Can We Ignore Churn Early On at a SaaS Company?

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.

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

There’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.

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

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

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.

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

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 Blissmo, Chewse, ClubW, CraftCoffee, CultureKitchen,DailyGobble, EcoMom, Farmeron, FoodA, FoodSpotting, KitchIt,GoSpotCheck, LoveWithFood, MileHighOrganics, NetPlenish, Ordr.in,ShopTouch, TeaLet, Ven.io, WholeShare.

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.

Converting Content-Audience Fit to Product Traction

Jason Lempkin has a new post out about gaining traction after your product ships.  He says it’s hard, much harder than building the 1.0 product which was already hard, and he makes some concrete suggestions on how to go about gaining traction:

-  Finish hiring your core team.  Presumably you’ve left the sales and marketing until post-1.0?

-  Get attention for your app:  ”Whatever you can possible do.  Go to every conference.  Speak at any possible event you can, no matter how small.  Win every award. Try to get every blog to write about you.  Reach out to anyone and everyone in your space.  Be respectful, but totally, utterly, shameless here.  Do whatever you can possibly think of here.”

-  Hit the pavement and get early customers and partners

-  Lavish attention on every single customer and lead

-  Plan your next release carefully–it may be your last

Wow, put that way, the job seems really tough!

After reading the account, I do have memories of startups that had to solve the traction problem through brute force and shoe leather.  They were painful and very scary.

The thing is, success is about being prepared (with a healthy dose of luck, though chance does favor the prepared mind).  As I tell my kids, “It doesn’t matter how smart you are, if the other guy already did the homework and knows the answer while you’re still trying to figure it out, he looks smarter.”

So it is with achieving product traction.  This is why I wrote my earlier post about achieving what I call “Content-Audience Fit” to tell Founders it has to be their first priority, even ahead of building a product.  Possibly even ahead of knowing what product you will build.  I say this for two reasons.  First, if you don’t know your audience, you can’t build a great product anyway.  While you might think you know your audience, how can you be sure until you have Content-Audience Fit?

If you have Content-Audience Fit, the following things are true:

1.  There is a reasonably large audience that is steadily growing and is consuming your content.  They care about what you have to say in the market you’re interested in.  They are subscribing to your mailing list, following you on Twitter, liking you on Facebook, or whatever other Social Medium works for your market.  Consequently you know what Social means to your market.

2.  You are part of the Conversation taking place on the web for your chosen market.  You are posting in their online communities.  You’re on the blogs of the key influencers (you do know who they all are, don’t you?) commenting.

3.  You are so familiar with the commercial players in the market that you’ve helped the Market Audience understand some of them better.  You’re commenting on their blogs too.  That establishes you as an agnostic authority in the market.

4.  Because of your participation in all the right conversations, and because of the quality of the content you’re producing, Key Influencers will recognize your name.  You are beginning to get folks asking you unsolicited questions as a recognized Expert.

There is a not-so-subtle difference between this Content-Audience fit and “Get attention for your app”.  It’s because you’re getting attention for your content.  You’re establishing yourself as an expert, not a guy shilling your products and company.  Because your content is very high quality and it’s being given away freely, you’re invoking the principle of reciprocity, which is a powerful force when marketing and selling.  You’re laying the groundwork to present your selling proposition from a position of strength, after your prospects have already decided you’re the expert.

Imagine being able to validate your product vision, and eventually early versions of the product with that kind of Audience insight.  It’s invaluable.  It should be a requirement.  Yet so many companies build the product first and consult the Audience afterward.

Second, you need a strategy to make this business of gaining Product Traction easier.  I love the definition that strategy is what you do to make winning easier.  If you ever needed a strategy, it is when you launch your 1.0 product!

So how do we convert Content-Audience Fit to Product Traction?

Back up.  Let’s get the timing right first.  You don’t want to start trying to achieve Content-Audience fit after you’ve built Product 1.0.  That’s way too late.  Here’s a mini-case study:

I took Helpstream, a Social CRM startup, from being invisible to having a successful blog that had achieved Content-Audience fit in about six months.  At the end of the six months, the key influencers knew who we were and were starting to write about us.  For example, Paul Greenberg, the “Godfather of CRM”, wrote a short passage that perfectly signals good Content-Audience fit:

A few weeks ago, I had a discussion with fellow Enterprise Irregular Bob Warfield, who is the EVP of Products for a company called Helpstream. I have to admit, when I saw Bob’s rather cogent commentaries on the Enterprise Irregulars site, I became curious as to what he did and what the Helpstream company dealio was. I asked him and we set up a demo and a conversation between me, Bob, and Anthony Nemelka, the President and CEO of Helpstream and a long time industry veteran.

That second sentence telegraphs where we’re going and why Content-Audience fit is so critical to a product launch.  Because of my “cogent commentaries”, Paul asked us for a demo.  Imagine Content that is so good, the key influencers are coming to you, rather than you going to them hat in hand trying to get a meeting.  I would budget a minimum of 6 months and perhaps as long as 12 months to achieve your Content-Audience fit.  Sounds like you need to get started at the same time you start the Product, right?

This is an insight that is missing from many startups.  In fact, many want to do a stealth launch and keep everything secretive.  Feel free to keep your product aspirations a secret, but you’re nuts if you’re not belting out super high quality content for your audience from Day 1.  That means as you sit around the table with your fellow Founders, and you ask the question, “Who is spearheading our drive for Content-Audience Fit and who is writing all that content?”, there had better be a good answer.  That marketing guy you partnered with who has never actually done a blog, he has just simply hired people who did blogs?  We might be past the evolution in how marketing is done for that to be a good idea.  First question I ask any marketing candidate at any level is, “Show me your blog?”  If the response is, “Huh?”, the interview is not going to go well.  It’s no different than asking any question about marketing deliverables.  Would you hire someone who had never had any contact with advertising of any kind?  Content marketing is so critical to small companies, how can it be an afterthought?

As an aside, I recently came across a bootstrap business called, The Wirecutter.  The Founder achieved Content-Audience fit before they ever started this little company by writing for Gizmodo, Wired, GadgetLab, and MaximumPC.  How about grabbing one of the big name bloggers in your space as a co-Founder?  How about at least as an advisor to help you get to Content-Audience Fit?  Have them brutally critique your content until you get it right.

