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Archive for January, 2013

Career Advice: When They Replace the CEO At Your Company, It’s Time To Move On

Posted by Bob Warfield on January 18, 2013

steve-jobs_john_sculley

A word of warning: VC’s and CEO’s may hate this post, though more the former than the latter unless you’re the New CEO replacing the Old CEO.  I must also say that the Valley has gotten better in recent years as it has realized that replacing a CEO is no small thing.  Many now conceed that may be easier to train a good Founder to be a CEO than to get a CEO to understand what the Founder has hardwired into their DNA.  Nevertheless, replacing CEO’s is a very common thing in the Valley.  Young entrepreneurs have no idea how prepared their Board is to do so if they hit a rough spot.  I had a VC tell me one time, “Replacing people is what we do, that’s really how we add value.”  What the Young Entrepreneur may not know is that perhaps their Board made the decision to replace the Entrepreneur as long ago as the very first time they gave them money.  I guarantee any smart investor will have thought about it and decided how far they think the Founding CEO can take the company.  A clock may be ticking that the Founder doesn’t even know exists.

I will leave aside the discussion of what the replaced CEO/Founder ought to do.  They’re going to have to figure out how to make peace with the new arrangement and whether to stick with their company.  Ideally, everybody knew it was coming and the Founder didn’t even want to be the CEO.  Equally as ideally perhaps the New CEO and the Board will continue to see some value in keeping the Founder around and that value will be something the Founder is prepared to deliver.  In that case, maybe there is hope and you should disregard this post.  These are matters for the Founder to consider with regards to their career, but if you’re not a Founder, read on because your situation is different.  This is not about whether it’s possible to hire a better CEO or whether there aren’t companies that have done very well hiring new CEO’s.  It’s not about the fate of companies at all, it is about the fate of your personal career.  This is about some math and some personal experience that both speak loudly to my own calculations about career.

First thing is, I have a fair bit of experience with this process.  Out of 7 gigs so far, 3 have involved a CEO replacement and at the most recent one, I was the CEO that replaced the incumbent.  Based on the experiences of the first two I had decided that if the CEO was replaced in future gigs, I was moving on.  This is what I told the Board the first time they came to me and wanted to replace the CEO at the third gig.  What I hadn’t counted on was that they would ask me to step up to the position at a later date.  Somehow, when that happened, I forgot my old plan and launched into the CEO job with gusto.  We showed immediate strong growth and got the customer to where it should’ve been in terms of financial metrics for a SaaS company of our size.  It didn’t matter in the end and the company failed because it couldn’t raise a round (which is the cause of death for most startups).  I should have stuck with my original plan and moved on when the CEO was replaced.

I can walk you through the whole story and point to ample extenuating circumstances for why the company couldn’t raise a round–we needed to raise that round shortly after the 2008 Dinosaur-killing Sequoia memo went out, one of our two VC’s wouldn’t participate because they had investments in competing companies, yada, yada.  It’s all bullshit because these were symptoms and not the disease.  When Boards replace CEO’s they are fixing a Big Problem.  Typically it is a very big problem, although it may not be the problem you think it is.  You’re there, in the trenches, focused on winning at your startup.  Your Board is jaded, they have a lot of other investments, and they’re focused on minimizing their pain while they let their winners run with as much rope as possible.  They are far more subject to Deal Fatigue than you are, and they’ve heard so many presentations filled with facts and figures that they’re much more willing to go with their Gut.  They have the luxury of going from your Board Meeting, which is depressing as heck, to one at another portfolio company that is leaping over tall buildings in a single bound.  Only the very best Board Members can be objective and keep all these experiences separate.  Put your hand in cold water and then into lukewarm water and the lukewarm feels scalding hot.

That Big Problem will be described in rational terms like, “This company has never hit a target yet on Sales.”  But, the reality may simply be that not only are they tired of dealing with missed targets (which may have been overly optimistic, missed by just a little bit, or impacted by Outside Events out of the Company’s control), but they’ve also lost their optimism, and they don’t trust the Old CEO.  That’s a very dangerous Big Problem to try to solve because Deal Fatigue magnifies the scale of every problem.  You see, the VC’s never had the degree of Hope and Fanaticism that I hope you came into the deal with.  They can’t, they’ve seen too many fail and they’re totally bought into the Portfolio Effect.  They don’t have to fight every battle tooth and nail, they just have to know where to double down and where to cut their losses.  You can’t take it personally, it’s their job and their business and they are good at it.

So if the CEO is being replaced, your business is probably facing the very biggest problem the Board can imagine plus a lot of subjective negative momentum that only the Board feels.  It’s both a numbers problem and a relationship problem.  Naturally there must be a relationship problem, because events are leading to a divorce.  Sure, maybe it’s all proactive and there’s no problem beyond a little growing pain.  Right.  And maybe that horse over there is really a unicorn that temporarily misplaced his horn.  There are two cases to replace the CEO:

1.  The incumbent was never going to take the whole trip and knows it and everyone has found a happy upgrade.  This is a Good CEO Transition.

- or -

2. That Big Problem is staring the Board in the face (numbers) and they don’t believe the incumbent can get through it (relationship).  This is a Bad CEO Transition.

This is the time to take a good hard look at the Old CEO and ask yourself whether they were the sort that never planned to finish the job and they welcome an incumbent.  You can tell if you’re any kind of judge of character at all.  The signs will have been there all along.  The Old CEO will be too young and inexperienced.  They will lack ultimate leadership potential and CEO gravitas.  The new guy, meanwhile, will be much more experienced and will carry much more gravitas.  They’ll be exceedingly smooth and confident.  There will be at least an initial sense that the old and new CEO’s like each other.  Those are some of the signs of a good CEO transition.

In a bad transition, the new guy may be a little more experienced at being a CEO or they may be the same or less CEO experience.  They often have a totally different background, “Hey, all we need to do is replace this Engineer with a Sales Guy and we are Golden.”  They often have a track record that has little to do with Startups and everything to do with having been a lesser executive at a much bigger company.  It’s the first CEO gig for an SVP of Sales, for example.  When they’re together, which will be rare, the Old and New CEOs don’t talk to each other much and don’t make much eye contact.  The Old CEO is either completely absent or remarkably quiet compared to his old self.  He’ll have nothing to say about his plans going forward.  “I just want to take some time off to relax with my family and decide what I’ll do next.”  Lastly, if the New CEO has some kind of amazing comp package, that’s a sign that an otherwise talented exec is being asked to step in and do what the Board views as Mucking out the Stalls.  Those are some of the signs of a bad CEO transition.

If your company has had a tough time making its numbers, if it has been pivoting, if there is unusual pressure for progress, if you’ve either just raised or are about to raise a round, and you see the Bad CEO Transition Signs, get your resume in order.

Why move on if you’re dealing with a Bad CEO Transition?

First, let me direct you to Jason Lemkin’s missive about what the dilutive effects of a new CEO will be.  What he has to say is absolutely true and I’ve seen it from both sides of the table (as the New CEO and as an exec greeting the New CEO).  Virtually everyone except the New CEO and VC’s will be taking a significant equity haircut.  It’s got to come from somewhere and the New CEO is the savior while the Board doesn’t consider itself part of the problem.

Second, consider what happens after the New CEO is hired.  For starters, you know something ugly is out there in the Board’s purview, whether or not you’ve been told what’s going on.  If you don’t already know, nobody is going to let you in on the secret just because there is a new CEO–quite the contrary.  Publicly, there are no Bad CEO Transitions, there are only Good CEO’s brought in amicably for the continued maturation of the company.  Besides realizing there is a Big Problem, you also have to come to terms with the challenges New CEO faces in overcoming that problem.  No matter what anyone may think, CEO’s are punished way too much for failure and rewarded way too much for success.  In other words, New CEO is going to have to make a lot more changes because just changing the CEO doesn’t go very far to solving the Real Problem.  New CEO can’t do it alone.  They are going to need a lot more capital (hence the dilution Jason writes about) and talent.  Unless your problem is one of simple execution, New CEO also faces the problem of educating themselves enough on your company and space so they can begin to formulate a solution.  Once they arrive at a solution, it will nearly always require still more time to hire the right people to help facilitate that solution.

Translation:  There will be no progress on your Company’s Big Problem during the CEO’s first six months and still no progress for probably much longer.

In fact, there may be no measurable progress for more than a year, although a smart New CEO will find something to declare victory on within 6 months.  Meg Whitman wants five years to show much progress at behemoth HP.  The reason it’ll take much longer is that even after the CEO formulates a new plan (what they’re doing the first six months), they must then get all the rowers in the boat moving in that direction and doing so with enough force that it has some measurable impact.  During that time, at least another six months, all sorts of unpleasantness will surface.  Anyone in the organization with a political bone in their body will be trying to romance the New CEO either to advance their own personal position, get New CEO to embrace their agenda for how to make it all better, or often both.  All those battles Old CEO fought to get the troops aligned and moving in one direction are suddenly undone, and the Old Combatants will be back to thinking they were right in the first place and the fact that Old CEO lost his job just proves it.

