Seeing is Believing as a Potential Entrepreneur

Last week I was talking to a soon-to-be startup founder and I asked why he wanted to start this new company. Easy, he said — after working at other startups, and the most recent one being a success, he believes he can do it. Watching the founders in action showed him that he has the skills and work ethic.

Seeing is believing as a potential entrepreneur.

Many stories have been written about the quest to run a mile in less than four minutes. No person had achieved this feat until Roger Banister in 1954. Once he did it other runners realized it was possible and many more followed suit. Today, over 1,400 people have done it.

Seeing is believing for human potential.

As an entrepreneur, it’s one thing to read about startups on TechCrunch or watch founder stories on YouTube, but it’s an entirely different, more powerful experience to see another founder succeed. Seeing the founders in action shows they’re merely human, like everyone else. They had an idea, entered the arena, and made it happen.

Want to be an entrepreneur?

Join an entrepreneur group.

Work at a startup.

Seeing other entrepreneurs succeed is one of the most powerful forces for potential entrepreneurs.

Start With Customer Delight

This past week I had two conversations with entrepreneurs that boiled down to the same thing: every successful venture starts by delighting a customer. Simple, right? Wrong. Entrepreneurs love dreaming about the future, how the world should work, and what needs to be created. Only, as the creator of the idea, it’s easy to believe things should function a certain way.

We should sell to job titles X, Y, and Z because they’ve always been the buyers.

We should avoid doing X because it’s never worked for other companies.

We should charge X to ensure Y gross margins.

We shouldn’t spend more than X to acquire customers.

We should avoid custom work and one-off services as they aren’t scalable.

None of it matters if customers don’t love the product. Put another way, don’t optimize the business model around what makes a “good business.” Instead, optimize the business model around customer delight and then figure out the rest.

Start with customer delight. Without happy customers, nothing else matters.

More Capital Results in More Startups

For as long as I can remember, I believed that the amount of capital in a startup community was driven exclusively by the quality of the local startups. Want more capital? Build better startups. Now, I believe I was wrong and more capital results in more startups.

Many years ago when we tried to raise money for Pardot, we thought we’d checked all the boxes. Great market. Great customer base. Great growth rate. Yet, capital was still incredibly hard to come by. I didn’t feel our difficulty raising capital was a function of local capital as we pitched investors from Boston to Silicon Valley. Our difficulty was because we didn’t do an amazing job convincing investors we’d build a big business. Regardless of our fundraising challenges, our community had limited capital and we looked nationally.

Fast forward to today and our community is brimming with capital and startups. Seed stage investors have raised over $100M, which is an enormous amount when the check sizes are often $250,000. Coupled with all the investors, there’s a commensurate number of pre-accelerators, accelerators, university initiatives, and scale up programs. Startups are everywhere.

Investors have to put capital to work in order to earn their fees and profits (ideally!) from their own investors. If there’s more seed stage capital now, which there is, it translates into more startups raising that type of capital — the money has to go somewhere.

But where are the new startups coming from?

A few ideas:

  • Science Projects – A couple developers put something together on nights and weekends to demonstrate a prototype. Before, they’d have to have some traction to raise money. Now, it’s a less of an issue and science projects are getting funded.
  • Spin Outs – A team within a startup identified an unrelated issue and started building a solution. After a few conversations, they decide to spin it out as a new startup and raise capital.
  • Bridges – A young startup is making progress, but not enough to raise a big new round. Instead, investors do a bridge round in an effort to keep things going with an eye towards hitting a meaningful milestone.
  • Less Tech – Before, most startups were software/Internet businesses. Now, more have a tech component but aren’t primarily tech, and are raising money from tech investors.
  • Startup Programs – Accelerators and other community programs are achieving their intended function by helping startups raise money at higher rates.

Put simply, investors take more risks now. More ideas and “projects” are getting funded. More programs are prepping startups to raise money, and succeeding in their efforts. It’s a great time to be an entrepreneur and the capital is flowing.

More capital does equal more startups. The money has to go somewhere.

