Category: Strategy

In thinking through the two most recent posts on 5 Ways to Identify Product/Market Fit and 5 Quick Steps to Go From Product/Market Fit Focused to Customer Acquisition Focused, it became clear to me that there’s value in organizing the startup lifecycle into generic stages. With simple stages, it’s easier to communicate and focus in on what’s important when talking with entrepreneurs (e.g. how often have you heard entrepreneurs worrying about scaling their product when they don’t have customers yet).

Here are the four stages of a B2B startup:

• Stage 1 – Search for Product/Market Fit (1 – 2 years)
  This involves putting the core team together, building a simple version of the product, signing the first 20+ customers, and honing in on the needs of the market. Most startups fail in this stage.
• Stage 2 – Build a Repeatable Customer Acquisition Process (1 – 2 years)
  This involves experimenting with a number of different sales and marketing tactics to find as many channels as possible that work in a scalable, predictable fashion (e.g. if you can do something repeatedly but only sign one customer a month, it doesn’t count because it doesn’t have scalability). If the market timing is right, product / market fit is in place, and the team executes, the necessary inputs to achieve the desired outputs become clear and it’s time to step on the gas.
• Stage 3 – Maximize Growth (indefinite)
  Once it’s clear there’s a repeatable customer acquisition process with scale, it’s time to focus on growing the business as fast as possible. This involves ramping up sales, marketing, engineering, services, support, operations, etc, implementing more processes and procedures, and scaling the corporate culture. As long as the business is growing north of 20% per year, it’s full on maximize growth mode.
• Stage 4 – Maximize Profitability (no longer a startup)
  After the core growth engine of the business slows down it’s time to transition to maximizing profitability. Most businesses in this mode give some attention to growth and most attention to profitability (and profitable growth, where possible). When attention to profitability is valued over growth, and change has slowed down, it’s no longer a startup.

These are the four stages of a B2B startup. Between each stage there’s no clear line of demarcation, but it helps to know where the startup stands so as to focus on the most pressing issues. Each stage has it’s own nuances and entrepreneurs that have built a successful business can appreciate the differences.

What else? What are your thoughts on these four stages of a B2B startup?

Bonus: Read about the 4 Stages in 8 Words.

Achieving product / market fit is one of the most difficult things to do as an entrepreneur and the ultimate goal of phase one of the startup process. Most of this first phase of the process is spent building a minimum respectable product and doing whatever it takes to get the product into the hands of users — users provide the required oxygen for the product to improve. While most startups never make it past this phase due to funding, timing, lack of viable market, poor execution, etc., many do complete phase one and enter phase two where they have to build an efficient customer acquisition machine.

Here are five ways to identify that product / market fit has been achieved:

1. 10+ customers have signed on in a modest period of time (e.g. 3 – 9 months) and they haven’t been friendlies (people you already knew, favors you called in, etc.)
2. At least five customers actively using the product with little / no product customization (e.g. the product is valuable and mature enough that heavy development work isn’t required for each new customer)
3. At least five customers have actively used the product for over a month without finding a bug (no matter how great the product is people always find issues with it, which is natural for this beginning stage)
4. At least five customers use the product in a similar way and achieve similar results (early on you find that customers use the product in ways you didn’t imagine, which is great, but the goal is to find consistent, repeatable patterns)
5. At least five customers exhibited a similar customer acquisition and onboarding process whereby they bought and went live with the product in a timeframe that was consistent with each other (e.g. had a two month sales cycle and took a week to get the product running)

Here, the theme is consistency and a small amount of repeatability. There’s an on going maturation process that takes time, even with extended resources. As a founder deep within the process of developing product / market fit, it’s useful to refer back to these five ways to assess progress.

What else? What are your thoughts on these five ways to identify fit and what other ones would you add?

Several weeks ago I was talking to a friend that’s thinking about making the entrepreneurial plunge. One of his main concerns was taking a big pay cut, especially when thinking about the bonus he expects to get at the end of this year since the year is going so well. Of course, that’s likely a red flag that he’s not risk-loving enough to dive into something, but you never know.