There is a tiny bit of good news in that if New CEO has been around the block and is smart, he knows darned right well the politicians are out in force and he is taking notes.  When he has a good idea who the worst offenders are, he will replace them with his own Trusted Lieutenants.  That’s good news assuming the Trusted Lieutenants are less political and are genuinely stand-up people who will help the Company succeed.  New CEO will probably also replace whoever runs the part of the company perceived as being the biggest part of the Big Problem.  Of course determining the truth of that is also ripe for political discord.  Sales will argue the Product sucked or that Marketing never got them enough leads.  Marketing will argue Product didn’t listen to their Product Managers, didn’t build enough product, or that Sales didn’t follow up the leads they were given.  Product will argue there’s been Sales Execution problems or that Marketing never really understood their product and wasn’t able to present their beautiful baby in a good enough light.  Finance will skewer anyone that was off budget by even a little bit.  This will all slow down the ability of New CEO to figure out what is happening considerably.  The smart ones may just choose to ignore all the history, focus on the Big Problem, and just start implementing their idea of Best Practices in whatever parts of the organization are most likely to improve on the Big Problem.  This is scary to all concerned because the changes are not motivated by anything in the Company’s history–they’re motivated by New CEO’s history and experience, which is not yet well known or understood withing the Company.  That’s why it will seem like there is no rhyme or reason to the decisions being made–you won’t have the right background to understand them.

If you are unfortunate enough to be in one of the organizations affected by these changes, life will be tough.  Progress in your area will be delayed while this cycle of learning, renewal, and execution winds it way down through various org charts until it has gotten sufficiently far from the source of the pain (the Board is the source) and sufficient time has passed that we can’t afford to keep rearranging the Deck Chairs on every deck.  A lot of the changes will make no sense to you at all, and you may wake up one day to find yourself in a company that bears little resemblance to the one you were so committed to not very long ago.  Whatever your motivations–money, a chance to work on something really cool, belief in the dream, etc.–it may no longer be possible to pursue them.  At best, a lot of time will pass and you’ll look ahead and still wonder when things will get back to “normal”.

Does all of this really have to happen?

If you have a Bad CEO Transition, in other words, one to fix a Big Problem, then I’m afraid the answer is, “Yes, that’s pretty much how things play out.”  Whatever happens, it will take a lot longer than anyone hopes to fix things.  Often, things will not play out and the company will be in permanent decline.  None of the three CEO replacements I’ve participated in resulted in a company that was ultimately better off.  Two of the companies are dead (Borland was a $500M a year high flyer and it is still dead having fallen inexorably with Philippe Kahn’s departure), and one still has a chance to get there, but at least from a shareholder value perspective, their high point is a long time back.

What do you do in these cases?

If you are in the right position, likely an executive reporting to the CEO and someone who at least sits in the Board Meetings, you are in a position to see it coming.  Watch for what I call the Three Deadly Sins of a CEO:

1.  They’ve missed their numbers.

2.  The Board is not confident in their plan to fix #1.

3.  They are not taking coaching from the Board.

In every one of the Bad CEO Transitions I have witnessed, these three sins have been allowed to go on for too long.  That is a surefire way for a CEO to get themselves fired.  Make no mistake, every CEO will break all 3 deadly sins at some point.  Many will break 2 at a time.  Some will break all 3.  That latter group has a very limited time in which to show results before the Board will take action.  I would say 6 to 12 months depending on the level of Deal Fatigue the Board is fighting to maintain perspective against.  For startup CEO’s, Deal Fatigue is charged directly against Political Capital and when you run out of PC, you’re toast.  Unfortunately, Deal Fatigue carries on like any other debt, and even the New CEO inherits the Deal Fatigue which is charged against their PC from the outset.

If you are not in a position to judge the subtle nuances of the Three Deadly Sins of a CEO, you may have to wait until the deed is done and the Old CEO is out before you know what’s happening.  In either case, once you know what’s coming, it’s time to prepare your parachute because the plane is going to lose altitude quickly and may very well crash.  If you’re lucky, the Outside World can’t tell there is a Big Problem.  The Board and everyone else will try to put forward the face that it is all a logical progression.  Find your next position on the strength of whatever positive sentiment remains around the deal.  If you ultimately believe the deal will be a success, buy out your options as cheap insurance that you will still profit to a degree.

Perhaps the best way to look at it, if you can be so objective, is to consider whether you would take the job with the company as it stands with New CEO and knowing everything you know about it.  Forget the old Dream that taints your soul and judgement.  Do you want to work at a turnaround?  One way to do that is to assume you have to start vesting your options all over again with a 1 year cliff.  The dilution, confusion, delays, and added risk associated with New CEO are going to amount to the same result anyway.  If you’re like me, and you’ve seen how the movie ends a couple of times, you’ll regretfully move on to find something new and less tarnished.  Unless of course it’s you they’re asking to step up and be the CEO.  My advice if that happens is to only consider that job if you’re a corporate ladder climber at heart anyway.  If you’re an entrepreneur, you won’t be happy and there are easier ways to get to be a CEO with none of the downsides.

What happens if you stay?

There are two winning strategies in turnarounds–you either want to be the first to leave or the last.  The last to leave gets to reap any benefits of the turnaround and having been part of it, may be rewarded more.  But there is the certainty that at best, the Company will wind up back on whatever Dream Success Track you had imagined, but it will happen much much later than you’d expected.  Alternatively, you can go find a new opportunity that doesn’t have the Deal Fatigue and Political Shuffling needed before New CEO can be successful.  BTW, make sure your new opportunity’s CEO has been there for at least a year and tangible results are surfacing in your new company’s press releases lest you be jumping from the frying pan into the fire.

PS  Isn’t the Jobs-Sculley picture strangely prophetic?  Sculley is leaning on the Lisa, which was the more buttoned-down-and-business-like computer and Jobs is leaning on the upstart Macintosh.  That’s not unlike their styles, personalities, and even their track records.  Today there is no sign of Sculley or Lisa anywhere and the Mac is stronger than ever.  Also, the transition from Jobs to Sculley was a Good CEO Transition and the one back to Jobs was a Bad CEO Transition.  One put the company into a funk for years–so much for ignoring this advice to move on when it’s a Good CEO Transition.  Steve Ballmer represents another Good CEO Transition and an argument to have moved on from Microsoft when Gates left.

The Bad CEO Transition (back to Jobs) brought Apple back to life as one of the World’s Greatest Companies, but even that last miraculous transformation took quite a while–years.  If we look at the Return of Jobs as the Best Possible Bad CEO Transition, that’s another way to get the measure of how such things may matter for your career.

Posted in business, strategy | Leave a Comment »

A/B Testing Your Sales Reps: Stellar Advice from Jason Lemkin

Posted by Bob Warfield on January 11, 2013

Jason and I don’t always agree, but Jason is a prolific blogger and a very bright executive you can learn from, so there’ll be a chance to agree somewhere down the road.  This latest post of his is one I loved.  He’s basically describing the problem of hiring your first Sales Rep if you don’t have an experienced VP of Sales to do the hiring.  The advice is simple:

If you only hire one rep, you won’t learn anything.  You’ll have no idea why they succeeded or failed.  If you hire two, you can look at the differences in style and results as well as benefit from the sum of both of their experience sets.

The analogy to A/B testing for marketing seems clear to me.  If you just make a change and roll it out, you have no idea how that change affected your subsequent results.  You can speculate that it drove them, but you really need to have the placebo in your testing to compare it against.  That’s why A/B testing is so important and I was tickled to see it applied to this problem.  It’s very smart advice.

I have known excellent VP’s of Sales who do essentially the same thing.  There is an old saw about how at any given time 1/3 of the sales reps are making their numbers, 1/3 are not, and 1/3 are so new it is too soon to tell.  Every year they fire the group that didn’t make the number so they can hire a new 1/3 and continue the process of Darwinian selection.  If the company overall misses, nobody fires the whole sales team, at least not if they had been making numbers in prior periods.

 

Posted in business, strategy | 2 Comments »

Can We Ignore Churn Early On at a SaaS Company?

Posted by Bob Warfield on January 10, 2013

Jason Lemkin has my juices flowing again.  He’s published a blog post with the suggestion that you should ignore churn and length of sales cycle as key management metrics when a SaaS company is young.  I’m with him on the Sales Cycle–it’ll be all over the map in the early days.  But on churn?  Nope, I am diametrically opposed.  In fact, I am so opposed to the idea of ignoring Churn that I’m going to have to get downright Medieval on the idea.  It’s going to be a bit of rant:

Churn is good, churn is right, it clarifies and cuts through to the essence of the evolutionary spirit…

Oh wait, that’s Gordon Gecko talking about Greed.  Let’s get back to Churn and why I think it’s a huge mistake to ever ignore it for any stage SaaS company including the very earliest.  I will extend this to any company that sells subscriptions to anything, and not just SaaS software companies.