BTW, people like Paul Greenberg have extremely high standards.  There is a reason they get nicknames like the “Godfather of CRM”.  They are trusted and they didn’t get there by being dummies or shills.  If your content doesn’t have something really meaningful to say, you’ll get nowhere with this strategy.  But if you get the meeting because your PR firm pounded hard enough on doors, and then in the meeting you still have nothing to say, you’re going nowhere anyway.  So:

It is critically important to do the work of achieving Content Audience Fit!

That’s it.  Full Stop.  End of Sermon.  Don’t.Mess.It.Up!!!

Okay, now imagine you’ve got that fit, as defined by the 1,2,3,4 list above.  Let’s use it to produce traction.  This is done in the following ways:

The Audience that’s ready to Jump Now is ready.  Invite them in.

There are always those influencers who get an edge by working harder to learn than the others.  Always those prospects who are ready to buy now and want the new new thing.  If you have achieved Content-Audience Fit, all you need do is announce the availability of a product and any of these people in your audience will be likely to check in.  Start with  your Beta Test.  You can keep it as controlled as you like, but put the announcement out through your content channel and be sure to communicate at least your value proposition well enough so people will want to jump in.  If you don’t have a big enough audience yet that having 5% of them answer your invitation, you don’t have Content-Audience Fit.

Give the Early Adopters an Amazing Deal and Make Them Heroes

You don’t need revenue yet, you need credibility.  You put out the call to action, and the right people have self-selected by coming forward.  They like you or else they wouldn’t have come forward.  They’re active in the online world or else they’d have no idea you existed.  They’re raising their hands to tell you they care.  Make it easy for them to feel like that was the best decision they ever made.  Focus your spotlight of attention entirely on them.  Save your bandwidth so you can give them completely unreasonable amounts of it.  Make them heroes and they will make you a star.

You need to charge them a little bit or it isn’t a real transaction.  Give them the best deal you will ever offer in your corporate history and make sure they know that in the nicest possible way.  Give them attention and services that will never be available to others in even a year’s time.  Plug every member of your team into the success of these early customers.

When that fire has caught, you can ask them for a favor.  You can ask them to help you get the word out.  At the very least, you need them to be a willing and able reference.  Next step up, you need them to be a case study.  Grand Prize:  you need them to be a source of referrals.  Try to discreetly make sure when you sign them up that they’ll be able to do some of this, at least serve as references.  You can’t ask for that favor up front, but you can find out if they’ve ever been involved with early software, done references, yada, yada.

Earn the Right to Raise Your Price and Sell Bigger Deals

The company I mentioned earlier, Helpstream, had nearly every marketing automation company as customers for our Customer Service Social CRM product.  I remember calling each of these CEO’s, who were all entrepreneurs like myself, and asking them what Helpstream could and should do going forward.  Phil Fernandez, CEO of Marketo, shocked me by telling me, “Bob, I don’t know if I should be saying this, but you should raise your prices.”  Even more shocking was that Phil wasn’t the only one to tell me that.  So we did, after carefully making sure to grandfather existing customers with appropriate agreements so that they were taken care of.  There was virtually no pushback whatsoever, and it helped the business tremendously.

What had happened is we had earned the right to raise our prices by delivering on our promises and raising our credibility.

The ability to price higher comes most from credibility.  Sure, you might have the world’s greatest product, but nobody knows that if you don’t have the credibility.  Can you see where having good Content-Audience Fit is the first step on the credibility journey?  Beyond that first step, it is your conduit for telling your customer’s stories and continuing to build that credibility.

The next step is being able to tell your Early Adopter’s stories.  In terms of closing business, there is nothing like being able to have a prospect talk to a customer that gushes about your product.  At Callidus Software we used to invite prospects to our User Conferences precisely to maximize the exposure to that kind of sentiment.

Startups are enaged in earning the right to raise prices and to sell bigger deals throughout their history.  Successfully getting your first 5-10 reference accounts is just the first rung on that ladder.  Each company you sell to would like to know that they’re not the largest deal you’ve ever sold.  Raising the size of your largest deal earns you the right to sell even larger deals.  Accumulating this asset of referencibility is your primary deal closing accelerant until you’re large enough to point to being the market leader or perhaps to being a public company.  Gordon Moore’s Chasm Crossing can largely be seen as the process of establishing the credibility needed before those who are not Early Adopters will buy.

All along your journey, your Content continues to establish your company’s expertise in its chosen field.  You never walk away from that–you just keep building on it.  If your references are your Sales Accelerant, your successful Content is your lead generation accelerant.  Establish your web properties as the go-to spots to learn about what your customers care about.  All the best marketing startups like Hubspot, SEOMoz, Marketo, and Eloqua are working this way.  Maybe that’s a clue for the non-marketing startups that this is how marketing is done these days?

Lead With Content for Competitive Skirmishes and Insights

Competitors are great for startups.  If you’re the only one in a market, you have to undertake to grow that market all by yourself.  With competition, the cost is shared and the market can grow much more quickly.  In addition, picking a fight is a sure way to add passion to your content and help drive more traffic.  You can’t agree with everybody, but you need to agree with the position your key audience want you to stake out.

Take advantage of that with your Content strategy.  See which conversations your competition are dominating and wade into those conversations with your own viewpoint.  That viewpoint has to carry substance, but when it does, if you win the audience’s hearts and minds who are watching the conversation, they will come your way.  You can’t win them all, but this is where you start stacking up the different value propositions.  This is where you carve up the market into micro-niches that are looking at things each a little differently.  Here’s where you find out which micro-niches matter, and which ones are dead ends best left to the competition.

Passive sonar gained by just passively consuming the content from your space is great, but so much more can be learned through active pinging of the landscape.  See how they respond to your messaging, analysis, and insights.

Conclusion

There’s a lot of work required to achieve traction.  But, if you subscribe to my Content-Audience Fit idea, you’ll begin that work Day 1 at your company.  When you’re ready to enter Beta Test, you’ll have a lot more going for you than your sales guy’s contact lists and willingness to burn through shoe leather.  You’ll have an audience that wants to come to you, embrace your product, and help you spread the word.  FWIW, Helpstream wasn’t my first or last experience with Content-Marketing Fit.  My bootstrap company, CNCCookbook, thrives on the notion today.

