Too Many Would-Be Entrepreneurs Are Thinking About Their Ideas, Companies, and Investors All Wrong

As so often happens, the serendipitous intersection of one too many notes from the same chord in a short time have prompted me to post.  In this case, I am seeing a lot of evidence that would-be entrepreneurs just don’t think about their ideas, their companies, or investors as they should.

Case in point: I recently had dinner with a friend to do some catching up.  He explained that another mutual acquaintance had an absolutely brilliant idea for a startup.  My friend really wanted to be a part of it, and he confided that they were thinking of going the Y-Combinator route.  I’m sure it’s annoying to my pals (especially the ones who are themselves Angel or professional VC investors), but any conversation that focuses more on the investors than the idea and business models immediately launches me down a set path that the recipient often finds a little bewildering if not downright antagonistic.  Despite all that, I asked my friend why he wanted to go with Y-Combinator?  Why get any invested capital at all?

He spent quite a while, too long really so it only lit my fire brighter, talking about the $30,000 they would receive in exchange for 15% of the company.  I asked him to explain what the $30,000 would allow him to do that he couldn’t otherwise accomplish on his own.  After all, $30,000 is really not very much money.  This goes to the heart of one way Entrepreneurs don’t think right about their plans.  If $30,000 seems like a lot of money to you, if it seems like an enabler of some kind, it’s my belief you’re using it to solve the wrong problems, and that in fact, they aren’t real problems to start.  You’re thinking of using it to quit your Day Job, to hire others, or to pay for advertising.  You don’t need to do any of that, as it turns out.

Let me explain–I’m a firm believer in Bootstrapping ala 37Signals.  Their formula is pretty simple–you can build a company on 10 hours a week while you keep your day job.  David HH wrote a great post on this not too long ago entitled “All or Something “.  The gist is that you don’t need to adopt an all-consuming commitment to get something interesting done.  The intro to his article is worth reading carefully:

One of the most pervasive myths of startup life is that it has to be all consuming. That unless you can give your business all your thoughts and hours, you don’t deserve success. You are unworthy of the startup call.

This myth neatly identifies those fit for mission: Young, without obligations, and few if any extra-curricular interests. The perfect cannon fodder for 10:1 VC long shots.

They’re also easier to rile up with tales of milk and honey at the end of the rainbow, or the modern equivalents, “compressing your working life into a few years” and “billon dollar waves”.

But running your life in perpetual crunch mode until the buy-out or bullshit-IPO fairy stops by your door is not surprisingly unappealing to lots of people.

In fact, what you do might even be better and more successful if you take your time by only working 10 hours a week on the idea.  I’ve seen this for myself with my CNCCookbook bootstrap.  The problem is you think you know exactly the right thing to build and if you could only get it done, riches would be yours overnight.  The reality is that nobody knows exactly the right thing to build in a vacuum.  You benefit by interacting with the market, and it takes time for the market’s message to come back to you and be properly infused in what you’re building.  You can’t infuse it at a 100 hour a week pace because it simply doesn’t come to you fast enough.  It requires a feedback loop and a little more gradual change.  This applies not just to the product itself, but to achieving a content-audience fit and then growing that audience to an interesting stage.  If you think otherwise, then you’re not being realistic.  You’re looking for that long-shot of completely unbridled demand that will seize your company and carry it in the vortex to the Land of Oz.  You’re looking for that 10:1 VC long shot.  Unfortunately, you don’t have a portfolio so that the 10 that didn’t work before the 1 that did doesn’t sink you.

Here’s the other issue–if you can’t overcome the kinds of problems $30,000 will solve without the $30K, you may not have the right idea or you may not have the right team for the idea.  Creating a successful multi-million dollar company is a big accomplishment.  If all it took was $30K, a little advice, and some networking, there’d be a lot more people with their own multi-million dollar companies.  There’s a set of skills your team must have.  There’s a set of qualities your idea and market must have.  Without them, $30,000 won’t begin to fix the shortfall.  $30K is just a convenience, not a solution.  It’s not even aspirin, it’s a vitamin pill.