First thing I want to acknowledge is that Jason is very clearly speaking about SaaS companies that are similar to his Echosign experience.  He talks about things like 7 figure SaaS deals.  For companies like that, who regularly do 7 figure deals and who are VC-backed, he is closer to being right, but I still don’t believe it is good advice for those companies to ignore churn.  Here’s why:

You can sell software that isn’t good enough to get people to renew

Jason says, “Because SaaS done well, is sticky … and once you get a Great VP of Client Success, Your Churn Will Go Down.”

(The boldface is his.)

That argument became circular right at the point where we stipulated that “SaaS done well, is sticky.”  You won’t know if you did SaaS well if you ignore Churn because you can sell software that isn’t good enough to get people to renew.

Jason seems to use the ability to close the deal as the litmus that the software must be good enough to be likely to renew simply because it sold in the first place.  This only makes even a little sense for big ticket sales so this is where Jason raises the 7 figure note, but it is still a circular argument.  Yes, closure of the sale means the problem being solved is sufficient to warrant a 7 figure expenditure.  Yes, the Sales Cycle around a 7 figure expenditure means there was some diligence done on the software.  And yes, Jason’s experience was that his company and likely others he talked to had low churn without trying.

Unfortunately, there is a simple existence proof that this is not always the case–there is tons of Enterprise Shelfware out there.  Companies bought it and never installed it.  Or they bought it, intalled it, and nobody would use it.  It’s even more common for the more expensive software because some centralized decision making organization wants to impose a solution on the troops and the troops aren’t having any.  Or some change rendered the software moot.  There are companies who make their living coming in to find what you’re not using any more so you can quit paying for it.  Sure, you should know about this well before the renewal date comes up, and you should figure out how to get past it, but whose job is that in an early stage startup?  The Sales Guy is off closing the next deals and calling on all of his minions to help sell more ASAP.  If the CEO doesn’t call out Churn as a top priority, it won’t get done.

Come on, we’ve all bought a subscription to something we didn’t renew.  It’s one reason companies make it so hard to cancel–because it happens so often.

Before going on, every Exec Staff Meeting needs to do a Customer Success Review right after the Sales Pipeline Review every single week.  If you don’t have a VP of Customer Success, get your VP of Prof Svcs to do it.  You need to know the status of every customer in implementation (roughly corresponding to sales “prospects”), what the issues are, and when is the go-live (roughly corresponding to when sales will close the deal).  The review must also cover the status of everyone live including any problems being reported.  Do it every week just like the Sales Pipeline Review.

Now let’s consider a different kind of SaaS company.  Something more like an SEOMoz or perhaps a Marketo.  They don’t charge 7 figures.  SEOMoz doesn’t sell many seats into an org and the seats are cheap.  Marketing Automation companies have this problem that if they let customers pay for them monthly, the customers will turn the service on and off and only buy it when they need to refill the lead pipeline.  There is ample possibility in such lower price lower friction scenarios to sell a product where everything was hunky dory during the Sales Cycle, the deal closed, they went live, they even used it a bit, and then they decided it wasn’t helping.  And they didn’t renew.  And you got horrendous churn.

Jason somewhat acknowledges this when he says it is more important to consider Churn at Freemium startups.  That’s a conflation.  It is more important to consider Churn at startups with lower average deal sizes, whether or not they employ a Freemium model.  For the reasons I mention above and below, it is still important to consider even with large deal sizes.

Failing to make renewal the path of least resistance

I am a big believer in what I call the “Gas Pump Theory of UX Design”.  People take the path of least resistance.  At most gas stations in the US, people read left to right, so they put the most expensive grade of gas on the leftmost button.  Or they stick the cheapest grade in the middle, out of order.  If you’re not thinking about what you’re doing, you just bought their highest margin product.  So it is with renewal, especially on subscription products that are not absolutely mission critical.

Companies these days are reasonably focused on the Growth Hacking associated with web site conversions and landing pages.  It uses this path of least resistance a lot, and Growth Hacking gets the business.  But I wonder how many are focused on Growth Hacking to keep the business?  Since Saas compounds, this is very valuable Growth Hacking indeed.  Put another way, we often hear things like it costs 7X more to get a new customer than to get more revenue from an existing customer.  Note:

If your existing customer doesn’t renew they are no longer a customer.

If that happens, you just spent that 7x or some such to replace that revenue because you failed to make renewal the path of least resistance.  You just did the complete opposite of the compound growth SaaS is justifiably famous for.  You just invested the bulk of the expenses you will ever have around that customer while limiting the lifetime value of the customer to the lowest it can ever be because you weren’t worried enough about Churn.

Doing it right means worrying about Churn enough that a new Sales Cycle is to be spun up to ask for the renewal sale in time to get it done.  That Renewal Sales Cycle can mean anything from sending a Rolex-clad Scratch Golfer straightaway to Customer X’s Headquarters to meet with the CIO to starting a drip email campaign to having the product itself remind you the clock has started counting down.  It can mean having a “man overboard” promotion that fires up if the customer is more than X days late with the renewal.  You might choose to be proactive and offer the discount for early renewal.  If you plan to raise prices soon, something every young SaaS company should be looking at annually, time that so that it happens right after the quarter where the largest number of customers need to renew.  Then go talk to them before that happens and give them a sweetheart deal.  You’ve got the old Colombian lead (we’re raising prices) or silver (renew early and get a deal) working in your favor.

BTW, customers don’t like it if you only call them when you want more money.

This Renewal Sales Cycle needs all the same Growth Hacking expertise your original sales need.  At Callidus, the Sales Rep that closed the deal originally was responsible for the Customer’s continued satisfaction.  Consider doing the same until you can afford to have a handoff Customer Success Rep.  Make it that person’s responsibility to secure the renewal and quota them on it.

Don’t wait for the all too common scenario where you get to your renewal anniversary for the original customers and golly, churn looks high.  But someone says, “Let’s wait a bit, those were some of the first customers, they’re not telling us much about why, and they probably just weren’t a good fit.”  So you wait another quarter or two and eventually get to the part of the cycle where a surprising number of customers didn’t renew and then you’ll wish you’d known why and fixed it a lot earlier.

Churn is a measure of Customer Satisfaction.  Every Churned Customer is a Bad Reference for your Company and Products.

One could argue Churn is the only Customer Sat Metric that really matters.  It’s the one where the customer is putting their money where their mouth is.  As an aside, there’s another good one where you call them up and tell them you need to raise your prices, but that’s another story.

A Churn Rate that’s too high means low customer satisfaction, and that ultimately goes directly to your ability to close new customers who try to speak to these old non-renewing customers or customers who barely got up the gumption to renew about your product.  The non-renewers are going to be the worst form of reference.  They’ll say things that are friendly and happy on the surface.  They won’t directly shoot you down in most cases.  They’ll just opine that, “Great product, but didn’t quite solve our problem.”  Like any reference call, there’ll be an undercurrent to the tone that makes your Spidey Senses tingle.

Worse, if you are not proactively all over Churn, you’ll inadvertently put prospects in touch with customers you thought were happy, but that are actually not going to be renewing.  They may not even realize it yet, but they won’t be able to articulate a strong enough case for the product because somewhere in their gut they know there are problems.

Everyone, including Jason, recommends you commit almost unnatural acts to ensure the success of your first reference customers.  If they don’t renew, they are not successful.  If you gave them the software or made it so ridiculously cheap, they didn’t really renew either.  Not in any meaningful way.

Every Churned Customer is a Bad Reference for your Company and Products.

Churn is at the Bad End of Compounding

One of the things we love about SaaS is that it compounds.  But Churn is at the Bad End of Compounding.  It cuts off the compounding and reduces it to linear growth at the absolute worst time–the latest possible time before the customer would’ve paid in more revenue.  That’s the point where the line on the revenue graph that represents compound growth is the furthest from the line that represents linear growth.  As I’ve already mentioned, it’s the point where you’ve invested the most in the Customer for the least return.

CEO’s, let’s be careful out there.  A customer is a terrible thing to waste.  Don’t let them Churn.  Renewals are not an entitlement, they are something you earn.

Posted in business, saas, saas business venture, strategy | 2 Comments »

Is Silicon Valley Worth the Cost for Tech Startups and Bootstrappers?

Posted by Bob Warfield on January 9, 2013

SiliconValley_mThere’s always some article or other in the blogosphere rambling on about why XYZ will be the next Silicon Valley–they’re quite popular.  I just read an interesting piece that has some clues about the true costs of living here (yes, I live at least near SV and have worked most of my career in SV).  The article is really about how much top paying companies pay in the Valley, but it strays into the realm of cost of living.