Reading News on an iPad is Astonishly Bad UX

Hi, my name is Bob Warfield, and I am a news junkey.  I subscribe to about 200 blogs in my feed reader.  I alternate between my Gmail, Google Reader, and Google News when I have a spare moment of leisure, looking for something new and exciting to discover.  I do this almost entirely on my iPad because it’s nice to get away from my home office desk where I spend most of my time working on my bootstrap company, CNCCookbook.  More and more, I am considering reducing the frequency of my access to Google News and primarily limiting it to my desktop.  The reason?  The User Experience reading news there is astonishingly bad.  Mind you, it’s only a little bit better on the desktop, but I find that accessing it with Chrome instead of the iPad’s built-in browser smooths the journey just ever so slightly, and it needs a Hell of a lot of smoothing.

Welcome to Smoothspan Blog, fasten your seat belts, and keep arms and legs inside the car at all times, because it’s been awhile, and it’s time for a good rant.

Before I go much further, let me give some absolution to Apple and the iPad, though the browser on the device surely could stand to be better.  Some part of what I am about to report is potentially browser related, but I do understand the iPad browser is more like an innocent bystander than the slavering maniac who is dishing out the BS causing my pain (sorry, a little of my inner monologue keeps slipping out when I’m angry).  I will also give partial absolution to Google and their News reader.  Again, it can only be partial, because just as Apple could build a more robust browser (you’ll see what’s needed shortly), Google could treat their news sources like they treat everyone else.  There’ve been SEO-related Google Search releases that heavily penalize sites that are too spammy, for example, but you don’t have to spend long accessing the literary giants like the New York Times via the Google News to see that those who are supposedly well above the commonplace web are offering a UX that has more in common with the worst days of America Online (AOL for you young ‘uns) than it does with their high falutin’ words.

With that aside, it’s time for me to explain what my problem is, and the good news it that it is simple.  When I open the Google News page, here is the sort of thing that happens to me more often than not:

I click an article only to discover I can’t really read it without subscribing due to the pay wall

For example, the Wall Street Journal has been doing this to me.  I’ll wind up on a page with a big giant Pay Wall notice and there is maybe one sentence of actual story text.  Of course Google got to index the whole story and placed it in their News Feed according to the full text, not the one sentence.  This is in violent contradiction to their normal webmaster guidelines where making the experience for Google differ from that of average viewers is strictly Verboten.  It is also in contradiction to their recent changes that heavily penalize pages that show much advertising above the fold.  Advertising?  Fold?  Hah!  On the WSJ stories I’ve been seeing there is nothing but advertising above the fold.  I don’t care who they are or what kind of national treasure their journalists may be, this is spam, served up steaming hot by Google and the WSJ.  Oddly, while this happened to me three times this morning on the iPad, there was no sign of it on my desktop.  I’m sure there’s some cookie or other thing counting off my accesses, and since I mostly read on the iPad, it gets dinged first.

BTW, NY Times, just because you let me see 10 or however many articles before your Pay Wall popup, I’m not any happier.  How about this:

Unlimited articles if accessed via Google News, and however many your Pay Wall allows if I go there via search, a referral link, or directly?

I click on an article and I’m immediately greeted by an offer to download their iPad app

Oh goody.  That’s just what I want.  Guess what guys?  You are needlessly and annoyingly delaying me on the journey to my reward.  I am reading from a feed that has God knows how many different news publications.  What are the chances I want to download an app for each and every one?  This is the Internet in the 2000′s.  There may be some people who want to sit at the breakfast table and read your waste of wood pulp cover to cover.  Leave them to doing that on the wood pulp and leave me out of it.  At least get the hint when I say, “No” the first time and quit asking.

I click on an article and it freezes and reloads multiple times.  Ultimately, it may just crash.

This happens constantly and is the robustness issue I hold Apple partially accountable for.  Apparently, in order to enact their diabolical Pay Wall, Advertising, and Privacy Subversion schemes, the newspapers have to run such wretchedly abusive Javascript, that the browser just can’t handle it smoothly.  I don’t see this in Chrome on my desktop, but it is constant on the mobile devices.  Something comes up.  You start reading.  You might even get one little scroll in.  Then the screen repaints and you’ve lost your place.  Or it freezes and you can’t scroll further until the diabolical machinations have completed.  This may go on through two, three, or even four cycles before it finally settles down.  On any of the cycles, there is a finite chance that the browser evaporates completely due to a crash and you’re left staring at the desktop.  Now you have a question to face, because that newspaper has just asked you in true Clint Eastwood fashion, “Do you feel lucky, punk?”  If you do, you’ll reload.  If not, you’ll demurely return to Google News and look for some other story to read.  After all, you were probably not worthy of the high quality journalism and you mercifully just missed seeing that damned pay wall or an offer to download an iPad app.

Here’s a news flash, if you’ll pardon the pun:  you newspaper guys should fire your IT departments that write this stuff and pick up a nice copy of WordPress.  I never see these problems reading the 200 blogs I subscribe to.  Never.

And gosh, you might save enough to invoke the Pay Wall less often.

I click on an article and it is video.  Worse, it is video that can’t be played on an iPad.

Yes, Steve Jobs can still reach out from the grave with his hatred of Flash and stop us in our tracks on his sacred iDevices.  Excellent.

I don’t tend to like video at all on my iPad.  Playback is often painful, buggy, or nonexistent.  Yet, there’s no way for me to tell in advance that I am headed into a video-only story and that worse, it won’t even play on my iPad.  Sorry Google, I gotta blame this one on you, and yes Apple, you too.  Silly buggers, why did you think this was a good thing?

After I get done reading an article and go back to Google News, it insists on repainting

Hey, love the real time spirit.  But if you spend half your time waiting for repaints either in the news story or Google News, a lot will change and you’ll never even see it.  You Google guys are supposed to be algorithm experts, how about a little algorithm here?  How about if the story isn’t that big a deal, if it is just a rehash of something you already showed, you don’t refresh that more than every 10 minutes or so?  Gimme a chance to get to the bottom of the page once anyway.  If some amazing thing happens, and I’m trusting your algorithm mightily to understand and be reasonable about the definition of “amazing”, then feel free.  But don’t just do it every time anything at all has changed on the front page.

Okay, how do we fix this crappy User Experience?