So $30,000 is actually not really very useful to someone that is focused on the 10 hour a week plan.  Certainly it isn’t worth giving up say 15% of your company and potentially a lot more than that in terms of control and heartache that will still be there long after the $30,000 has been spent.  To his credit, my friend did get off the $30K after a little while and suggest that having all that networking and mentoring would be worthwhile.  That’s actually something I see as being much more valuable, but in truth, it actually isn’t all that hard to come by in Silicon Valley.  After all, the networking is one reason why we put up with so much cost to live here, isn’t it?  If you think you need an incubator to be mentored, to ask questions, and to learn how to do it, ask yourself how that’s any different than signing up for a bunch of the Anthony Robbins-style self-help seminars?  You know the kind–some flashy personality is telling you they have all the answers and they’re willing to share them so that you too can be a multi-bazzillionaire loved by everyone.  All for a price.  Guess what, this works for some people, but for most, they could’ve had the same answers without much effort.  I told my friend I’d be happy to help him understand how to launch and build a business having founded 4 software companies and been involved in 7 software startups.  I also told him the cautionary tale of those making their livings off such advice.

Hacker News is a good place to find such people, and I’m not picking on HN for it, that’s just where the paying customers are for these peddlers.  I call them the Entrepreneur’s Self-Help Gurus.  Don’t get me wrong–there are some dynamite folks out there who can and will help you, but I’m referring to a different sort of group.  These are folks who did something that if examined closely, was not an especially big deal.  Yet now they’re making more than they ever did on the not-especially-big-deal telling other people how they did it.  ”I’ve got the secrets, and I’ll share them for just a small fee.”  Perhaps they created a software company in an odd little niche, never cleared more than $100K with it, but now they’re making $200K and more telling others how to do it.  To me, there is something wrong with that picture.  Just for kicks, I signed up for a bunch of the more popular pay-for-content mailing lists.  You can get them on sale all the time from AppSumo, for example.  After going through about four of them promising everything from SEO expertise to how to get 10,000 Facebook followers, I finally quit.  I hadn’t managed to learn a single useful thing from them.  In fairness, if I had been at the very beginning of my journey, they might have helped a little, but everything they had to say that was useful was available for free on some blog somewhere on the Internet that I had already read.  FWIW, I keep a clipping blog of such information I call Firehose Press.

I finally realized, that what these people were selling, was not the information, but the confidence to use the information.  That’s not something I really needed, and I hate to be a wet blanket, but if that’s what you need, are you sure you’re ready to be an entrepreneur?

One more thing on the subject of networking–you can go have coffee with so many extremely talented and successful people in Silicon Valley at the drop of a hat that it’s ridiculous.  People here are incredibly generous with their time.  Heck, if Y-Combinator fascinates you, go look up the Alumni and go ask them what they learned there and what they got out of it.  You just need to find a friend of a friend to introduce you and most decent people will share a cuppa joe with you.  Why not?  I often do.

Okay, so maybe the networking mentoring isn’t the thing.  What about all those juicy introductions to VC’s?  I have several problems with this one too, being the VC Curmudgeon and all.  It isn’t that I haven’t dealt with the VC’s.  In fact, they’ve been involved with every company I’ve been with until this latest one.  Let’s start with the intro process.  It’s not hard.  You need a CEO who they would want to talk to and an intro from someone they know.  If you have such a CEO, they can get that VC intro from someone they know.  VC’s actually want to meet people, they just want to meet people who won’t waste their time.  Same with Angels only it’s even easier to meet one of them and you might not need that CEO quite yet (but you will, so may as well find them so they can help you from going too far astray).  You don’t need Y-Combinator to meet these people.  What you need to meet a VC is pretty simple:

-  A product finished enough to be sold.

-  Real paying customers who will say extraordinary things about your product.

-  Traction.  The amount varies with the space, but there needs to be evidence that pouring gasoline on the fire will make it bigger in a hurry.

Too many entrepreneurs think investors want to give them cash to make some or all of those three things happen.  I won’t say it can’t work that way, but it works less and less that way every day in the Valley.  Y-Combinator, for example, used to invest more than $30K.  Most of the VC startups I’ve done raised a couple million dollars on a slide show and a team.  Those days are long gone.  You’re going to have to bootstrap to a greater or lesser degree (and mostly greater) anyway, so you may as well get started learning how to do it, even on 10 hours a week.  In fact it’ll be better if you limit yourself to 10 hours a week–it will teach you to focus.  The realization that I had to bootstrap to raise VC is what set me on the bootstrapping path, by the way.