When talking about salary, I tried to make the point that compounding growth of equity is far superior to investing the residual of income less tax. I gave him the simple example of $100,000 in equity growing 40% per year vs an extra $100,000 income that you pay taxes on (assume 50% tax rate), then invested and earning 5% per year:

• Year 1
  Equity -> $140,000
  Savings from Income -> $55,000 based on $50,000 + $5,000 from investing it
• Year 2
  Equity -> $196,000
  Savings from Income -> $107,750 based on $57,750 + $50,000
• Year 3
  Equity -> $274,400
  Savings from Income -> $163,137 based on $113,137 + $50,000
• Year 4
  Equity -> $384,160
  Savings from Income -> $221,293 based on $171,293 + $50,000
• Year 5
  Equity -> $537,824
  Savings from Income -> $282,358 based on $232,358 + $50,000

Again, this is example shows taking a $100,000 annual pay cut in exchange for a one-time grant of $100,000 in equity that grows at a rate of 40% per year. Without selling it and paying taxes in year five, the equity is worth almost double the value of saving and investing the residual income each year. Compounding growth is an amazing phenomenon.

What else? What are some other thoughts on compounding growth vs investing residual?

Some entrepreneurs come up with ideas at a rapid rate while others struggle on the ideation side and are amazing at execution. Regardless of entrepreneur type, there’s a little idea I’m a big fan of: keep an ongoing Google Spreadsheet of business ideas. It could just as well be in Evernote or some other system, but I like Google Spreadsheets for quickly glancing at ideas and sorting them by different categories.

Here are some situations that are great for generating business ideas:

• When you’re shopping for a good or service and get price quotes that are significantly higher than what you expected, there could be an opportunity
• When you find a business problem and can’t find a solution (this is how Pardot came about)
• When you encounter a business challenge where there are solutions but they aren’t elegant
• When you see a trend emerging that is clearly going to have a major impact, especially if you’ve seen a pattern before (e.g. analytics are a big deal for web sites and with the rise of mobile apps, analytics wil be a big deal for them as well)

Yes, keeping a spreadsheet of ideas is common sense, but most people don’t do it. If you are an entrepreneur or want to be an entrepreneur, start recording your ideas now.

What else? What are some other situations that are great for generating business ideas?

One of the best ways to come up with entrepreneurial ideas is to look at internal challenges. Every company has problems and opportunities that aren’t being met, some more obvious than others. Here’s a simple exercise: take the three smartest people in your organization that you have good rapport with and ask them about their three biggest challenges. With these nine challenges in hand, whittle them down to your three favorite. Now, reach out through friends and acquaintances to do customer discovery (example guide) as to which one has the most opportunity. Voila, there’s a potential business idea.

Here’s how my entrepreneurial endeavors evolved:

• Built websites in high school and college and couldn’t find a good content management system, so Hannon Hill was born
• Had limited visibility into sales and marketing effectiveness at Hannon Hill, so Pardot was born
• Had a tough time connecting Pardot to other cloud-based apps to exchange data, so Kevy was born

The next time someone says they want to be an entrepreneur but don’t have a good idea, take them through this simple process.

What else? What are your thoughts on good ideas coming from internal challenges?

If you haven’t been following Box’s Aaron Levie (@levie) on Twitter, you’ve been missing out. Levie has some of the most poignant and prescient startup quips anywhere. Here are 10 of my favorite startup tweets from @levie:

1. The best disruptions reduce the cost of technology, expand its availability, and create more value for the ecosystem, not less. (link)
2. The first era of enterprise software was won with sales, being closed, and complexity. This era: service, openness, and simplicity. (link)
3. Sometimes things are the way they are and can’t be changed, other times it’s because no one ever tried. Your job is to find the latter. (link)
4. The trick is to build a core competency narrow enough to be unique, yet broad enough to be compelling, and then constantly evolve it. (link)
5. The only way to avoid disruption is to constantly do what you would do if you were just starting out. (link)
6. Focus too much on the near-term and you won’t get tomorrow’s customers, focus too much on the long-term and you won’t get today’s. (link)
7. Imagination > Resources = Disruptor.
   Resources > Imagination = Disrupted. (link)
8. Spend only as much time thinking about the competition as it takes to beat them, and nothing more. (link)
9. Your time horizon matters more than almost anything else as a startup. The longer you’re in the game, the more shots you can take. (link)
10. Better to go after a bigger market without all the answers, than a smaller market without any questions. (link)

@levie does an amazing job distilling startup strategy into 140 character sound bites. I’m looking forward to reading many more.

What else? What are your thoughts on the startup tweets from Box’s Aaron Levie?

