Last year Clement Vouillon of Point Nine Capital wrote an article entitled The Rise of the Non “VC compatible” SaaS Companies. It made the rounds in tech circles online. And it expressed a growing sentiment in the world of SaaS start-ups; for the majority of SaaS founders the traditional VC model is a clusterfuck that makes very little sense.
Fast forward 18 months, and the article looks downright prophetic.
In recent months some of the most well known names in tech have announced that they’ve decided to buy out their investors. First it was Wistia, followed shortly thereafter by Buffer; both buyouts a sort of declaration of independence that gave both companies back the ability to build their businesses on their own terms.
Rand Fishkin of Moz poured his heart and frustrations into his book Lost and Founder, then began building SparkToro taking a drastically different approach than he did in building Moz. Investment funds like Indie.VC have turned from a little known “isn’t it cute what they’re doing” blip on your Twitter feed to a highly regarded fund with an extremely passionate following.
If you’re reading this post, this probably isn’t news to you.
I’ll be the first to admit that all of the above resonates with me - I think more companies looking to stay independent and operate on their own terms is, generally, a good thing. But that said, the dialogue around the “VC compatibility” issue has quickly become very much divisive and polarizing.
Venture capital is not inherently bad or the manifestation of greed and commitments to impossible-to-deliver growth. And the companies choosing the independent path are not all hipster led lifestyle businesses choosing nobility over bankroll and operating with a chip on their shoulders.
The fact of the matter is there are countless ways that you can choose to build your business, and even amongst this new flock of independent SaaS companies there are significant, deliberate differences in the approaches these companies have taken.
This post will look at two more established companies - Wistia and Buffer - and two newer start-ups - Outseta (my start-up) and SparkToro - taking a closer look at the pros and cons of the unique decisions each company has made on their road to independent growth.
TWO ESTABLISHED COMPANIES CHANGE COURSE
Don't fret, we just bought out our investors and took on some debt
$650,000 from angel investors in 2008
$775,000 from angel investors in 2010
$17.3M in debt from Accel-KKR in November 2017
Wistia, a Cambridge, MA based video hosting company, made waves throughout the SaaS world this July when they formally announced that they had taken on $17.3M in debt to buy out their investors.
The company had for a few years prior followed a growth-first path, hiring aggressively and prioritizing projects designed to make an immediate impact on their growth rate. This newfound focus created cultural issues within the company, saw the company’s monthly burn rate dramatically increase, and did little to accelerate growth. At the end of the day, “We broke pretty much everything,” says CEO Chris Savage. Perhaps worse yet, long tenured employees of the company began leaving, saying the new focus on growth “didn’t feel Wistia.”
Wistia is certainly not the first tech company to suffer from over-scaling, but their story is both unique and illuminating for a number of reasons.
First, Wistia had for years taken a long-term approach to growth. They had built a highly profitable business that was generally adored by its customers. They had been very deliberate about not raising too much money, and to date the company has only raised a total of $1.4M. Their first round of Angel investment in 2008 had not been a round for the sake of raising a round, or funds really even earmarked to invest heavily in growth. Founders Chris Savage and Brendan Schwartz only raised money when after two years, “we admitted to ourselves we needed some help from folks with more experience than us.”
Despite taking this carefully considered, only-what-we-need approach to growth they began hearing advice and a narrative that you’d be hard-pressed to find anywhere outside of the traditional Silicon Valley tech bubble.
“As we grew the company and began sharing our story, we kept hearing the same counterintuitive advice from other entrepreneurs — Wistia was too profitable. We weren’t spending enough on growth, thereby limiting our opportunity.”
While I’m all for reinvesting in growth, it’s hard not to chuckle when you hear that a business is too profitable. In a for-profit business, isn’t making profit the objective? The idea of temporarily jacking up your annual growth rates so you can sell your business at a high valuation multiple is really a much more sideways approach to growth if you take off your tech blinders for a minute and use your head.
But after a few years of more aggressively chasing growth and realizing that they were no longer having much fun, Wistia’s Founders decided something had to change. If they were to get back to growing Wistia on their own terms, some serious challenges lay ahead.
They needed to provide a return to their angel investors
They needed to provide return to their employees
With no intention of selling their business, they needed to replace their stock option plan
They didn’t have enough cash on hand to buy back stock, so they had to raise money
They had to raise debt which increased their ownership in Wistia, but also their risk
The solution to the problem that gave Wistia back the right to grow on their own terms came in the form of taking on $17.3M in debt from Accel-KKR in November 2017, an enormously difficult decision that has since been generally and rightly lauded in tech circles.
“We felt confident that the profitability constraints the debt imposed would be healthy for the business. Spending or hiring ahead of budget to try to juice growth weren’t options in this model and we’d be forced to grow the way we wanted to: sustainably, with a focus on creative, long-term solutions for our customers and team,” said Savage.
As one of Wistia’s very early customers, I watched the company grow up from afar and had heard bits and pieces of this story from those both inside and outside of the company. But as I reflect on this story, there’s three things that stick out in my mind that I admire.
Wistia’s Founders made the decision to take on debt after they received an offer to sell their company outright. It was a large enough sum of money to change their lives, and their family’s lives, forever. Not many people choose to walk away from a pot of gold. Especially when you’re taking on $17.3M of debt in a business with an annual run rate of $32M.
In raising debt, the company chose to provide a return to both their investors and their employees. It was the right thing to do, but this is exceedingly rare.
Ultimately one of the major reasons Wistia chose to raise debt was so that they could get back to taking long-term, creative risks that had been hadn’t been prioritized when they were pursuing growth more aggressively. While taking creative risks may not be what’s most important to your tech company, it’s one of Wistia’s four core values and is deeply important to them. I applaud them for “knowing thyself” and serving their values above all else.
Curious how he felt reflecting on the decision to raise angel money - a decision that ultimately resulted in Wistia needing to take on $17M in debt - I asked Wistia Co-founder and CTO Brendan Schwartz if he’d do anything differently.
“That money brought us two phenomenal teammates, a really helpful mentor who's still on our board, and lots of connections and help from investors. I'm quite confident we would not be as successful without raising that money initially,” said Schwartz. “The only thing I think we would have done differently in retrospect would be to structure the deal with some kind of payback terms similar to what Bryce has been doing with Indie.vc. I think that's a great way to preserve optionality - you can pursue the venture track or you can aim for profitability, pay back your investors, and maintain full control over your business.”
$120,000 through AngelPad start-up accelerator in August 2011
$330,000 seed round in December 2011
$3.5M series A round in December 2014 (60% was from Collaborative Fund)
Bought out main series A investors (representing $2.3M of $3.5M raised) in July 2018
Just a few short months after Wistia’s announcement another household name in tech circles, Buffer, announced that they were also buying out their investors. While they didn’t need to take on any debt to buy out their investors - let alone $17.3M worth - their story is uniquely turbulent in a number of ways.
Buffer began as very much a darling child of the tech world - they had everything going for them. After raising a total of $450,000 in 2011, Buffer would raise a Series A round of $3.5M in 2014 - 60% of which came from Collaborative Fund.
Buffer was so hot at the time - revenues were growing 150% per year - that the terms they got for their Series A were insanely good. They were doing $4.6M of revenue at the time and the business was valued at $60M - a valuation multiple of 13x revenues. The $3.5M they raised only required them giving up a 6.2% equity stake in the company… and no board seat. The company even took $2.5M of the $3.5M and paid it out to the Founders and early team members.
Without question, Buffer was flying high.
After the Series A, Buffer fell into a similar trap to Wistia - they hired too quickly, specifically to accelerate product development. Shortly thereafter Co-founder and CEO Joel Gascoigne and team had to make the tough decision to layoff a number of Buffer employees to regain financial control of the business. Morale took one on the chin.
Shaken by this experience and unwilling to compromise on many aspects of his company’s unique culture (open salaries, fully-remote team) that he viewed as Buffer’s secret sauce, Joel began articulating a vision for the company that accepted a slower, more deliberate growth rate. This vision was not aligned with his investors, or his Co-founder and CTO, both of whom would leave the company.
As tensions with his Series A investors increased, the fine print on the Series A term sheet surfaced some additional challenges if Buffer sought to control its own growth trajectory.