Complexity of Startup Messaging

Last week, during two separate conversations with entrepreneurs, it was offered up that their startup’s messaging was too complicated. Tons of jargon, buzzwords, and technobabble were attempting to drive home a particular feature set and positioning. Only, it was doing the opposite.

More complexity is a failure to distill messaging down to its essence.

More complexity is a crutch for not taking the time to present what really matters.

More complexity is the easy way to avoid being uncomfortably narrow.

In school, we’re told to do assignments where you have to write 1,000 words. Volume of words is a primary driver of the output. More words is conferred as more value. In business, it’s easy to fall into that trap.

In lieu of more words, the focus needs to be more clarity. More thought over more verbosity. More crispness over more jargony.

The next time you describe your product, competitive position in the market, or value add, reduce the complexity of the verbiage. Increase the understandability. Make it clear.

The Hunt for Authentic Demand

There’s a never-ending debate in the entrepreneur world: build it and they will come or demonstrate authentic demand first before building it. The first approach — build it and they will come — a.k.a. the “Field of Dreams” approach is the most common. Inspiration for a new idea hits an entrepreneur and they work to bring it to life. Entrepreneurs that study the Lean Startup take a more modern approach whereby customer discovery is employed to truly uncover a meaningful pain or opportunity before building a solution. Customer discovery yields better outcomes but there are plenty of pros and cons with each approach.

Entrepreneurs should start with The Mom Test: How to talk to customers & learn if your business is a good idea when everyone is lying to you and unlearn their natural tendencies of leading the witness during customer discovery as well as being too broad with the initial idea. Entrepreneurs are naturally optimistic and eager to get to validation. Most people want to be supportive and say it’s a good idea regardless of whether they’re the ideal customer or having any expertise to back it up. Asking harder questions and seeking objective feedback takes more work, and delivers better results.

Once the basics are in place, it’s time to hunt for authentic demand. Authentic demand represents prospects that want to buy something but have no options — there’s an unfulfilled market need. The hunt for authentic demand is no different than a sales rep looking to build a pipeline, and that’s precisely how entrepreneurs should treat it. Here are a few sales tactics to use in the hunt for authentic demand:

  • Cold Calling – Pick up the phone. Call the people that fit the ideal customer profile. Ask great questions. Yes, most people don’t like answering the phone but there are still plenty that do, especially in certain industries.
  • Outbound Emails – Email is easy, fast, and effective. People respond to unwanted email when the message resonates and the pain is real.
  • LinkedIn InMails – More expensive than email but often more effective, LinkedIn InMail works. Tailor the message. Find the authentic demand.
  • Social Media – Follow the ideal buyers. Understand their view of the world. Find a connection point and make the ask.
  • Networking – Talk to anyone that’ll listen — friends, family, co-workers, etc. Share the story and ask for intros.

Treat the hunt for authentic demand like a sales process. Come up with a goal — say 100 activities a day — and develop a system. Then, work the system. The more experiments and activities, the more certainty that authentic demand is real (or non existent and it’s time to move on). If there’s authentic demand, and the hunt was a success, the greater the chance of the startup succeeding.

Start with the hunt for authentic demand.

Big Markets Continually Create Opportunities

Last week I was reading through the DigitalOcean S-1 IPO filing and seeing their cloud hosting business at $357M of recurring revenue growing 25% year-over-year reminded me how large, fast growing markets continually create opportunities.

At Pardot, for most of our run with the business, we used SoftLayer for our cloud hosting. At the time, SoftLayer was the up-and-comer that primarily did dedicated hosting with a strong price-to-feature ratio. Rackspace was the much larger player in the industry commanding a premium and differentiating via their customer service model.

Today, SoftLayer and Rackspace are much smaller players compared to the juggernauts of Amazon Web Services, Microsoft Azure, and Google Cloud. From the outside looking in, it felt like the market was wrapped up. How would a relatively new startup like DigitalOcean compete with three trillion dollar companies?

