Why is a strong startup community important for the local region?

Last week Dan Berger interviewed me for Boise Startup Week and asked a great question: why is a strong startup community important for the local region? I’ve been thinking about this question ever since. Startups, and startup community building, has been a passion of mine for decades. Of course startup communities are important, but I take it for granted.

Here are a few ideas as to why it’s important to have a strong startup community:

  • Job creation. The majority of new jobs are created by companies less than five years old. Large companies are in the business of outsourcing and off-shoring jobs. Local regions need good jobs to be healthy, and most new jobs come from startups.
  • Wage growth through exports. The only way to increase wages in a region is to increase the exports out of the region. Having more flower shops on the corner, and restaurants down the road, is great for quality of life, but doesn’t help grow the wages in an area. Startups, by their very nature as inventors of new technologies, serve national and global markets, thus exporting their solution outside the region.
  • Wealth creation. Similar to wage growth through exports, another benefit is wealth creation, which benefits non-profits, the arts, and many other quality of life functions in a community.
  • Desirability for young people. Startup founders are 42 years old, on average, but the average age of startup employees is much younger. Startups are cool and desirable for young people, and without them it makes it much harder to attract talent to the region. Vibrant cities need startups.
  • Second order benefits. Startups support the local economy by renting office space, engaging service providers like lawyers and accountants, and spending money. More startups results in more business for the rest of the community.
  • Civic pride from local startup successes. Just like we cheer on our local sports teams competing on the national stage (go Braves!), and have resulting civic pride from success, we also have civic pride from local startup success. I enjoy telling people that startups like Calendly and Mailchimp are local.

Strong startup communities are important for the local region and entrepreneurs should lead them.

Running the Product/Market Fit Engine the Superhuman Way

Every so often I come across a podcast interview that is so profound and thoughtful that I stop everything and concentrate on the content. Last week I listened to an interview with Rahul Vohra, the founder of Superhuman, and it was one such show. There were a number of takeaways over the course of an hour, but the most interesting part for me was about thinking through product/market fit.

Here are a few notes on Rahul’s ideas starting around the 13 minute mark:

  • Raise as much capital as you can upfront
  • Make decisions as long term as you can
  • Don’t put out a minimum viable product, put out a maximally delightful product
  • Listen very closely to your users
  • Don’t fail fast, succeed inevitably

Here are a few notes on the Superhuman product/market fit engine:

  • Ask your users “How would you feel if you could no longer use the product?” with possible answers Very Disappointed, Somewhat Disappointed, Not Disappointed
  • Companies that struggle to grow always have less than 40% Very Disappointed
  • Companies that grow easily have more than 40% Very Disappointed
  • Predicts success better than Net Promoter Score
  • Expand on the first question with three more:
    • What type of person do you think would most benefit from the product?
    • What is the main benefit you received from the product?
    • How can we improve the product for you?
  • Analyze the results to the first question “How would you feel if you could no longer use the product?”
    • If startup is in the 5-15% Very Disappointed region, consider pivoting the product or market to find a higher scoring segment
  • Find the High eXpectation Customer (HXC), the most discerning person in your target market, by going back to the survey results and taking all the users that said they would be Very Disappointed, then analyze their answers to the next question “What type of person do you think would most benefit from the product?” as happy users will use the words that most accurately reflect themselves, then use these words to create your own definition of HXC
  • Go back to all your surveys, assign a persona to each response, then take the users that most love your product, and use them to narrow the market
  • Superhuman was scoring less well with sales, engineering, and data science people but scoring well with managers and entrepreneurs
  • Deliberately ignore the personas that aren’t HXCs (resegment where you don’t change the product, but do change the market)
  • Repeat this process on a loop to further increase the focus on the HXCs ultimately driving an eventual Very Disappointed segment being greater than 40% of your users, and thus achieving product/market fit (Superhuman was able to increase their score from 22% to 58% over several quarters)

Every entrepreneur searching for product/market fit should go over and listen to the interview with Rahul Vohra. There’s no way to guarantee success, but this product/market fit engine from Superhuman is the best I’ve heard.