They needed to provide a return to their investors
They had to layoff employees after hiring too aggressively
They could not provide liquidity to employees or seed investors without majority support from Series A investors. They had to buy them out first.
Their Series A term sheet provided downside protection for Series A investors, who had the right to claim a guaranteed 9% annual interest on their investment at any point 5 years after the initial investment.
Communication soon broke down with Collaborative Fund and Joel found himself in a meeting where he was being asked if he would step down as CEO of Buffer if he could not afford the 9% annual interest his investors were entitled to after 5 years. If Joel was not willing to pursue growth that was in alignment with his investor’s expectations, he could be squeezed out of his company altogether.
Luckily for Buffer, the layoffs and slowed emphasis on growth had helped Joel regain control of the company and start operating profitably again; so much so that he was putting $400,000-$500,000 of profit away in the bank each month. Buffer spent $3.3M - about half of the cash they had in the bank - to buy out their main VC investors (who had kicked in $2.3M of the $3.5M Series A investment). Those that chose not to accept the buyout proved to be comfortable with Joel’s decision to grow the company at a slower, more organic rate moving forward.
While Buffer’s path to independence did not require walking away from a pot of gold and taking on a large amount of debt, the company’s path was both turbulent and admirable in its own right. Laying off employees, watching your relationship with investors who believed in you sour, losing a Co-founder and a CTO, and having it suggested that you might be squeezed out of the company you’ve spent the last 7-8 years of your life building is all agonizing stuff that will keep you up at night.
To make matters worse, when you “had it all” previously these things are even harder for your team and employees to understand. Said Gascoigne, “Whereas in the past we’d had it all and achieved growth alongside creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate.”
Another takeaway for me from Buffer’s story is how easy it is for Founders and investors to become misaligned, even when both sides have good intentions. When Buffer set out to raise their Series A, they knew they were raising an “atypical round” in terms of the round’s size, not turning over a board seat, and only giving up a small stake in their company.
Collaborative Fund, who looks to make investments that are “better for the world” and “pushing the world forward,” was open to this structure granted some downside protection. Said Gascoigne, “We shared openly that we may not want to raise further funding, sell the company, or IPO. We were transparent that we wanted to be able to keep questioning the way things are done. Specifically, we communicated that we wanted the option to be able to give a return via distributions, not an exit.”
The point is these conversations were on the table from the get-go and from afar this looks like a situation where neither the Founder nor the investor meant any ill-will or malice. But while stashing away $400,000-$500,000 of profit per month and accepting a slower growth rate made a lot of sense to Joel, it certainly didn’t jive with the expectations of his lead investor; previous conversations had or not.
Ultimately what I appreciate most about Buffer’s story is similar to what I appreciate about Wistia’s.
Buffer chose to pay out $2.5M of the $3.5M they raised in their Series A to their Founders and early team. I applaud the decision to pay out those who were responsible for the company’s early successes and the company’s ability to raise that round in the first place.
While Wistia wasn’t going to sacrifice their ability to take creative risks, Joel wasn’t going to compromise the remote workforce and highly transparent culture that he’d built at Buffer. In fact, he saw these aspects of the company as largely responsible for their successes. I admire his recognition of this part of their culture as a strategic advantage and something that he would absolutely not compromise on.
TWO NEW COMPANIES PLOT THEIR COURSE
Our start-up structures are new and daring, we distribute wealth through profit sharing
Sparktoro, a Seattle based company that’s building a “search engine for audience intelligence,” is a product of Rand Fishkin (formerly Co-founder of Moz) and his Co-founder Casey Henry.
$1.3mm from 35 angel investors in June 2018
When Rand Fishkin made the decision to start building his next company after Moz, he came out of the gates swinging with his book Lost and Founder followed shortly thereafter by a very atypical funding round.
The traditional VC model was not a fit for his new business, and he wasn’t afraid to say it. He’s hell-bent on showing that there are alternative paths for Founders who want to retain the right to grow their company on their terms.
Rand and Casey chose a corporate structure and investment terms that are a departure from the norm - the company is a LLC and can pay dividends to employees and investors when the company does well. The company has the option to pay profits out to investors or choose to invest profits back into the company’s growth. On the surface, this structure looks similar to the deal Basecamp made when they took investment from Amazon.com CEO Jeff Bezos - a no control stake in a LLC that has now returned (via profit sharing) more than 5 times the amount Bezos initially invested.
The structure is also specifically designed to hold the Founders accountable; neither Casey nor Rad can take any profit or raise their salaries above the market average for Seattle until they have returned all invested capital to their investors.
Changes to this structure require that 80%+ of outstanding units (think of these as stock options) vote for the suggested change. If the company is sold, investors get to greater amount between the amount they invested or the worth of their outstanding units.
They wanted the ability to stay independent and profitable vs. seeking an exit or IPO
They wanted the ability pay out invested capital as dividends when the company did well
The Founders had different financial situations and didn’t want to wait to start working on SparkToro full-time
SparkToro’s path is most interesting to me because the decisions they made were very much intentional and deliberate. While Wistia and Buffer had existing investors and lots of success before they were faced with the financial restructuring of their businesses, if they wanted to plot their own independent course their hands were somewhat tied and they had to figure out how to best make that happen. Casey and Rand were starting with a perfectly blank slate.
The first thing that I like about what they did is they made a deliberate effort to highlight their new course in the hopes that others can follow or at least derive some inspiration from the decisions they made. This is evident in their one page term sheet, their investor prospectus, and even their mention of using tools like Carta to distribute units. All of this is helpful fodder and they took the time to make these documents clean, understandable, and generally as useful to others as possible.
But what’s really most interesting to me about SparkToro’s path was that behind the term sheets, financial figures, and equity structures they took the time to share the human element behind some of their decisions.
They could have bootstrapped the business, but they decided not to because that wasn’t an option for Casey’s family or financial situation. Rand had previously funded Moz in the early days via consulting revenue, and was well aware of the hidden costs and tradeoffs that come with bootstrapping.
And let’s face it - between Moz’s success and Rand’s standing in the worlds of marketing and VC-backed technology companies, money wasn’t only available but it was available on their terms. They got a decent valuation with very little traction and were able to add a number of key investors with a vested interest in their business without giving them voting rights.
While this scenario is exceedingly rare, it definitely removes the majority of the drawbacks often associated with raising money. While SparkToro did give up a good amount of equity, the only other real downside in this scenario is adding some complexity around reporting and legal costs earlier on than they might otherwise have. And while their investors don’t have voting rights, they still represent stakeholders that need to be considered in future decision making.
With these realities on the table, I appreciate the deliberately frugal approach and agreements Rand and Casey made regarding how their funding would be spent. By agreeing to take market level salaries and not allowing themselves to raise their salaries or dip into any profits themselves until all capital is returned to their investors, they’re demonstrating self-imposed financial constraints that show investors they’re being responsible and judicious with their investment dollars.
It was also cool to see the one area where they admittedly splurged - high quality health insurance through WTIA. They weren’t afraid to call out their needs in this area or compromise and put their families at risk by skimping on their healthcare until a later stage. Personally, I was not aware of programs like these and while WTIA’s program only serves the state of Washington, this set me on a course to exploring options like this for California residents (where I live).
All of which brings us to my start-up, Outseta, a fully remote team that’s building a suite of software tools specifically for early stage SaaS start-ups. We’ve been in business since late 2016, and since the get-go have been building our own intentionally independent path. Like SparkToro, we also open sourced our operating agreement in the hope that it would be helpful to others considering a similar path.
My Co-founder, Dimitris, also Co-founded Buildium, where we met. Buildium (founded in 2004) was set up as a LLC with a membership units plan to help drive employee retention and deliver financial rewards to employees in the case of a liquidity event. It was certainly one of the few SaaS start-ups I was aware of with this structure at the time. Buildium bootstrapped for its first 8 years, well past $5mm in revenue, before eventually raising money to keep accelerating growth. The path we’ve chosen at Outseta certainly reflects this past experience, but with some notable changes.