While we can quibble with the accuracy of the numbers and ancillary factors like quality of life (undeniably good in the Valley or in NYC as some on Hacker News opine), let’s assume for the sake of discussion that while salaries are higher, they are not high enough to offset the much greater cost of living relative to other parts of the world.  Looking a the way our great state operates and as well as the Economy, it’s going to get worse too.

What does that mean for Tech Startups and Bootstrappers?

This is a poignant question for me because I moved my first startup to Silicon Valley from Houston, Texas in the late 80’s.  At the time it made total sense and I have no regrets, although even then it took us years to make enough money and then to screw up our courage to buy expensive California real estate and own a house again.  The reason I moved was not access to technologists or building product.  I was hiring great software developers out of Rice University (one of the best CS schools in the country) and University of Houston.  They were cheap and cheerful and we built software good enough to receive acquisition offers from both Borland and Microsoft (we wound up being bought by Borland and the product became their Quattro Pro spreadsheet).  Heck Silicon Valley itself hires tons of developers all over the world.  Building software in Houston was very cheap back then.  We took our company all the way to profitability for about $600K in capital over 4 years.

What got me to move was the marketing side.  Even back then I wanted a less advertising-driven and more content-driven marketing strategy, and the way to do that was through PR.  So I was doing media tours.  I was on planes to either the East or the West Coast to talk to the people I needed to talk to–there was no leverage to being in Houston.  I was also desperately in need of marketing advice, and there was nobody to talk to in Houston, Texas about how to do marketing for a high tech software company.  We worked with Ogilvy and Mather’s Compaq team for a while and they did great creative, but it just isn’t the same in terms of getting the right strategic sense.  So, after much deliberation, we moved.  It was absolutely the best thing for us and there’s nothing at all I regret about it.

Flash forward to today.  Are there still compelling reasons to endure the higher costs?

My central thesis for moving–the need to network in order to learn and influence–still exists, but it is weaker.  There are still plenty of great developers available elsewhere, and I would not come to SV just to gain access to them.  I might do so if I was a non-technical founder who wanted a technical co-founder who had “Been there and done that.”  I don’t know how else other than track record the non-techie could tell whether the co-founder was any good.  But not to put together a team.  You can build any product there is with a maximum of 10 developers, and you can find 10 good developers in any major city that has a school with a good Computer Science program.  Been there and done that.  While that leaves out a lot of territory, it also opens up a lot of territory.  If you are yourself a seasoned developer who hires well, you can probably even skip the need for a “Good Computer Science Program” and you’ll still wind up finding enough developers.

Let’s also talk about hiring non-developers.  I have less feel for that, but my sense is this is also available much more broadly than just Silicon Valley.  For one thing, I’ve worked with some fantastic people on content marketing who happened to be in Silicon Valley, but there wasn’t any reason to believe you couldn’t meet people like this elsewhere.  They weren’t so steeped in SV Startups that they’d be impossible to find.  If I were a Techie Founder desperately in need of my non-Techie Soul Mate Co-Founder, I would go on the hunt for the most successful blogger I could find in my area who I could get interested in my audience and in learning whatever they didn’t already know about how to turn their blog into a marketing tool.  You can do a lot with a blog.  Having worked with lots of Marketers in Silicon Valley, I think it is harder to find great content creation people than it is to find the Marketers, and I mean no disrespect to the Marketers.  It’s just that what has to be done on the Marketing side is pretty easy to discover:

-  SEO for your content

-  The idea of a funnel and Conversion Rate Optimization with A/B testing

-  The usual need to know how to ask for the sale

A little bit of that and a whole lot of super valuable content will get you off the ground surprisingly well.  That’s why so many Techies seem to actually get somewhere bootstrapping.

But getting back to this issue of networking to learn and influence, I believe those advantages are still possible, but they are far weaker today, and particularly weak for Startups and Bootstrappers.  We can learn so much more from the Internet and freely available content there than I could from buying books in the 80’s when I moved my company.  Endless people are making a living telling you exactly what to do.  I keep a clippings blog called Firehose Press for every article I read about marketing and sales that was a good one.  There’s tons of data there culled by daily reading.  More stuff than you can possibly act on.  While it would be handy to just hire or co-found with someone that already knows all that stuff, I don’t personally think that would be very easy even sitting in Silicon Valley.  For one thing, I have met a lot of Marketing people and very few understand SEO and the rest of it very well–they hire agencies to do that work.  As for Content Marketing experts, they are scarcer than Hen’s Teeth.  My own blog outperforms the metrics for the blogs of most of the companies I have worked for.

I can only really see three strong reasons for Venture Startups and Bootstrappers to be in Silicon Valley:

Energy, Fashion, and Bubble Riding

These are all somewhat intangible, but related.  There is undeniably Energy to be had by going to visit your startup buddies and talking about ideas, techniques, hopes, dreams, gossip, and what everybody is doing.  If you are getting energy from that experience, you’ll find it hard to get outside the community.  Sure there are places that claim to be the “Next Silicon Valley”, but I’ve talked to a number of folks who went from here to there and they say it is disappointing once you’ve experienced the real thing.  So I won’t deny that energy, but I will say there are also some negatives there.

Building a business is a lonely job, and despite the number of get rich by following my advice businesses there are, you are only going to get rich by keeping your own counsel.  It won’t happen because you and your young drinking buddies figured it out together.  Advice is good, but the best quality of real leaders is they make the right decisions absent enough data to have it handed to them.  That’s why CEO’s can be so tough to deal with sometimes.

Let’s also keep in mind that there are also monoculture risks in being too steeped in a community.  Yes, you can keep a finger on the pulse and understand the prevailing fashion trend (gee, are we doing photo sharing today, coupons, or some goofy check-in and review Consumer Internet play today?).  If you’re a dedicated Bubble Rider, you need to sense of what’s happening.  That’s what you do is jump on or ideally create the Fashion Trends.

But, it is not clear to me and never has been that this is a particularly low risk play.  I think it is much higher risk than simply solving real problems that real customers have.

Venture Capital

If you’re determined to raise Venture Capital you will have to be where the Venture Capitalists are.  You need to do that both to Influence them and to learn who they are and how to approach them in a way that is successful.  You can’t do that remotely and I am skeptical you can just get on a plane and visit Sand Hill Road when you need money.  Relationships have to be cultivated over time.  This is a serious Network Effect that isn’t going to change any time soon, and I think it is by far the strongest reason to come to the Mecca.

Pilot Accounts for Enterprise Software

If are so fashion challenged, as I am, to seriously contemplate Enterprise Software, you will need to find your initial Pilot Accounts.  If you handle everything right, they become your Reference Accounts.  You need about 10 of these carefully nurtured Kobe Beef Customers (hey, if they want a daily neck message, get your little hiney over to their offices and lay one on them) so that when the poor schmucks you actually plan to charge retail come through the door they have someone to talk to who will say nice things about you.  Trust me, you’re going nowhere without the Reference Accounts.  You can get started making real money with fewer than 10, but once you get 10, you can quit worrying about the Kobe Beef process and hopefully you’ve treated your other customers so well they are automatically Reference Accounts too.

To get your first Reference Accounts is going to be a function of networking.  It will be rare that you can just walk in the door cold and get someone at a Big Company to make a bet on your sorry startup self.  No, it’s only going to happen with someone you or someone you know already knows because they’re the only people that’ll trust you.  Either your sales guy will crack open his Rolodex (sorry, probably starting to be peeps who don’t know what that is!) or you’ll talk to someone you golf with, or something similar will happen.  While that can happen outside Silicon Valley (or insert other Tech Mecca Here), it is more likely to happen in SV.  The reason is because the Big Cos with offices in SV have done this before.  If you go cruising into some Oil Business cum Frac company in Houston, Texas, maybe they haven’t ever taken a flyer on a fly by night like your startup.  Maybe your pal knows he can lose his job if it blows up, whereas in SV they know it is all part of being on the Bleeding Edge.  Heck they have offices there partially because they want to talk to people like you so some can rub off and become a balm for their Innovator’s Dilemma.

Thing is, if you’re going to need a bunch of Reference Accounts, consider that you might need to do that in Silicon Valley.

Conclusion (aka When Am I Leaving Silicon Valley?)

On balance, if I was a young guy living outside SV looking to Bootstrap a new company into being, I wouldn’t start by moving to SV.  I’d just go for it and I expect I would be successful sooner, making more money sooner, yada, yada.  I would care about VC because I want to Bootstrap and I don’t care about Enterprise Software because it’s too hard to Bootstrap.  I would make sure I was reading all the right blogs and I would figure out how to do some remote networking in case I needed a service or some advice from someone not in my burg.  It can be done and works pretty well.

