David Cummings on Startups

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  • HubSpot, Marketing Automation, and Content Marketing

    After yesterday’s Notes from the HubSpot S-1 IPO Filing, there have been a number of interesting blog posts on the same topic including Louis Gudema on HubSpot’s S-1, BetaBoston on HubSpot’s S-1, and David Raab on HubSpot’s S-1. One of the points that I think is missed is that as part of HubSpot moving away from the small business market and into the mid-market, there’s also a shift from blogging with SEO tools to full marketing automation. With Marketo’s Q1 growth at 64% year over year, there’s huge money in marketing automation.

    Content marketing is hard due to the need for fresh content on a regular basis. I like how Louis Gudema defined running a content marketing program as publishing at least six pieces of content, of any length, per month. While I’m a fan of content marketing, one key point is that customers of HubSpot (and most any other provider, including Pardot) can still get tremendous value from the software through the marketing automation functionality.

    Marketing automation, while still requiring content for landing pages, drip programs, autoresponders, and more, doesn’t require fresh content. Companies can invest in content periodically, without having dedicated people on staff, and see a huge return on investment (ROI) from marketing automation. In addition to the ROI, there’s real benefit in sales and marketing alignment, closed loop reporting, and improved marketing accountability.

    The key takeaway: HubSpot understands the continual production challenges with content marketing and demonstrates value to customers via marketing automation, such that customers still have a strong ROI even without content marketing.

    What else? What are some other thoughts on HubSpot, marketing automation, and content marketing?

  • Notes from the HubSpot S-1 IPO Filing

    HubSpot just filed their S-1 to go public and I’m excited to dive into it. HubSpot has been in the B2B online marketing space slightly longer than Pardot and has awesome co-founders in Brian Halligan and Dharmesh Shah. Dharmesh is truly the king of content marketing with his excellent slide shows, best-selling book Inbound Marketing, and huge OnStartups.com community.

    HubSpot started out as a blogging platform before adding search engine optimization functionality and finally becoming a marketing automation platform. As HubSpot became more focused on marketing automation, Pardot and HubSpot started to see each other more often in the market and had a few partnership discussions before we ultimately decided we were heading down a path of direct competition.

    Here are notes from HubSpot’s S-1 IPO filing:

    • 11,624 customers and 1,900 marketing agency partners (pg. 1)
    • Focused on the mid-market (pg. 1 — this is a change from a few years ago when they were small business focused)
    • Revenue (pg. 2)
      2011 – $28.6 million
      2012 – $51.6 million
      2013 – $77.6 million
      2014 1H – $51.3 million
    • Losses (pg. 2)
      2011 – $24.4 million
      2012 – $18.8 million
      2013 – $34.3 million
      2014 1H – $17.7 million
    • Mid-market defined as companies between 10 and 2,000 employees (pg. 2 — this is a very broad definition of the mid-market)
    • Average revenue per customer is $8,823 per year (pg. 2)
    • 20% of customers outside the U.S. (pg. 4)
    • Professional services revenue (pg. 6)
      2011 – $2.8 million
      2012 – $5.7 million
      2013 – $6.8 million
      2014 1H – $4 million
    • One major risk factor is the inability of customers to create content to make blogging, social media, and inbound marketing in general worthwhile (pg. 10 — regularly writing good content is a serious effort)
    • 719 full-time employees as of June 30, 2014, up from 304 as of December 31, 2011 (pg. 12)
    • Accumulated deficit of $123 million (pg. 39)
    • More than 90,000 individuals with a free or paid Signals account used the Signals product during June 2014 (pg. 47)
    • 88.6% annualized subscription dollar retention rate (pg. 47)
    • $11,334 cost of customer acquisition (pg. 48 — it’s awesome that they are so transparent with their renewal rates and cost of customer acquisition)
    • $7.3 million in cash on hand and negative $22 million in working capital (pg. 60)
    • Great letter from the founders that describes the background of the business and the big vision (pg. 71)
    • Seven core principles of the HubSpot Culture Code (pg. 88)
      We are maniacal about our mission and our metrics.
      We empower every employee, at every level, to “Solve for the Customer”.
      We are radically transparent.
      We give ourselves the autonomy to be awesome.
      We are unreasonably picky about our peers.
      We invest in individual mastery and market value.
      We constantly question the status quo.
    • Venture capitalists own 66.3% (pg. 110)
    • Founders own 13.7% (pg. 110)
    • Co-founder/CEO owns 4.9% (pg. 110)
    • Note: The S-1 made no mention of competitors like Pardot and Marketo, which is unusual for this type of document.

    Overall, I expect this IPO to be very successful due to the excellent team, large market opportunity, current growth rate, and awareness of the company within the online marketing industry. Look for HubSpot to have a market capitalization in excess of $1 billion shortly.