I could go on for quite a while in that vein.  The UX here really is pathetically bad.  I spend literally hours on the net and never experience anything like it until I get started reading News stories.  That ain’t right.

One approach is for Google to penalize the egregious and Apple to fix their darned browser so it doesn’t crash so much (I have to laugh about the claim Flash accounts for most crashes on Apple devices, pretty sure it is this browser which crashes more than anything I run on my iPad, Flash/AIR apps included).  That’d be nice, but Apple being Apple (“we don’t need no steenking Google Maps and we’ll ship whatever we please whenever we please”) and Google being Google (“honestly, we don’t mean to be Evil, we just are”), that might not happen.

How about just putting some Social voting into Google News?  This way Google can point to real facts from users if the NY Times wonders why it is getting less traffic?  Or, they can point to real facts when Bob Warfield is on a rant and tell him to sit down, users clearly don’t agree.  I believe a lot of good comes of group curation.  Unfortunately, I am just not sure Google cares a lot.  It’s pretty hard to tell what they do care about these days.  Google News might just be something they do so as not to leave an exposed flank and they don’t need to do it particularly well before moving on.

Or, how about counters?  Imagine if each story told what % of the time it was crashing your browser, what % of the time you’d have to go through some full page ad for mobile app or other, the average time it would take to load (another thing Google penalizes everyone but the newspapers for), and, well, you get the idea.  Heads would roll.  Things would get better.

I do find myself wondering about Yahoo.  I used to read their news before I became a Google Guy.  Unfortunately, they’re the people who will constantly log me out of my stock quotes to force me to type in my password expressly so they can sell a full page ad on their login page.  Do I think they will offer a better UX?  Nah, probably not.

(End of Rant)

Wishing you all Happy Holidays and be sure to check out the Geminids meteor storm tonight.  It is happening at a quasi-reasonable hour even.  FWIW, I hit many of the worst problems described above trying to find the details on the Geminids and that’s what drove me to the keyboard.  Sorry for the interruption, and please return to your normally scheduled activities as I will mine.

The Very First Thing a Founding Team Needs to Do: Achieve Content-Audience Fit

A lot of entrepreneurs,  when faced with the question, “What’s the most important thing to do first?”, would answer, “Build a product.”

Big mistake.

The most important thing to do first is to find an audience.  It may be that building a product is an integral part of growing your audience, but you’re not ready to build a product or grow your audience until you’ve found the right audience to start with.

How will you know you’ve found your audience?

There are some important signs.  For example, you can participate in their communities and be well received.  An even better test is you can get their communities to consume your content.  Before you’re going to have much hope of achieving Product-Market Fit, you’d better achieve Content-Audience Fit.  When you have that fit, when traffic to your web site is growing steadily and you’re starting to get some big spikes in traffic from particularly compelling content, you’re close.  When you can measure growth in the audience’s commitment to your content, for example, when your mailing list for your blog is growing and people are clicking through the weekly digest to get to the actual articles, you have achieved some degree of Content-Audience Fit.

Content-Audience Fit is a surprisingly high hurdle.  It is higher than getting a bunch of random people to sign up to try a free software product, for example.  The reason is that there is less value being offered by the content.  People actually have to be willing to spend some of their attention on your content simply because it is that good.  They do it because you’ve demonstrated you understand what they want and that you have something worthwhile to offer.  There are tons of people that will play with some free piece of software for a short time, and you’re probably not even set up to measure how hard they played with it yet.

With Content, all you need is a blog to deliver the Content from and Google Analytics to measure its impact.  Maybe augment that with a MailChimp account so you can actually start to aggregate some followers to your Tribe and use the Analytics there to tell how committed they are.  Anyone who is willing to undertake the hard work needed to consume your Content and decide they like it well enough to want to keep consuming it is a valuable member of your Tribe.  The more you can grow the Tribe, the more voices there will be to help you get your message out, to tell you what problems they need to have solved, and to guide you in the next phase of your journey:  achieving Product-Market Fit.

To be a successful Bootstrapper, you’re almost certainly going to have to be a Content Marketer anyway.  Advertising is typically going to be too expensive before you get some capital and a following.  So do yourself a favor.  Forget the product for a little while.  Focus on achieving Content-Audience Fit.  When your past striking flint and blowing on the tinder, you’ll have a little fire glowing.  It’s a big accomplishment.  So far it’s just kindling, but soon you’ll be ready to throw a real log or two onto that fire.  That’s when you build your product, as soon as the Content Kindling has caught and you can see some actual flames.  The timing will be perfect, because your costs will go up and your available attention for producing product and content will go down as soon as you ship your product.

You can’t afford to be just starting to look for Content-Audience Fit after the product is ready to ship.  That’s too late.  And it’s a terrible time to discover your market has no passion for what you’re trying to do.  That bit of news was tragically knowable with a lot less effort if you had only started out finding an Audience.

Extra Credit Note to Investors:

If you find a team that knows how to create a product, we both know that’s not enough.  You’ve raised the bar on that some time ago.  But if you find a team that has achieved Content-Audience Fit, they’ve demonstrated a critical marketing skill.  At the very least, you know that this team can present compelling content that draws a significant audience.  Combine that Audience Insight and ability to compell the Audience with a decent Product and that’s the essence of a startup that will grow.  I am surprised every time I walk into a startup and ask who in Marketing is a hard core blogger and hear back that basically nobody is and they’ve outsourced that task to technical writers of one kind or another.  Those startups are proceeding on a wing and a prayer that they actually understand their Audience.

The Series A Crunch: One More Reason to Bootstrap and Skip Venture Capital

I’ve talked a lot about bootstrapping on this blog–I am a total convert, and I’m enjoying every minute of bootstrapping my own company.  There are many reasons for my enthusiasm.  Investors these days are going to make you take most of the bootstrap journey before giving you a dime being one of the biggest.  You’ve got to build a product, you’ve got to get customers, and you even have to show some kind of decent momentum.  No more raising money on a slideshow idea and a team.  No more just build a cool product and get money.  You really do have to go quite a ways on your own nickel.

Yes, there’s a little bit of seed money to be had, but what are you really getting for that?  What is that transaction all about?

In the end, it’s about getting very meager wages in exchange for handing over a lot of equity and control to some strangers you’ve just met.  Are you really that concerned about a job?  Should you really be calling yourself an entrepreneur if you are?