Too many entrepreneurs think they need something to be able to be entrepreneurs.  They need money, advice, connections, confidence, permission, or at the very least, a guru they pay to tell them how it’s done.  But here is the amazing thing: you don’t need any of those things.  You can do everything that needs to be done in 10 hours a week to build a very successful multi-million dollar a year company.  Do that first, ahead of worrying about investors, and you will be 10x better off.  Because, here’s the thing, if that company explodes with a growth rate beyond your wildest dreams and you need a lot of capital right now just to keep the site up and running, that’s not a crazy home run extraordinary case for the VC’s.  That’s what they expect to see.  That’s what they’re looking for to get their checkbooks out.  That’s table stakes and we’ll see where it goes from there, whether you can monetize it, whether you’re the right ones to run it, and whether it is a passing fad.  If you have a deal at that stage, congratulations.  You’ll have to beat the VC’s off with a stick, and you’ll be able to dictate your terms.

But what if you don’t have one of those?

Don’t despair.  Remember:  an Enterprise Software Company that puts together a steady-but-not-sexy business and manages to get to $100M in revenue and an IPO is often seen as a failure in VC portolios.  They want the $1 Billion deals.  But you?  Heck, you’d be thrilled to be the 100% owner of a $15 million dollar a year software business with 20 employees that was throwing off cash like crazy and whose customers loved you.  That is unless you are that rare Zuck/Gates/Ellison/Brin type that really does care more for power than money or lifestyle, of course.

One last reference to recent influences that spurred this post.  I saw Jake Lodwick’s post in Pando Daily, “An Acquisition is Always a Failure.”  I understand exactly where this guy is coming from having had 2 of the companies I founded acquired.  Surpass was acquired by Borland and that was the Quattro Pro product and Integrity QA was acquired by Pure Atria.  Surpass was a great acquisition.  I joined Borland, we sold over $100M of Quattro Pro the first year, I moved up through the ranks to eventually run R&D for Borland in its heyday, and it was a fabulous company to be a part of.  I learned a lot.  Pure Atria was a great company too, but it didn’t last.  Six months after I got there it was gobbled up by Rational.  They already had a product with a brand that competed with Integrity QA’s product and it was based in Boston, not Silicon Valley.  Despite Integrity’s product being one of the most innovative things I have ever worked on (Genetic Algorithm-Based Software Testing), it basically never went anywhere because politically, it was stuck in a closet where there was no light.  It exists today as an IBM product called TestFactory, but it’s growth was stunted and it never recovered.

It’s fascinating to read the comments in Lodwick’s article and contrast them with where Jake is coming from.  He says:

Whereas we’d once been free to work on whatever seemed interesting, we now found ourselves in vaguely defined middle-management roles, sitting through pointless meetings where older doofuses who didn’t understand the Web challenged our intuitions and trivialized our ambitions.

That was basically my experience working for Oracle, where I learned a lot, but couldn’t accomplish much.  Similar with Rational.  Big Companies do work much differently than smaller ones, or as Jake says:

They’re another class of entity entirely, more concerned with sustaining their own rhythms and control structures than experimenting with strange ideas from acquired ex-founders. It wasn’t long before I was ejected like a virus.

Then he describes the frustration of being loose with money, but without company all founders who get acquired feel:

With a fat bank account, I was pretty set to do whatever I wanted for a long time. The sale afforded me the ability to make art, invest in other companies, and unwind. But it didn’t take long to realize that my new life was a hell of a lot less exciting than running an independent company had been.

So true.  Then we have the commenters, and as I read through them, it’s hard to see them as being focused on much but the money, whether this is an indictment of what they need to do (investors need an exit/cash out), or whether there aren’t a few examples where an acquisition made a thing far greater than it otherwise would have been (Android).  Most of them missed Jake’s message and wisdom entirely.

Here’s the thing.  At one point Jake talks about getting $50,000 checks each month.  Do the math carefully before you decide you need a VC-scale company to make enough money.  I went through one of those VC-backed Enterprise Software IPO’s, and while I made good money, it was #3 on my hit parade of exits.  Owning a business 100% that plops $50K checks on my desk each month would’ve been a much better deal, and this is to say nothing of all the deals that crash and burn because the VC was driving for a 10:1 Long Shot.  You have to live through a lot of Ramen noodles on the long shots, then maybe you’ll see that big payoff.  Or maybe you’ll have been diluted out of your mind and it won’t be such a big deal.  I’d have been much better off owning that $50K/month business that I could keep on running that doing the IPO I did.