Everyone Feels Above Average At Angel Investing

Over the years I’ve talked with a number of friends that have expressed interest in angel investing. Typically, they say something like, “I’m looking to make 10 investments so that I’m sufficiently diversified and financially successful.” Then, they offer up an oft repeated refrain of how the investments will play out:

  • 3 failures ($0)
  • 3 get the investment back (1x)
  • 3 make a good return (2-3x)
  • 1 excellent return (10-20x)

After 10+ years of angel investing, and many lessons learned along the way, I’m confident that this 10 investment scenario represents the best (luckiest?) of the best angel investors.

Everyone feels above average at angel investing. Not just merely above average, way above average.

The reality is that angel investing is hard. In fact, angel investing should really be viewed as charity work in most cases.

I’m reminded of this phenomenon after reading the recent article The Pervasive, Head-Scratching, Risk- Exploding Problem With Venture Capital Now, venture investing should be easier than angel investing as the startups are more mature with metrics, customers, and operating history. Only, after analyzing a number of returns, the authors showed that to consistently generate good returns, VCs need to invest in 500 startups. 500!

From the article:

Funds with 500 portfolio firms have a 13.5 percent median return, compared to 10 percent for the 15-investment funds. In fact, the returns of the worst (fifth percentile) ultra-large VC funds are the same as the median returns from undiversified VC funds. 

The Pervasive, Head-Scratching, Risk- Exploding Problem With Venture Capital

Now, I do recommend angel investing but with the caveat that it should be done for the enjoyment of helping entrepreneurs, not for strong financial returns. If financial returns are the motivator, plan to do it extensively across hundreds of startups.

Find Your Digital Mentors

Last month I was on a panel discussing the importance of mentors and how they really helped me in my career. The panel moderator asked for recommendations on how to find mentors and I gave my favorite answer: start with digital mentors.

Digital mentors are people that you don’t know but they help you through their books, blogs, articles, videos, and podcasts. Digital mentors don’t have to be traditional writers, rather its people you respect and value their thoughts.

Have a favorite entrepreneur? Go on YouTube and find their talks or conference discussions, then skim the videos.

Have a favorite thought leader? Go on Stitcher and find podcasts they’ve been on in the past, then listen to the first few minutes of each.

Have a favorite author? Go on Amazon.com and find all the books they’ve written, then try the Kindle free sample.

Of course, Twitter, LinkedIn, WordPress, and others are great resources as well.

Entrepreneurs should find their digital mentors and make it a habit learning from them.

5 Remote-First Principles from Brex

One area I’m really interested in right now is the trend away from traditional office structures for companies. All employees sitting in the same building for 40+ hours per week has felt antiquated for years. Now, with the pandemic, many of us have been forced to work from anywhere for 6+ months, and most people never want to go back to the previous office usage patterns. Of course, purely remote work isn’t the answer for everyone, and there are a number of good reasons to work in an office. Remote-first/work from anywhere has been getting the most attention lately, so let’s dive in there.

The best post I’ve found is Remote-first at Brex. Here are a few notes from the piece:

  • Principle #1: Clone the internet, not the office
    • Use internet best practices, not traditional office best practices, for distributed work
  • Principle #2: Async decisions by default
    • Written word becomes the most powerful tool, not meetings and people’s in-person personalities
  • Principle #3: Intentional relationships
    • Cultivate relationships more thoughtfully
    • Frequent company and team in-person meetings, at least once every two months
  • Principle #4: Physical-mental balance
    • Every person needs four things: an uninterrupted work space, connection to tribe, connection to nature, and physical activity
    • Office hubs in major cities for people that want to go into an office
  • Principle #5: Iteration
    • Everyone is learning and experimenting, expect remote-first work styles to evolve

Remote-first is a fascinating trend that is only growing in importance. Look for the trend to influence all types of companies, and many new best practices to emerge. I’m excited to see what the future holds.