I like the 37Signals take on the whole bootstrap thing.  They simply ran a consulting business to pay the bills and agreed amongst themselves they would each contribute 10 hours a week to their startup and they’d make sure it was a solid 10 hours.  By following that journey they produced not only the Basecamp product but Ruby on Rails as well.  Yeah sure, not everyone is as brilliant, but that’s not bad for having paid the bills through consulting.  Why do you need to raise capital again?

Whatever your thoughts on needing the capital, Sarah Lacy delivers one more crushing reason to find another way:  the Series A Crunch.

Folks have been talking about the coming Series A Crunch for a long time.  There simply is not enough later stage VC to support all the thousands of seed companies that have been started.  Lacy says that people she’s talked to suggest only about 20% of those seed companies will get another round.  And trust me, not a heck of a lot more will get the Series B after that.  There’s never enough money for the next stage simply because that’s how the plan works.  The plan is to provide as little capital as possible, get as much control as possible, cut off anyone who doesn’t produce phenomenal results, and then double down on a the very few that are left.  Rinse and repeat until you get to IPO’s.  Growth less than 2x a year is not tolerated.  3X is about right and more is better.  You will be stack ranked against the other deals the investors have seen constantly.

Mike Maples says that every year there are 10 awesome companies created.  John Collaghan of True Ventures says there are about 2000 companies a year getting seed money.  Let’s run the numbers.  For a Consumer Internet play, we’re talking perhaps 5 years and for an Enterprise SaaS play let’s use 7 years.  Further, let’s say we raise enough for 18 months each time.  This is an easy problem to set up in Excel, but I will save you the trouble.  To go from 2000 to 10 in 5 years means 4 18 month rounds and only 17% of companies are getting funded each round–that’s pretty close to the 20% Lacy quotes.  To go from 2000 to 10 in 7 years means only 35% are getting funded.  I’m not surprised, it’s easier to show steady progress in an Enterprise SaaS deal whereas Consumer Internet is more of a hits business.  What you have to keep in mind is the winnowing rate is going to be much worse on the early rounds.  The VC’s have a much lower sunk cost, it is concentrated with fewer investors, and you have a lot less to show for it.  At the later stages it’ll be a lot easier to argue the company is just fine tuning for some minor challenge or other, but that the market and product fit for that market are well proven.

BTW, whichever path you take, you are signing up for a lifetime of clearing some amazing hurdles.  What’s telling is that when asked about what happens to the companies that are merely “Good” and not “Great”, according to Lacy, Maples response is, “Screw ‘em.”  And that’s the problem for the entrepreneur.  Unless you are building a $1 Billion revenue company, and you’ll get the acid test with every round you raise, you’re going to work very hard for low wages and wake up one morning to discover you’re done.  The VC’s won’t put any more in.  The doors are closed.  Note that despite making the Founders millions, and continuing to pay off, with no Board to answer to, 37Signals is merely a “Good” company.  The VC’s would shut the doors on it or sell it off without a second thought.

Welcome to the “Unsustainability of Hyper Growth VC Startups” as I called it in an earlier post.

It’s a crazy world indeed where you can do a fantastic job building a “Good” company and have it be judged inadequate.  If you’re unlucky, you’ll be one of those companies that got to profitability and needs no further investment, but the company just keeps going and going, unable to pay out to the Founders like a true Bootstrap can and unable to achieve a Liquidity Event that satisfies the VC’s appetite.  They’ll be after you to sell the silly company out where their preferences will put most of that return in their hands or to take some extreme risks in order to pivot and have a shot at one of those $1 Billion opportunities.

Here’s a radically different way to think about the capital:

1.  You need to go most of the way through Boostrapping to start.

2.  If you wind up with the kind of wildly successful company that just might qualify to a VC as one of the 10 “Great” companies, you can always raise the money later.

3.  If you are measuring everything the way you should, you will know if you could’ve been “Great” without having to spend the money.  Remember, the VC’s were going to dole it out pretty slowly anyway.  Your biggest obstacle is you won’t have the capital to make it on an advertising model or to give away your product for years while you ponder possible ways to monetize it in your Ivory Tower.  Good luck with that stuff right now anyway.  Andreesen Horowitz VC Chris Dixon says 10 million users is the new 1 million and Fred Wilson says the late stage world is switching to Enterprise which isn’t ad-driven anyway.  Having to actually charge for your product is a small price to pay.

4.  Given all that, you’re not talking about an awful lot of personal investment to just build the company until it pays your bills.  If need be, you can follow the 37Signals plan and invest 10 hours a week.  You’re going to be either spending your savings or your spare time, but let’s face it, are you really an entrepreneur if that bothers you?

5.  Fast forward down the road.  You’ve done extremely well.  You paid your bills by year 2 like many Boostrappers have.  You have a company that has doubled beyond that every year for 5 years.  Maybe you did even better.  You’re sitting on a company with less than 20 employees (probably 10 or 12) that’s doing $6 or $7 million a year.  If you have something that could be “Great” in the VC sense, you’re probably doing $10-12 million or more.  Now if you really want to swing hard for the fence, go raise VC money.  Do it like the Github guys did.  Take down $100 million in capital.  Cash out $10 million for yourself and put that in the bank.  Keep running for that brass ring and be secure knowing whatever happens, you not only have the $10M, but you built the company the way you wanted without a lot of interference and you’ve had to give up far less equity because you waited.  Or, forget the VC’s.  Keep putting several million of the company’s $10-12 million a year in your pocket.  Keep doubling every year.  Don’t wait for them to say, “Screw ‘em” because yours is just a “Good” company.  Now you’re the one who can say, “Screw ‘em”.  And remember, the more successful you get, the more easily you can raise money or sell the company to a larger player.

It’s not bad work if you can get it.  Come on–you really going to take those Two Aces (a “Good” hand) and turn them in because you hope for a Royal Flush (a “Great” hand)?

Most Hiring and Investment Decisions are Terrible Due to Pattern Matching

One often hears venture capitalists refer to their decision making process as “pattern matching“.  This reference to machine learning (and a fuzzy match really ought to be pattern recognition, but hey, the techies aren’t using this language so much) is intended to sound smart.  One envisions coupling years of hard-earned experienced with the biggest neural net found between two ears.  Unfortunately, all too often, pattern matching involves making inferences from a statistically insignificant amount of data and calling that a formula for success or wisdom.  It’s just noise, yet we see it so very often at work in making the most important of decisions.