In the end of the Day, as an Entrepreneur, you need to get crystal clear about a few things:

-  How much money do you need to get from your venture?  If $1M a year is a happy number, the chance is a bootstrap is much less risky than a VC deal.  Remember, income equates to investment portfolio about 20X.  That $1M a year income stream requires a $20M liquidity event after taxes before you can live like that without working.

-  How much control do you have to have?  Hey forget whether you’re an ego maniac.  I’m talking of control more akin to artistic control.  The control to deliver on what you do well.  On why everyone always says they love you, but that Boards, CEO’s, and Professional Managers are only too quick to override if it suits their agenda.  If that artistic control to do what you do best is important, adding people who own significant parts of your company can only dilute that control and maybe even result in your being “ejected like a virus.”  OTOH, if you want Bill Gates or Steve Jobs-style control over an industry, you’re gonna need VC’s.  If you want to change the world with Electric Cars and Private Spacecraft like Elon Musk, you’re gonna need VC’s.  Just be really honest with yourself about what you need versus what might be nice to have.

-  Most importantly, how will your venture change your life?  What does it have to accomplish to make you happy?

Too many entrepreneurs get signed up for the promise of (to quote David HH’s article), “compressing your working life into a few years.”  Sounds great, but it better be just a few years to put up with the amount of BS that kind of pressure cooker entails.  And the truth is, it is never just a few years.  It’ll be 10 long years to reach the conclusion, assuming it is a happy one.

Why not start out with a venture that makes you happy every single day you pursue it?  If it has VC potential, you’ll know soon enough and you can decide then what path to take.  If it doesn’t have VC potential, you may still wind up realizing everything you’d hoped for and more.  Even better, it may be at much lower risk.

 

Om Malik Boycotting Google Keep Because of Google Reader

Om’s boycotting Google Keep, and he’s damned right–every word he wrote.

Here’s the money quote for me:

It might actually be good, or even better than Evernote. But I still won’t use Keep. You know why? Google Reader.

I spent about seven years of my online life on that service. I sent feedback, used it to annotate information and they killed it like a butcher slaughters a chicken. No conversation — dead. The service that drives more traffic than Google+ was sacrificed because it didn’t meet some vague corporate goals; users — many of them life long — be damned.

Looking from that perspective, it is hard to trust Google to keep an app alive.

Google is now squarely in the Evil Doing Business, and it will cost them over time to get back out of that penalty box.  Regardless of how well Google Reader may have been doing in terms of revenue and strategic objectives, it was doing what it did for the wrong people to be messing with, starting with Om Malik.  I say that because the primary users were the very people who write the news on the web.  That’s a tough audience to make angry.

If Google was as smart as they claim to be, they’d issue an apology to everyone involved and make Google Reader promise to keep Google Reader happy and healthy for at least 5 more years before evaluating the decision again.

Google, If You Think I’ll Move From Reader to Another Google Product, Drop Dead

Just got the news that Google Reader will be turned off July 1.  Realistically, I should’ve moved after the first time they brain-damaged it and I railed about it, but I stupidly stuck to it.  Now I’m sorry.

I’m not the only one, Om Malik says it is his second most used Google application after Gmail.  Ditto for me.  I’d like to see Google publish the real figures on the supposed decline in Reader usage.  I bet it was still huge.  This is just a typical big company move to push their customers, I mean products, into toeing the line they’ve drawn.  They want us to go to Google+ or some darned thing where they can sell more ads or beat some competitor into submission.

What will be next, Google, turning off GMail?  Or are you too intent on bashing Microsoft over the head with it?

I’m tired of companies treating me like the product instead of the customer when they’re ad-driven.  It’s a sham and a bait-and-switch.  It is the root of all the evil Google claims they will never do, and keep doing with ever increasing frequency.

