Recently a startup founder was asking me questions about how to architect his new web application so as to scale with millions of users. I told him that’d be a high class problem and he shouldn’t even worry about it right now as a minimum viable product is most important focus. Here are some high class problems in startups:
Scaling the web app due to so many users
More qualified job applicants than you can hire
Funding round oversubscribed by investors
More leads than your sales team can follow-up with in a timely manner
My recommendation is to not worry about high class problems and instead focus on what you can control and warrants attention.
What else? What are some other high class problems for startups?
At today’s Atlanta technology community lunch the featured guest was Promod Haque, one of the most famous VCs in the world. One of the stories that stood out to me was when Promod recounted when it was first emphasized to him that customer intimacy was a major key to success.
10 years ago Promod was chairman of a company where the CEO was actively recruiting a VP of Engineering. The VP of Engineering was almost ready to join the company but stipulated that he had to talk to the chairman in person first. Promod, curious about this request, met with the prospective VP of Engineering, and was posed one single questions: is there money in the budget to hire a VP of Product Management? After saying, yes, of course, that they were actively recruiting a VP of Product Management, Promod inquired as to why this gentleman was concerned. The prospective VP of Engineering said that he can build anything but that he needs a VP of Product Management that is truly connected to the customers and can distill down what needs to be done. The yin to his yang would be critical to the success of the company.
My recommendation is for one of the company co-founders to own product management and make it one of his or her top priorities. Product management is one of the more difficult skills to hire for and is best done by someone who is truly passionate about the product and builds great rapport with customers.
Many people talk about how much hard work it is to build a company. I particularly enjoy the phrase “an overnight success takes 10 years.” One aspect of entrepreneurship that isn’t talked about very often is burnout in startups. Michael Arrington, the founder of TechCrunch, recently cited burnout as one the of main reasons he just sold his company to AOL. A startup is often all-consuming, and after five years, can be difficult to maintain the pace.
After the company has achieved a level of success and stability I believe it is important to start moving towards a work/life balance. Here’s a few of the things I’ve found useful:
Daily thinking time (I walk a mile every other day)
Building a sales team is one of the more difficult things to do as an entrepreneur. You see, sales people are a great type of person that can sell themselves better than anybody, but it isn’t easy to determine if they’ll be effective for your product and prospects. Another challenging aspect of building a sales team, in addition to finding the right people, is determining who gets what leads. The traditional approach, especially with field reps, has been territories or geographic regions. The biggest challenge with territories for fast growing companies is that as you hire more sales reps territories inevitably shrink leading to disillusionment among sales reps, especially if their sales volume goes down after being a high performer.
We have an inside sales team and don’t do territories. Here’s what we do:
Two different lead queues for round robin assignment of leads
The first queue is for regular leads that come from standard sources like white paper downloads, campaigns, etc
The second queue is specifically for test drive sign-ups as those are our best and highest qualified leads
Both queues are round robin and by having two different queues we solve the problem of the highest quality leads getting passed out in an equitable manner. This avoids the situation where all leads go to the same queue and certain reps having bad luck with the leads that come their way.
My recommendation is to think through these challenges early in the process of building a sales team as it can help the moral and effectiveness during fast growth periods.
Interviewing is one of the most important jobs for startup founders. According to Fred Wilson, the three most important things a CEO does include sets overall vision and communicates it with stakeholders; hires, recruits, and retains the very best people; and makes sure there’s always enough cash in the bank. For our interview process we do a combination of interviewing with a half dozen people, two page essay, product exercise, reference checks, and more to make sure we hire the right people. Nothing is more important than getting the right people on the bus.
Here’s the number one interview question we like to ask:
Tell us what we do and why you want to join our team?
This seems like such a simple question but it really reveals how serious and excited they are about the position and company. The key is getting them to talk about your company because it shows how much research they’ve done, how much they’ve visualized working for you, and what type of team member they’ll be. My recommendation is to incorporate this question into your interview process and never settle hiring anyone but a great fit for your team.
After hiring over 40 people in the past few years I’ve had the chance to look at a bunch of resumes. So, naturally, there a few things that consistently stand out. I’m no expert but here are a few tips geared specifically towards recent graduates:
Include everything on one page (there’s no way there’s more than one page worth of relevant info)
Include your major GPA and overall GPA, but only out to one decimal (recent Emory graduates have a tendency to take it out to three decimal places, so the career center over there must be telling them to do so)
Use no more than two fonts and make the layout consistent throughout
Double and triple check for typos and grammar (yes, my blog posts have both)
Make the purpose or goal paragraph at the top meaningful and don’t just say the desire is gainful employment
I just finished reading Jerry Kaplan’s book Startup: A Silicon Valley Adventure from 1996 and I must say it is one of the best entrepreneur books I’ve read in a long time. Jerry recounts the story of founding GO Corporation, the first pen computing company, and the wild ride of burning through $75 million dollars before a forced merger with another company and a final sale to AT&T. Here are some of my takeaways:
The original idea for the GO tablet in the late 1980s was for a large screen with one single button, much like the iPad is today
The issues of weight, battery life, screen, and memory back then are all the same issues of today
GO had a closet at their office configured by IBM security personnel for IBM confidential files that had a key only the GO CEO had and they even went as far as to put chicken-wire above the ceiling tiles to block someone trying to get in, which, of course, is ridiculous
At the 1991 COMDEX show in Las Vegas it cost $53,000 to rent a small private room off the main hall plus $1,000 to have it vacuumed and $150 for electricity
AT&T called the network of infrastructure that made phones work “the cloud”, which is different from today’s popular term
Nine years after the book was published Kaplan finally sued Microsoft for anti-trust violations, which were chronicled throughout the story
My recommendation is for technology entrepreneurs to read the book.