Consider the decision of who to hire.  I recently read two articles that smacked heavily of pattern matching.  First was a write-up in the San Jose Mercury News on Silicon Valley’s Age Bias.  While cultural biases are certainly at work (people of similar ages simply relate to one another better), those making decisions from any greater gap in years are doing so based on pattern matching.  A careful reading of the article yields the best advice for job applicants is to:

- Ditch your wrist watch, they’re Old School–kidz these days use their phone.

- Make sure you have fruit on any electronic devices you’re toting.  No Dell or Blackberries please, if Steve Jobs didn’t envision it, it is a boat anchor holding your career back.

- Shave your head or dye your hair, and invest in as much cosmetic surgery as you can afford.  Wrinkles are Verboten!

- Lose the Bally Executive Loafers grandpa, and don some Converse High Tops.  While you’re at it, forget Faconnable dude, and get a hip tee-shirt.  Maybe I will wear my “There’s no place like 127.0.0.1″ to interviews.

It’s possible those are useful attributes for executive success, but they sound to me like noise and affectation.  In other words, they’re trying to game the pattern matchers.

Jason Lemkin has his hiring pattern matcher running at full song when he advises not to hire CEO’s, Architects, Gamers, or Dualies.  Dang, I’m shot down on two before I even get started since CEO was the very first job I ever had and I have been a “Dualie” (VP of both Engineering and Product Management) on a number of occassions.  I can’t agree with a single one of Jason’s pattern matching rules and the reason is simple–I know too many exceptions for each of them, not even including my own personal work experience.  The reasons why they’re exceptions begins to lay the groundwork for why pattern matching results in so many bad decisions:

When hiring or investing, we want the Exceptions, not the norms.  

But, Pattern Matching weeds out the Exceptions before we even get a chance to consider them.

That’s worth repeating again:  when hiring or investing, we are explicitly trying to find the exceptions.  If asked, we will react very negatively to the idea we’re seeking the mean.  Yet, if it’s exceptions we want, why do we pursue a decision making methodology that is so geared to not adding value because it depends on statistically insignificant noise and often eliminates the Exceptions before we know they’re there?  These ideas, conscious (I won’t hire a CEO) or unconscious (that guy has no gray hair on his bald head so he must be a better specimen than the last guy I talked to), when laid bare on the table, start to sound pretty silly when you think of it in the light of finding Truly Exceptional People or Deals.  If there really was a formula, everyone would be Exceptional and Rich, but they’re not.  Most great success stories are Contrarian.  We can rationalize Google after the fact all we want, but back when it started, it was a contrarian play.  The pattern matchers would’ve argued search was done and over and companies like Excite and Alta Vista had won, much as folks today are arguing the Consumer Internet is done and companies like Facebook and Twitter own it.

Before I go much further, let’s not confuse Selling with Buying.  If you are selling, knowing the Buyer is a pattern matcher and what patterns they’re looking for is a huge advantage.  It tells you exactly how to pitch what you’re selling to win the business.  Always go to school on your Buyer’s tendencies in this regard.  If you can’t get much information, ask questions that will lead to your own pattern matching model of what that Buyer expects.  The mere fact that you can go to school on pattern matchers shows they have an additional  weakness that is endemic to that form of decision making: not only does it give the wrong answers but it is too easy to game.

What I want to talk about is not advice for the Seller, the path there is clear–lean into the pattern matching with gusto.  Rather, I want to talk about how to be a better Buyer.  How to avoid the Pattern Matching Trap in your own decision making.

Step 1:  Write Down Your Objective Criteria

Like I said before, nothing like laying the rules down on the table and shining a bright light on them.

Step 2:  Identify Rules that Are Hopelessly Anecdotal, Perishable, or Symptoms Rather Than the Disease and Eliminate or Rewrite them

Anyone who has worked in machine learning or big data (I’ve done both, having a Genetic Algorithms and an Unstructured Search startup under my belt) will be familiar with the notion of curve fitting, or to use a better term, overfitting.  Testing a predictive algorithm involves feeding it historical data and seeing how well it’s answer matches the historical outcomes.  It is important to always hold out a significant body of historical data that is not used to train the algorithm, but only to evaluate its accuracy.  If you fail to do so, you run the risk that your algorithm embodies no essential understanding of what it is predicting.  Instead it is simply implementing a mathematical algorithm that happens to produce a result similar to the historical data it was trained on.  You have an overfitted algorithm in that case, and it is worse than useless because it provides misleading answers under the cloak of way too much confidence.

For human pattern matchers, it is almost impossible to get enough data points to be statistically significant and to avoid overfitting.  The consequence will be that you can point to several historical examples where some formula worked, but in the latest example at hand you have a bad hire or you’re losing on an investment because it strangely isn’t behaving according to the model.  The grim reality is you’ve based your decision on purely anecdotal evidence and not enough of that.  You overcome that shortcoming by going beyond the pattern to analyze the underlying causes that lead to the pattern.

Patterns are perishable too, because they’re driven by market forces that change over time.  We can go back perhaps 3 or 4 VC cycles to the heyday of the 80′s or 90′s and find all sorts of patterns that just simply are no longer operative.  It doesn’t matter how well they worked then.  To determine whether you have perishable data, you need to have current data points.  This won’t save you if you’re in the absolute midst of a transition, but most of the time the system is stable and not in a punctuated equilibrium.  So make sure you have some current data points and are not just referring to something that happened years ago one time.

Lastly, on the question of Symptoms rather than Disease, it’s pretty simple:

Is that pattern there because it explains something in a deep and insightful manner, or because something hurt at the time, and you’re not sure why, but you want to make sure none of the conditions surrounding that hurt can be repeated?

The latter is a symptom while the former shows at least some understanding of the disease.

Jason, whom I have ribbed a bit for his article on not hiring CEO’s, actually provides his analysis of the underlying disease for each case.  He doesn’t want to hire someone who had CEO on their resume for a small company because he is afraid they’ll be too full of themselves.  He also goes on to further clarify that it is people who were CEO’s of insignificant companies that he particularly worries about, and if you were CEO of a real startup that didn’t make it, that’s okay.  The thing is, having done that analysis, I would skip the whole “Don’t hire CEO’s” thing and instead think about how to objectively determine which candidates are too full of themselves.  ”Don’t hire CEO’s” was a proxy for the rule that should have been, because almost any candidate for any senior position might turn out to be too full of themselves.  Avoiding such people is the real insight, and that insight is not captured simply by avoiding “CEO” on resumes.