If you think I’ll move from Reader to some other Google product, drop dead.  It ain’t gonna happen.  From here on out, I will look to minimize my involvement with anything new from Google.  In fact, I’m shutting down my PPC advertising as soon as I am done here.  At least where that is concerned, I am a customer, and I can vote with my pocket book.  Learn how to save your data out of reader here.

This is bad news indeed for bloggers all over the world, who should find their own ways of letting Google know they’re not pleased.

A Modest Proposal

What Google should have done, is ceded Reader, source code and all, to a company that actually values Blogs and Bloggers.  How about the WordPress folks?  They should take it up, or failing that, create a WordPress theme that emulates reader and make it available for free via WordPress.com.  Matt Mullenweg, are you listening?

Failing WordPress, either Microsoft or Yahoo should dive onto this just for the customer goodwill.  I bet both companies would get back folks who haven’t been enthusiastic about them for years if they could field a good replacement within 3 years.

Postscript

A quick perusal of the comments in these various blog (blog == duh!) posts about Google Reader tells me there are lots of unhappy products, um customers, out there when it comes to this latest Google decree:

GigaOm

Techcrunch

Gizmodo

LifeHacker

And, here is a list of potential alternatives:

OldReader:  Very slow as I write this.

NewsBlur:  Down as I write this.

Rolio:  Awesomely slow as I write this.

GoodNoows:  Performance not too bad.

There are likely more, but I am too disgusted to root around for them right now.  Notice I’ve commented on site status, which has been poor this afternoon, no doubt due to the tiny few who still used Reader (yeah, right, there are zillions of us) looking for alternatives.  I haven’t looked into any of them yet, so I have no favorites to recommend.  These sites are all about to get a huge windfall of users as they choose alternatives, but it remains to be seen which ones can really take up the exodus.

There’s also things like Feedly, NetVibes and Flipboard, but I don’t want that ilk.  I don’t want a magazine.  I subscribe to nearly 200 blogs and need a power tool that lets me triage minimalist summary lists the way Reader did so I can get right to the good stuff.  I also don’t need an iOS or other mobile app.  While I often access Reader via my iPad, I also want desktop access without the nuisance of an app.

Charging for Your Product is About 2000 Times More Effective than Relying on Ad Revenue

I was reading Gabriel Weinberg’s piece on the depressing math behind consumer-facing apps.  He’s talking about conversion rates for folks to actually use such apps and I got to thinking about the additional conversion rate of an ad-based revenue model since he refers to the Facebooks and Twitters of the world.  Just for grins, I put together a comparison between the numbers Gabriel uses and the numbers from my bootstrapped company, CNCCookbook.  The difference is stark:

	Ad-Based Revenue Model			CNCCookbook Selling a B2B and B2C Product
	Conversion from impression to user	5%		Conversion to Trial from Visitor	0.50%
	Add clickthrough rate	0.10%		Trial Purchase Rate	13%
	Clickthrough Revenue	$      1.00		Avg Order Size	$ 152.03
	Value of an impression	$ 0.00005			$      0.10	=	1,976.35	times better

Let’s walk through it.

Both sites have visitors who convert to something more.  In the case of the Ad-Revenue model, presumably it is a person who creates an account on a Facebook or Twitter-like site, thereby becoming a user.  Gabe says that conversion rate for a really strong property might be 5%.  It can be much lower, like 1 to 3%.  I went with the optimistic 5%–the model is already too hard to contemplate 1%.  In the case of CNCCookbook, the conversion is from visitor to Trial user for the software.  We have a 30 day free trial on all our products.

From becoming a User or Trial User, the next conversion rate is monetization.  For the Ad-Revenue model, I did a quick search for clickthrough rates on display advertising and came up with 0.1%.  Sure, you might get your Users to click on more than one ad over time, but let’s just keep these numbers simple.  They’re not going to click on 2000 ads to even the score, after all.  For CNCCookbook, we have a very high conversion rate from trials–about 13%.  I view that as a commentary on the high quality of our software–people like it if they try it.  I understand conversions in the 5% are more common, so you may be forgiven for deciding the ad revenue model is only 1000 times less effective than charging for a product.

Okay, given those conversion rates, we take the average revenue per transaction and multiply all that on through to find the value of an impression.  What is it worth to you to bring another visitor to your site?