If, OTOH, it was going to be critical to raise VC, perhaps because I want to do Enterprise Software or because I’m a Bubble-Riding-Fashion-Seeking-Consumer-Internet-Kinda-Guy, I’d quit fooling around and get myself moved to SV.  There’s no substitute for it.

If I was a young SV guy who’d had some success and was thinking of starting my first Bootstrap company, I would seriously consider moving out.  I’m talking about a someone who is either single or at least doesn’t have kids.  Getting off the salary crack pipe is hard, but if you’re at the stage where the equity in your house will practically eliminate the mortgage in another town and you need to get your overhead to be cheap, cheap, cheap, it makes sense.  Ideal would be if you can go as a Techie/Non-Technie founding team.  Move to Austin or some place together.  Think of the adventure.  You’d be successful and self-sufficient that much sooner.

Now I’m an older guy already living in SV and Bootstrapping a company.  When am I leaving SV?

I probably won’t ever leave SV.  Too many friends here and the kids are teenagers at that time when moving them is really tough.  I do think about it largely from an economic point of view from time to time, usually when I visit some place like Houston that is much cheaper.  Summers there are pretty nasty though.  If I keep having thoughts of moving there, I’m going to have to change my visits to happen during the summer.

Postscript

Hey, what about those VC Incubators?  How can I possibly be successful with an Incubator?

Sorry, but I’m not a big believer in Incubators.  They’re giving you very little in exchange for what seems to me to be a lot.  Largely they’re giving you confidence because they’re selling the age old self help value proposition:  “We know the formula for wealth and we’re willing to teach it to you for a price.”  Here’s a little secret: everything they are going to teach you is readily available for free or at very low cost on the Internet.  The only thing they have is their reputation which is the magic pixie dust that’s going to tell you that THIS is finally the one true formula.  Guess what?  There is no one true formula.

Go read the books by the 37Signals guys.  They have a great reputation too and it is a lot cheaper.

BTW, VC intros are part of that One True Formula.  Incubators can get them for you, but you can also get them for yourself.  It’s not really that hard but it is also not really that important.  I was getting them in frickin’ Houston, Texas at the tender age of 22 right out of school.

The VC’s won’t give you any money until you have something worth investing in.  Go get that done and you can get the meeting with the VC’s.

Posted in bootstrapping, business | 3 Comments »

No office, no boss, no boundaries: The Life of a Bootstrapper

Posted by Bob Warfield on January 7, 2013

LonelyUmbrellaI loved this CNN article that I found courtesy of Hacker News, except for the sketchy spin on loneliness.  It captures some of the lifestyle I’d like to have, though I’m not there yet.  I have been able to quit my day job, but I’m still low enough in six figures and busy enough with the business that living continuously on the road is somewhere, um, down the road.  To give an idea, here is what my day looks like, give or take a half hour on the timings:

6am to 7am:  Wakes up, triages email, RSS Blog Feeds, and News on iPad from bed.  Decadent, I know, and a disgusting habit, but I’ve grown to like it enough I will admit to it.  I use my iPad for information consumption and triage.  I hate typing on it (methinks the Microsoft Unicorn er Surface will fix that), so at most I read the email in Gmail and either star it for futher attention on a real PC or archive it.  This is a common workflow for me and I also use it for my RSS Blog Feeds.  I subscribe to about 200 blogs at the moment, so being able to rapidly triage is critical!

7:30am:  Sit down in front of PC to do CNCCookbook Customer Service.  Order fulfillment, question answering, and site metrics monitoring all fall in this category.  Between Customers, Beta Testers, Trial Users, and other miscellaneous contacts, I am dealing with a population of about 6,000 that want a piece of my time in some way.  My tools for this time include GMail, User Voice (my Customer Portal software), a PHP BBS clone (our User Forums which I call the Customer Club), Google Analytics, and Mailchimp if I need to check status on some mail campaign.  For example, every Wednesday morning we do a big mailing of our blog digest and I like to check which articles are getting the most traction.

8:30 – 9am:  Depending on how much is going on, I am ready to progress from customer service to writing software.  It’s important that I shut down the web browser and bring up my Agile Backlog (that lives in Excel because it is just so easy and I don’t have to coordinate with a team) and Adobe Flashbuilder.  Time for heads down software development.  I take a break after every 2 or 3 Agile Backlog items are retired or every 2 hours to hour and a half, whichever comes last.  I find the breaks refresh my ability to concentrate and help stave off a stiff back and neck.  Ideally a break will consist of a walk on at my new treadmill desk and a bit of Web Grazing (it’s more leisurely than Web Surfing) on my iPad.  Of course, I will take the opportunity to do a quick Customer Service check-in on the walk and deal with any issues when I get back to my PC.  If the weather is nice, I’ll take a short walk outside.  You can see Monterrey Bay from my house.  Breaks are 10-15 minutes and I think they correspond to time in an office spent at the water cooler, restroom, or chatting with coworkers.

11:30 – Noon:  Go to lunch.  Unless I am really in a crunch mode, I want to leave the house for lunch.  I have lunch with my wife MWF and with a co-worker, friend, or other contact on Tuesdays and Thursdays.

1 – 1:30pm:  Back to work.  I do a quick Customer Service check then I am back on the coding with breaks cycle.

3:30pm:  Go offsite for coffee.  I am a total coffeeholic.  My ideal office-style work environment will be within walking distance of at least one Starbucks-or-better quality coffee establishment.  I will then proceed to take people on walking meetings for coffee, one in the morning, one in the afternoon, instead of looking them in a conference room.  Works great.  Unfortunately, I can’t really justify more than one coffee outing a day in my new Bootstrapper’s Lifestyle.  I don’t have anyone to meet with really.  Nevertheless, there are quality of life issues, and it is important to step back from the individual tree I am banging head against at the moment to review the status of the forest.

4:45pm’ish:  Back to work.

6pm:  Dinner with Family.

7pm:  Back to work.  If I am really up against a deadline (all self-imposed, but they really always are), I will keep coding.  Otherwise, this is when I do my marketing work.  The vast majority of marketing at this stage consists of writing content.  I averaged 5 blog posts a week in 2012.  To do this work, I keep a big Delicious bookmark list of things that might turn into articles.  Or they might not.  If I can’t face writing at 7pm, I will allow myself up to 1 hour to go Surf the web to research article ideas.  The rule is I have to stick to content that is relevant to my audience.  Content creation happens about 5 nights out of the week.  The other two involve setting up A/B tests, working on web design, web analytics, and grooming my Agile Backlog for Marketing.  Everything except the Editorial calendar is managed from my Agile Backlog, including all marketing.  The Editorial Calendar works better by immersing myself in ideas and seeing what ignites the Muse.  Something always does.  Ideas either come from Surfing the Web, looking at my Delicious Bookmarks, or through Keyword and other Analytics Analysis.

9-10pm:  Knock off.

I don’t watch TV except for Kindle Fire episodes after 10pm.  When I went to Windows 7 64-bit, my last first person shooter computer game quit working.  I have studiously avoided starting on another.  While I do play games, they’re simply ones that get old after 10 or 15 minutes of play.  I follow this routine religiously 5 days of the week.  On the weekend, I follow the same routine unless there is a Quality Alternative.  The QA’s include a structured activity with the family such as seeing a movie or going dancing with my wife (we love live music).  The other source of QA’s is getting time in my own Machine Shop where all of this started.  That’s what I had to do to scrape up an extra 10 hours a week to start Bootstrapping with a Day Job and that’s what I’ve kept to since leaving the Day Job.

On vacations, I bring a laptop that is equipped to do all of this work.  I have access to everything from any computer thanks to the magic of Dropbox, 1Password, and having signed up for as many Cloud/SaaS alternatives as I could.  I prefer not to write code on vacation as time is short and that’s not why I am there, but I can and do keep up with Customer Service and will even manage to write a bit of content–more like 1 or 2 articles a week instead of 5.  If I know I will be travelling, I tee up 3 or 4 articles that can be published before I leave.

That, in a nutshell, is the life of this busy bootstrapper.  From my Bootstrapping Odyssey post you can get an idea of the marketing results and deliverables that can be accomplished on such a schedule.  From a coding perspective, Github suggests I committed about 900,000 lines of code (Adobe Flex for the most part) during 2012.  I only worked full-time the last half of 2012, so hopefully I can do more in 2013.

I love the Bootstrapper’s life I have found.  It’s hard work, sure, but I’d be working just as many hours at some Venture-Funded Startup if I wasn’t doing this.  I know, because I’ve done that 6 times before.  I’ve also had the luxury of taking long periods off between gigs. It takes time to find the right position at an executive level.  Periodically, I consider whether I would be happy retired and living off the fat of the land.  Then I spend whatever money I’ve made on silly toys in a move akin to the old explorers burning their ships in the New World so there can be no turning back.  Life is empty for me without the act of creating something–products, companies, new relationships, new experiences, and new interests.  Perhaps it is my sense of mortality, but I realize after just a couple of months that I haven’t yet accomplished everything I want to in life and it’s time to get back to work.