We wanted the ability to stay independent permanently and have all employees reap financial benefits when the company does well via profit sharing rather than pursuing an exit that makes a small number of shareholders wealthy
We wanted to to embrace self-management, a structure that rewards autonomy and focuses on rewarding employees for their contributions to the company rather than their positional authority or job title
We knew we’d be bootstrapping against heavily venture-backed competitors in a particularly competitive market
Our founders have very different financial situations, which we knew would predicate us taking a long term approach to building the company
The first thing that I’ll note is that by deliberately choosing to bootstrap in such a competitive market, we knew that we had to take a very long term approach to building Outseta. We have and are continuing to ramp up the amount of time we spend on the company - Dimitris is still involved with Buildium as a board member, and my Co-founder Dave and I both continue to take on some consulting work.
There’s obviously a trade-off here, one that was questioned recently when I was interviewed by Nathan Latka on his podcast. “If you’re so confident in what you’re building, why don’t you go all-in?” he asked. In short, our answer is…
We’re building a product with key functionalities - CRM, subscription billing, and customer communication tools (email, live chat, help desk) - that don’t need to be “validated.” These are established categories and known needs of the companies we serve - there’s no “first mover” advantage in this market and there are already players of all shapes and sizes.
Like Wistia, we think that needing to operate within the constraints of our own profitability is actually a good thing and will keep us financially disciplined.
I would argue that the path we’ve chosen is much more “all-in” than building the company using someone else’s money. We’re putting ourselves, our own time, and our own money on the line.
Perhaps most importantly, I’d say our ability to take this long term approach is only possible because of the relationships our founding team has with one another. I worked with Dimitris for 5 years previously at Buildium, Dave and Dimitris worked together previously at Sapient. In addition to the prior working relationships, there are friendships. While that creates challenges of its own, what it’s meant for us is a high degree of confidence and philosophical alignment in how we want to build Outseta.
Secondarily, it’s really important for us to share Outseta’s financial successes with our team without requiring an exit event. As such, all employees at Outseta are eligible to participate in profit sharing once they’ve been with the company for one year. We also issue membership units (like stock options) to employees and offer a buyback program so that if an employee gets a great opportunity elsewhere they can take it and still cash in on the value of their units. This program pays back employees based on the number of membership units they hold and the valuation of the company, which we calculate as 2X the past year’s revenues.
Finally, as Rand and Casey did it’s worth acknowledging that our founding team has different family and financial situations. This is certainly a potential source of misalignment, but at the same time it’s a reality that’s forced us to consider how we wish to structure and operate Outseta that much more.
Since day one, every hour spent working on Outseta has been tracked and everybody is earning sweat equity in the business commensurate with their time invested in the company. The plan, absolutely, is for us all to go full-time when we have the revenues to support our own salaries.
In the meantime, I have all the “normal” financial challenges that you might expect; I have a mortgage payment each month, school loans to pay off, and a fiance who wants to remodel our bathroom. On top of that, I simply need to “keep the lights on” as well as pay for my own health insurance. All of the above is without question stressful, especially when you look at friends with big-salaried corporate jobs and growing 401ks.
My advice for anyone considering bootstrapping that doesn’t have financial freedom is this; don’t fall into the trap of viewing bootstrapping as this noble endeavor that’s going to impose some short term limitations. Manage your burn rate obsessively, and create a plan to keep yourself financially afloat for 3 or 4 years.
I’m coming up on two years now making about a 50% salary without any benefits. I’m 32 years old and generally healthy, so I opted for a “good enough” health insurance policy that really just provides coverage were anything bad to happen to me health-wise - it costs about $280 month through Covered California.
Bootstrapping for 3 months is very different than bootstrapping for 3 years, so do some soul searching ahead of time to figure out if this is feasible for you.
Wistia and Buffer are two very admirable companies that have done well for themselves already. Outseta and SparkToro are really just getting started. But while all of these companies have made very different decisions to get to where they are today, they all share a common belief - that the right to grow your business at a more organic, deliberate pace can actually be one of the biggest advantages to long term revenue growth that’s out there.
If you’re considering a similar path I hope this provided some inspiration, and I’d love to hear about your company’s path via a comment below.
By Geoff Roberts 8 min read
At Outseta almost all of our customers are early stage SaaS start-ups; in many cases just a single Founder or a small group of Co-founders. Every single one of these companies knows they “should be doing SEO,” but between building your product, incorporating your business, testing other marketing channels, and hustling to make some early sales SEO too often gets pushed by the wayside.
That’s too bad, because the sooner you start taking SEO seriously the sooner your business will realize the the benefits of sustainable organic traffic. Even if you’re investing heavily in SEO, this often takes 12-18 months.
With this very challenge in mind, I decided to ask three leading SEO experts about two of the biggest SEO related challenges I see early stage SaaS start-ups face; both of which I'm wrestling with at Outseta.
Let’s meet our experts.
Neil Patel, Co-founder of Kissmetrics, Crazy Egg, and Neil Patel Digital
Let’s do it.
Question #1 - Link building with limited resources
Geoff Roberts: We are an early stage, bootstrapped SaaS business. I am the Co-founder responsible for go-to-market strategy; I own all of our marketing efforts as well as sales. Link building is a very time consuming task, so I’ve basically chosen not to spend time deliberately building links and am instead focusing on content quality and occasional guests posts on other sites. I feel like I should be spending more time specifically on link building, but it’s such a time-suck and I have other competing priorities (sales for one!). What’s your advice for other bootstrapped start-ups when it comes to link building - how much time is “enough,” and how would you recommend they tackle link building in a more deliberate, cost effective way?
Miguel Salcido: Well, it's never ‘enough’ time. Link building needs to be an ongoing effort, like any marketing channel. You will need to prioritize.
Focus more on content for third-party sites like LinkedIn, B2B blogs, and Medium which seems to be a great place for start-ups. Because at this point, your product is fairly unknown and very niche. You need to get the word out and build brand. So put most of your energy here to start out. Use ghostwriters if necessary to save time. Once you’ve established the brand and traffic to your site, you can shift the focus to more content for your own site.
Make sure that you have at least 2-3 very high quality guides or content pieces that you can use to drive people to, making sure to have a lead magnet (tools/checklist/calculator/etc.) that you can offer with each piece of content so you can capture emails.
For your content, try to focus on use cases for your software if possible. And interviewing SaaS startups is also a good route.
Create “teasers” for every piece of content you have and post those out through your social channels, focusing on LinkedIn. Schedule these to post regularly. The teaser should entice readers to “click here to see the full article” in order to get them to your site. Schedule all of this using Buffer + Quuu.
Neil Patel: I would follow the tips in this video. And as for time, I would spend at least 5 hours a week building links. After a year you can slow down.
Marty Martin: Link building is a hateful, extremely time consuming, onerous task, and not one that many people have a real knack for. Being successful in link building is all about your creativity, process, and breaking it out into manageable tasks. Otherwise, it can take an unending amount of time.
Link building at scale, as a siloed task, can be broken out roughly into the following steps that can be run in parallel, saving you time and frustration:
This is typically the realm of agencies, and not something a bootstrapped startup can pull off on its own.
But don’t despair! As a startup, there are other options to consider. If you’re getting a lot of press because you’re amazing, ask for the links. One option is to use a tool like Ahrefs’ Alerts. It will notify you of any mentions of your brand name, where the citation is not linking to you. Then simply email the journalist or website editor, thank them for the mention, and ask for the link back to your home page so their readers can find you. That’s an easy, manageable, once a week type activity that will earn you links over time.
Another option, is using Ahrefs (as mentioned above), or another tool such as Majestic that will show you your competitors’ broken links. A small amount of checking and you may find a resource your client used to have that now 404s, and that’s an opportunity for you. Build the same resource, download the list of broken URLs, use an intern or other internal resource to find contact info for all of those websites, and write to them to tell them their users are missing out as the site they’re linking to no longer has the resource in question, but your site does. Ask for them to update their broken link to your website. This is a task that can be broken out into a process as described above, and tackle a bunch of links at once. We’ve found broken resources with thousands of link opportunities this way.
Does your college or university have an online magazine and/or alumni magazine? Pitch them to write about your recent advancements as an entrepreneur. Do you have business partners and other principals? They should pitch their schools as well!