From the DigitalOcean S-1 (page ii):

DigitalOcean was founded with a focus on creating simple solutions that developers love. Our mission is to simplify cloud computing so developers and businesses can spend more time creating software that changes the world. We estimate there are approximately 100 million SMBs globally today and 14 million new businesses started each year across the globe. We believe DigitalOcean is the perfect place for them to start, get lift-off and build their businesses.

DigitalOcean S-1 page ii

For DigitalOcean, it was “simple solutions that developers love.” The early days of Amazon Web Services were focused on developers as well, but back then the technology was significantly more complicated and difficult to use. DigitalOcean nurtured a loyal community of developers with simpler tools and a stronger focus on community. Now, nine years later, it’s blossomed into an IPO-scale business.

Big markets continually create new opportunities. Even with major incumbents that seem to do it all, new areas of opportunity emerge, and the bigger the market, the more opportunity a small slice represents.

Startup Valuations in the Time of the Everything Bubble

Last week I was talking to a prominent investor and I asked about the current state of the investment climate. He said that startups a year ago raising money at 30-50x revenue were off limits to his firm and today they’re commonplace. Hearing this, it made me think of Fabrice Grinda’s excellent Welcome to the Everything Bubble.

Ten years ago, a hot, fast growing SaaS company would get a 6-8x run-rate valuation (see ExactTarget at IPO in 2012). Then, in the last 4-6 years, hot, fast growing SaaS companies moved to a 10-12x run-rate valuation (see Zoom raising $100M at a $1B valuation in 2017). Now, there are dozens of public SaaS companies trading north of 20x run-rate and plenty trading north of 30x run-rate (see BVP Cloud Index). What gives?

The main factors:

  • Market Size – The total addressable market for SaaS is much larger now, providing more confidence that startups can grow to a scale even bigger than previously anticipated.
  • Digital Transformation – COVID has accelerated the adoption of many SaaS products as companies have been forced to work in a distributed fashion, driving up growth rates.
  • Interest Rates – With the Fed interest rate effectively at 0%, the bar for a quality rate of return has been dramatically lowered, making investors willing to pay a higher price to achieve the same outcome.
  • Money Supply – With so many stimulus dollars flooding the system, and not a corresponding drop in overall incomes, the money has to go somewhere, and many people have put it in the stock market, thereby driving up valuations.

Ultimately, I think about it as a function of startup growth rate and how many years of future growth an investor is willing to pay for now. Let’s say long term, in a normal financial environment, SaaS companies are worth 4-8x revenue because of great gross margins, ability to have high free cash flow margins, predictability of business, growth expectations, etc. If a SaaS company is expected to grow 100% top-line in the next 12 months, and grow 80% in the following 12 months (growth rates typically decline such that growth is 80-85% of the previous year’s growth, depending on a myriad of factors), there’s some basic modeling to look at potential valuations:

  • Year 1
    • $10M ARR
    • 100% expected growth rate
  • Year 2
    • $20M ARR
    • 80% expected growth rate
  • Year 3
    • $36M ARR
    • 60% expected growth rate
  • Year 4
    • $58M ARR

Assume at the end of 36 months, the $10M ARR SaaS startup will be at $58M ARR with a trailing twelve months growth rate of 60%. Assume, for simple math, it has a constant future valuation of 8x run-rate (growth rate will slow but economies of scale will expand). At the end of 36 months, it’ll be valued at $464M ($58M x 8).

Now, take different hypothetical valuation climates:

  • Ultra Hot – 30x run-rate representing a $300M valuation
  • Hot – 20x run-rate representation a $200M valuation
  • Great – 12x run-rate representing a $120M valuation
  • Good – 8x run-rate representing an $80M valuation

If you could predict the future, and know with certainty the outcome, whether investing at 8x run-rate or 30x run-rate, all scenarios generate quality returns. Reality is much more complicated, but as interest rates go down and availability of money goes up, there are still worthwhile returns even paying what appears to be exceptional valuations.

SaaS valuations are part art and part science. In the age of the Everything Bubble, as long as there are good returns to be made paying ultra hot valuations, looking for high multiples to persist.

