more ideas to simplify digitally?

Culture Deck in Time of Crisis

With the continuing health and economic crisis, one of the areas that needs even more attention is the culture of the organization. With layoffs, furloughs, and other dramatic changes, people are hurting, both inside and outside the organization. One of the areas to resort back to, or create fresh, is a culture deck.

The most famous culture deck is from Netflix, having been viewed nearly 20 million times (also, an updated one is available).

Here are notes from the Netflix culture deck:

  • Seven aspects of the culture
    • Values are what we Value
    • High Performance
    • Freedom & Responsibility
    • Context, not Control
    • Highly Aligned, Loosely Coupled
    • Pay Top of Market
    • Promotions & Development
  • Values the following nine behaviors and skills
    • Judgement
    • Communication
    • Impact
    • Curiosity
    • Innovation
    • Courage
    • Passion
    • Honesty
    • Selflessness
  • Adequate performance gets a generous severance package (meaning, people that are OK get fired)
  • A team, not a family
  • The Rare Responsible Person
    • Self motivating
    • Self aware
    • Self disciplined
    • Self improving
    • Acts like a leader
    • Doesn’t wait to be told what to do
    • Picks up trash lying on the floor
  • Netflix Vacation Policy and Tracking – there is no policy or tracking
  • Netflix Policies for Expensing, Entertainment, Gifts & Travel: Act in Netflix’s best interest
  • Managers: When one of your talented people does something dumb, don’t blame them. Instead, ask yourself what context you failed to set.

For another excellent example, check out the HubSpot Culture Code: 

Use this crisis to think through the culture, and what it should be with time. A culture deck is a great way to communicate the ideas.

Startup Cash Considerations in Crisis

With most startups in crisis mode, one of the top considerations is cash management. The ability to raise capital has been greatly diminished and things are likely to get more challenging before they get better.

Steve Blank has an excellent post from Jeff Epstein titled Action Today for CFOs with recommendations like:

  • Evaluate your when you run out of cash in a worst-case scenario
  • If you don’t have 24 months worth of cash, consider the following:
    • Draw down your lines of credit and view the interest payments on them as buying insurance
    • Sort all vendors by how much you spend and call each asking for a discount or loan to spread out payments further into the future
    • Cut marketing programs that don’t have a demonstrable ROI
    • Implement a hiring freeze
    • Let people go
    • Cut all salaries by a certain percentage
    • Tightly monitor collections and mitigate problems

Some more cash saving ideas:

  • Eliminate all discretionary expenses (require any purchases over X to go through the CFO or CEO)
  • Remove any subcontractors or consultants
  • Determine which vendors you much have and which ones are nice-to-haves
  • Suspend the 401 (k) match
  • Ask employees to take unpaid time off, convert to part-time, or a leave of absence

Entrepreneurs are generally optimistic, glass-half-full people, and now is one of the most challenging economic climates we’ll see.

Cash is always critical, especially so in a crisis.

The number one reason startups die is that they run out of cash.

Weekly Communication

In Patrick Lencioni’s latest book The Motive, he writes that leaders make their organizations healthier by “reducing politics, confusion, and dysfunction and increasing clarity, alignment, and productivity.” In today’s turbulent world, the need for strong organizational health has never been more important.

Entrepreneurs often struggle with a lack of clarity and alignment due to weak communication.

The more turmoil, the more communication required.

The more uncertainty, the more communication required.

The more chaos, the more communication required.

Regardless of the times, entrepreneurs should send a weekly email update to their constituents — employees, advisors, mentors, and investors. People want to know what’s going on. People want to help. Regular email communication is the most repeatable, and scalable, method.

As for the format of the email, go with something simple:

  • Purpose of the company (repeat it every time!)
  • Recent customer story
  • Recent culture story
  • Goals with current progress
  • Any other highlights (employee, team, department, etc.)

That’s it. Communicate in a variety of manners, repeat the message, and make the foundation a weekly email.

Technology Hall of Fame of Georgia

Last week I was honored to be inducted in the Technology Hall of Fame of Georgia. It was an incredible experience and I’m grateful.

Below are my remarks.

How I Got Here

18 years ago I was making what proved to be one of the most important decisions of my life. 

I had recently graduated and was deciding where to live.

In college, I had started a software company called Hannon Hill and our biggest customer was in Atlanta. 

I reached out to get their thoughts on moving to Georgia. 

He offered up a sublease and invited me to come join them. 

It was my first experience of Georgia’s Can-Do Attitude. 

Hannon Hill led to Pardot which was acquired by ExactTarget and then Salesforce.com. This was the catalyst for the Atlanta Tech Village which helped nurture SalesLoft, Calendly, Terminus, Rigor, and a number of other startups. 

I didn’t realize it at the time, but getting that help, community, and office space from our customer nearly 20 years ago was a precursor to the exact Atlanta Tech Village service.

Georgia’s Can-Do Attitude continues to thrive. 

