Testing a thesis and iterating quickly is one of the central tenants of lean startups. One of the ideas that lean startups should also employ is reaching out to many different potential types of customers while they build the product with feedback from a core group. Spraying and praying, based on educated guesses, isn’t employed as much as I would have expected.
The idea is pretty simple. Take the core value proposition of the product, with feedback from the potential prospects who’ve helped guide development, and start reaching out to other groups that might be a good fit. Ideas to try include:
Related industries/verticals
Different job titles within those industries
Factors like revenue size, number of employees, and geography
The idea is to pick out chunks of 25 contacts, pulled from LinkedIn/Jigsaw, in each potential area and start talking to people. Over time, patterns and fruitful opportunities will emerge. Once momentum has been achieved in an area, double down on it and maximize the value.
What else? What are some other ways to find potential customers?
After reading Michael Lewis’ latest book, The Big Short, this weekend it got me thinking more about junk bonds. Michael Lewis referenced his first book, Liar’s Poker, which chronicles the rise of the junk bond industry at Solomon Brothers, several times in the new book. Ted Turner’s autobiography, Call me Ted, talks about how junk bonds were the only way he could finance the growth of his empire without giving up control of his namesake business.
Why don’t we see the equivalent of a junk bond industry for startups?
Financing for startups typically revolves around angel investors (three Fs – friends, family, and fools) and venture capitalists with the occasional bootstrapper thrown in. I don’t see junk bonds working for pre-revenue companies as bonds are predicated on the ability to pay interest as well repay the whole amount at maturity. But for startups that have moved from the seed stage to early or growth stage (e.g. at least $1 million in revenue), knowing the gross margins for software and SaaS companies are typically north of 70%, there should be opportunity for junk bonds (e.g. high interest loans) to finance growth. The bonds would be senior debt such that failure to repay or refinance the bonds would potentially turn ownership of the company over to the bond holders, there’s sufficient collateral in the form of company equity to back the financing.
Here are a few reasons why we don’t see a junk bond market for startups:
Reporting, auditing, and other controls for startups are typically weak giving little transparency to potential financiers
Many technology startups that reach $1 million in revenue already have investors and are on the investor train (e.g. once you raise institutional money, and things are going well, you’re going to likely raise more and more rounds of equity financing)
There are so few startups looking for this type of financing that connecting the buyers and sellers would be prohibitively expensive
We’re not going to see a junk bond market for startups anytime soon but I believe there’s a need in the market for profitable, fast-growing startups to be able raise debt financing without collateral (e.g. real estate or physical assets) backing it up.
What do you think? Is there a market for startups to do debt financing with asset-lite businesses?
Several years ago a friend of mine gave me the book The Ultimate Question as a colleague of his at Bain had written it. After reading the book we immediately started to implement it as part of our quarterly client check-in calls. The Ultimate Question, according to the book’s author Fred Reichheld, is as follows:
Would you recommend this product/service to a friend or colleague?
The theory is that it isn’t whether or not a customer is happy but rather how likely they are to rave about you to others. Too often people will say they are satisfied when they are indifferent or don’t actually care. The most profitable and successful companies, like Apple and Google, have the most rapid fans.
Calculating the net promoter score is fairly easy (see this online calculator). Ask customers to answer The Ultimate Question on a scale of 0-10 with 10 being the highest. Once you have the scores, categorize the responses into promoters (9-10), passives (7-8), and detractors (0-6). To determine the score, take the percentage of promoters and subtract the percentage of detractors (the percentage that are passives are ignored). That’s it. Companies that score above 75 are considered excellent, and yes some companies have negative scores.
My recommendation is to consider using net promoter score as way to measure how successful your company is with your customers.
Several times now I’ve said that a great corporate culture is the only sustainable competitive advantage. How do you define a great corporate culture? Here’s how we define and measure our culture to determine if we are doing a good job:
We measure ourselves against the core foundation of good work, good people, and good pay:
Good work – fun, interesting, and challenging
Good people – positive, self-starting, and supportive
Good pay – well above average compensation with strong benefits
We have an anonymous quarterly survey sent to all employees asking if they agree or don’t agree that we meet the core foundation (last quarter we had 100% somewhat agree or agree and we typically have 92%+ agree) as well as asking the Ultimate Question (how likely are you to recommend this as a place to work to your friends)
We measure employee turnover and typically only have one or two employees leave per year
We require unanimous consent for any new hires (anyone in the hiring process can say ‘no’ and the candidate will not move to the next round)
Defining a great corporate culture is hard. We’ve set out our own standards and methodology and feel confident we have an awesome corporate culture.
Entrepreneurs are typically half-glass-full types of people and I’m no exception. I have much to be thankful for and Thanksgiving is a great time to reflect. One of the best parts of being an entrepreneur is that there are so many opportunities everywhere you look.