Build a useful asset, driven by data, that can be a useful resource to journalists or other websites. For example, the government has tons of freely available, regularly updated datasets you can use to build a data driven piece of content on your website. We have used data from the Census Bureau, US Patent & Trademark Office, and other resources to build amazing pieces of content for our clients. They attract links naturally, and with a little outreach effort, you can draw in additional links.
Having the right tool helps as well. We use a tool called Pitchbox to manage our outreach and follow ups. It makes the outreach and response process a breeze.
Question #2 - Keyword selection in established, competitive categories
Geoff Roberts: At Outseta we offer a platform that integrates CRM, subscription billing, email marketing, help desk and knowledge base, and reporting tools. “CRM,” “Email marketing,” and “Subscription billing” are insanely competitive keywords - to the extent that I feel like it’s not even worth us really targeting them. Also, we sell a platform solution that isn’t nicely categorized as “marketing automation,” for example. As a result, I haven’t been very deliberate in selecting keywords to date; our SEO strategy has instead primarily been…
The “normal” build your first few links stuff that start-ups do - building social media profiles, an Angellist profile, some start-up directories, reviews sites, etc.
Creating very high quality, long form content - the idea being if the content is good enough, it will naturally build backlinks.
Guest posts on other topically relevant blogs.
What’s your take on this approach? How would you recommend start-ups in established, competitive categories get more deliberate with keyword selection given these challenges?
Miguel Salcido: You are a hyper-niche B2B SaaS startup. There are no keywords to describe everything you do. So you will have to focus on the solutions your platform provides, and yes those are super competitive terms. I’d also focus on “startup” related terms (startup tools, SaaS startup tools, etc).
If you can find a similar company and see what they target, using SEMrush, then that’s a good idea for keyword research.
Your approach so far is solid, just make sure the content is in fact really high quality and you do that by measuring engagement, email signups, links, and sharing. If you’re not getting those things, then your content is not resonating.
Neil Patel: I wouldn’t worry about keywords. Just blog about content that is super highly relevant (to your audience) and you will start to rank for terms. Next, place banners and links within blog content to landing pages to drive signups.
Finally, go into Google search console and see what pages get the most traffic. Look at the list of keywords that you are getting impressions for and then sprinkle in the keywords you haven’t mentioned on your site yet. The key isn’t to just add keywords, but it is to also expand the content.
Marty Martin: If you are starting a new niche or opportunity with your SaaS product, why not come up with a catchy industry name (think how Rand Fishkin of SparkToro and Dharmesh Shah of Hubspot coined the phrase "Inbound Marketing"), and start using that name in all of your marketing. Eventually, when people start searching for that phrase, you’ll already be the dominate player. Now, this isn’t an easy thing to do, but if it catches on, you’ll be set.
I think your approach above is time tested and can pay dividends with time, but most startups don’t have the luxury to wait for good content to become seasoned and linked to. Good, long form content can draw links over time, but it is a very slow process without outreach.
One thing that may get you more awareness is to build integrations for Zapier, IFTTT and similar services. I’ve become aware of many amazing tools just by browsing their integrations.
Thank you to Miguel, Neil, and Marty for weighing in on these questions. For any SaaS start-up that’s resource constrained, I hope this provides some clarity on your approach to link building. And for any start-up competing in an established and extremely competitive category, hopefully the advice this group shared will help identify the keyword targeting strategy that will yield the most meaningful results for your business.
By Geoff Roberts 10 min read
In recent years much has been written about the "death of email marketing," the basic premise being that everyone's inboxes are more inundated with emails than ever before. Spammers are a problem and response rates are on the decline as we all get better at ignoring the noise in our inboxes.
Email prospecting is a blunt instrument, they say. At best it's a spray and pray game where you blast a sizable list of targets and pray for a 20% open rate and a 2% response rate.
The day I sat down to write this post I stumbled across the following Linkedin update from Larry Kim, Founder and former CEO of Wordstream. Larry has Founded and acted as CEO of successful tech companies, has been a mentor in Techstars, and is the type of guy with a Twitter following of 35,000+. I must admit it put a smile on my face to see him openly vouching for sending cold emails.
I would even argue that with all the lousy emails people are receiving, there's never been a better time to stand out from the crowd with a well designed email prospecting strategy. This article will outline step-by-step the approach that I've been using at Outseta to achieve a 40% response rate on prospecting emails. My hope is some of these tactics will help you in your prospecting efforts, too.
A "cold" email list does not equal a low quality list
When I say that I've been sending emails to a "cold" list, what I mean is that not a single person that I've emailed knows me or anything about Outseta. What that does not mean is that I'm emailing a low quality list - if you are sending emails to undeliverable email addresses, or have out-of-date contact information, that's on you.
Step 1: Find a data source that contains information on target companies
The first step in successful email prospecting is finding a data source that contains information on target companies. At Outseta, we sell to early stage SaaS companies so sites like Founder Dating, Gust, AngelList, and Product Hunt are a great place to find target companies. AngelList and Product Hunt even let you sort specifically to find SaaS businesses, then filter by "Joined" or "Created Date" making it easy to find newly added leads.
There's 13,357 potential leads for me right there on AngelList alone!
If you sell to colleges, an example of a data source could be the Princeton Review. If you are looking to sell your product to yoga studios in San Diego, you can simply Google "San Diego yoga studio" and begin building your list of targets that way.
I recommend building a list of at least 50 target companies to start.
Step 2: Find relevant contacts at your target companies
Now that you have a a list of target companies, you need to find the right person to reach out to at each of your targets. Here are a few tricks that I recommend.
About Us pages
Lots of companies today have "About Us" pages on their website. This often acts essentially as a directory of company employees. Here's an example from our own website.
Look up the target company on Linkedin
By looking up your target company on Linkedin, you'll find what is essentially a company directory of Linkedin member profiles. Simply search for the name of the company, then click the link that says "See all employees on Linkedin."
Google Search "Company name, title"
In this example, I searched for "Mailchimp CEO."
One of these three tactics usually does the trick. Now you should have a nice list of target companies and specific people at those companies that you'd like to reach out to. Which brings us to...
Step 3: Find email addresses for your targets
The best way to get started with finding email addresses is simply looking the person up online. Check their Twitter profile. Maybe they have a "Contact" page on a personal website, or an About.me page that contains contact info. If you visit the person's Linkedin profile, you'll find it says "Contact and Personal Info" in the right hand side bar. By clicking "Show more" you'll expand this section, and oftentimes find contact information readily available.
If none of the above tactics work, your next best option is searching for the email address of anyone else at your target company. Most companies use a consistent structure for their email addresses - something like [email protected] or [email protected] If you can figure out what email structure the business uses, you can then use a tool called Hunter.io to guess at what the person's email address might be, and verify if you are correct or not. In this example, I verified that geoff(at)outseta.com is in fact a valid email address.
If you can't find a valid email address for someone on your target list, remove them from your list and move on. Again, your success will depend on the quality of your list!
And a final note; when you first start this process, you should build your own list. It's your responsibility - nobody else is going to assemble the list with as much care as you will. Once you've proven this process and that it can generate results, you can absolutely train someone else to do this for you... but you should do it to start.
Crafting prospecting emails that get responses
Now that you've assembled a high quality email list, it's time to craft your approach.
Step 4: Your subject line needs to be something your recipient cares about
This sounds obvious, but it happens all the time; prospecting emails are sent with a subject line that the sender, not the recipient, cares about. "Sign up for Product XYZ" or "Can we connect for 15 minutes"...
The recipient has never heard of product XYZ, or you for that matter, so why would they want to connect?
Much has been written about email subject lines - yes you should avoid words like "Free" or "Sale" to avoid spam filters - so I'll just leave it at you need to mention something that the recipient genuinely cares about, that peaks their interest in a non-gimmicky way.
In the case of the prospecting emails I've been sending, I came up with a very simple solution - make the email subject line the name of the company that I am emailing. Nothing more than "Subject: Start-up Name."
This sounds simplistic, but in this case it works - start-up companies are by definition unknown. They have little-to-no brand awareness, and are starved for attention. It makes sense that when you email a start-up Founder with the name of their company in the subject line, they get excited - "Someone knows about us!" and they open the email.
Step 5: Personalize your approach
This is probably the single most important step in this process, and it's the one that everybody skimps on. I like to start all of my prospecting emails with...