Missed the Internet Wave

Last week I listened to Matt Mullenweg of Automattic/WordPress on The Past, Present, and Future of the Internet. In the interview he talks about how early in his career he felt like he missed the wave of the Internet revolution. Hearing his story brought back my own feelings of missing the Internet wave. For me, I was in college during the dot com boom and subsequent bust. Because there was so much startup activity — tens of thousands of ideas and billions of funding — it seemed like every concept worth trying was already played out.

I had missed the boat, or so I thought.

What I failed to understand was that while many of the first-order startup ideas like buying books online (Amazon.com) and bidding on online auctions (eBay) were immediately doable, the second-order startup ideas would take longer to be viable. Much longer.

Even when it’s obvious there’s a better way, inertia is an incredibly powerful force. People and infrastructure are static by default. Most people don’t wake up thinking how they’re going to make major changes to how they do things. Change is constant but generally avoided.

The biggest second-order wave I’ve been lucky enough to be part of is the Internet as enabler for significant productivity enhancements within sales and marketing. There’s no way I could have seen the wave in college as I had didn’t have any experience in sales and marketing. With time, it became apparent that the “normal” way of acquiring customers was cumbersome and inefficient compared to what the Internet enables. From Pardot (marketing automation) to SalesLoft (sales engagement) to Terminus (account-based marketing) to Calendly (scheduling), these only touch select areas of customer acquisition, but the market is so massive, that these are all meaningful fast-growing businesses.

I missed the first wave, but rode a second wave created from it.

Don’t assume all the opportunities are done and make sure you are in the arena.

Uncomfortably Narrow at Product Launch

Recently an entrepreneur was talking about his new startup and how they were “uncomfortably narrow” with the feature set at product launch. For years we’ve been talking about the minimum viable product and “if you weren’t embarrassed by your product at launch, you waited too long.” Both drive home the point that entrepreneurs often build too many features for too many people before launch, thereby reducing their chance of success (too much capital burned, code base slowing down development, failure fatigue, etc.)

Ever since hearing the term “uncomfortably narrow” it’s been rattling around in my head. Entrepreneurs by their very nature are optimists, ready to resourcefully will their ideas into the world. Something that is uncomfortable narrow is, by definition, less than what is desired.

Fewer features. Fewer modules. Fewer use cases.

Entrepreneurs want to build more. Hence the internal conflict around purposefully limiting the product and making it uncomfortably narrow.

Getting a potential customer to say “yes” is much harder than saying “no.” Thus, the thinking goes that more features are needed to overcome these sales objections. While that can be the case, in the early days that’s often code for “your product doesn’t solve my core issue.”

Instead of adding more features around something that doesn’t solve the core issue, which is the normal approach, the better route is to be uncomfortably narrow and just solve the core issue. Then, once the customer is happy, add new functionality around it. This might mean a modest iteration or a serious pivot to build a valuable core.

Entrepreneurs should be uncomfortably narrow at product launch, and stay that way until it’s clear their limited feature set has provided customers something truly valuable.

With happy customers, and the start of product/market fit, only then is it time to expand the functionality. Start uncomfortably narrow at product launch.

Calendly as the World’s Scheduling Platform

With last week’s news that Calendly raised a $350 million round at a $3 billion+ valuation, the largest venture round in Atlanta’s history, a number of people reached out to say congratulations. Of course, all credit goes to Tope Awotona and his team for building such an incredible business.

After the kudos, the most common question is, “How can the company possibly be so valuable?”

Easy, scheduling is a universal challenge.

Think of every job function that interacts with other people. Wait, that’s nearly every job function. Now, think of the last time it was a challenge to coordinate calendars for a meeting. Hmm, that’s all the time. Software is uniquely suited to make this problem go away. Calendly does this for more than 10 million people every month and that number is growing fast, super fast.

But, naturally, it wasn’t always this way. Every entrepreneur starts the same way — taking that first step. Tope shares his incredible personal and professional journey on How I Built This With Guy Roz — Calendly: Tope Awotona. Devastating family challenges. Lots of trial and error. Great vision. Amazing execution. Growth, growth, growth.

Congrats to Tope on building an iconic business and making millions of peoples’ lives easier.