The Entrepreneur’s Financial Sacrifices

Over the last two weeks multiple entrepreneurs volunteered to me that they emptied their 401k retirement savings to fund their startup. While that financial sacrifice seems extreme to many people, to some entrepreneurs it’s the only way forward.

Reflecting on my journey, at one point I had $50,000 in personal credit card debt for Hannon Hill. Our company was doing well, but still sub-scale, and we desperately needed to invest in certain areas. I made the choice, fully self aware, that if things went badly I was on the hook for the debt. Yet, I pushed forward with the full belief that we’d make it and the company would thrive. Everything turned out well but it was scary for a period of time.

Entrepreneurs make a number of financial sacrifices, and here are a few of the more common ones:

  • Salary Cut – Taking the plunge from being employed at a regular job to being a no-income entrepreneur is brutal. This is often the main reason people that want to be entrepreneurs don’t do it.
  • Credit Card Debt – Banks aren’t in the business of lending unless there’s already a valuable asset in place so many entrepreneurs resort to credit cards. I like to think that Capital One is the number one non-family funder of entrepreneurs in the U.S.
  • Retirement Plans – Programs like 401k plans incentivize people to save for retirement, but they also act as emergency savings accounts which can be tapped for any reason at great penalty. Entrepreneurs use these retirement plans as seed capital.
  • Skipping Mortgages/Student Loans/Other Required Payments – Some entrepreneurs purposefully skip payments of other loans or bills in an effort use the temporarily saved cash to invest in the business, often resulting in a negative impact to their credit score. One entrepreneur would purposefully blur an account number on their payment checks so that the check couldn’t get cashed right away, thereby buying more time to be able to make the payment (not ethical but did work).

Financial sacrifices are a difficult and challenging part of the entrepreneurial journey. As with most things, the more struggle to make it succeed, the more rewarding the outcome.

What else? What are some more financial sacrifices?

5 Traits of the Most Successful Entrepreneurs

Yesterday I was reflecting on some of the most successful SaaS entrepreneurs I’ve had the chance to work with – Rigor, SalesLoft, Terminus, Calendly, Teamworks – and what they had in common.

Immediately, five traits came to mind:

  • Big chip on their shoulder – All of these entrepreneurs had a prior startup that failed – every single one. Now, there was something to prove.
  • Unwavering belief they’re going to make it work – With a high locus of control (very rare!), these entrepreneurs truly believe they can control their outcomes.
  • Irrational tenacity – Hard work and effort are critical, especially in conjunction with the overall belief that success is possible (too many people believe they’ll be successful without putting in the requisite work).
  • Extreme resourcefulness – Begging people for help, figuring out how to do something at 1/10th the normal cost, and constantly moving things forward with limited resources are part of the formula.
  • Continuous desire to learn – Regularly asking for help, reading books/articles, and sharing experiences (EO, YPO) come naturally to these entrepreneurs

Entrepreneurship is terribly difficult. The most successful entrepreneurs I know have an innate quality where they just know they’re going to make it work, no matter how hard it gets.

What else? What are some more traits of the most successful entrepreneurs?

Excellent Meetings and Communications Recommendations from Tesla

An internal Tesla memo from Elon Musk on Tesla Model 3 Production was just leaked to the public. In it, there’s an excellent section on productivity, specifically around meetings and communications. From the memo:

– Excessive meetings are the blight of big companies and almost always get worse over time. Please get of all large meetings, unless you’re certain they are providing value to the whole audience, in which case keep them very short.

– Also get rid of frequent meetings, unless you are dealing with an extremely urgent matter. Meeting frequency should drop rapidly once the urgent matter is resolved.

– Walk out of a meeting or drop off a call as soon as it is obvious you aren’t adding value. It is not rude to leave, it is rude to make someone stay and waste their time.

– Don’t use acronyms or nonsense words for objects, software or processes at Tesla. In general, anything that requires an explanation inhibits communication. We don’t want people to have to memorize a glossary just to function at Tesla.

– Communication should travel via the shortest path necessary to get the job done, not through the “chain of command”. Any manager who attempts to enforce chain of command communication will soon find themselves working elsewhere.

– A major source of issues is poor communication between depts. The way to solve this is allow free flow of information between all levels. If, in order to get something done between depts, an individual contributor has to talk to their manager, who talks to a director, who talks to a VP, who talks to another VP, who talks to a director, who talks to a manager, who talks to someone doing the actual work, then super dumb things will happen. It must be ok for people to talk directly and just make the right thing happen.

– In general, always pick common sense as your guide. If following a “company rule” is obviously ridiculous in a particular situation, such that it would make for a great Dilbert cartoon, then the rule should change.

Four Pivots Needed – Survive and Then Thrive

Recently I was talking to an entrepreneur about his journey. Four years ago they started out knowing exactly what was going to be successful: a specific training product that his last employer could really use. Only, things didn’t go according to plan. It turns out that the employer didn’t actually want the product. The perceived pain was the typical nice-to-have and not the critical must-have.