The Four Ways to Calculate SaaS Churn

Dave Kellogg just published an excellent new post titled Churn is Dead, Long Live Net Dollar Retention! Slides from my SaaStr 2020 Presentation. In the post, Dave argues that churn is too easily manipulated and that Net Dollar Retention is the better metric, to which I agree and have argued in the past (see Churn, Churn, Churn and Compounding Revenue’s Value in the Future).

One of the most important items of the presentation, which isn’t as well understood in the market, is that churn calculations can be done a variety of ways, and therefore manipulated.

From the presentation, here are four ways to calculate churn rates:

Let’s break out those four ways to calculate churn:

  • Gross ARR – Take the annual recurring revenue (ARR) lost at the end of a period (e.g. the end of last year) and divide that by the ARR at the start of the period (e.g. the beginning of last year). So, assuming $1 million of ARR lost last year, and $10 million of ARR at the beginning of last year, the churn would be 1/10 = 10%.
  • Gross ATR – Available to renew (ATR) is similar to the ARR calculation with one major difference: you don’t get credit for any multi-year contracts that transcend a calculation period. If a customer signs a three year contract, under the Gross ARR model, you assume they renew in year one and two for calculation purposes. Under Gross ATR, multi-year contract customers are removed and only customers that are available to renew are counted.
  • Net ARR – Similar to Gross ARR, but you add any expansion or up-sell revenue and deduct any contractions or downgrades within the cohort.
  • Net ATR – Just like Net ARR, but within the available to renew cohort.
  • Bonus – Churn can be calculated against logos (customers) instead of revenue, making for even more ways to calculate churn. And, there’s additional funny business that can be done in calculating upgrades and downgrades to determine Net ARR and Net ATR.

Churn is one of the most important things for SaaS entrepreneurs to know cold. Go watch Dave’s presentation and get a deep dive on churn and net dollar retention.

Startup State of the Union Slide Deck

Early in the Pardot days, it was clear things were going well and we had something special. Only, we were inexperienced and didn’t know what we were doing (does anyone, really?). My concern was ensuring we grow faster than the market, and to do that we had to ensure our employees’ personal growth was even faster than our company growth. For me, my needed personal growth was around communications and company alignment.

To facilitate communications and company alignment, I focused on things like simple strategic plans, daily check-ins, weekly team update, weekly all-hands meetings, and monthly strategy dinners.

Recently, I was introduced to a new idea: the Startup State of the Union. Generally, the idea is to map out all parts of the business in a slide deck that is updated monthly and available to the team.

As an entrepreneur, you are a cartographer making the map, not following someone else’s map. The Startup State of the Union is your internal map.

Let’s take a look at what slides would go into the Startup State of the Union

  • Purpose / Vision
  • Simple Strategic Plan
  • Why Now, Why Us
  • Customer Testimonials
  • Product Screenshot
  • Technical Platform
  • Leadership Team
  • Board / Investors
  • Departments
    • Customer Service
      • Consider team, renewal processes, etc.
    • People Operations
      • Consider team, recruiting process, employee development process, etc.
    • Marketing
      • Consider team, definitions of qualified leads/accounts, ideal customer profile, tech stack, etc.
    • Sales
      • Consider team, AE + SDR + CSM alignment, territories, etc.
    • Finance
      • Consider team, financial forecasting process, etc.
    • Product
      • Consider team, product planning process, pricing/packaging, etc.
    • Technology
      • Consider team, development process, etc.

Overall, the big idea is to have an internal slide deck, updated regularly, that captures where the business is today, where it is going, and how it is run to get there.

Organizational alignment is hard, and only gets harder as the company grows. Consider a Startup State of the Union internal slide deck to capture the most important details and re-evaluate them regularly.

The Great Reset for Startupland

Last week I was talking to an entrepreneur and he shared the latest progress for his startup. The story was a familiar one in the time of pandemic:

  • Growth slows, sales cycles lengthen, uncertainty clouds decisions
  • Layoffs to conserve cash and reflect new growth expectations
  • Recognition that metrics needed to raise more money on ideal terms won’t be met
  • Reset business expectations for measured growth with a focus on getting to profitability/breakeven
  • Realize profitability/breakeven relieves an artificial pressure, providing a newfound freedom

This is the great reset for startupland.