As for the loneliness aspect, the guys described in the CNN article need to get out more or something.  I miss coffee with co-workers, but I have always been an extrovert at heart and keep friends and contacts for years and years.  I’ve made a wealth of new ones as part of CNCCookbook, so the journey continues.  I was talking to one developer friend about Bootstrapping and he wondered aloud whether it would be possible to work from Venice, Italy.  I opined as how if the company were successful enough, I’d encourage it just so I could fly there periodically to meet with him.

Posted in bootstrapping | 7 Comments »

A Solo Bootstrapping Odyssey: 2012 Was The Year I Quit My Day Job

Posted by Bob Warfield on January 6, 2013

For those who like Bootstrapping Case Studies, here is mine.

2012 was the year I moved on from a Day Job and started doing my Bootstrapped Company CNCCookbook full-time.  I’m not the first to do so, and certainly not the last, but I thought I’d provide a historical background and then some data on CNCCookbook in 2012 along with lessons learned so far to help those that follow.  There are a lot of other stories along these lines that range from extreme bootstrapping successes like 37Signals to smaller successes like patio11’s Bingo Card business.  This is not my first entrepreneurial endeavor, but rather my 7th.  However, the others were all venture funded while this has been the first that I bootstrapped from scratch without any outside investment.

CNCCookbook was incorporated 2 years ago in late 2010.  We sold our first software in November 2010.  The product was called “G-Wizard Calculator“, and it is a very specialized calculator for CNC machinists.  I started the company largely because the Silicon Valley VC Startup scene had veered a long ways away from my vision of what startups ought to be and always had been for me.  I wanted to have fun building awesome software that solved real problems my customers had and gave them good value.  I wasn’t much interested in Riding the Bubble, lucrative as that can be.  I was more interested in doing the sorts of thing I read about from people like Seth Godin than in building the next Consumer Internet app.  In short, I wanted to build value the Old Fashioned way, or at least that was the delusional fantasy that has sustained me on this enjoyable journey.

I quickly discovered there’s quite a lot to be learned in the course of bootstrapping, but fortunately, I found all of it to be interesting.  Some of the key problems you will have to solve to build a successful one man software company include:

-  How to take orders and charge for the orders.

-  How to control access to your software so that you can have free trials, paid subscriptions and renewals.

-  How to get people to try your software.

-  How to provide customer service by way of answering questions and dealing with all the minutiae that comes of helping customers complete their purchases and learn how to use the software well enough to realize the value they’ve purchased.

-  How to keep the business moving forward and growing at an acceptible rate.

-  Perhaps most of all, how to juggle all the balls while getting everthing done and holding down a Day Job using only 10 hours a week.  If you can’t manage your time effectively, get fired up to do more after a long day at work, and know what not to waste time on, bootstrapping may not be for you.

Back in 2010, I had a reasonably thriving web site/blog that I’d started in order to chronicle the machine tool hobby I’d started 10 years before.  2007 was the first full year the web site was in operation.  Prior to the end of 2010, I did little to the site except write blog posts that were interesting to me on an irregular schedule.  People tell me I’m a pretty good writer, and I had a substantial readership with nearly 600,000 visits in 2010.

Here’s some data on site traffic from 2007 through 2012:

CNCCookbook Site Traffic

CNCCookbook Site Traffic

From 2010 to 2011 growth flattened out because I was splitting my attention too many different ways and not producing enough content.  At the end of 2011 I instituted a rule that I would not work on marketing unless it was after 7 pm in the day.  2012 grew like crazy because I had figured out the content marketing formula and I was cranking on good content rather than wasting time on things that didn’t matter.  We did very well ending 2012 with over 1.2 million visits.  Is that a lot or a little traffic?

Look at it this way.  The market leading CNC software company is Mastercam, and SEMRush says their organic traffic is 10,810 while CNCCookbook’s is 4,032.  If a one man shop can get 40% of the traffic of the market leader, I’d say that’s pretty good.  In fairness, they count on being sales driven and using a reseller channel, but even so, that’s not too shabby.  Not only does content marketing work, but it works well.

We attract our visitors entirely via the content, whether through referrals from other sites or via organic search traffic.  There’s no paid advertising except when I am experimenting off and on with it.  As a solo entrepreneur, I don’t have a tremendous amount of time to spend on site traffic.  In fact, I have a rule that I only do marketing work after 7 pm in the evenings.  The rest of the time is devoted either to customer service or building product.  Not only does content marketing work well, it is extremely time and cost efficient, at least if you’re good at producing content that works.

Despite my marketing “curfew”, quite a lot of marketing gets done.  To give an idea, I logged 126 specific events in my marketing event log that I use to try to understand what was going on when the various analytics changed.  Events are typically things like running an A/B test of some landing page.  There are another 100 or so items from my Agile Backlog for marketing marked as completed that didn’t deserve logging as events to compare analytics to.  As another metric, I wrote 239 blog posts–about 5 a week on average, during 2012.  In addition, there was more content produced, such as detailed tutorials on the two areas of industry practices that my two software products are designed to help out with:

-  Feeds and Speeds:  This term originated with manufacturing and machine tools, though High Tech embraced it too.

-  G-Code Programming:  G-Code is the “assembly language” of computer controlled machine tools.

Content marketing aficionados will recognize these latter two as the sort of “Evergreen” content that is extremely valuable in terms of SEO and generating a solid foundation of site traffic.

Early in the process of starting CNCCookbook, I decided Content Marketing was the only way to go.  As a bootstrapper, I didn’t want a business that required lots of expensive advertising because I didn’t want to invest the capital.  I had the opportunity to try my Content Marketing theories back before they were as fashionable as they are today.  I used both CNCCookbook and my day jobs at the time, Helpstream and Hotchalk, as the test vehicles for the strategies.  They worked extremely well for all 3 companies, which is a testament given how different they are:  CNC Manufacturing Software both B2B and B2C, SaaS Social CRM/Enterprise Software, and Online Education.

I had a real leg up with the CNCCookbook web site, because I knew I had already achieved a Content-Audience Fit and that I only had to learn how to optimize the content machine further.  My Marketing philosophy was that I would give away tons of valuable content (or at least content that is as valuable as I could make it, but the numbers show my audience felt it was valuable too) with little or no marketing “spam”.  I do not spend a lot of time asking for the sale and the content on my web site is designed to attract any machinist, not just machinists who are ready to buy my products right away.  As a result, I get to build a relationship and some reciprocity debt with my audience before I go for the sale.

The sales funnel works like this:

1.  Attract people to http://www.cnccookbook.com by offering valuable content that scores well in organic search.

2.  Priority #1 is to get them signed up to the mailing list so they can continue to receive the valuable content in weekly blog post digest.  At the end of 2012, we had about 16,000 names on our mailing list.  I get very decent open rates and site visits each Wednesday when I send out the weekly blog digest.  About 1/3 to nearly 1/2 of the list will visit as a result.

3.  Visitors in this active “content community” become aware of our products through content.  We report all product progress via the blog.  When solving any problem, mention relevant related capabilities in our software.  Report periodic special offers in the blog.  They also become aware through various “ads” that appear at the top of the screen (Hellobar), bottom of screen (homegrown slideup banner), and in the navigation panel on the left as well as the “Software” menu at the top of every page and the site’s Home Page.  All of these vehicles direct users to the various home pages for our software where they can sign up for a free 30-day trial.

4.  During the trial, we use an email drip campaign to try to make sure users are coming up to speed.  The email sent is intentially kept friendly and conversational and is directly from me.  I try to avoid making it too “slick”, and I try to make sure everyone gets what they need to come up to speed and be as productive as possible during the trial.

5.  The product itself also has a number of features designed to enroll folks into the community and help them along.  I’ve discussed these in a prior blog post.

6.  The product and email drip campaign will countdown at the end and present the trial user with links to purchase.

7.   Whether or not they purchase immediately, we work hard to keep them on our mailing list.  We run sales periodically, about every 6-8 weeks, that substantially increase our close rate (some folks will only buy at a discount), but we don’t want to run them so often that people only buy at the sale prices.  I think this timing, which was worked out via testing, has served us well.

To date, about 16,000 have participated in the product trial.  13% will end up buying, a number that’s pretty high for software free trials.  The software is sold via SaaS-style subscription at $69/year, and renewal rates are pretty decent, although we haven’t been selling long enough to see very much of that yet.  Sales in 2012 were up about 120% versus 2011.

The software side is interesting too, but I’ll save the technology details for another post sometime.