From there, they pivoted to the a related idea. Failure.

Next, it was another adjacent idea. Failure.

Finally, on the fourth pivot, and 3+ years of work, they started to hear feedback from customers that this new product solved a crucial problem. Success. Product/market fit was achieved quickly and the startup is now scaling nicely.

The early years of a startup is about surviving. A conversation here, an innovation there, and with enough customer discovery and iterations, finally finding a market opportunity. Make sure and survive in order to thrive.

A Failure at Raising Money

Back in 2009, we were in our third year of Pardot and things were looking good, really good. We had just cracked $1M in annual recurring revenue (a big milestone!) and went out to the market to raise money from venture capitalists. Only, we botched the process (actually, it was all my fault). Some of the mistakes:

  • Made the timeline to raise money too loose such that we were at different phases with different investors over the course of several months (best practice is to run a serious process over 4-6 weeks)
  • Made the personal time commitment too loose such that I was still 80% on the business and 20% fundraising when it should be the other way around
  • Met with 29 VCs from Atlanta to D.C. to Boston to Silicon Valley and didn’t do a good job of lumping meetings together resulting in lots of flights with only one or two meetings
  • Personally prepared the financial forecast without outside expertise resulting in a session with a VC where I was being grilled why gross margins were going down three years out instead of up, and I wasn’t prepared
  • Not really understanding how to put more money to work other than pointing to our cost of customer acquisition relative to payback period and saying we’d put most of the money into sales and marketing (a bottom-up SaaS revenue forecast is the way to go)

In the end, it didn’t matter. After doing some spreadsheet jockeying, it was clear that we were better off continuing to bootstrap the business as we couldn’t see a 5-to-1 payback on raising money (e.g. invest $1 and make the business $5 more valuable). Raising money doesn’t ensure success, but if you are going that route, don’t make the same mistakes we made.

What else? What are some more lessons learned from raising money?

Focus on One Solution for One Market

Recently, an entrepreneur reached out to get some thoughts on going after two very different segments of the same market. As an example, think about a product that’s sold to one group for hundreds of dollars per year and another group for hundreds of thousands of dollars per year. My recommendation was to focus on one solution for one market.

The old adage still rings true: most startups die of indigestion, not starvation. Meaning, entrepreneurs are optimistic and eager to chase a number of opportunities, yet by going after multiple markets with multiple solutions, the chance of success goes down dramatically. Building a product that 10 customers love is incredibly difficult, so why make it twice as hard going after two markets or having two products?

Over time, most products and markets do run out of steam and it does make sense to expand. Too often, entrepreneurs give up early on a market and don’t go as deep as possible. If the market is growing double digits for the foreseeable future, it likely makes sense to stay the course. If the market changes, or there’s a new opportunity that’s at least 10x better, changing directions is an option.

Entrepreneurs should focus on one solution for one market and delight the customer.

Signing the First Customer

Yesterday I had the opportunity to interview Craig Hyde of Rigor at our Simply SaaS Forum. Of course, I asked one of my favorite questions: how did you sign your first customer? Craig recalled spending eight months full-time building their product before signing KontrolFreek as their first customer for $50/month. Now, it wasn’t much money, and frankly, KontrolFreek wasn’t sure it was even worth purchasing. Then, as timing would have it, the KontrolFreek site went down and Rigor promptly notified them using their digital experience monitoring platform. Rigor showed when the site started to degrade as well as when it came back online — all data delivered to their ecommerce vendor to enforce the SLA and work to ensure it doesn’t happen again. After that, KontrolFreek was a customer for life and Rigor was off the races telling that story and signing up customers.

For Pardot, our experience signing the first customer was different in that the product was built around our sister company, Hannon Hill, from the beginning. By being in the same office, we could ask questions face-to-face and move fast listening to the feedback and desires of the marketing and sales teams. While things started slow, as they almost always do, once it got moving and we figured out that the product created 10x the value of the alternative (status quo), high growth followed.

Signing the first customer is critically important for a number of reasons:

  • First, by exchanging money — even a modest amount — the relationship becomes real and the feedback becomes serious. Make sure and charge something so that it’s a bonafide customer/vendor relationship.
  • Second, too often entrepreneurs build their product in vacuum without feedback and input from the customer. By following the customer discovery process and signing a customer quickly, the product is going to achieve product/market fit much faster.
  • Third, while entrepreneurs believe in their vision, it can be lonely as that vision is untested and unconfirmed. The sooner that first customer buys into the product, and shares great feedback, the more confident the entrepreneur is that he or she is on the right path.

Signing the first customer is one of the first micro-milestones in a startup, and often one of the most important. Entrepreneurs should start talking to potential customers even before starting their startup, and work to close a paying customer as quickly as possible. Remember: nothing happens until something is sold.