I’ve mentioned most of these before but it is important to give thanks as a company. Here are a few of the things we do to give thanks and celebrate our success:
Thanksgiving pot-luck lunch the day before Thanksgiving
Weekly catered lunches (free food Fridays)
Monthly heroes ($100 cash plus a cool lawn ornament for the month)
Quarterly celebrations (e.g. Braves game, bowling, Piedmont Park picnic, etc)
Quarterly community service projects to give back (e.g. Junior Achievement, clean a park, etc)
I think it’s important to give thanks and we’ve incorporated it into our corporate culture.
There is no recipe for success in startups. Every startup is different. There is a pattern for success I’ve seen many times: Build a great corporate culture with strong engineering and sales teams. Yes, all departments like marketing, services, support, operations, and finance are critically important. The reality is that engineering and sales are the most difficult to get right.
A product doesn’t have to be the best to win but it does have to be good. Engineering teams matter. As much as B2B tech entrepreneurs would like to have self-service products, people buy from other people. Sales teams matter.
The corporate culture is the over-arching fabric of a company and the only truly sustainable competitive advantage.
Build a great corporate culture with strong engineering and sales and you’ll be successful.
As you might have guessed I’m a huge fan of web marketing. There’s so much opportunity online between search engine optimization, pay per click ads, lead nurturing, webinars, social media, etc. The challenge, naturally, is that the competition and complexity is fierce. Finding a good web marketer is hard. Here’s what I look for in a web marketing employee or consultant:
Ability to clearly articulate their current employer/client’s web marketing results (results, not activities!), what’s working, what isn’t working, and how it has changed over the past six months
Preferred strategy for generating and nurturing leads online including PPC, email marketing, white papers, sponsorships, etc
Personal blog or other online writing experience (e.g. should have at least a dozen posts)
Personal Facebook and Twitter account, and for the Twitter account it should have at least 50 tweets (it’s important for a web marketer to be adventurous and experiment with different tools)
Experience with common tools like Google AdWords, Google Analytics, email marketing systems, marketing automation products, etc
Good feel for analytics driven marketing including return on investment, trends over time, funnel analysis, and hard numbers
Web marketing is easy. Results are hard. My recommendation is to focus on web marketers that can demonstrate results. Absent availability of that, hire for fit plus aptitude and train on the job.
What else? What other aspects do you look for in a web marketer?
Several EO Accelerator participants (accelerants) have asked me this year about setting up a board of advisors. In addition, the board of advisors topic was brought up again a couple days ago in my post What Should I Write About? I view advisors, both formal and informal, as very important even though I’ve employed informal advisors much more than formal advisors. I’ve also been an advisor to several companies.
Here are my thoughts on a formal board of advisors for startups:
Advisors should fill gaps in expertise (e.g. sales, marketing, services, support, operations, engineering, finance, etc) and/or be able to make key introductions to customers, partners, and investors
Advisors should meet quarterly or bi-annually as a group over a nice dinner as well as individually at least once between meetings
Advisors getting to spend time with other high-quality advisors, in addition to the entrepreneur(s), is a big part of the advisors’ experience
Advisors should be asked to commit for one or two years, but not typically more as the needs of the startup change over time
Advisors should not be compensated with cash but rather with equity (e.g. .1% – 1% depending on what they bring to the table with the norm being closer to .25% of the startup) along with the opportunity to invest in each round
Advisors that are also investors are ideal as they have more skin in the game
My recommendation is to seriously consider advisors and know that it is like anything where the more you put into it the more you’ll get out of it.
What else? What other advice do you have regarding startups and a board of advisors?
One of the goals of the most recent quantitative easing strategy (QE2) is to replace investment assets in banks, like T-Bills that make interest, with cash that doesn’t make interest. With cash on hand that isn’t income producing, banks are more likely to loan the money to businesses or consumers, as well as increase the money supply through the money multiplier effect. For technology startups, lines of credit and bank loans are especially difficult as almost all loans are done against hard assets like real estate or equipment. Even the recent increased guarantees by the SBA still don’t account for knowledge industries that are asset-lite.
Here are a few items startups should keep in mind when thinking about a bank line of credit or loan:
Typically banks will do a line of credit for 75% of current accounts receivable (meaning, if you have $120,000 owed to your business, with $100,000 current and $20,000 overdue, a bank will loan you $75,000)
Certain banks like Silicon Valley Bank and Square 1 Bank specialize in banking venture-backed startups and provide sizable bank loans based on the reputation of the venture investors (but the VCs don’t co-sign on the loan) as well as loans against a small percentage of recurring revenue
A new class of investor that provides a loan in exchange for a percentage of future revenue is emerging (see TechCrunch’s article on RevenueLoan)
My recommendation is to build a relationship with a community bank or startup-focused bank, establish a line of credit, and know that the best time to ask for money is when you don’t need it.
Over the past 550 posts I’ve covered a ton of different topics and had over 64,000 page views since January 2009. Most of my posts are related to these categories:
Entrepreneurship
Sales and marketing
Corporate culture
Software-as-a-service
Product management
Operations
I love writing about these topics and plan on continuing to do so. My question is this: what should I write about? What are some specific questions or thoughts you’d like to talk more about related to these categories or others? Thanks for reading and please let me know what I can do to improve this blog.
David Cummings on Startups 