Spend Time Producing Content, Not Just Consuming It

Last week I was talking to a would-be entrepreneur and I recommended he start a blog to share some of his thoughts with the universe while he searched for a business idea. After hemming and hawing, he said he just likes to consume content. True, consuming content is fun and easy, but it doesn’t force thinking through ideas and articulating a position. The act of producing content, even for an audience of one, while difficult at first, gets easier with time.

Another entrepreneur I met with recently was asking for go to market ideas for her new product. With a focus on small businesses, it was clear that the cost of customer acquisition would have to be low based on the product price point, and that it was going to require a light-to-no touch sales process. I asked about search engine optimization (SEO) and content marketing only to have her lament that they’d tried it without much luck. SEO and content marketing, just like most endeavors, takes a significant amount of time and energy to be successful. The best time to start producing content was years ago. The next best time to start is now.

Spend time producing content, not just consuming it.

Whether it’s simple tweets on Twitter, or long-form articles, entrepreneurs would do well to start writing more frequently. Take the time, put in the effort, develop the muscle — it’s not easy, but, ultimately, it’s worth it.

What else? What are some more thoughts on producing content, not just consuming it?

How Much to Raise When Times are Good

Talking to entrepreneurs lately, it’s clear we’re seeing some of the best valuations in nearly 20 years (hello, dot com days). This is especially true for startups with limited/no metrics as well as ones that have outstanding growth rates. In the middle — a startup with decent growth and decent metrics — times are pretty normal and valuations are much more reasonable.

Last week, when asking an entrepreneur how much they were targeting for their next valuation, he said he wanted the highest valuation possible along with personality fit with the new investor. On the surface, this makes sense — minimize dilution and enjoy the journey. Only, there’s a piece missing here, and it’s an important one: if you raise at too high a valuation, the business might not be able to grow into it, and the downside can be catastrophic.

Two weeks ago I talked to a different entrepreneur that’s raised almost 5x the equity as they have in annual recurring revenue, and the business isn’t growing fast (< 30%). Unfortunately, the Rule of 40 has been broken for years in this case. Too much money was raised at too large a valuation and the business hasn’t performed. Now, the cap table is broken. Lots of pain is imminent (cram down, down round, common equity getting wiped out, etc.).

When times are good, and exceptional valuations possible, find the upper in end of reasonable where the business can confidently grow into the valuation. The valuation might not be as glamorous as possible, but there’s tremendous value in resting easy knowing that even if the business falters a smidge, the last valuation is readily exceeded with time and the existing cash in the bank.

What else? What are some more thoughts on how much to raise when times are good?

When Freemium Works as a Business Model

Last week an entrepreneur mentioned they were thinking about introducing a new product with a freemium business model. Freemium, where there’s a free edition of the product along with a premium upgrade, has been a mainstay of cloud software for decades now. Only, it doesn’t work for most products.

Let’s look at when freemium works best. Here are a few characteristics:

  • 2nd or 3rd generation product – Once the market has been educated, and people know how to use that type of product, freemium works as users can jump in and be productive (e.g. Mailchimp was a 2nd generation product when it came out).
  • Fast time-to-value – Products that deliver value quickly work best for freemium such that users can understand and appreciate the product with minimal handholding (e.g. Google Docs where you can start typing immediately). Complex, complicated products don’t work well in the freemium model as there’s too much energy required to get value.
  • Viral distribution – Freemium really shines when the very nature of using the product propagates it to other users. Think about Calendly links for scheduling meetings, Dropbox sharing of files to different people, etc. Distribution is one of the most difficult aspects of B2B software, and the most successful freemium products have a heavy viral component.

Freemium, when it meets these criteria, is one of the best business models around due to elegant product distribution and scalability. The next time freemium comes up, see if it has these three characteristics.

What else? What are some more characteristics of the most successful freemium products?

Constant Course Correction on the Entrepreneur Journey

Earlier this week I was talking to an entrepreneur and he shared that they’d just found product/market fit. With a few dozen customers, and strong sales momentum, things are looking good for the startup. Naturally, I had to ask: was this the original idea for the company? As expected, it wasn’t anything remotely related to the original idea.

Almost every successful entrepreneur I’ve met wasn’t successful with the initial idea.

While some pivots are more dramatic than others, Jonathan Chambers chimed in that it’s constant course correction. Sometimes the current course needs minor tweaks (standard iteration) and sometimes a completely different direction is required (full pivot).

Plan for constant course correction on the entrepreneur journey. New information, new findings, and new innovations are part of the search for success.

