So Many Tries, So Many Entrepreneurial Failures

Recently, a friend was asking about entrepreneurial endeavors I’d tried over the years, and I realized it’d be fun to enumerate them and reflect on lessons learned. From starting a business, talking to customers, finding solutions, and working to build a sustainable business — every part of the entrepreneurial journey is a learning experience.

Here are some of the ideas I tried, in chronological order.

  • Lawn maintenance service – Enjoyed the work, only did it passively as jobs came in
  • Shareware software – Loved programming and fascinated by the idea strangers would pay for software over the Internet without talking to anyone
  • Local classified ads – Bought a second phone line and connected an answering machine for people to call in with their ads, placed printed classified ads in two local restaurants, realized quickly there wasn’t much demand
  • Sports cards dealer – Loved tracking the players, buying cards from different markets, and helping people complete their collections
  • Web design – Enjoyed the creative process of designing a site in Photoshop, crafting all the pages by hand (HTML + Dreamweaver), and delivering a finished product to the client
  • College textbook exchange – Provided a quality solution to students and learned there’s a number of structural challenges to changing the textbook market
  • College professor rating service – Students loved leaving ratings and reviews but a number of ethical questions arose and there was a lack of interest scaling it
  • College laundry service – Clear product demand but a number of logistical and pricing/margin challenges
  • College online food ordering – Built a working prototype but couldn’t get adoption from restaurants without point of sale integration (times are different now, 20 years later)

In hindsight, each idea played on something I was personally interested in and simply translated into a service for the market.

Every idea was a failure in that I wasn’t able to make it into a sustainable, profitable business.

Every idea was a success in that I created a product or service, brought it to market, and gained more experience.

The lesson: it takes a number of failures before a success. Find a problem, create a solution, and start a business — the more you try, the more you learn.

Compounding Revenue’s Value in the Future

When talking to entrepreneurs about revenue growth, I look to emphasize the value of compounding revenue now and how it plays out over an extended period of time. It’s easy to think that it’s no big deal that we missed our sales number for the quarter or had a lower renewal rate than expected. Only, when you really dig in, a lost dollar today translates into many lost dollars of revenue and enterprise value over the long run. Similarly, an extra dollar of revenue sold today translates into much more revenue and enterprise value over time.

Let’s look at an example. Say you were able to beat the sales plan and the net dollar retention plan adding an additional $1 million in new recurring revenue in a calendar year. With an extra $1 million in recurring revenue:

  • Year 1 after exceeding goals
    • Extra ~$800,000 to grow the business (assume 80% gross margin)
    • Hire two additional sales reps and increase marketing spend (assume 50% of the extra $800,000 goes to sales and marketing)
    • Add $1M of new annual recurring revenue from the new reps (assume the two reps each have a $500,000 quota and hit it)
  • Year 2
    • Extra $1,600,000 to grow the business (year 1 gross margin plus the gross margin added by the new reps assuming 100% net dollar retention)
    • Hire four additional sales reps and increase marketing spend
    • Add $2M of new annual recurring revenue from the new reps
  • Year 3
    • Extra $3,200,000 to grow the business (it keeps layering on the previous year!)
    • Hire eight additional sales reps and increase marketing spend
    • Add $4M of new annual recurring revenue from the new reps

In this example, by the end of the third year after the year of an extra $1M in annual recurring revenue, the business has added $8M of new annual recurring revenue. $8M of annual recurring revenue pays for dozens of employees and adds $40M – $80M of enterprise value in today’s market (assumes 5-10x run rate multiples).

The next time someone questions the importance of renewing an existing customer, or signing a new customer, remind them that $10,000 of recurring revenue today is worth up to $800,000 of enterprise value after three years. Every dollar counts.

The Email Inflection Point in the Product/Market Fit Journey

When we launched the initial marketing automation product for Pardot, the feature set was quite simple. We had a minimal analytics that would track the individual lead’s movement around the site, a basic form capture to collect contact information, rudimentary CRM integration to sync data, and that was about it. Over time we added core modules like landing pages, automation rules, complex CRM integrations, and dynamic customer journeys. Only, the initial plans didn’t call for email marketing.