    What else? What are some other thoughts on the HubSpot S-1 IPO filing?

  • Economics of Customer Onboarding Programs

    After talking about The Importance of a Customer Onboarding Program, it’s now time to talk about some of the economics of customer onboarding. Many Software-as-a-Service (SaaS) entrepreneurs don’t realize that customer onboarding costs have to be amortized over some period of time and that they affect the cost of goods sold (here’s a separate primer on SaaS cost of goods sold).

    Let’s say the customer onboarding costs are as follows:

    • 10 hours of manual labor and hand-holding, on average, for each new customer onboarding
    • $60 per hour fully burdened cost for the implementation team
    • $600 in total onboarding costs for each new customer
    • One year amortization period for the customer onboarding costs (this length of time is debatable)
    • $600 total cost, divided by 12 months, equals $50 per month for the first year in additional cost of goods sold

    So, if the SaaS service is $1,000 per month, the gross margin is reduced by 5% per month for the first year due to the onboarding program costs. Of course, customer success and happiness is much more important than gross margin, but it’s important to understand how onboarding programs play into the economics of the business.

    What else? What are some other thoughts on the economics of onboarding programs?

     

  • The Importance of a Customer Onboarding Program

    Early on in the life of Pardot we realized that many customers would sign up for the product only to struggle implementing it. Seeing this, we started requiring a $2,500 quick start package so that we could ensure the client had a successful onboarding. Unfortunately, it added serious friction to the sales process since the up-front fee often required multiple signatures. The solution: raise the monthly fee from $500 to $1,000 and include a quick start package at no additional charge for all customers. Sales took off dramatically and we never looked back.

    Here are the categories of the Pardot Quick Start Onboarding Package:

    • Project Planning
    • CRM Integration
    • Technical Setup
    • Marketing Asset & Integration Setup
    • Training

    After 30 days, the Pardot client is up and running with their core sales and marketing tools integrated, prospects tracked, and emails blasting.

    Customer onboarding is critical to the success of many Software-as-a-Service products and should be treated as a key part of the customer experience.

    What else? What are some other thoughts on the importance of customer onboarding?

  • The Ratio of Business Development Reps to Account Executives

    With the Rise of the Inside Sales Rep and the Sales Development Team, one of the most common questions that comes up is about the ratio of appointment setters to closers. First, a quick primer. Sales Development Reps/Business Development Reps (BDRs) were popularized by the 2011 book Predictable Revenue. BDRs use email and phone to prospect, qualify leads, and set appointments for Account Executives (AEs), which close the deals.

    Overall, the main goals is to have much more specialized functions on the sales team. Too often, expensive sales people are used to cold call (prospect), respond to inbound leads, set appointments, deliver demos, write proposals, and close deals. The modern approach is to have one team dedicated to prospecting (Business Development Reps), one team dedicated to following up with inbound leads (Market Response Reps), and one team taking the qualified leads to close (Account Executives).

    Now, back to the original question regarding the ratio of BDRs to AEs. Of course, every business is different, but one constant stays the same when thinking through the ratio of BDRs to AEs: the Account Executives should have as many Business Development Reps as necessary such that the AEs are only working active, qualified opportunities. Everything that takes place before an engaged lead is ready to start the buying process should be handled by the BDRs. More often than not, sales teams have too many AEs and not enough leads. One strategy in this common scenario is to let go of the low performers and use the money saved to hire more BDRs until the successful AEs are well fed.

    The next time someone says they want to hire more sales people, ask the hard questions and figure out if they really need Business Development Reps and not more Account Executives.

    What else? What are some more thoughts on the ratio of Business Development Reps to Account Executives?

  • Revolving Door Transactions and Strange Coincidences

    Back in 2005 I was talking to a friend’s uncle who had previously worked in the technology industry for a number of years. He shared with me a story that during the 1990s he worked for a software company in Atlanta where the owners of the business bought a building that was 50% occupied, signed a lease so that their own company would use the remaining 50% of the building, and then sold the building to new investors, all in the same day. This is known as a revolving door transaction where entrepreneurs buy a building in the morning and sell it in the afternoon for a significant personal profit.

    After almost 10 years that story has stuck with me and represents an opportunity that many entrepreneurs don’t consider. Only, it gets more interesting. I bumped into my friend’s uncle last night at an event at the Atlanta Tech Village after not seeing him for several years. We caught up for a few minutes and then he tells me that the Atlanta Tech Village is the building he worked in 20 years ago for American Software (NASDAQ:AMSWA). Not only that, the Atlanta Tech Village is the building that the entrepreneurs did the revolving door transaction!

    Life is full of strange coincidences and this is another interesting one.