The lean startup methodology is great and deserves the most attention. As contrasting to the lean startup, there’s the traditional heavy startup with extensive engineering along with customer discovery, large burn rates right out of the gate, and more. While the heavy startup shouldn’t happen too often, there’s still a place for it.

Here are a few ideas when a heavy startup makes sense:

• When an entrepreneur has extensive domain expertise in a market, running heavy can result in a fully assembled and cohesive team in a shorter period of time
• When a market opportunity is winner take all, and it’s go big or go home
• When a market requires more fully baked software before trying out a minimum viable product, like in healthcare or other complex areas

Heavy startups aren’t very common, but they still have a place in the startup world.

What else? What are some other ideas as to when heavy startups make sense?

There’s a debate in the startup community between the lifestyle and growth entrepreneur. Now, no one likes labels, but the idea is that a lifestyle entrepreneur optimizes for his or her lifestyle while the growth entrepreneur focuses on growth at any reasonable any cost.

Here are some ways the lifestyle entrepreneur differs from the growth entrepreneur:

• Lifestyle entrepreneurs look to company profitability for personal income, keeping in mind growth goals, while growth entrepreneurs put all the emphasis on growth
• Lifestyle entrepreneurs are averse to raising outside money while growth entrepreneurs always try to raise money
• Lifestyle entrepreneurs are more comfortable with the status quo while growth entrepreneurs are constantly looking to shake things up and reinvent their business to grow faster

Why distinguish between lifestyle and growth entrepreneurs at all? It’s important to understand ones motivations and ambitions, especially when developing a peer group and connecting with mentors.

What else? What are some other differences between lifestyle and growth entrepreneurs?

Launching a startup is one thing. To actually get it humming, and making strong momentum, it often takes two years of serious, full-time effort. Here’s how I’ve seen it play out in the past:

• First Three Months – Assemble the team and build the minimum viable product
• Next Three Months – Launch the minimum respectable product
• Next Six Months – Sign the first 10 paying customers and tighten the product/market fit
• Next Six Months – Focus in on building the customer acquisition machine while refining the product
• Last Six Months – Continue tweaking the sales and marketing mix using objective data about what’s working and sign a critical mass of customers

Startups aren’t overnight successes. Often, two years is the magic mark for startups to start humming, assuming they found a strong market with solid timing.

What else? What are your thoughts on it taking two years for a startup to start humming?

Today I enjoyed hearing Bill Nussey (@bnussey) give the commencement address at the 2013 ATDC Startup Showcase graduation. I’ve enjoyed talking to Bill over the years and hearing him speak at several events. There was one piece of advice he gave me that changed the trajectory of my career.

Way back in April 2007 we had just launched Pardot 1.0, which was a pay-per-click bid arbitrage system to generate leads for technology companies. Much like LendingTree.com, Pardot 1.0 was a platform where prospects would put in their information and vendors would compete for their business. I had reached out to Bill as I wanted to share the vision for Pardot 1.0, and he graciously agreed to meet me for lunch at the River Room on the Chattahoochee River.

We were sitting outside on a beautiful Spring day and I was selling hard on the benefits of a Pardot 1.0 platform and how they could buy higher quality leads at a lower cost. After a few minutes talking about Pardot 1.0, he shared that there was this marketing automation company called Eloqua that was of great interest to him. Eloqua focused on the B2B segment of online marketing and was a combination email service provider and micro web analytics tracking platform.

Now, at the time, I had never heard of Eloqua or marketing automation software, but the functionality sounded similar to several of the Pardot 1.0 modules we’d already built. I thanked him for lunch and returned to the office to tell my cofounder about Eloqua. We’d been struggling with Pardot 1.0 and the market opportunity of generating leads on behalf of vendors. What if we pivoted and starting selling pickaxes to gold miners instead of mining gold on behalf of vendors?

After a week of analyzing things, debating what was and wasn’t working, and researching Eloqua, we decided to pivot Pardot into a SMB marketing automation platform. We already had a good bit of the core functionality including landing pages and micro web analytics tracking. The missing pieces were CRM integration, automation rules, and email marketing. With a new course charted, we went heads-down and decided to build the updated product with the goal of a beta launch in September 2007.

Bill introduced us to Eloqua and the idea that put Pardot on course to becoming a major success. For that, I’m forever thankful.

Sharing ideas is powerful. You never know who you can help or who can help you.

What else? What are some other examples of the power of sharing ideas?