Imagine a hypothetical startup with 10 account executives that is growing quickly. This startup has two AEs that outperform meaningfully, six that are at typical quota attainment, and two that are underperforming. Where should your sales enablement team focus their time?
This is the team's performance last year. They generated 8.6M in bookings on 10M in quota capacity (which is really good). Most teams aim for 70-75% attainment.
If the sales enablement teams had focus on the top quartile AEs and improve their performance by 20%, the company would have booked $9.
In a world where there are no secrets, where innovations are quickly imitated or become obsolete, the theory of competitive advantage may have had its day. Realistically, ask yourself, If all your competitors gave their strategic plans to each other, would it really make a difference?
In 1986, Amar Bhide wrote “Hustle as Strategy” for the Harvard Business Review. At the time, he was an assistant professor at HBS.
In early and developing markets, selling complete products is often a superior go to market strategy, rather than selling an innovation in a layer in the stack. This is true for five reasons.
First, for early customers to generate value from a novel technology, that technology must solve a business problem completely. End-to-end products do that. Layers in the stack don't. They optimize existing systems. In early markets, customers want to buy a car, not a better camshaft.
If you have one marketing dollar to spend on your startup's growth, should you spend it on acquiring a new customer or on expanding an existing customer?
Mining the existing customer base for customer expansion seems very logical. Customers know your product and your sales team, so increasing the account value should be easier.
Plus, the strategy is successful in practice. The PacCrest survey suggests upsell drives somewhere between 8-26% of new bookings for SaaS companies, depending on the scale of the business.
I’ve wondered what it’s like to work at Apple. I’ve read books and articles about Steve Jobs and the turbulence the company experienced. Ken Kocienda co-wrote the Safari browser and developed the first iPhone keyboard. His book, Creative Selection, is the first book that provides a view of the day to day environment at Apple. It’s full of wisdom. These are my learnings from the book.
There are few brainstorming sessions at Apple because ideas are difficult to debate.
Customers will pay you to build your SaaS product. It's one of the great advantages of a SaaS model. Annual prepay contracts - wherein customers pay for a year's cost on day - is a free loan from customers. And every startup can benefit from this advance. There's only one requirement: you must be able to sell your product while you're building it.
Step 1 is reaching product market fit, the point at which some group of potential customers will pay.
In early markets, customers prefer entire solutions, not best in class point products. These solutions often include significant professional services and education. At the beginning of a new wave, most customers don't understand the technology well. So, they seek experts to guide them.
Companies that provide services and education often win the early market. They develop customer relationships, reinforce their expertise with a strong brand, define the purchasing criteria in their favor and ultimately grow faster.
At Redpoint's annual investor meeting earlier this year, I quipped, “The day-trading taxi drivers of the dotcom era have been replaced by crypto-trading Uber drivers.” But over the weekend, a grizzled Uber driver with a mane of grey hair and wind-and-sunburnt cheeks asked me about crypto. “Can you explain to me why public key/private key technology is important on the Blockchain?” He pointed out the Bitcoin ATM that charges 10% from his cigarette-infused Prius.
What should be the return on investment of a startup's cash burn? Fred Wilson posed this question last year in his post Some Thoughts on Burn Rates. In that post, he suggests, and I agree, that a 5x ROI on cash burn is a good target.
How does one calculate ROI? It's a simple formula:
Cash_Burn_ROI = Revenue_Multiple/Revenue_Pay_Back_in_Years1
If a business is worth 7x revenues and revenue payback is 14 months, the burn ROI is 6x or 7 / 1.
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There's a crisis in the scientific academic world. It's called the Replication Crisis. Scientists have found that they cannot replicate the results published by many scientific studies. The same thing is happening in the world of business.
Over the last 15 years I've read several hundred business books, and I've written one. Across those 15 years, one of the most interesting is a book called The Management Myth, which traces the history of management science back to its less than solid origins.
In the eleventh episode of Masters of Scale, Reid Hoffman interviews Peter Thiel. The episode revolves around the idea that to truly succeed, a startup must not beat the competition, but break free of competition entirely. The episode has many great points, but the one that stood out most to me is the idea of false competition.
You could say that Coke and Pepsi compete very intensely, on the other hand you could say that there's somehow quite differentiated from a brand so that in practice different people prefer Coke or prefer Pepsi and they're actually is a much smaller set of people who view them as interchangeable products.
One of the most difficult go-to-market strategies for startups is platform. Platform go to markets mean selling software that can do many things, depending on the customer need. Selling a platform is challenging for five reasons.