The Entrepreneur’s Chip on the Shoulder

I’ve always had an entrepreneur’s chip on my shoulder — a sense of inferiority to other tech entrepreneurs.

I’m not based in Silicon Valley.

I failed at raising venture capital.

I was rejected by the prominent tech center in town.

Only, the constant rejection by the “superior way” fueled my motivation even more.

It can be done anywhere.

It doesn’t require venture capital.

It doesn’t need approval by the community.

Entrepreneurship is hard. The failure rate is high. Yet, success happened.

Perhaps it was the team. Perhaps it was the market. Perhaps it was timing. Likely, it was all three.

In reality, we’re all making it up as we go. The best we can do is look to learnings from those that have gone before us. We learn, we grow, we encounter new challenges — the cycle never stops.

Use the chip as fuel. Find the inner motivation. Make it happen.

Growing the Startup Community

One of the more popular questions I get is, “How do we grow the startup community?”

Great question.

While some people suggest things like more risk capital and institutional investors, I’m not convinced that’s the answer. The answer, I believe, is even more challenging.

Here are three ideas for growing the startup community:

  1. More Ambitious Entrepreneurs – Let’s face it: most of the ideas in our community are incremental. While we aren’t suited for moon shots, we are suited for solving harder problems, building mission critical workflow systems, and driving for larger outcomes. Too many entrepreneurs are pursuing nice-to-have products instead of must-have products, and the success rate shows it. We need more ambitious entrepreneurs thinking big.
  2. More Anchor Technology Companies – While we have a number of large entrepreneurial success stories in town, we’re really missing out when it comes to anchor technology companies. Think about Dell in Austin, Amazon.com in Seattle, and other major tech companies that recruit thousands of people to the region, create tremendous shareholder value, and are deeply ingrained in the community. It often takes 20 years to build an anchor technology company — perhaps some are already in the works now.
  3. More Repeat Entrepreneurs – I often tell people that that best time to invest in an entrepreneur is after they’ve had their first full-time entrepreneurial failure and are ready to step back in the arena. Yet, to be a repeat entrepreneur you have to have started your first serious venture. We have a decent number of first-time entrepreneurs but we’re lacking when it comes to serious repeat entrepreneurs. Possibly, it just takes time but to grow the community, but we need even more first-time entrepreneurs so that the cycle starts sooner.

So, there you have it. More ambitious entrepreneurs, more anchor technology companies, and more repeat entrepreneurs are how we grow our startup community in a meaningful way. None are easy; all are important. Growing a startup community is hard, and we’re going to keep working at it.

What else? What are some more ideas to grow the startup community?

Characteristics of the Ideal SaaS Startup

Earlier this week I was talking with an entrepreneur about the ideal characteristics for a SaaS startup. Some characteristics can be identified at ideation and many of the characteristics emerge once the product is in market with customers. As more of the characteristics emerge, they drive how fast the startup grows and ability to raise capital (if desired).

Here are characteristics of the ideal SaaS startup:

  • Product Value – It can’t be repeated enough: every successful SaaS startup either helps the customer make more money in a quantifiable way or runs a function of the business that’s mission critical. Most startups fail and most startups have nice-to-have products.
  • Product Distribution – Getting the product into the hands of customers in a financially justifiable manner is one of the biggest challenges post product/market fit. Ideal go to market is either viral (like Calendly), high volume inside sales (like Terminus), or a combination of inside and enterprise sales (like SalesLoft). The more complicated the sales model, the higher the average order needs to be otherwise the business won’t scale efficiently.
  • Total Addressable Market (TAM) – Ideal startups serve small, fast growing markets that are going to be large (billions) in a few years but are too small currently for big incumbents to care. Tomorrow’s TAM should be dramatically larger than today’s.
  • Gross Margins – As the startup scales, margins should be in the 70% range at a minimum with 80%+ as the long term target. If the margins can’t be in the 70% range long term, the business likely isn’t SaaS.
  • Renewal Rates – Two of the most important metrics for SaaS startups are gross renewal rates (how many customers or dollars renewed in a time period divided by how many were up for renewal) and net renewal rates (how many dollars renewed and expanded in a time period divided by how many were up for renewal). Gross renewal rates should be in the 80% range, at a minimum, and net renewal rate should be above 100%.

The ideal SaaS startup has both great market fundamentals and excellent metrics across key categories. Most startups won’t achieve all the desired characteristics, but the ones that do have the opportunity to create large, enduring companies.