My name is Geoff Roberts, I'm a Co-founder of Outseta."
After that brief introduction, I immediately make some sort of personalized comment about their business. Everybody has been on the other end of generic email blasts, and it's immediately obvious when you receive an email like that. So take five minutes to learn about the prospect you are emailing and try to add value to them in some way. Consider...
Asking them a clarifying question about their product or service - show genuine interest in them.
Providing a tip that might be useful to them based on your past experience.
Drawing parallels between their business and your own.
Offering to help them in some capacity.
The number of ways you can go about doing this are endless, but you need to do your research first. Check out their website, look at content they've shared, and look at their social media interactions. If you can't genuinely add value or personalize your approach in some other meaningful way, take them off of your list. Here are a few examples from emails I've sent.
This was a company that provides real estate websites to real estate investors.
"I stumbled across (Company Name) on AngelList when I was researching SaaS companies in the real estate industry. I was previously head of marketing at Buildium, a property management software company so I've spent a lot of time thinking about how to market websites and software tools to an audience of real estate investors."
This email got a response and we ended up talking both about Outseta and about how the start-up could best market their business.
Another company I emailed was building a network for start-up Founders to share their objectives and drive accountability.
"I came across (Company Name) on Angellist and I love the concept of providing collaborative workspaces in order to set objectives and drive accountability. One of our idea validation interviews at Outseta was conducted with a very similar company called OpenCompany, which has since rebranded and pivoted a bit to become Carrot.io."
Again, I likely got a response because I was familiar with a company that was tackling a very similar problem. The recipient checked them out, was curious about why they pivoted, and I was able to peak his interest because I shared something very relevant to him.
Ultimately, I had a strong hunch that the personal approach I was using in my prospecting emails was one of the primary drivers of the strong response rate that I was seeing. I decided to test this hypothesis - the results were pretty astounding.
Personalized Approach: 117 emails sent, 48 responses, 41% response rate.
Traditional Email Blast: 437 emails sent, 7 responses, 1.6% response rate.
That's right - I saw a 39.4% increase in response rate when I took the time to personalize my email approach. Same quality list. Same call to action. The only difference was I led with a personalized comment based on researching the recipient's business, rather than sharing a more generic comment with a larger audience.
Two or three sentences of personalization is enough, but it's an absolute must. Here’s one of my favorite responses that resulted from this approach.
Step 6: Clearly and succinctly articulate your value proposition
Now that the recipient knows that they aren't on the end of an email blast and that I've actually taken the time to understand their business and engage with them in a meaningful way, it's time to tell them what I have to offer and why it's important to them. Again, 1-2 sentences should suffice - get to the point! Usually I go with something like...
"Anyways, at Outseta we've built a platform that offers fully integrated CRM, subscription billing, customer communication, and reporting tools. This allows SaaS start-ups to launch "leaner" with less technical overhead."
Step 7: Ask for permission to send them additional content or information
I will admit, this is a practice that I was initially skeptical of - start-up Founders tend to be insanely busy people, so why wouldn't I just send them information right away? Do they really want me to send them another email?
Turns out, this works really well. I end each of my prospecting emails with...
"Would it be OK if I sent along more information on our approach?"
This works for a few reasons:
I've already grabbed their attention with a personalized approach.
I've clearly (and quickly) mentioned what I'm offering and why it matters to them.
I'm building some credibility and trust by not jamming marketing materials down their throat that they didn't ask for.
My goal with this initial prospecting email is simply to get a response from the person - any response! If the person responds I know that they are alive, that they read my message, and the door is open to engage with them further.
By ending the email with an open ended question, recipients that are interested in what I'm offering will usually reply with a "Sure, send some info over." Those that aren't interested tend to send along a polite "No thank you," which is equally valuable and let's you know that you should spend your time elsewhere.
Here are the actual responses from the examples I shared earlier.
Step 8: Consider the timing of your emails
Don't get hung up trying to find the mythical perfect time to send prospecting emails, but do use some common sense and whatever information you have at your disposal.
At Outseta, I've found good triggers to be when companies launch their product on Product Hunt or publish their company profile on AngelList. These indicate early stage businesses that are just getting a product to market or are embarking on their start-up journey, and that's the time that we'd ideally like to intercept our prospects.
If you were selling a product to colleges, chances are it's best not to send prospecting emails on graduation day. You get the idea.
Last but not least, a little experimentation is a good idea. I saw particularly strong response rates during the "dead" week between Christmas and New Years, when start-up Founders had more time than usual to unbury themselves from their email inboxes.
Yes, this is a time intensive process and it's easy to make excuses as to why your email prospecting efforts aren't working. But for bootstrapped start-up this is a strategy that costs nothing, that can yield significant results.
Start small. Send 10 emails that are absolutely the best emails you can craft.
I think the responses you get will surprise you.
By Geoff Roberts 6 min read
In the past few months I've been involved with launching a number of SaaS products on Product Hunt, a community where early adopters discover the latest new technology products. Product Hunt is the best site of its kind, followed by Betalist; both sites represent a unique opportunity for early stage start-ups to gather product feedback and land their first users.
There are plenty of "How To Launch On Product Hunt" guides already out there, and I've devoured most of them at this point. My first piece of advice is to take it straight from the horse's mouth - Product Hunt has published two guides on the topic themselves.
The reason for this post is twofold; first, the best way to launch on Product Hunt has changed pretty dramatically, so a lot of the content that's already out there is outdated. Second, I'll give an honest assessment of my own experience in terms of what worked for us and what didn't.
Let's do it.
Is Product Hunt's Ship product worth it?
Product Hunt's Ship product is a suite of tools designed to help you gather product feedback and build an audience prior to officially launching your product on Product Hunt. I will admit that I was at first skeptical about Ship, but I decided to pony up the $79 per month to give the product a whirl. I realized a few benefits from using Ship.
Ship allows you to schedule your launch on Product Hunt. Honestly this is mostly a convenience thing, but it's a nice perk of using Ship. Without Ship, you need to fill out all of information required to launch a product in real-time per se; what this means in practice is that it's been the norm for people to wake up at ungodly hours to launch their product, maximize the amount of time they have to accumulate upvotes, and get something of a first-mover advantage.
This is definitely helpful in terms of planning your launch; you can set expectations with your internal team in terms of exactly when your product will launch, and you can easily schedule other promotional activities to work in tandem with your selected launch time. This was also helpful to me because it allowed me to reach out to the Product Hunt team in advance and let them know exactly when we were planning to launch (more on why I did this shortly).
Ship represents a massive opportunity for influencer marketing and virality. In all honesty, there used to be a pretty fool proof way to all but guarantee a successful launch on Product Hunt if you could just pull it off; getting an influencer with a large following to "hunt" your product. I'm talking a Jason Lemkin or a Hiten Shah type. In the past if you were able to recruit an influencer with a large following to hunt your product on launch day, it would automatically notify all of their followers via email that they had hunted your product driving a ton of traffic and upvotes to your page.
This tactic doesn't work anymore... unless you use Ship. So if you have a personal connection to a major industry influencer, or have someone like that on your board, or can simply convince an influencer to subscribe to your product then you can still reap this benefit. This is a pretty smart monetization strategy by the team over at PH.
How this works today is if you are using Ship, you are allowed to build an "Upcoming Product" page that Product Hunt will also help promote. Get your influencer to subscribe to your upcoming project page, and all of their connections will be automatically notified. Bingo, you've tapped into the virality benefit that PH used to offer. If you know someone with a significant following on Product Hunt, Ship is absolutely worth the $79 per month.
Ship allows you to directly communicate with people interested in your product prior to launch. Ship captures contact information for anyone who subscribes to your upcoming page and allows you to email them directly. The number of people who subscribe to your upcoming page is a decent barometer for how much interest there will be in your product, but on top of that this is useful in terms of gathering feedback on your product prior to launch and communicating updates to your subscribers to keep them in the know as your launch day approaches.
Tips for launch day
The mechanics of writing a good Product Hunt listing are covered well elsewhere; tips for writing solid taglines, adding relevant images, a descriptive GIF, etc. What follows are additional promotional tactics that proved valuable.