Going Full Time on CNCCookbook:  Lessons Learned

I went full-time on CNCCookbook July 1, 2012, so I have 6 months into it.  The company throws off sufficient revenue that I can pay myself what I would make in salary at a startup.  Typically, my position would either be VP of Engineering/CTO or CEO, and I’d be paid at the upper end of startup salary scales, so I’m pretty happy with CNCCookbook.  Our revenue grew 150% plus in 2012, and if it keeps on like that, it’ll be a very happy experience indeed.  I own 100% of the company, and have taken no outside investments.  I started actively trying to make it a business in mid-2010, at the 37Signals recommended pace of 10 hours a week.  I went full time after 2 years, and reached salary-parity with a Day Job, or Escape Velocity as I like to call it, 2 1/2 years into the exercise.  I love the business, products, and customers and I’m very pleased with the path I have chosen, so much so, I wonder what took me so long.

I’ve just started working part-time with some developers who I hope will ultimately join CNCCookbook when we’re large enough to be able to hire them.  Meanwhile, I have a 10-hour a week plan for them to participate, and that’s worked well.

In no particular order, here are some lessons and thoughts I have for others who want to try something similar.

Things That Worked

-  I had the luxury of starting this company having already achieved Content-Audience Fit.  I knew quite a lot about my audience, I knew what content they were interested in and hence what problems they wanted to solve, and I even had quite a lot of empirical web analytics data to go on.  In hindsight, I wouldn’t call all that a luxury.  I can’t understand how to do a decent job bootstrapping a company without it.  Anything else and you’re just building a product that you’ll throw over the fence and hope someone will consume.

-  I focus relentlessly on spending my time doing things that nobody else can do for my business.  If I can buy a solution, preferably SaaS, I will do that rather than build it even if I know I could do a better job.  That means I bought my e-commerce solution (1ShoppingCart), customer service (UserVoice), hosted wordpress blog (Page.ly), and a lot of other things.

-  I’ve taken a radically different approach to the back-end of my SaaS software architecture, which I call “Fat SaaS”.  In essence, I put as much intelligence as I possibly can into the client and keep the back-end very simple.  It all runs on Amazon Web Services, is highly scalable, very reliable, and didn’t take much effort to build.  Eventually I’ll write about it.  The thing is, focus your efforts on what your customers can see and be delighted by.  The rest is just plumbing.

-  I am firmly of the opinion that our high close rates are due to not only the quality of the software, but also because we don’t use the hard sell.  The trouble with a hard sell is that while it may increase close rates for those ready to buy, it can so turn off those who are much earlier in the funnel that they won’t return when they are ready to buy.  Having seen the process at a lot of companies, frequently they’re not even measuring the impact on the later tail of prospects.  They’re only interested in what’s closing in the next 3-6 months.  I still see significant sales even 1 year after the end of the free trial.

-  We appeal both to hobbyists (B2C) and businesses (B2B).  This sounds odd and unworkable, but for the community of machinists, it works fine.  Based on various surveys I have done, we seem to have about 60% professionals and 40% hobbysists.  The professionals will pay more and require less support, but the hobbyists get the word out in the various online communities.  The reason I can serve both markets is the participants are passionate about machining.  I believe passion is an essential litmus for content marketing success (and likely bootstrapping success).  If you can’t detect passion in the audience, how can you get them interested in your content?  How can you get them to tell others about it?

-  Only having 10 hours a week for the first 2 years was beneficial.  When you’re learning what to do, having a lot more hours available doesn’t necessarily help.  It takes time for the ideas to percolate, for the right influences to be felt, and for the results to be measured.  Heck, it takes time to think of all the ideas.  You don’t have them all up front so that all you have to do is implement them as rapidly as you can.  And of course, limited resources maximizes your focus.

-  Using an Agile Methodology to run everything including the business and marketing side has been hugely beneficial.

-  I have never owned or touched a server for this business.  It’s all been in the Cloud from Day One.  It started at LunarPages, my original El Cheapo ISV, and fairly quickly migrated to Amazon.  Today, the site is entirely on Amazon.  Static pages are hosted via S3 and we use the Page.ly service to host WordPress.  My order of preference in implementing a service is:

  • Defer it.   Do you really need it now?
  • Use SaaS.  They do it for a living.  Are you really going to do a better job or is it a distraction?
  • Outsource it.
  • Build it.  Least desirable.  If I build it, it better be highly differentiated and valuable to my audience.

-  I farmed out the simple back end we use for authentication so I could focus on the machinist-specific client.

-  There is a tremendous art to using Sales (by that I mean special prices for a limited time) to enhance your revenue and close rates without trashing your average selling price.  Learn to do that as early as you can through experimentation.

-  Measure everything.  My primary measurement tool is Google Analytics.  But, I get lots of data from SEMRush, SEOMoz, SurveyMonkey, and the various telemetry I’ve built into my product.  All the key data goes into a weekly marketing report as a row in a spreadsheet.  I focus entirely on the trends and let the absolute values work themselves out over time.  If the trends are right, you can’t lose.  There’s no more powerful force than compound interest.

-  Drive the business with the metrics.  If you can’t measure it, it isn’t real.  If you don’t have an Analytics + Metrics + Decision Making Machine, you don’t really have a scalable strategy, you have a bunch of gut ideas that may or may not work.

-  Taking on 3rd party software to resell.  See my note below about the Road Ahead.  This has worked extremely well for us and added about 30% to our top line revenue for very little effort.

Things I Wish I Had Done Differently

-  Our first product was easier to build, but was too cheap.  At $69 a year, you need a lot of customers before you can quit your Day Job.  Being able to charge even a little more would’ve accelerated the process, assuming we could still get it sold.  One of the problems is that being a solo bootstrapper, there were real limits to what I could produce, especially while having to learn all the other non-technical jobs.  A bootstrap team of 2 or 3 could attempt a much more ambitious first product and probably get to full-time viability sooner.

-  The scalable formula for growing a Content Marketing effort is simpler than I thought.  Over time, Google has made it harder and harder to play SEO tricks.  The more I wanted to find the Tricky Secrets, the more time I wasted.  This is one reason why I eventually limited myself to working on marketing after 7pm at night.  In mosts cases, only three things have mattered:  Doing good keyword research.  Doing enough A/B testing.  Producing great content.  Figure out what formula works for you, and as soon as you have a scalable formula, focus on scaling it.  Save time for a few experiments, but not too many.  You don’t have enough attention to split too many ways.  There is such a thing as Minimum Viable Marketing and it is just as important as Minimum Viable Product.

-  I made some bad choices on various services I signed up for.  This was mostly a function of being largely review-driven and not having a clear enough idea of my long-term needs.  The heart of the commerce platform for CNCCookbook is email.  Initially, I chose a service called 1ShoppingCart because it integrated everything I thought I would need in one package.  1SC turned out to have a very poor set of API’s and was better suited to sales of physical goods than SaaS software.  I’ve made it work, but at this stage, mostly as a shopping cart.  After having looked at a lot of email platforms, and gotten a pretty deep false start with Constant Contact, I am finally happy with MailChimp.  I would’ve saved myself a lot of trouble if I had started everything from MailChimp and built out around it.  Spend time reviewing the API’s of any service you sign up for.  You never know when you’ll want to dig into them.

-  I started with a static web site for historical reasons.  CNCCookbook was originally formatted much differently than a blog so it didn’t occur to me to use blogging software.  Today, I have integrated WordPress and love it.  If I had it to do over again, I would probably have simply built everything on top of WordPress.

-  Social Media are helpful, but deliver a lot less marketing value than you would think.  Automate your use of them and let it ride.

-  I got started focusing on my mailing list late.  There was no way to sign up for the list or even get a real RSS feed until the beginning of 2012.  This was a huge mistake.  A good mailing list is as much an asset as anything else your business will have.  Treat the people on it well by not wasting their time and you won’t be disappointed.

-  Our products are not a pure SaaS model.  When the subscription expires, the product continues to deliver considerable value, though far less than if the subscription is paid up.  The jury is still out on whether I gave away the cow instead of selling the milk on that deal.  I am happy with renewals, and it may be that without this feature I would’ve had far fewer sales to hobbyists, so I can’t truthfully say I would do this differently.  But, it is something I think about a lot.

The Road Ahead

CNCCookbook’s biggest problem is lack of product.  We have a fantastic readership, traffic is growing steadily, and the word of mouth around our first product and the web site is great.  It’s become the de facto standard and we’ve even signed up a bunch of big name manufacturers who use it.  Our problem is not having enough software to sell into this channel.  As soon as I realized this, I went in search of 3rd party software I could resell to this audience and was successful with a couple of packages during 2012.  I would guess they added about 30% to our revenues.  2013 will be the year we ship our second product, and hopefully also our third and our fourth products.  My suspicion is that this will radically scale the business along every dimension and I’m really looking forward to it.