Step 3:  Focus on Rules that are Objective, Verifiable With Enough Data Points, and Lead to a Model that Makes Sense.  Avoid the Proxies.

Avoid proxies.  A proxy is a rule that sounds right and works for a while, but turns out to be treating the Symptom and not the Disease.  I was in a very successful company one time that optimized all of its behavior around PR.  Turns out that was a great proxy for a while but what Wall Street really wanted was Profits, not PR.  PR was just a tool to be used to generate more Profits and focusing single-mindedly on it led us to take our eyes off a lot of balls that had nothing to do with our image but everything to do with our profitability.  That company went from being a $500 million behemoth to nonexistent in just a few years after that time when PR started to fail.

Let’s consider the hiring question.  Remember, we want to hire Exceptions and not regress to the mean.  Does having some hugely successful company like Google or Facebook on the resume constitute a useful signal?

I would argue no, because there are lots of people that have worked at some big successful company.  We’ve all had the experience of hiring one of them and then wondering why they were ever successful in those organizations (or even were they successful) because they aren’t accomplishing anything in our organization except telling endless useless stories about how things were done at their old company.  Working for one of those Beacon companies is a proxy and what’s needed is some rule that far fewer people can qualify for.  A rule that correctly identifies something more important than fogging a mirror at a Google or a Facebook.

What I like to look for is someone who has played a critical role in accomplishing something amazing at almost any company.  Have you tapped into one of the lead developers on Google’s Gmail?  Now you’re talking.  But how do you know they were a lead developer?  This is a critical role for references.  Track down somebody on the Gmail team–it’s a targeted search so you should be able to find someone the candidate hasn’t given you pretty easily using LinkedIn or some similar tool.  Call them up and be very straightforward about asking whether your candidate was really one of the top handful of developers that made it happen.  If the story is true, your contact should be extremely enthusiastic about them.  If they’re evasive, the story is not true.  Move on.  This is not the Droid you’re looking for.

Hiring the young is a particularly pernicious proxy for this kind of criteria.  If you’re 22, you haven’t had much time to make a huge contribution to an impressive project.  Even if you did, you have probably only been able to do so once.  Perhaps you’re even still in the middle of finishing doing so.  OTOH, if you have a 40 year old, you can start to look at statistically significant trends.  By 40 you will have had a shot at at least 4 five-year stints.  People say if you stay longer than 5 years, something is wrong, but that may be just another false proxy.  Out of 4 five year stints, how many were successful?  At age 40, I’d had 2 successes, 1 failure, and had started in a role for a company that would eventually be my 3rd success with an IPO.  Now do you want to hire the youngster who may have done it once but mostly just sounds really smart, has done a lot of hacking, and is out of Stanford, or a guy who actually had a 67% success rate?  Apparently, VC’s and others want the former.  They just don’t realize that Old Age and Treachery Always Overcomes Youth and Enthusiasm.  That and they probably don’t want to sit on a board with a CEO who has tons more operating experience than they do and is hence less “coachable”.

I’ll close with a final pattern matching example.  In a great post, Fred Wilson recently exposed one of the big sources of the herd mentality among Silicon Valley VC’s.  In “What Has Changed?“, Fred talks about what’s different with today’s deals, and is talking primarily about the growing sentiment there is a shift away from investing in Consumer Internet deals.  He mentions three causes, but the most interesting is this one:

The momentum/late stage investors have moved from consumer to enterprise. there is a large pool of money in the venture capital asset class that is opportunistic, momentum driven, and thesis agnostic. this pool is driven largely by the public markets. this pool of capital was “all in” on consumer web/social web in the 2009-2011 time frame. it drove a lot of activity throughout the venture capital markets because each layer of the VC stack (angel, seed, Srs A, Srs B, Srs C, etc) needs to be aware of what the next layer up wants to fund. when the momentum/late stage wanted web/social, the layers below gave them web/social. now that the momentum/late stage wants enterprise, we should expect the layers below to give them enterprise.

To put that in the context of this article, the early stages are trying to game the pattern matching of the late stages to give those investors what they want.  Dave McClure, a seed stage investor from 500Hats, reacts pretty negatively to that thesis by saying, “If true, this is a huge error.”  He’s right and both Fred and Dave go on to suggest that those who have a clue (and both do) will continue to focus on their core investment thesis regardless of what these late stage funds see in their pattern matching crystal balls.  Unfortunately, the nature of VC is that it is a universe whose physical laws are constructed to maximize the likelihood of bad pattern matching.  After all, an industry where one deal in 20 or 30 makes a fund will focus on the statistically insignificant by design.  They lose track of minimizing the failure of the other 19 to 29 deals and focus entirely on finding the next One.  This precludes the model of a fund that is pretty good at minimizing loss and making solid singles and doubles and focuses entirely on home runs.  Ironic that Moneyball says that’s exactly the wrong thing to do and VC returns are doing so poorly these days.  Clearly separating the Cause and Effect of Successes and Failures is just one more way of saying avoid too much Pattern Matching.

Conclusion

Much of the world works through pattern matching.  It’s a bad approach to decision making, but one you will have to deal with.  Your skill will be in getting your signature to fit the pattern matching key of your buyer, and in avoiding the pattern matching trap for your own decisions.  In the hiring world, it’s figuring out how to identify the truly exceptional before you’ve already weeded them out with banal pattern matching rules.  In the investment world, it’s figuring out what the market really wants and needs while dressing that up to fit the pattern matching of your Board and Investors.  Having to endure that task is one reason they say it is lonely at the top.  If you’re pattern matching, you’re doing what many others are doing and you’re susceptible to being gamed.  You’re not being Exceptional, so try another strategy.