In this analysis at least, it’s pretty easy to see why bootstrappers need to be charging for their products and not relying on ad revenue.  Unless you just happen to have an amazingly viral product, it’s just too hard.  You have to rack up way too much traffic to get to interesting revenue levels.

Or, to put it like 37Signals:  Charge for your products, Dummy!

How Many Software Companies Monitor Their Software as Well as Tesla Monitors its Cars?

The unfolding story of how the New York Times’ negative review of the Tesla Model S may have actually been faked is a cautionary tale for software vendors.  Basically, there is enough instrumentation and feedback built into the Tesla S that Elon Musk was able to “shred” the review, as Dan Frommer writes.  The graphical plot of exactly what was happening with annotations is particularly damning:

It’ll be fascinating to see how the NYT responds.  Hard to imagine how they do anything but investigate Broder and ultimately move him along elsewhere.  To do much else would imply very little journalistic integrity.

My question for you is that since you’re reading this blog and are likely somehow involved in high tech hardware or software at some level, how does your product compare in terms of how well it can monitor what your users are doing with your product?

I’m fascinated with the idea of closing the feedback loop for the good of customers.  Yes, it’s great Musk can catch the NYT in a bogus review, and perhaps you will catch a reviewer too, but the potential for improving your customer’s experience is of much greater value to your product.  This may seem like a Big-Company-Only idea, but I’m pursuing it with a vengeance for my SaaS bootstrap company (CNCCookbook) because I need precise feedback that pinpoints where I can do the most good for my users with the scarce resources I have available.  I can tell you from experience that the tools are available and straightforward.  You can have the data for very little effort invested.

The next thing I am after is to automate responses to that data.  I’ve been reading the blog of a company called Totango with some interest.  They essentially want to provide SaaS automation for a Customer Success team.  Various folks have written about the importance of Customer Success and I’m also a big believer.  My thoughts at this point are to start out relatively simple.  I want to understand the early lifecycle of my products and be able to trigger automated actions based on that cycle.  For example:

Step 1:  Installation

Monitor the first time the customer has successfully logged into the product.  Offer increasing amounts of help via emails once a day until they achieve this milestone.  The emails can start with self-service help resourcs of various kinds and eventually escalate to offering a call or help webinar.  The goal is to get the customer properly installed.

Step 2:  Configuration

This seems like part of installing, but in fact there is significant post installation configuration needed for CNC Manufacturing software.  Same sort of thing: provide daily emails with increasing levels of help until the system determines that the user has properly configured the system.  Also, this is an opportunity to collect information.  We provide canned configuration for the most common cases and finding out what the next tranche of cases to target should be is very helpful.

Step 3:  The Path to Power Usage

It’d be great if everyone who signed up for our 30 day free trial actually got to see and understand all of the features that set our product apart.  I’ve seen some other products like Dropbox (Full disclosure: they give me another 250MB of storage if you use that link and then sign up. If you’d rather I didn’t get the extra storage, use this link instead. If you sign up, they’ll give you a link where you can get 250MB free too.) walk customers through a usage maturity exercise.  They’ve somewhat gamified it by giving out some of their “currency” in the form of extra storage if you complete the tasks.  My goals here would be to get everyone to see as many of our unique functions as possible during the 30 day trial.

Step 4:  The Holy Grail: Referrals

If all this goes well, the customer gets through the Trial, understands the unique capabilities of our products, and likes the product well enough to buy it, then the final stage in this incarnation is to ask them to refer others they know who might like the product.

That’s a pretty simple roadmap for how to create some closed-loop feedback of telemetry and drip email that improves your customer’s experience.  So I’ll ask again:

Is your company setup to monitor your users as successfully as Tesla monitors its drivers?  Why not?  I’ve used a lot of software where it is pretty clear they’re not monitoring much at all.  I’ve even talked to some of them to encourage change, and they seem receptive.

If you have a story about what sort of work along these lines you’re doing, please share it in the comments below.  I’m very curious.  I think we have the potential to personalize the experience for our customers like never before.

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

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

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

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

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

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

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

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

- or -

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

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

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

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

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

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

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

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

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

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

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

Does all of this really have to happen?

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

What do you do in these cases?

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

1.  They’ve missed their numbers.

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

3.  They are not taking coaching from the Board.

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

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

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

What happens if you stay?

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

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

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

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

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

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

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

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

 

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.

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.