People Connect With People First, Companies Second

During the Pardot journey I’d talk to customers at tradeshows like Dreamforce and ask about their experience as a customer. At first I was expecting feedback and input on the product — what worked well, what didn’t work well, etc. — only the feedback was always about the people. Comments like “we love X on the sales team” or “Y is great to work with.” While customers thought Pardot was great, it was really the people at Pardot they loved.

People connect with people first, companies second.

As much as we like to talk about our cool technology and awesome startups, the ones that people really engage with do so because of the people they interact with at the company. There’s a reason the “service” part of Software-as-a-Service is more important than the “software” part — good products make for good customers, good service makes for raving fans.

Remember that people connect with people above all else.

What else? What are some more thoughts on the idea that people connect with people first, companies second?

Video of the Week: Chip Conley on Measuring What Makes Life Worthwhile

Chip Conley is a successful entrepreneur and I’ve enjoyed reading his books over the years. For our video of the week watch Chip Conley: Measure What Makes Life Worthwhile. Enjoy!

From YouTube: When the dotcom bubble burst, hotelier Chip Conley went in search of a business model based on happiness. In an old friendship with an employee and in the wisdom of a Buddhist king, he learned that success comes from what you count. 

Valuing a Pre-Revenue Startup

Last week an entrepreneur reached out for help on an estimated valuation for his pre-revenue startup. After building a prototype and getting some non-paying early testers, he’s looking to raise an angel round and wanted thoughts on what’s normal in the market. I asked a number of questions and offered up a few ideas:

  • Base Valuation – Pre-money valuations are usually $1-$2 million for a startup with a prototype and a handful of users. Typical funding rounds are for $300-$500k whereby the entrepreneur sells around 20-25% of the business.
  • Management Team Premium – If it’s an experienced management team or highly-regarded prior employer, there’s a large increase in pre-money valuation to $3-$4 million. Investors view an experienced management team as more likely to be successful and pay up for it.
  • Half the Next Round Valuation – Figure out the milestones for this round (e.g. revenue targets), and estimate the corresponding valuation for the next round with those milestones. Then, with the expected next round valuation, divide it in half to value this round. Investors want to believe that they can double their money on paper in 18 months, and see a clear path to get there.

Pre-revenue valuations are always subjective and come down to how eager either side wants to get a deal done. There’s no exact number but these are good guidelines for normal deals.

What else? What are some other ideas for valuing a pre-revenue startup?

Drop the Second Product

Recently I was talking to an entrepreneur that had just started getting traction on a new product. After digging in, it was clear they still had a prior product they were selling and supporting, even though it only had a handful of customers. My advice: drop the second product.

Here are a few reasons why a startup should only have one product:

  • Talent – The best people work on the most important product. Second products inevitably languish without the right talent.
  • Limited Resources – Startups are inherently resource constrained. If one product has limited resources then two products are going to have even more limited resources.
  • Go-To-MarketCustomer acquisition is the biggest challenge for startups. Dividing go-to-market across two products makes it even more challenging.
  • Speed – Startups beat large companies due to speed. Spread the efforts over multiple products and the speed is impacted. Stay fast and nimble.

Drop the second product. Entrepreneurs would do well to focus on one product and do it well.

What else? What are some more thoughts on the idea that startups should only have one product?

Customer Acquisition As the #1 Challenge

As the cost to build an app has gone down over the last 10 years due to open source and cloud computing, the number of apps as grown. Now, there are dozens of apps that do the same thing in every category imaginable. The result: customer acquisition is the number one challenge with so much noise in the market. And, it’s only going to get more challenging.

Here are four things to work on to build a customer acquisition machine:

  1. Community – Work towards 1,000 true fans. Start small. Find the first 10 that care. Then the first 100. Nurture the community and grow it over time.
  2. Content – Write original content. Make a statement. Have a strong opinion. Put new ideas out there. Find a rhythm.
  3. Engage – Connect with people. Target best-fit accounts. Run a process. Follow the account-based engagement best practices.
  4. Experiment – Follow the Traction book. Constantly experiment. Try new ideas like micro apps and social selling.

Customer acquisition is the most difficult challenge required for startups to succeed. Invest in it early and build the expertise over time.

What else? What are some more ways to build a customer acquisition machine?

How do you know when it’s time to shut down the startup?

After grinding it out for a couple years, most startups are failing. Startups are hard and 99% never hit $1 million in annual revenue. How do you know when it’s time to shut down and give up? No one wants to be the person that quits, and investors made a bet on the entrepreneur, yet most of the time it doesn’t work out. That’s the game; it’s brutal.

Here are a few ideas to consider that it’s time to shut down:

  • Market Timing Not Right – Being too early is a failure. Being too late is a failure. Sometimes the timing is off and nothing can be done.
  • Too Much of a Nice-to-Have – Most products aren’t a must-have. There are only a few must-have products and entrepreneurs (myself included) try hard to convince people that a product is a must-have. Markets decide winners and losers based on need and value.
  • Value to Cost Misalignment – Some products fit a real need but the cost of customizing and delivering the solution is too expensive relative to what the buyer can afford. A product that’s a must-have but unaffordable to the audience is a failure.
  • Tiny Market – What seems like a big market can end up being a tiny or niche market. While a modest business could be built it isn’t usually worth pursuing.

Notice I didn’t say running out of money. That happens as well but scrappy entrepreneurs find a way. Deciding to quit is more about a fundamental business model flaw with no apparent pivot to make. Failure happens — don’t drag out too long.

What else? What are some other ways you know it’s time to shut down a startup?

5 Ways Raising Venture Capital Changes a Business

Continuing with the theme of The Slow Startup Movement from yesterday, one of the points to go deeper on is the different ways raising venture capital changes a business. Raising venture capital isn’t inherently good or bad — it has its pros and cons, just like anything. Here are five ways the business is changed after raising venture capital:

  1. C Corp Conversion – Most startups are LLCs (or should be) and as part of raising institutional capital have to convert to a C Corp (essentially can never be converted back). A C Corp has more complexity, double taxation on profits, and more annual paperwork but doesn’t pass through profits or losses (required by institutional investors for a variety of reasons).
  2. Quarterly Board Meetings – Most entrepreneurs don’t have a formal board or board meetings until after raising institutional capital. Board meetings, and the process of preparing for board meetings, are useful exercises for entrepreneurs when the business is scaling.
  3. Constantly Raising Money – Once the first round is done, the entrepreneur has entered the fundraising race track and can’t get off until the race is won or the keys have been handed over to a hired CEO. The entrepreneur is expected to raise money every 18-24 months (if not sooner).
  4. Focus on Growth Above All Else – Growth, growth, growth. Other aspects of the business are still important but every strategic conversation includes how to grow faster.
  5. Exit Timeline – The clock is ticking. Investors need to see a return in 3-5 years (and absolutely no later than 7-10 years). An exit isn’t required tomorrow but it’s somewhere in the mid-range future.

Raising venture capital changes a startup by heightening the focus and sense of urgency to create value. These are five basic ways the business is changed.

What else? What are some more ways raising venture capital changes a business?