First, most customers buy software to solve a particular and immediate problem. When pitching a platform, the potential buyer has to imagine what the platform can do for them. On the other hand, point solutions present a more concrete alternative of what is, rather than what could be.
A founder asked me if we had reached the point that SaaS is commodified. “Can you build a venture scale SaaS company anymore?” He made three key points to support the argument.
First, the technology barriers to starting a SaaS company continue to fall. Amazon, Google and Microsoft provide sophisticated, scalable, and easy to use infrastructure as a service. Next-generation machine learning tools are also available by API and improving all the time.
“Would you compare a bootstrapped SaaS company to a seeded company? At what point does the bootstrapped company have to raise if it's profitable, if ever?” One founder asked me this question recently.
I hesitate to compare and contrast bootstrapped and venture backed businesses, because I'm a venture capitalist and it's very easy to dismiss any analysis as biased in favor of venture investment. As I've said countless times, there are many ways of building a very successful business.
At some point in the life of most SaaS companies, the business will be faced with the question, when should we move up market? The strategic question might be catalyzed by increasing cost of customer acquisition in the core SMB segment. Alternatively, a surge of large customers paying for the product might trigger the question. Or account executives might raise it. Whatever the reason, this is a key strategic question.
Michael Porter wrote the seminal book on strategy in the early 1980s. Called Competitive Strategy, I think it should be required for anyone starting a company. Strategy is a seemingly murky amorphous intangible concept, but Porter brilliantly prescribes the five questions strategy should answer. What are the answers for your business?
What is your distinctive value proposition? This distinctive value proposition comprises three key parts. Which customers will you serve?
Amazon's acquisition of Whole Foods is notable for many reasons. Of course, there's the magnitude $13.7B. The second is the shockwaves reverberating through the grocery industry. Costco fell 10% and Kroger almost 25% on the news. Third, the acquisition underscores the importance of physical retail even to the largest American ecommerce giant. Those are all remarkable in their own right.
However, the most interesting part of this acquisition is that it marks the current apotheosis of technology's impact in the broader economy.
When I was taught Michael Porter's value chain analysis, I learned to analyze at the industry level. A beer supplier sells to wholesaler sells to distributor sales to retailers sells to customer. But as I went back last night and reread Porter's Competitive Strategy, I was surprised to learn that Porter's intended value chain analysis to be used also at the business unit and at the company level.
The more interesting of the two for startups is the company level.
A friend recently asked, “Which path is better for SaaS startups? SMB to mid-market to enterprise or straight to enterprise?” It's a key strategic question for many founders building software companies.
Startups that initially target small to medium businesses benefit from several key advantages. First, these businesses are faster to revenue. Simpler products satisfy SMBs, so startups can begin to charge smaller customers much sooner than enterprise customers in a product development lifecycle.
There are three kinds of software value propositions. Software that increases revenue, software that reduces cost, and software that promises improved productivity. To maximize the effectiveness of your customer success efforts, you need to understand which type of software company you are building.
Software that increases revenue is the easiest to sell. For most companies, growth is the most important priority. Growth trumps cost-reduction because growth increases the value of the business more.
One of the hardest thing to do in sales, especially for early stage SaaS companies, is to disqualify customers. When a startup disqualifies a customer, they turn away a revenue opportunity, a chance to add $1k of MRR or $3k of MRR, and meaningfully grow the top line. But if the customer isn't the right customer, that incremental revenue bears a hidden cost.
In the earliest days of the business, those potential customers waving checks promise an attractive revenue boost.
Startups fail when they run out of money. Startups run out of money when they lack focus. Without a maniacal focus on serving customer needs in a unique way, startups can flounder amidst competition. Without product market fit, the business is challenged to generate strong metrics and faces fundraising challenges. That's why it's critical to identify and focus on your startup's competitive advantage.
most of the time, start up competitive advantages fallen to five categories: product, cost, positioning, distribution and execution.
ARR15102550100 New Customers per Year1333666713,33333,33366,667133,333 When an SMB SaaS startup is young with quickly growing revenues, more of the same works. A $1M ARR SaaS startup with an average selling price of $750 per year needs to add 1,333 each year on average to double.
Fast-forward two years when the company is at $5M in ARR and the business needs to be adding 13,333 customers each year. At $25M in ARR, suddenly the 100% growth figure demands 33,333 customers.