Most startups were negatively impacted by the pandemic. A small percentage were positively impacted. All expectations were changed.

Look for this reset to play out in a number of ways:

  • Revenue growth and profit margins, also known as the Rule of 40, will be one of the most important metrics
  • Hiring, going forward, will be more measured. Entrepreneurs will start paying greater attention to revenue per employee.
  • Work from anywhere, and the corresponding hire from anywhere, will change huge numbers of companies forever, in a way that has a positive benefit for the world.
  • Costs, especially office space, will be more scrutinized, resulting in leaner, more efficient organizations.
  • Investor expectations are lowered and more attention will be paid to existing portfolio companies.

We’re living through the great reset for startupland and the impact will be felt for years.

The Hallway / Zoombomb Values Test

A few weeks ago I was going through a series of simple strategic plans with a group of entrepreneurs. When we arrived at the section on core values, the average plan had 10 values with highly detailed explanations. After seeing this pattern, I offered up the Hallway Values Test:

  • Independently stop 10 employees in the hallway
  • Ask each employee to write down the company values
  • Compare the answers to the actual core values
  • Assess the percent right and grade it on a typical letter scale

What’s the chance your company gets an ‘A’?

After going through this exercise with a dozen entrepreneurs, it’s clear that every company would get an ‘F’.

In today’s pandemic environment, the Hallway Values Test isn’t doable. Instead, run it as a Zoombomb Values Test. Drop in on a Zoom call and ask each person to type up the values in a local notes app — no cheating. Then, when everyone is ready, copy and paste the answers into the Zoom chat window. Now, see how many were right and assess the results.

Of course, the next question is how to improve the grade on the Hallway Values Test.

A few ideas to improve on the Hallway Values Test:

  • Have 3 – 5 Values – As much as we want to capture an extensive list of values as part of the constitution of our company, try limiting it to three, and no more than five values. Less is more when it comes to people remembering, and upholding, core values.
  • Incorporate Values in Regular Communication – Repetition, repetition, repetition. Put the core values in the Weekly Update Email, talk about a different value at each Daily Check-in, and give out a lawn gnome to the employee that most embodies a value each month
  • Require Culture Anecdotes at Quarterly Reviews – Update the quarterly check-in process with the question “how are you following the values?” and require an anecdote for each value.

The Hallway Test is a great way to assess the strength of values in a culture. Personally, I believe culture, including values, is one of the most important things an entrepreneur can instill in a business, and when done well, becomes one of the most powerful and sustainable advantages.

Ready to assess the strength of your values? Run the Hallway Values Test.

Start Thinking in Systems, Stop Thinking in Goals

Last week I was asked about my personal goals, what keeps me going at this point in life. My answer was simple: I don’t have any goals. Instead, I have systems that I believe will lead to positive outcomes. I want to help spread the magic of entrepreneurship, and make an impact on the world. My systems will help me do my best, not striving for goals.

Start thinking in systems, stop thinking in goals.

I can control the systems. I can control the effort I put in. I can control where I spend my time.

I can’t control if I hit the goal of creating 100 successful startups. I can’t control if I hit the goal of creating 10,000 high paying jobs.

This type of thinking really crystallized for me while at Pardot when we did our quarterly and annual planning. Yes, we had goals. Yes, we cared about hitting the goals. Only, we couldn’t guarantee that we’d hit the goals. This idea of control, or lack thereof, made me go deeper. Primarily, what can we control?

We can control the required number of sales activities to likely achieve quota.

We can control the on-boarding steps necessary to ensure customers have a successful experience.

We can control the product planning process to ensure the most important enhancements.

So, we set goals and focused our energies on the systems we could control.

When I see goals, and talk to entrepreneurs about their goals, I try to tease apart if the goal is within his or her control. If it isn’t, I work at helping reshape the goal to something that is more controllable, and share the idea about systems.

Control what you can control.

Start thinking in systems.