Email "Upcoming" page subscribers. If you did take advantage of Ship, PH gives you the tools to directly email all of your upcoming page subscribers. This is a no-brainer, as these people have already expressed interest in what you are working on. On launch day take the time to send every subscriber a personalized email letting them know about your product launch and asking them to upvote your product. I think you'll find that just about everyone will oblige; this represents low hanging fruit.
Email else anyone who has expressed interest in your product. At Outseta we are pretty protective of the audience that we've built. While lots of "how to launch on Product Hunt" guides suggests blasting every email contact and social channel that you have at your disposal on launch day, I think this is overkill and can lead to lots of people being hit with duplicate, poorly targeted messages.
As with any marketing campaign, you need to consider your audience. You might sell to an industry that is altogether unfamiliar with Product Hunt; if that's the case, you're going to get little value emailing that audience about your PH launch.
If you have contacts that you feel are likely to be Product Hunt users, by all means notify them of your launch. Beyond that I'd advocate for only reaching out to contacts that have expressed legitimate interest in your product in some way, perhaps as beta users. In this case even if the contacts aren't PH users, they may be invested enough in your idea to create a PH account in order to upvote your idea.
Product Hunt allows new users to login with existing Twitter, Facebook, or Linkedin accounts. They must then complete some configuration settings around their name and title, as well as the types of products they are most interested in. This is a pretty easy process, but spell it out in your email approach so that you recipients know exactly what your ask is of them and how they can go about delivering on your ask.
Tweet at Product Hunt. Tweet a link directly to your listing @ProductHunt. Don't include any other hashtags. It's in PH's best interest to also share particularly well designed and launched products.
Share a relevant "collection" of related products. Product Hunt allows you to assemble "collections" of related products. Prior to your launch, take some time to build a collection of products that are relevant and useful to your own product's potential users. For example, when we launched Outseta I compiled a collection entitled "The Day One SaaS Start-up." Every product in the collection is relevant to our audience and complimentary to our own product.
Once you've assembled your collection, reach out to Niv Dror who is in charge of community at Product Hunt ([email protected] or @Nivo0o0 on Twitter). This is a good way to get your collection in front of the team at PH, in hopes that they will help promote the collection that you've assembled.
Product Hunt is just one channel to get the word out about your SaaS start-up, but it's an inexpensive one that can serve as a serious catalyst for finding your product's initial users. Follow the guidance outlined in this post and you'll have a better chance of making your Product Hunt launch as impactful as possible.
By Geoff Roberts 5 min read
An operating agreement is a key document used by LLC companies to govern internal operations. It basically lays out for the business owners how financial and functional decisions within the business will be made.
This past month Dave, Dimitris, and myself got together in Boston hash out the details of the operating agreement that we’ll use going forward. This post serves to break down the key decisions that we made in layman’s terms, so future employees understand how Outseta will operate moving forward. Our hope is that other start-ups can also benefit from seeing where we ended up, and maybe borrow some ideas as they consider their own operating agreement.
Here are the key details of Outseta’s operating agreement.
Who works at Outseta? How will decisions be made?
There are two different classifications for people working at Outseta - employees and members.
Anyone working at Outseta that is not a contractor is an employee. Well, duh.
All employees that have been with the company for more than 1 year will participate in our profit sharing program.
Members are employees who have an ownership stake in the company and are eligible to vote on the following decisions. A 66% majority is needed for an item voted on by members to be approved.
Dissolving or selling the company
Amending our operating agreement
Issuing more membership units (think of these like stock options)
Removing “managers” (more on this momentarily)
Every 4 years members will vote for “managers” who will serve a 4 year term.
Dave, Dimitris, and myself are Outseta’s existing managers.
All other management decisions (but not those listed above) related to the business will be made by the managers.
If there are 2 managers, decisions need to be unanimous to be approved. If there are 3 managers, there needs to be a majority vote for decisions to be approved.
Delivering financial rewards
When Outseta makes money, we think our employees should make money. Aside from salary there are two other ways to line your pockets when the business does well; profit sharing and membership units.
Profit sharing program
50% of the Outseta’s profits will be distributed to employees who have been with the company for more than 1 year.
The extent to which you participate in the profit sharing program will be based on how many years you’ve worked at Outseta. The longer you work at Outseta, the larger your portion of the profit pie.
Because Outseta is a LLC we offer “membership units” as opposed to traditional stock options or equity grants. This essentially represents an ownership stake in the business - if Outseta is sold, acquired, or in some other way liquidated all members working at Outseta will receive a payout based on the number of membership units that they hold (just as you would with traditional stock options). Initially membership units will be granted at the managers' discretion, but we’ll look to formalize a more scripted means of issuing units to ensure fairness going forward.
If a member leaves the company they do not retain any ownership or equity in the business. Instead, we offer a buy back program where Outseta will buy back membership units from departing members. Members who have left will receive a payout based on the number of membership units they held and how much the company is worth. The valuation of the company will be calculated as two times last year’s revenues. For example, if last year’s revenues were $5mm and a member had membership units that represented a 1% stake in the business, our buy back program would pay them ($10mm X 1%) = $100,000. We will periodically review this formula to make sure it’s fair. The buyback will happen over the course of a few years based on the financial reserves of the business.
In short, we think that the profit sharing program incentivizes all sorts of good behaviors amongst employees - it encourages commitment to the company and financial discipline, while also giving all employees who have been with Outseta for more than a year the opportunity to participate in the financial successes on the business. And if members do wish to leave Outseta to pursue other opportunities, it also allows them cash out their membership units at a fair rate.
Why do we exist? How do we behave?
It’s unusual to see information around durable items like company purpose and values in an operating agreement. We thought it would be useful to include this information in ours because we hope to leverage our operating agreement as an asset that can help prospective hires understand the opportunity at Outseta, how the business will be run, and how decisions will be made.
Why do we exist?
To help small companies simplify the technology choices they have to make to run their businesses
To create a profitable company we are proud of and is enjoyable to work for
How do we behave?
We look to invest in, develop, and fill open roles with employees/members first
We optimize for the best people possible by embracing remote versus co-located work
We value flexibility, but we honor our commitments to each other
We think long term over short term and care more about the journey than the destination
We embrace self management, encouraging autonomy and empowering our people to make decisions openly and transparently without managerial oversight
We earn influence by consistently demonstrating great work and decision making
What do you think? We’d love any and all feedback on the agreement we’ve come up with. You can also view the full version (the actual legal document) of the operating agreement here.
-Dave, Dimitris, and Geoff
By Geoff Roberts 20 min read
As the SaaS business model has matured over the course of the past decade, it's fair to say that awareness of the importance of the customer success function has escalated dramatically. Any SaaS business' success is intrinsically intertwined with the success of its customers - and if you think about it, this is a good thing. It creates alignment as an imperative.
Enter Aaron Fulkerson, CEO of MindTouch.
I was fortunate enough to be introduced to Aaron a few years ago now, just as MindTouch was beginning to hit its stride. MindTouch offers "customer self-service software" to customers including Optimizely, Zuora, Wal-Mart, Accenture, Whirlpool, Zenefits, and Intuit, to name a few. In early 2016 the company raised a $12mm Series A led by PeakSpan Capital to accelerate growth, largely on the back on fantastic customer success oriented metrics. These metrics included negative gross revenue churn - a measure that speaks to a company's ability to grow revenue from existing accounts at a faster rate than revenue is lost from cancellations.
Needless to say, as I was beginning to think about how we can build customer success into the DNA of Outseta from day one, I immediately thought of Aaron.
If you're interested in listening to the audio version of this interview, here's what you'll find...
First 10 minutes - Aaron shares how he and his Co-founder failed to find a suitable self-service product to disseminate research to internal staff when they were working together at Microsoft. He then details the journey that MindTouch took from being an extremely popular open source offering to making a somewhat terrifying pivot to a traditional SaaS business model.
10-25 minutes - Aaron shares how MindTouch now uses a customer success blueprint with each of their customers, which drives alignment not only throughout the sales and onboarding process but also across departments and with relevant executive sponsors. But simply having a customer success plan is not enough - you'll also learn how to hold your customers accountable to the agreed upon plan.