Only, I couldn’t do it alone. 

Thank You

There are a number of friends and family I want to thank. 

I want to thank my dad and Pam, who are here today, for their encouragement. 

I want to thank my wife Erica and kids for all their support. 

I want to thank David and Karen and the team at the Atlanta Tech Village for creating a vibrant community. 

I want to thank everyone at Hannon Hill, Pardot, Atlanta Ventures, and all the entrepreneurs and team members I’ve had the chance to work with. 

I want to thank Tripp Rackley for being my champion here today, and being a mentor over the years.

Our Opportunity

Georgia’s been incredibly generous to me and I’m going to do everything in my power to continue pushing our great state forward.

As an Atlanta region, we have a real opportunity to be one of the 10 most successful in the country for startup success. 

We need more bootstrapped entrepreneurs with scalable product market fit. 

We need more capital invested in the region. 

We need more of Georgia’s Can-Do Attitude focused on entrepreneurs. 

For this, I’m asking your help. 

The next time an entrepreneur reaches out for advice, say yes. 

The next time an entrepreneur wants to give a sales pitch, say yes. 

The more yeses we provide, the greater the chance for success. 

We have incredible momentum and now’s the time to realize our potential.

Closing

Finally, I’m truly humbled and honored for this recognition.

I’m eternally grateful for the communities’ belief in me. 

And, nearly 20 years later, I’m a proud representative of Georgia’s Can-Do Attitude. 

Thank you so much.

Churn, Churn, Churn

For years I’ve been telling entrepreneurs that a high net renewal rate (and net dollar retention) is one of the most important SaaS metrics. While net renewal rate is important, two people in the last week have told me gross churn — both logo and dollar — is more important. And I believe them.

Why is gross churn more important? Let me count the ways.

  • Black and White Value – With gross churn, the math is straightforward: how many customers (or dollars) are up for renewal at the start of the time period vs how many renewed. Pretty easy. Now, for net renewal rate, things get more complicated. Do temporary upgrades/downgrades count? What about deals with subsidiaries or related businesses? You could ask 10 different SaaS companies how they calculate net renewal rate and get 10 different answers. Gross churn calculations should always be the same.
  • Ability to Understand – Similar to the first point, it’s much easier to rally the team around a gross renewal rate since it’s easier to understand and calculate. Say we start the year at $10 million in annual recurring revenue and have 20% gross churn, we know directionality that we need to sign more than $2 million of new recurring revenue to grow (assuming no upgrades/downgrades). Now, if we can get better and only have 10% gross churn, we only need to sign more than $1 million of new recurring revenue to grow. Pretty simple.
  • Recurrence of Upgrades – People love talking about their > 100% net renewal rate, myself included. Only, it’s much more nuanced than upgrades outweighing churn and downgrades. Are the upgrades across every cohort or do customers primarily upgrade in their first year (implying they’re still rolling it out) and not upgrade after that? Do customers often downgrade in year two or three implying they finished a component of a project or transformation? Are the upgrades primarily from a specific vertical and has that vertical been tapped out? Net renewal rate can become less compelling with a more detailed analysis of the cohorts.

SaaS entrepreneurs should focus on the gross churn rate and ensure it’s as low as possible (under 20% annually for SMB and under 10% annually for enterprise). The old saying that’s it cheaper to retain a customer than sign a new one has never been more true, and is even more important with SaaS.

Make fighting churn a top priority of the company.

Authentic Demand’s Role in Startup Success

One of the old startup adages that rings true, yet can be hard to appreciate, is “build something people want.” Why wouldn’t an entrepreneur build something people want? I’ve been there, building things no one wants, and the answer is simple: I thought I was right and other people would eventually come around. I was wrong. No matter how hard I tried, if the market had no interest in it, there was no chance the startup would work. A dangerous middle ground traps many entrepreneurs into years of hope that rarely pans out — there’s a bit of market interest and an internal belief that one more feature, one more module will help unlock the demand. Many entrepreneurs were defeated in the search for one more thing.

The most successful entrepreneurs uncover authentic demand in a fast-growing market and deliver a stellar product.

When we started Pardot, we believed there was authentic demand, but we didn’t really know. B2B marketers at the time were using B2C tools, and they didn’t meet their needs. Huge amounts of B2B marketing spend was shifting from offline to online (e.g. print ads in magazines to online keyword and banner ads). It was only after we got the product into the hands of early customers that we heard amazing comments representing authentic demand.

Some of my favorite feedback from customers:

I don’t know how I did my job before using Pardot.

Pardot changed our business.

I tell everyone I know about Pardot.

Pardot data is included in every board deck.

We grew our marketing budget 10x because of Pardot.

We quickly knew that this business was special. Word of mouth was spreading. Prospects started showing up ready to buy. The business grew like clockwork.

Find authentic demand. Prove there’s an undeniable need for the product. Fulfill the unmet need.

Success starts with finding authentic demand.