McKinsey released a study of high growth software companies entitled Grow Fast or Die Slow. One salient conclusion:
If a software company grows at 20% annually, it has a 92 percent chance of ceasing to exist within a few years.
In other words, software companies must grow quickly to survive. Slow growing businesses suffer from the lack of oxygen that fuels growth. Raising money is more expensive. Hiring becomes challenging.
What are your top three priorities in your job right now? If I asked you that question, I suspect within a minute or two you could articulate them. Is the software you are selling at your SaaS startup solving one of those three needs for your target customer? And, if it is, does your software meaningfully differentiate along one of the key competitive axes that your customer cares about?
See also: Innovator's Solution for SaaS Startups
There's a familiar path now to SaaS companies that start in the SMB (small-to-medium business) part of the market. Over time, they seem to inevitably begin serving larger customers. Box, Hubspot, Zendesk and among many others have exhibited this pattern. Why does this happen?
I believe we're seeing Clay Christensen's Innovator's Dilemma at play. In short, new startups leverage a distribution advantage to acquire SMB customers at scale.
Jill LePore's New Yorker polemic “The Disruption Machine” attempts to debunk the incredibly popular Innovator's Dilemma, a theory written by HBS professor Clayton Christensen. I've been reading the debate around it with some interest. It's becoming a really interesting conversation but I think the debate is focused on the wrong thing - whether or not these ideas are absolutely correct, even axiomatic. They aren't always true. But that doesn't mean these concepts are useless.
![image](https://res.cloudinary.com/dzawgnnlr/image/upload/q_auto/f_auto/w_auto/image_42_820246467" alt="horizons.jpg" Credit: Karl Scotland
When I started at Redpoint in 2008, I wanted to find every way of analyzing companies I could. Consultants scrutinize the inner-workings of companies daily and create simple frameworks for explaining their operations. So I bugged a handful of friends with experience at the Big 3 consulting firms for their most used frameworks.
Recently I came across an old friend, a framework I studied then called McKinsey’s Three Horizons in The Lean Entrepreneur, an anthology of lean startup techniques and case studies.
Atul Gawande, the American surgeon known for his book “Better”, wrote an article in this week’s New Yorker called “Slow Ideas: Some innovations spread fast. How do you speed the ones that don’t?” He describes the challenges faced by healthcare institutions all over the world: despite the advances in research, the most difficult part of improving care isn’t availing doctors and nurses to these breakthroughs, but changing their behavior. Some doctors simply won’t wash their hands no matter how many times they are told it reduces infection rates.
![image](https://res.cloudinary.com/dzawgnnlr/image/upload/q_auto/f_auto/w_auto/image_70_381770266" alt="bullet through water.jpg"
One of my favorite courses in engineering grad school was Marketing which was taught by a brilliant quirky professor. On the first day of class, our professor wrote on the board this equation:
Innovation = Invention + Go To Market
Addressing a group of engineers who prided themselves on their technical skills, this professor of marketing tried to instill in us that invention alone isn’t enough to create innovation.
Do you measure your product’s time to utility? If not, you should.
The best products reward users as quickly as possible after installation and account creation. But it’s easy to forget about this and as a result, watch conversion rates from download/install-to-active fall.
CRM products have the longest time to utility of most software products. The end user, a salesperson, logs into a blank Salesforce installation. She must type in a bunch of data about a customer.
About a year ago, Peter Thiel spoke at a PandoDaily event where he extolled the last mover advantage:
“First mover isn’t what’s important — it’s the last mover. Like Microsoft was the last operating system, and Google was the last search engine.”
I hear this refrain more and more in pitches. The thinking goes the last entrant to the market benefit from mistakes made by earlier entrants.
![image](https://res.cloudinary.com/dzawgnnlr/image/upload/q_auto/f_auto/w_auto/image_91_362574171" alt="platform-arrows.jpg" How deeply do you consider the impacts of building a public API for your startup? It’s no small decision: you could be enabling your disruptor.
APIs are incredibly powerful tools for enabling partners, building ecosystems and engendering success among customers. For example, Salesforce’s Force ecosystem, which enables developers to build products atop customer Salesforce installations and increases the value customers derive from Salesforce selling more seats and retaining customers longer.
Who can forget gems like these word problems from 3rd grade math class?
Q: Jack walked from Santa Clara to Palo Alto. It took 1 hour 25 minutes to walk from Santa Clara to Los Altos. Then it took 25 minutes to walk from Los Altos to Palo Alto. He arrived in Palo Alto at 2:45 P.M. At what time did he leave Santa Clara?