In fact, we actively didn’t want to do email marketing. Who wants to be an email service provider (tools like Sendgrid didn’t exist then)? Who wants to deal with deliverability? Who wants to fight spammers? The initial strategy was to have integrations to Mailchimp and Constant Contact such that modules like the forms manager could trigger an autoresponder and an automation rule could trigger a 1-to-1 email.

Quickly, we realized something was wrong.

Our approach delivered a poor, incomplete experience to our customers. Email was too important to be siloed from the marketing automation system. Email was too powerful as a marketing channel to not be a first-class module.

After endless internal debates about email, we finally decided to become an email service provider. Now, we enabled email to be a core feature throughout the platform. Now, marketers didn’t have to switch between as many different systems to run their marketing programs.

Email was a major inflection point in our product/market fit journey. Prior, customers liked the software but our product/market fit was modest. After adding email marketing, and a few rounds of refinement, our product/market fit was excellent and customers raved about the solution.

Major strategy changes often seem daunting. By focusing on the customer, and going down a much more difficult path technically, we delivered a superior experience. And, in the end, that was one of the most important product decisions we ever made.

Time and Effort are the Greatest Barriers to Entry for New Markets

Back when we were pitching Pardot to VCs in an unsuccessful attempt to raise money, one of the more common questions was, “What are the barriers to entry?” Then, a more specific variation of this question would arise, “What’s stopping Google from assigning 100 engineers to this market and crushing you?” Both are legitimate questions and we’d counter with things like having a mini-brand, 100+ paying customers, strong product/market fit, and so on. One famous investor, who writes the excellent Above the Crowd blog, told us he wasn’t interested because there weren’t enough defensible network effects or marketplace elements to be interesting. Fair enough.

In hindsight, the answer to the barriers-to-entry-question is much simpler: until there’s a meaningful market, no big company is going to care. By the time the market is large enough to matter, the winners will have been established, and the massive tech companies will merely acquire one of the leaders. When a major tech company does enter a large existing market as a laggard, most often they abandon it a few years later (see Google Hire’s recent shut down notice). Why? The market it already saturated with viable solutions and competitive dynamics are too strong. For major tech companies it’s always better to buy than build for a new product offering.

So, with small-but-fast-growing markets as the ideal target for most startups, barriers to entry are almost non-existent. After talking to thousands of people about entrepreneurship, and seeing so few people start companies, I take a different view.

Time and effort are the greatest barriers to entry for new markets.

Creating a new company is hard. Expect 5 – 10 years of difficult work to build something viable.

Most entrepreneurs don’t have the time.

Most entrepreneurs aren’t willing to put in the effort.

With new markets, there’s no guarantee it will grow into a large, meaningful market. Some do, most don’t. Quite often, people think a market will catch on and grow fast, only to have it fizzle out. That’s a big risk, and people are generally averse to risk.

The next time someone asks about barriers to entry for a new market, remember that it’s rarely an issue. It’s not that an entrepreneur couldn’t enter the market, it’s that there are so few entrepreneurs out there, and even fewer are going to commit the time and effort.

The Recurrent Competitor Worry

Back when starting Pardot, we only knew of one existing competitor: Eloqua. After getting into the marketing automation market (then called demand generation followed by lead management), we quickly found competitors that were established but subscale in Austin and Minneapolis.

Then, as with any small but fast growing market, more competitors emerged. And more emerged. And more emerged. The number of new competitors was staggering.

I was worried.

Two years in this new upstart called Genius emerged. With slick marketing, a clever edge to their product, and tons of VC money we were nervous. A couple quarters went by and we kept losing deals to them — we were losing the fight.

Then, unexpectedly, something happened. Genius essentially went away. We were no longer losing competitive deals. Customers they had signed were defecting and coming to us. While they were great at raising money and customer acquisition, their product wasn’t meeting the needs of the customer. No matter how hard they tried, and how much money they threw at the technology, they weren’t able to deliver a compelling product.