25-31 minutes - Aaron offers his advice on how SaaS start-ups should be thinking about customer success from the get-go, and what they can do to build a customer success oriented culture.
If the audio version of the interview isn't right for you, a slightly trimmed down transcription of the interview is available below.
Geoff Roberts: Hi everybody. I'm Geoff Roberts Co-founder of Outseta and I'm here today with my friend Aaron Fulkerson who is CEO and Co-founder of MindTouch. How's it going, Aaron?
Aaron Fulkerson: I'm doing terrific.
Geoff: Fantastic. Why don't you start by telling us who you are and what you're working on at MindTouch.
Aaron: Well like you said I'm the CEO of MindTouch and I'm also one of the two Founders and my responsibilities, they've evolved over the years from being everything from operational to tactical, running different departments, to now I feel like I'm actually CEOing. What's involved with that is I focus on the development of strategic partnerships, helping the market understand how our technology is disruptive for businesses. And of course being the principal person for communicating internally with our team. But it's around finding strategy, communicating the outward facing vision to the market, the partners, the analysts, the journalists, and then internally making sure that there is a steady drumbeat that keeps people focused.
Geoff: At this point MindTouch has had quite a bit of success and operates in the customer success and customer experience space.
Aaron: I like to think of it as what we do is customer self-service and that impacts success, support, and other business but it's really focused on the idea that 80 percent of the population wants to self-serve when they have a support question or when they're onboarding; they don't want to talk to somebody. I know that I don't want to. Turns out 80 percent of the world doesn't want to either. So that's what we're solving for; self-service.
Geoff: Makes sense. What can you tell me about the success that the company has had today in terms of customer count, revenue, and those sorts of things?
Aaron: Well we have about 350 customers. I don't know the exact count but it's approaching 400 customers and our customers will range from a lot of the software unicorn's from Domo, Zenefits, Zuora, Sprinklr, and Docker to more mature companies like Whirlpool and Electrolux that are in the consumer goods space all the way to the largest travel conglomerate on the planet which is TUI. It's really across the board the kinds of companies that we service but it's all very specifically focused on helping their customers self serve.
Geoff: OK. So today I want to talk about early stage startups and what they can do to build a customer success oriented culture and customer success into the DNA of their business from the get-go. I know MindTouch took a bit of a long path to get to where you are today. Can you talk me through the evolution of the company up to this point?
Aaron: The technology began as an open source project that my Co-founder Steve and I started to solve for a specific problem that we'd experienced when we were doing research at Microsoft in distributed systems. We were frustrated that we didn't have a means of disseminating our research out to the rest of the product teams in a way that was effective. So what it meant was that we spent a lot of time talking to people, giving presentations and we thought that there had to be a better way to disseminate our research.
I was the Program Manager of a 14 person team. My responsibility was to take these brilliant minds' research and package it in a way to get it to the product teams. So I went around to the different product teams. This was in 2003 or 2004, and we were spending $2B dollars a year in research which is nothing by today's standards but it was for the most that was being spent at that time. I thought surely somewhere at Microsoft somebody is developing a technology that's going to be useful for what we were trying to achieve, which was self-service. I went to the Sharepoint team and they were not working on this. I went to the Office team - same thing. I went to a bunch of different internal research incubation teams and there was nobody trying to solve this problem of how do you deliver an effective self-service experience.
So that's when we decided we should do this. We came up with the idea of doing it and then we said well let's do it as an open source project. That's where we started with this idea of how do you deliver self-service. We released it as an open source project and it became wildly popular within a year. It was a top 10 open source project and before we knew it we were getting thousands of downloads a day. That was around 2008, and that's when we started selling a commercial license.
Geoff: So the open source model very much validated the concept for MindTouch, and you knew you were working on something worthwhile. Talk to me about making the transition from the open source product to a traditional SaaS offering.
Aaron: It became clear that we were trying to address a market where the use cases were so broad and vast. We didn't have an addressable market that we strategically decided to attack. So we found herself in this position where we were like "what are we trying to do?" We're trying to compete with SharePoint and Dropbox and Box. It was at that point we were just like you know we've got a ton of distribution. In 2008 we did $1mm in cash receipts with an average deal size of $3000. In 2009, we did more than twice that - it was like $2.5mm. We were growing but we were clearly trying to address too big of a market. And all of us sudden we started to get all this competition in this category. So it was clear we didn't have that business model.
At that point we said look we don't have a business that we can scale because we're trying to be everything to everybody. So it was like, "OK why don't we divert our attention away from this broader use case and let's just focus on self-service," and it was Steve my Co-founder that was like "OK, well let's sharpen up the feature set and by the way we're going to do it in the cloud." I was initially really hesitant because when I started talking to our customers at the time they were mostly IT guys who had done installations for businesses. And for many of them their job, their sole purpose was to maintain that install. We were certainly at odds with the people who recommended us. I'm like Steve I don't know; I get that delivery in the cloud is faster and it's better for the customer. But at the same time I'm scared because all of our customers right now aren't there. So it was it was a scary proposition when we set out in 2010 to launch a cloud version, but we pulled it off.
Geoff: If you look back over the course of those 10 years and could shake your younger self and give yourself some advice on how the path forward could have been smoother, what would you tell your younger self?
Aaron: We were lucky that we actually turned what was a very popular project and a failing business into a successful business. If you look at what we did wrong, it's what I see so often when I talk to entrepreneurs - they have 10 businesses that they're trying to take to market instead of one. So they're trying to solve 10, 20 different problems instead of one. And there's no way you're going to do that; it's hard enough to solve one problem and build one business.
Geoff: So let's talk about MindTouch today. What does customer success look like within the company - where does it fit within the organization, and why?
Aaron: The idea that it is the success of the customer should be the central focus of the business. And that if everybody's economic incentives should be aligned. We have as part of the sales process this idea that we're going to develop a plan or a blueprint for customer success. So the customer success blueprint maps out the customer's objectives, their challenges. How we measure success. Who are the stakeholders. And this became something that helped me work deals, close business, and inform the customer success team after we close them so that they have a very sharp focus around launching the client. It also became something that informed the marketing team so that they could go back and develop case studies based on the impact that we had on the business. It also informs the product team so that they know which features to emphasize or de-emphasize. And of course as I said already it impacted our ability to close the business because it helped our sales efforts be very focused on the customer's needs and how they measure success.
So for us the idea of customer success back in 2010 became really the central aspect of our business that drove all our deal flow, all of our product development, and all of our marketing efforts by understanding this customer success blueprint that we put together for each client.
Geoff: What do these blueprints actually look like? Is it a Google doc? How do you actually distribute that plan amongst your team and amongst your clients?
Aaron: So this has become a thing in our industry now because a lot of our customers like Salesforce, like Gainsight - they've adopted the same model. Their CEOs and heads of sales have said "Hey straight up this is really effective, I'm going to use this model too."
In the beginning this just looks like a summary e-mail; you don't want to have a formalized document because then it makes it less likely that the prospect is going to actively participate in creating the document and you want them to actively participate - you want it in their words. So in the beginning it's really a series of summary emails after your conversations that say, "Hey I've updated what your objectives are. Your objectives are to improve the efficacy of your support team that's measured in cost and net promoter score. And and then our objective is to increase your renewal rates." Well how are we going to do it? So then it goes into challenges. What are your current challenges? Well our customers are upset because they don't know how to use the product or onboarding takes too long. So it really becomes this summary email that then later gets formalized into a document. Another key section is who are the stakeholders who are involved in the project? That's very important - who are you talking, who's measuring your performance, who needs to be involved to get the deal done. And what are the strategic objectives - if you're selling business software that's a considered purchase, there better be a strategic objective that ties into a board level issue. If it doesn't then you've got to hope that it's some kind of transactional software sale for a couple thousand dollars.
Geoff: Sure. So I would argue an entire generation SaaS companies, let's call them SaaS 1.0 companies, invested too late in customer success programs and churn caught up with their businesses. Then as SaaS 2.0 companies began to emerge you heard a lot more about customer success plans, onboarding programs, all those sorts of things. These of course are only effective if the client takes them seriously and commits to them. What sort of things are you doing at MindTouch to hold the client accountable to the plan or blueprint that you put together with them?