It was during those classes that our mathematics teachers taught us how to work backwards through the problem.
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To many entrepreneurs, hiring the first salesperson is a mystery. When should I do it? How much should I pay this person? How do I structure the work?
The great part about sales teams and sales departments is that they quantitative - sales teams thrive on numbers. At the most fundamental level, sales productivity has to exceed costs.
So let’s answer the question of when to hire a salesperson by understanding the financial mechanics of a sales team.
At first glance, SMB SaaS companies, those who sell Software-as-a-Service to small to medium businesses, may seem like any other software company. But they are quite a different breed.
Successful SMB SaaS companies have reinvented their businesses eschewing the expensive enterprise sales model in favor of end-user centric marketing, support and product development. These businesses often look more like consumer startups than enterprise startups. It’s all because of the nature of the market.
In his Stanford GSB lectures,Peter Thiel spoke about secrets. But he defined secrets for startups in a different way than one might expect.
A secret is not an unknown. Rather, it’s something just not widely believed to be achievable or feasible. In other words, it’s an insight, a thesis that isn’t widely held. Exploiting that secret should be the aim of every entrepreneur. Leveraging the secret means disruption and ultimately success.
There are three types of vision that a successful startup needs: product vision, business vision and team vision.
Product vision is the dream. It’s how your company changes the world. It’s the problem that you’re solving and the solution to that problem. Product visions don’t end on launch day. They extend for years through the company’s growth. A product vision isn’t a certain feature or even a completed product.
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Once you have built your product and it’s in the market, there are only three things that matter: distribution (getting the product into users' hands), engagement (validating that you’ve built the right product and that users are using it), and monetization (making money from those engaged users). Some companies call this the 3 Rs: reach, retention and revenue. Whatever you call it, this is your strategy.
I don’t remember much of junior year chemistry class except the lab experiment in which we made fireworks. My lab partner and I doubled and tripled the amounts of strontium, potassium, calcium and other explosives specified in the instructions. Our firecracker dwarfed our classmates' in size and when we lit them after two unbearable weeks of baking, there was no question we misunderstood chemistry. We expected an inferno and were rewarded with a pathetic fizzle and a C-.
The famous global macro hedge fund manager George Soros once said, “I don’t play the game by a particular set of rules; I look for changes in the rules of the game.”
Inside the House of Money
Soros' insight is equally well applied to startups. Successful startups discover and leverage changes in the rules of the game. Discovering the changes in the rules of the game is one of the hardest things about starting a company, but understanding precisely the change and developing a hypothesis for exploiting the change is essential.
In this month’s HBR, Clay Christensen and Maxwell Wessell published an article targeted to the CEOs of large companies on how to prevent disruption to their businesses.
They point to five major barriers to competition in a market listed in increasing order of difficulty to assail. Instead of reviewing the incumbent’s strategy, I’m going to flip these around to reverse engineer these defenses and build a startup’s playbook for disruption with examples from our portfolio.
Last week I wrote about the importance of a financial plan for startups at every stage. It’s a challenge to balance the predictability the board requests and the ambition the company wants. Often, as startups grow, they adopt two plans: a board plan and a company plan. By creating two plans and presenting each to the right audience, founders can communicate and motivate their teams effectively. The board plan is the more conservative of the two.
When building a freemium SaaS company or an ecommerce company or any product that requires users to move through a funnel towards an objective, it’s important to track this funnel to understand where the funnel can be improved. But tracking one funnel may not be enough. The aggregated funnel may be masking conversion differences across customers segments. For example, at Expensify conversion rates to paid vary quite a bit across customer size.
Developing a sales strategy is critical for software-as-a-service (SaaS) startups. The first step in developing a sales strategy is to build a robust market segmentation. I’ve used data from the US Census to develop a segmentation that reveals some surprising facts about the SMB market and may help inform your startup’s sales strategy. Chart 1: 98% of businesses in the US employ fewer than 100 people. 98% of businesses in the US employ between 1 to 4 people.
For years, a product can grow linearly before suddenly seeing compounding growth. Facebook is a great example. From 2004 to 2007, the company grew at a fairly linear rate. And then, the magic happened! The network effects kicked in and exponential growth ensued. ![image](https://res.cloudinary.com/dzawgnnlr/image/upload/q_auto/f_auto/w_auto/image_258_70314105" width="500px”/>
Linear growth always precedes exponential growth. For market places, in social networks or in advertising exchanges, the story is always the same. Linear, linear, linear. BOOM, exponential.