One competitor down.

But, how were we going to compete with all the players in the market?

I was asking the wrong question.

The focus must be on the customer.

The focus must be on delivering an amazing experience.

The focus must be on delivering incredible value.

Staying close to the customer is what matters most, not competitors. Yes, being cognizant of competition is prudent, but competitors are outside your control. Delighting the customer is within your control.

With hindsight, I realized I worried too much about the competition. I obsessed over them. I feared them. Only after experiencing continual success in the market, and seeing many competitors flail, did I come to understand that this was a normal part of the entrepreneurial journey. Competitors will always come and go — I needed to redirect my worrying to serving the customer.

In the end, the customer decides who wins.

Serve the customer.

Belittled for Not Raising Venture Capital

It was late Summer of 2012 and we were out at the annual Dreamforce show in San Francisco. In addition to having a booth at the show, I was out there meeting with partners and customers. For several months prior, we had been working on a distribution relationship with a large tech company that’d I’d always liked and bought a number of laptops and computers from over the years (their name rhymes with “Smell”).

Eagerly, I went to meet with their cloud software division located in the heart of San Francisco to wrap up a distribution agreement so that their customers could buy our software on one bill with everything else they sell. We exchanged pleasantries about being in town for the big show and the partner manager laid right into me.

Partner manager: How much venture capital have you raised?

Me: None.

Partner manager: Why not?

Me: We don’t need it. We’re bootstrapped, north of $10M recurring, and doing great.

Partner manager: You should raise venture capital.

Me: We don’t want to.

Partner manager: You’ll grow much faster with venture capital.

Me: We’re already growing super fast.

Partner manager: Every successful software company raises venture capital.

Me: We don’t need it.

Partner manager: You’ll be a better company if you raise venture capital.

Me: I feel really good about our company.

After this exchange, I was fired up. Our company was amazing! And, here I was, being belittled for not raising venture capital. This partner manager had been so brain washed by the Silicon Valley narrative that she couldn’t appreciate that there were other paths to success.

Venture capital isn’t right for everyone. In fact, it’s wrong for 99% of entrepreneurs.

See people where they are and work to understand their position. Even if you don’t agree with them, the best thing you can do is work to leave with a strong rapport and mutual understanding.

One final note: it was all I could do to bite my tongue during this conversation with the partner manager as we’d already signed an agreement to sell our company for ~$100M, and it would be announced shortly. Just wait until she reads the announcement!

Disrespecting a Team Member is Never Acceptable

I was two years in as a full-time entrepreneur and we were meeting a potential customer in a small nondescript building less than a mile from our office. Our startup was still struggling and I, as an eager first-time entrepreneur, was chasing any opportunity regardless of fit. Helping me that day at our sales meeting was our lead engineer, and after a few pleasantries, we started talking shop with the prospect.

Quickly, as the conversation turned technical regarding product capabilities, our lead engineer dove in regaling all the details. Only I, as a sales-oriented entrepreneur, thought our lead engineer was focused too much on the minutia and not enough on tying the functionality back to the customer’s needs. So, in an expression of poor leadership, I interrupted him mid sentence and took the conversation a different direction.

Another topic with the prospect, another detailed comment from our engineer, another poor interruption from me going a different direction — on and on it repeated.

Only after the meeting, as we got into the car, the lead engineer shared with me how little he felt. How I had unprofessionally talked over him. How poorly I had reflected our company in front of the prospect. How miserable I was in the setting.

It was all true.

Now, 16 years later, I still remember this lesson. I did an unacceptable job setting expectations with the lead engineer before the meeting. I did an unacceptable job showing respect to the lead engineer in the meeting. I did not lead, I trampled.

Disrespecting a team member is never acceptable.

The next time you have the urge to talk over someone, let them finish. Hear them out. Reflect on their position. Treat them with respect — it’s always the right thing to do.