    What else? What are some more strange coincidences you’ve encountered?

  • 2014 Inc. 500 Atlanta Companies

    Inc. magazine just released the 2014 Inc. 500 and there are several Atlanta companies on the list. As covered in 2013 and 2012, it’s great to see so many fast-growing firms in the area.

    Here are the Atlanta companies on the 2014 Inc. 500 list:

    • 147 – Residential Capital Management, 2,626% growth, $30.2m revenue
    • 178 – Apex Controls, 2,360% growth, $7.8m revenue
    • 180 –  Futurewave Systems, 2,343% growth, $2.8m revenue
    • 239 –  Expert Technical Solutions, 1,908% growth, $3.5m revenue
    • 305 – Clearleap, 1,510% growth, $9.8m revenue
    • 310 – CoolMiniOrNot, 1,495% growth, $6.2m revenue
    • 334 – Caduceus Healthcare, 1,385% growth, $6.0m revenue
    • 396 – StandBy Talent Staffing Services, 1,179% growth, $3.7m revenue
    • 401 – National Tax Credit, 1,176% growth, $3.4m revenue
    • 405 – Patientco, 1,167% growth, $3.0m revenue
    • 458 – Cloud Sherpas, 1,036% growth, $113.1m revenue
    • 467 – Mashburn Outdoor, 1,010% growth, $5.7m revenue
    • 483 – Premier Logic, 983% growth, $8.5m revenue
    • 489 – CATMEDIA, 970% growth, $4.6m revenue
    • 490 – STONE Resource Group, 969% growth, $9.0m revenue

    With 15 companies on the list, it’s a solid showing. I’d like to see more product-based tech companies on the list and expect things to change over the next 3-5 years.

    What else? What are some other thoughts on the 2014 Inc. 500 Atlanta companies?

  • The 7 Figure Club

    One of the initiatives we’re working on at the Atlanta Tech Village is bringing together different groups within the community to build relationships and help each other. Today we launched our newest group, the 7 Figure Club, for entrepreneurs within the Village that have either a million in revenue or have raised a million from investors. While one million in revenue or investment might seem arbitrary, it’s a nice milestone that represents customer traction or investor confidence. One million in revenue is also the requirement for the Entrepreneurs’ Organization.

    Slightly more than 10% of the Village is in the 7 Figure Club (21 companies). The format is a monthly lunch with the following agenda:

    • What’s going well
    • What’s not going well
    • Topical discussion (one topic per month e.g. fundraising, hiring, growth strategies, etc.)
    • Needs and leads (anything anyone needs help with or has something to help others)

    Overall, the club isn’t designed to replace an EO or YPO forum. Rather, it’s goal is to keep the largest companies in the Village abreast of what’s going on with each other and act as a regular meeting to help each other.

    I’m looking forward to participating in the 7 Figure Club.

    What else? What are some other thoughts on this type of entrepreneur group?

  • Fine Balance Between Being Comprehensive and Doing Too Much

    Earlier today at Atlanta Rotary we had the opportunity to hear Jeff Arnold, founder of WebMD and Sharecare, share some of this entrepreneurial lessons learned over the past 25 years. Jeff did a great job taking us through several of his experiences as well as talking about the some of the opportunities that lie ahead.

    Halfway through the talk Jeff made a comment that really stuck with me:

    There’s a fine balance between being comprehensive and doing too much.

    Personally, I’ve seen this challenge many times. As an entrepreneur, there’s a desire to please every prospect and customer. Only, that’s a formula for a frankenstein product. Entrepreneurs would do well to have a strong opinion of what will, and won’t, go into the product. When requests come up, figure how well they align with the vision of the product, and continually ask internally if 80% of the desired customers need the feature. Find the balance and build a comprehensive product that doesn’t do too much.

    What else? What are some other thoughts on the balance between being comprehensive and doing too much?

  • Helping Entrepreneurs that Want Feedback on an Idea

    One of the more common requests I receive from entrepreneurs is for feedback on an idea. Idea-stage entrepreneurs are always looking for external validation of their idea, and it’s often easier to talk to other entrepreneurs as opposed to finding potential prospects. My response right now is that I’m happy to help answer questions once they have 10 paying customers as my focus is on helping entrepreneurs get from 10 to 100 paying customers and not from 0 to 10. Yes, getting from 0 to 10 is where most entrepreneurs fail, but it’s also a good way to filter down to those that are making early progress.

    Here are a few recommendations for entrepreneurs wanting feedback on an idea:

    The takeaway is that entrepreneurs need to talk to potential customers of their product and not other entrepreneurs. Customer Development is hard work and the value has been well documented. Entrepreneurs that want feedback on an idea need to talk to prospects.

    What else? What are some other ways to help entrepreneurs that want feedback on an idea?