I was pleasantly pleased to discover that once you have a one man SaaS business, you can run it from virtually anywhere in the world that has a decent Internet connection.  All my servers are in the Cloud, and all my tools will fit on a laptop.  Consequently, I’ve had the pleasure of being able to run the business from the cabin of my Alaskan Cruise Ship, from a rented condo on a dive trip to Cozumel, Mexico, and from my hotel room in Waikiki.  It’s been a real blast and I’m eagerly looking forward to what comes next.

Posted in bootstrapping, business, strategy, venture | 13 Comments »

We Consistently Bet On The Wrong Horses for Success as a Nation

Posted by Bob Warfield on January 1, 2013

Happy New Year’s all!

I’m waking up well-rested this first day of the New Year and my blog reader is full of more of the same as regards how to fix our ailing economy and what our nation should do going forward.  There’s quite a lot of hand wringing about how the Fiscal Cliff deal was too weak because it didn’t address spending, how we’re going to have to learn to get by as a nation with fewer and fewer jobs, and a bunch of other malarkey   I use the word “malarkey”, because I have come to believe that as a nation and a culture (both naturally and in the sub-culture that is high tech startups), we consistently bet on the wrong things for long term success.

In no particular order, let me use this post to tell you what I mean:

-  We’re focused on the Fiscal Cliff, raising taxes on the rich, and cutting our deficit.  Nothing wrong with any of those possibilities except that not one of them will help the biggest problem our economy faces right now, which is that unemployment is way too high.  In fact, a lot of it, actually makes that problem worse.  Instead, we seem content with the idea that if we tax the rich more and slash the deficit enough, that will somehow fix the problem.  Paul Krugman, love him or hate him, is a Nobel prize-winning economist.  I don’t much care for his politics, but one thing I’ll say for him is that whatever proposition he puts forth, he provides data to support it.  One thing he’s been saying since the mess started is more spending, not less is what’s needed.  He’s gone on to show vast amounts of historical data on why this is so and we have the very convincing benefit of a double blind test where Europe went heavily down the austerity path while the US went with a (not quite big enough) stimulus plan.  Guess what?  We’re much better off economically and you can see that in black and white.  Fred Wilson writes that we’re now going to have to endure a “Death by a Thousand Cuts“, and I think his sentiment is totally wrong.  If Keynesian economics is write, and the data continues to show it is, that those “Thousand Cuts” represent forestalling real spending cuts to a time when they can be better afforded and we don’t need the extra propping up.  Sure, the money could be better spent, but none of the proposals are about how to do that.  Bottom line is there is a ton of data on this stuff, the path is clear (spend when the chips are down and cut when times are booming), but we’re so focused on the wrong targets and so politicized this is ignored.

-  We allow ourselves to believe that the job problems are structural, that there will simply be fewer jobs going forward, and there is nothing we can do about it.  Fred Wilson’s partner, Albert, says as much in his New Year blog post, “Starting 2013 with a whimper“.  Krugman will give you link after link where he suggests it isn’t structural at all.  Heck, I have seen it myself.  I recently visited family in Houston, Texas.  The place is absolutely booming.  There’s so many jobs there is a danger of overheating.  At one point in the Presidential debates it was pointed out that 1/2 of all the jobs created during the Great Recession where in this one state:  Texas.  For a real eye opener, use Zillow to compare real estate prices there versus Northern California.  They basically never felt the crunch the rest of the nation is experiencing.  Why?  Because of the Oil Business.  It is a business that creates real jobs.  It is an industry that spends on expensive machinery that wears out quickly.  Machinery and technologies that were developed here, where we are the world’s foremost experts.  Machinery that operates under conditions of extreme stress and breaks a lot.  It’s an industry where we can’t afford to wait for a container of parts to come from overseas from the low-cost bidder because that is too expensive and the low cost parts just break again even sooner.  It’s an industry that can’t outsource itself overseas and keep all of its profits overseas to the degree Apple has.  Imagine what it would do for the economy if we were more focused on job creating industries like this one than on building the next advertising driven social network.

-  We’re completely focused on the need for ever more progressive taxes on individuals while having let the real horse, corporate taxes get well out of the barn.  All that chit chat about how great the economy was when individuals were much more highly taxed goes double for corporations.  In fact, the difference in historical taxation for corporations is much larger than for individuals.  We hear that raising taxes on corporations destroys jobs, but as far as any logic goes, it is quite the opposite.  The most profitable company on the planet, Apple, has vast hoards of cash sitting in the bank and what few jobs they do create are all overseas.  If their profits were taxed like crazy, two things would happen.  First, they’d have a much higher incentive to raise their expenses (e.g. hire more people) and invest rather than salting it away and paying taxes on it.  Second, it would result in indirect progressive taxation because it would be far less attractive to pay huge earnings multiples for a share of stock and it would be far less attractive to distribute profits as dividends.  Making capital more expensive wouldn’t matter though because Apple is clearly not a particularly capital intensive company else they’d be investing and not salting away all that cash.  Why aren’t we making corporate income tax hugely progressive just like individual taxes.  Leave small businesses alone and tax the heck out of the Apple’s?

-  As a complete aside from taxes, we are too focused on Big Companies and not nearly focused enough on Small Business.  It’s been shown time and again that Small Business creates jobs while Big Companies destroy jobs.  Yes, when Obama came to Silicon Valley, who did he meet with?

-  As a country, a culture, and in the Digital Technology Microcosm, we have focused far too much on price and not nearly enough on building the best there is.  It has become popular to say that because companies like Facebook have ad-driven models, “we are the product”, and that’s why we are not treated well even though we think of ourselves as customers.  This goes a lot further when we focus entirely on price (where ad-driven is the ultimate price focus).  Pricing focus destroys a disproportionate number of jobs while quality focus creates a disproportionate number of jobs.  There have been some articles that point this out.  A focus on efficiency can only free up capital.  A focus on doing fundamentally new things that haven’t been done before might create some jobs.

-  We are too focused on investing in endless get rich quick schemes.  The Darwinian model of throwing out a tiny bit of seed and waiting to see what takes off with little capital is just too appealing when you have a big portfolio to help balance the risks.  Unfortunately, it self selects temporary fashion hits and things that are easy to do (they have to be) and creates few jobs and very little lasting value.  Compare and contrast creating the world’s best system for frac-ing oil reservoirs versus reinventing a better system for restaurant menus and ask yourself which one is going to do more to buoy our economy and create good jobs?  Here’s the list of food-related startups the same VC mentions in his article on reinventing menus:

 E la Carte, and other food-tech startups like BlissmoChewseClubWCraftCoffeeCultureKitchen,DailyGobbleEcoMomFarmeronFoodAFoodSpottingKitchIt,GoSpotCheckLoveWithFoodMileHighOrganicsNetPlenishOrdr.in,ShopTouchTeaLetVen.ioWholeShare.

I just look at the list and see more of the same, no real companies, no real jobs.  What could have been done in terms of creating the next real software company if all the seed money that went to the long list of food-related startups from the same VC had been focused?  Half the stuff Dave bemoans as being missing I can get pretty close to with Yelp already.  Do we really need to divide that pie to finer and finer degrees?  And just because it is a popular meme for bashing, do we need any more photo startups?  Which among the ranks of the unemployed have the inclination to do all the dining out and photo taking to grow those markets?  It kills me to admit it, but it is enough to make me want to agree with Arrington–not only is this ineffective, it’s downright boring.

The worst iteration of this has been Wall Street, which successfully sold the doozy that a “Free Market” is the same as a “Competitive Market’, and that therefore we should deregulate them as much as possible.  It’s only the competitive markets where the invisible hand is strong enough to do the right thing.  Anything else is a monopoly of one kind or another.  Monopolies can come about in industry, and they can also come about when the leverage inherent in exotic derivatives and deregulation puts control of too much in the hands of too few who are then willing to make a profit no matter what the cost.

-  We are too focused on riding the bubble rather than on building lasting value.  I will refer you to my post on Riding the Bubble for more.  Just do a search on this blog for Bubble and you’ll see it isn’t a new theme.  The Bubble Riders are all Momentum investors because there seems to be very little Value Investing at all in the Venture World.  It’s a shame because the most successful investor of all time, Warren Buffet, is a value investor, not a momentum investor.  But, we live with a monoculture when it comes to investment thesis.

If all this is what passes for how it will be done in the future, we shouldn’t wonder if the economy continues to suffer.

Meanwhile, it’s a New Year.  We don’t have to keep doing things the old way.  Selfishly, we can realize that ultimately you have to be a Contrarian at some level in order to have an edge.  I hear the VC’s are ready to switch to Enterprise for a while.  Let’s all turn over a New Year’s resolution to look at a bigger picture, see a longer term, and consider a change.

We’re due for it.  This other stuff has been failing us for a long time.

Posted in business, strategy | 2 Comments »

 
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