The other approach for entrepreneurs is to keep the pattern matchers out of your life as much as possible.  As an entrepreneur, you don’t need to get hired because you can create your own job.  But, one of the important secrets is you don’t need investors either.  There’s a big world of bootstrappers out there and today’s investors are going to insist that you take most of the bootstrapping journey before they’ll help you anyway.  On the subject of entrepreneurs creating their own jobs and not needing investment, ironically, most potential entrepreneurs I talk to that are worried about getting investments are guilty of following another proxy.  What they really want is the job and salary that they perceive as coming from the investment.  If you are in that category and you’re honest with yourself, you will have realized you are not an entrepreneur after all.  No harm in that and your decision making will be a lot clearer once you realize what you’re really after and quit trying to pattern match your way into being a founder.

People who see beyond the surface patterns to the essential truths (hey, maybe they’re all just increasingly successful patterns) are called Visionaries.  They’re the ones that Win Big more than once.

Saw the Microsoft Surface Tablet and Liked It

I was at Houston’s Galleria mall during the Thanksgiving weekend and got a chance to spend some time in both the Microsoft and Apple stores there.  I had read a few articles praising the device, such as Jeff Atwood’s piece (which fairly gushes), but was skeptical.  I’m not at all an Apple Fan Boy nor a Windows Fan Boy.  There are things I like about each platform and things I don’t like.  I loved the 17″ Mac Power Book I had at my last job, but hated its lack of Del and other keyboard keys I’m used to as well as its $4000 price tag (the reason I didn’t buy one after leaving and probably the reason they didn’t let me keep theirs, LOL).  I love my iPad and my iPhone, but I stubbornly stick to having the most-powerful Windows machine I can buy (actually build) on my desktop.  I really dig the Apple monitors, and will eventually have to deal with writing the check for one to attach to my crazy homebuilt PC.  You get the idea–I’m all about Best of Breed for each device.

Putting that all aside, I walked into the Microsoft store with an open mind and low expectations.  The first bit of good news and bad news was there weren’t many people there so I got to spend a lot of time with the Surface RT and equally I had a very helpful salesperson do a demo so I didn’t have to struggle learning all the secret gestures folks are complaining about.  It didn’t take long to figure it out and once having done so, I don’t think I’d mind Windows 8 at all.  The biggest issue with it is what others have already said–it’s intended to be used in a touch environment and if you don’t have a touch screen, you’ll be left continually wishing you did.  The bad news was that there weren’t many people.  I went from the Microsoft store to the Apple store within the span of about 45 minutes and the Apple store was completely mobbed.  The big attraction was the tablets, and I got a good look at the new iPad Mini which was also very cool, but I didn’t get to put hands on to any of the pads.  There was a line everywhere I looked.  Clearly the world is thoroughly pre-conditioned at this stage not to bother even stopping in at the Microsoft store, which is a major problem they will have to fix.

Getting back to the Surface RT, I spent a good 20 minutes with it, including the demo.  I got to try both keyboards.  The short story on the keyboards is that they’re both light years ahead of Apple’s touch screen keyboards which I universally hate and avoid unless I absolutely have to get text into one of the devices.  The iPad is truly read only for me.  I will triage email so that anything requiring more than a sentence is left starred in Gmail and waiting for me to get back to my desktop.  With the Surface RT, not only could I type without a problem on either keyboard, but I was doing so in Microsoft Word.  What a joy for someone who writes as much as I do!  The Touch Cover is the thinnest and comes in all those crazy colors.  It’s actually not to bad and I found I could touch type decently on it.  I had read complaints about keys being in weird places and such, but didn’t really notice a problem there.  However, the Type Cover was a revelation because it is a real keyboard.  I had to keep lifting it up to check how thin and light it is because I couldn’t believe they could build that nice a keyboard without having it weigh down the Surface too much.  It’s not a problem.  By all means, try out both, but if you’re anything like me, you’ll want the Touch Cover.

The overall device is super slick.  Apple has little or nothing on Microsoft in terms of the hardware aesthetics.  The touch screen looks great and works great.  I know it isn’t a retina display, but frankly, it looked fine to me.  I loved having access to MS Office, and the demo person was quick to point out that there is a tile that corresponds to the Start menu, so all that gnashing and moaning about the demise of the start menu seems unfounded.  I suspect there are probably some subtle differences that will occasionally be maddening, but it all seemed to hang together really well.

Based on this experience, there were really only two issues I could identify with the Surface.  First, this was a Surface RT, and you really want a Surface that’ll run any Windows software.  That’s coming, and the demo person actually steered us to think hard about waiting for it.  She was very straightforward about trying to understand what we wanted to use the device for, and one of us was looking for a much lighter and slicker alternative to a laptop.  When further queried on which apps she runs most of the time, the salesperson told us the upcoming device would be much better for her.  I think that’s probably true for me too, so I’ll be waiting for the “real” Surface to make a purchase.

The second issue was the troubling difference in traffic to the Apple Store versus the Microsoft Store.  It doesn’t matter how great the device is if nobody knows about it.  It’s early days yet, but I’ll make a prediction.  Once people start seeing the Surface (and not the RT) turning up in work situations and people find it is far lighter but works just as well as a laptop, that’s when it will take off.  It’ll be the workhorse device for what we all used to call Knowledge Workers.  I think Microsoft will have a very nice level of success with it if they handle it reasonably well.  There are shades of the old, “Microsoft wins with the Third Release” rule, and this time it is taking 2 releases as the RT is not the winner.  It’s just kind of a placeholder platform that shows the potential.

The real interesting story will be watching how Apple responds.  Despite all the kvetching about Windows 8, Microsoft now has a unified platform that spans devices.  Yes, it has a UI tuned for tomorrow’s PC’s moreso than today’s through it’s extensive optimization for touch, but historically, betting that tomorrow will get here sooner than expected has been a good bet.  Steve Jobs had been known to roll those very same dice more often than not.  Apple has the challenge that OS/X and iOS are not a unified platform.  They’re vaguely similar platforms.  For now and some time, they have the luxury that their installed base is so large most developers will build for iOS first.  Win 8 has the luxury that a ton of software is already built for it.  It also has the luxury of potentially being the best corporate or business platform.

The other interesting story will be watching who patented what.  Clearly Apple and Microsoft both have huge patent portfolios.  If Apple can patent rectangles with round corners maybe Microsoft can patent tablets with built-in keyboards.  If one gets a decisive patent wedge in, that’ll make it much harder for the other.  I hope there isn’t too much of that because I am firmly in the camp that patents stifle innovation.

It’ll be a great competitive race and consumers can’t help but win from it.