Marketing automation is one the fastest growing software-as-a-service markets. The idea behind marketing automation is to consolidate many of the traditionally disparate marketing tools into a single web-based product. Here are some of the marketing tools found in a marketing automation platform:
Email marketing – support for broadcast emails like newsletters and one-off campaigns
Landing pages – web pages that are optimized for converting visitors into prospects via a form
Forms – fields used to capture input from visitors often in exchange for items like white papers, free trials, webinar sign-ups, etc
CRM integration – bi-directional connection to common customer relationship management systems like salesforce.com, SugarCRM, NetSuite, and Microsoft Dynamics CRM
Lead scoring and grading – automatic scoring of prospects based on activities they perform as well as grading based on explicit data points about the prospect relative to the ideal customer profile
Drip programs – periodic emails and activities triggered by events and time (e.g. send email A right away, if prospect clicks a link in the email notify the sales rep and remove from the drip program, if not, send email B 10 days later, and so on and so forth)
Automation rules – powerful logic-driven conditionals to change scores, send emails, move prospects between lists, notify sales reps, and more based on a variety of criteria
Anonymous visitor ID – identify the visitor’s company based on their IP address so that a sales rep can follow up as well as know that someone at the company is potentially interested
Prospect tracking – individual lead tracking of all activities like web pages viewed including length of page view time, forms completed, email opens, email clicks, file clicks, and more
Closed loop ROI reporting – track money spent to generate leads all the way through deals closed so that marketers can understand the success of campaigns even where there’s a long sales cycle
Other common functionality like file hosting, lists, segmentation wizards, site search, and paid search integration is often included as well. Again, the general goal is one single system that replaces legacy systems like email markting tools and forms manager while adding significant new functionality like one-to-one tracking. In the end, sales and marketing teams are much more effective with marketing automation. My recommendation is for B2B companies with a sales and marketing team to seriously consider a marketing automation platform.
Most entrepreneurs start a company based on an idea that they are passionate about without regard to some of the more optimal financial ingredients in a business model. Let’s take a look at the trifecta of financial attributes for the perfect business model:
Recurring revenue — revenue that recurs on a monthly, annual, or multi-year basis is the best as it provides predictable cash flow
High renewal rate — going hand in hand with recurring revenue, renewal rates at 90% plus provide future enterprise value and contribute to the predictability of the business
High gross margin — revenue that has little to no marginal cost for each additional customer provides more room for profitability and investment in the business
A couple examples of businesses that typically meet these criteria include private wealth managers and software-as-a-service providers. My recommendation is to consider these three attributes when thinking through a business model.
What else? What are other attributes of a perfect business model?
Last night EO Atlanta had an event on positioning a business for sale including how to value it. Typically a business that is bought by an acquirer actively browsing is worth more than when a company shops itself around to other companies. Let’s look at a few more factors in valuing a business:
Concentration of customers (e.g. one big customer or lots of little customers where more customer variety usually is worth more)
Gross margins (percent of revenues after only product/service costs are taken out with high gross margins being more valuable)
Recurring revenue (percent of revenue that comes from monthly or annual fees with higher percentage of recurring revenue being more valuable)
Profits over the last twelve months (a simple formula for an average company is that the company is worth 4-6x the previous year’s profits)
Growth rate over the last twelve months (faster growth rate is more valuable)
Liquidity of the shares (more liquidity like with publicly traded companies is typically much more valuable e.g. 50%+ more valuable)
As you can see there are many different factors in determining the value of a business. It comes down to what another company or person is willing to pay for it with the more profitable and faster growing businesses being more valuable. An example would be a company with $1 million in trailing twelve months revenue with $200,000 in profit (assuming founders and management had market rate salaries) might be valued at 5x the profit, or $1 million. Some companies with no profits are bought for many times revenue due to their strategic value whereas other companies with significant revenues are bought for only a fraction of revenue due to significant debt, losses, and a decline in the business (e.g. Newsweek for $1).
Valuing a business is tough as the market of buyers is usually very small. These guidelines can help you come up with a rough idea of what a business might be worth.
David Cummings on Startups 