Aaron: That's a good question. I mean one thing I'll say is that when we started doing this our prospects thought it was a sales tool. And it took a lot of effort and literally years to help them understand that this is a tool that is useful to you whether you by MindTouch or not. This is something that frames up for their own internal team their team's thinking around a particular set of objectives and challenges.
So let me start now to answer your question - what techniques to use to hold them accountable. What we've done is map your success plan to a customer success program that ties in with a maturity model. Over the last five years we've collected all of the best practices and put it on like a continuum of effort and value for how do you deliver an effective self-service experience. That aligns with our customer success program; the maturity model you can use whether you buy MindTouch or not. It's just this industry best practices, it's unimpeachable. This is exactly what you should do in the kind of value you should get out of it, but we layer in our customer success program that's enabled by our software to drive them along this value continuum which is this maturity model. So by having a maturity model that ties back to value delivered for the company and having one that is technology agnostic is, I think, the best thing you can possibly do to help the company understand why they need to go through the series of steps.
Now you will always run into, periodically... what will invariably happen is that you have stakeholders at your client who don't give a crap. They're like, "Man, I just I want to collect my paycheck. You're making me do things and I don't want to do things. Leave me alone." And again it's by having a maturity model that ties back to very specific value, and having had that communicated to the executive team who are involved in the purchase before it got handed off to the team to operationalize you can hold them accountable.
There's things that you can do to hold them accountable because then you go back to the Vice President or C-level Executives and say, "Hey, you bought us for these reasons, we've got these plays and the guy won't follow through." So having that all sewn up with with look you've got your your customer success plan that maps to your success program that ties in with your maturity model those are the different pieces. I remember Joe Payne who, he's a great guy, he's the CEO at Code 42 but he was the CEO Eloqua too - Joe told me that at certain stages he had like these, I forget what he called it, but like a nuclear e-mail. If the stakeholder who was operationalizing Eloqua didn't follow through with their commitments, it would automatically send to their boss. It was a way of holding them accountable to the different stages of the maturity cycle. So I thought that's another interesting one that that I don't know if we fully adopt it, but I I know I laid it out for the team. I don't know if we're actually doing it, but it's basically like hey when you have somebody who we think of as a Jar-Jar here which is somebody who's like a stakeholder but totally ineffective like Jar-Jar Binks, he's useless right? Who doesn't want to follow through the steps for whatever reason probably because they don't care. Then you have these nuclear options that send to their boss and their boss is already informed because the tools you used earlier.
Geoff: Understood, but you're kind of walking on a tightrope at that point though - you're trying to drive accountability, but at the same time you don't want to come off as, you know, tattling on somebody who isn't taking this plan seriously. That that must be a challenge.
Aaron: Sometimes it is. But I would rather us aggravate somebody than us be shelf-ware. You know when we enter into a commitment with a client we're SaaS, and some people think that second "S" is about hosting but it is not. It is about the expertise that our team brings to the table in an engagement. Because we are the experts on this; when it comes to customer engagement, when it comes to self-service, there's nobody on the planet that is more dialed in, more capable, more competent, more informed than MindTouch. And we take that very seriously - the technology is just an enabler of those best practices. It's the best practices where there is the value. It's the second "S."
Geoff: Sure. I would imagine when you bring on a new client you're going to hold their hand a little bit more at first during the onboarding process, you need to get them up and running with the software. What does outreach to that client look like going forward? How often are you checking in and who at MindTouch is actually having those conversations and doing those routine follow-ups?
Aaron: Well we have a customer success team and an accounts team and both of them are hyper focused on the success of the account. Meaning that there are certain milestones and a four stage process that we expect our customers to be moving along. The customer success team tends to take more of a proactive support approach around training and "Oh you've done these things now do these things." The account management team comes in and they're compensated based on upsells. But the only way to get the upsells is by moving them along a maturity model. So if we aren't delivering value they can't upsell. So everybody who interacts with the client post-sale is focused on moving them along the value continuum.
Now what are the check ins? We do a quarterly business review. But last time I was checking it was more frequent than that; it was like every four to six weeks there was a check in with the QBR and the QBR was about assessing where they were on that maturity model.
Geoff: Let's shift gears for a moment and talk about culture within an early stage SaaS company. One of the things that I've admired from afar when it comes to MindTouch is just the culture that you've built here within these walls. What would your advice be to other entrepreneurs, other founders who are looking to really create a culture where customer success is embedded in the DNA of the company from day one.
Aaron: Well, I think about it in terms of MindToucher success and a MindToucher could be somebody who's a client of ours or it could be somebody who's on our team and why that's important is that I think about anytime somebody works with us, it's our goal, this is Steve my Co-founder and I, it's our sincere desire and our goal that that person's career is accelerated. And that's true whether the MindToucher is a staff member or a client. That's our business. It's really about advancing the careers of all MindTouchers.
Now there's a very specific way we do that; it is for our clients moving them along the maturity model. For our staff it's about making sure that we're making the hire that puts them in a position where they have growth opportunities etc. Right. But I think that whether it's a SaaS business or any business if that's what your focus is, on the success of your version of the MindToucher, you know your team and your clients, then you're going to succeed as a company. And that's how you build a lasting culture, a lasting company. It's being hyper focused on that. When somebody leaves here I take it as a personal failure if they haven't moved on to a better position. If it's a lateral move or a step back I failed.
Geoff: Now that you're a more mature company, how have you sort of formalized all those sentiments that you just expressed. Have they made their way into your core values as a business, for example?
Aaron: Yes. So we have our core values that we're very vocal about. We go through a new MindToucher orientation. We walk them through it. They're embodied in samurai's sculptures on the walls, there at the beginning every one of our all hands presentations. Those are kind of the cultural pillars. And then the other thing that that we've been really focused on is our guiding principles. Number one is having a culture that attracts smart, good people who want to work hard doing great things. And the second is delivering to market a product that our customers love so much that they recommend us.
So we have our values, grit, integrity, beginner's mind, passion for process, and incremental improvements. Those are our core values that really guide everything that we do and those are the guiding principles that we keep going back to and reminding ourselves, "Hey look are we building a culture that attracts good people that want to work hard doing great things? Are we delivering a product that our customers love so much that they recommend us? So those are kind of the things that we really focus on around culture.
Geoff: Sure, so in tying it back to customer satisfaction, customer success - do you use things like NPS or CSAT scores here at MindTouch?
Aaron: So we use NPS. I don't know that we've got our NPS dialed in. When we're posting scores in the high 70s, I question is that a function of their last interaction with support? Or is that something more holistic across the entire engagement? Maybe it is. You go to G2Crowd or Trust Radius and we have really, really great reviews on there. So we do use NPS. The thing I caution about is that the way we capture tends to be at interaction points with humans. With MindTouch humans, so I always question like is our NPS score ridiculously high because of that? I just don't know.
Geoff: Fair enough. Lots of actionable, good tips there for other SaaS start-ups. Any final words for new founders starting a SaaS business as they think about their customer success plans?
Aaron: Well, we've covered customer success plans, we've covered having a maturity model... just make it up to begin with. You know we started with this just feels right and then we iterated, iterated, iterated, iterated over the last five years to now something that Accenture uses in their customer engagement plans, our maturity model.
One of the things that I think is really important for us Founders is I think that there's a lot of misconceptions about the importance of, "Oh, if I build a great product then I've got an opportunity in the market." Most of the people who come to me seeking investment or introductions to get investment, I look at what they're trying to do and my response is do you have $500mm? Oh you don't? OK. You have no chance of succeeding. The reality is that there is so much capital flooding the software market that the broader the market opportunity you're trying to address the less likely you're going to be successful. So focus on a very, very boring, boring niche. Focus on something really, really small that you can really crush because nobody else has noticed it and then expand from there.
That's the most important piece of advice that I find myself giving entrepreneurs who are starting companies; it's "Dude you are going after way too big of a market opportunity." Focus on something much much smaller that you can actually be successful in and grow from.
Geoff: Well thanks for the time and the tips Aaron, I very much appreciate it.
Aaron: My pleasure, Geoff. Always great to talk to you. Take care.
By Geoff Roberts 20 min read
Soren Ryherd is Co-Founder and President of Working Planet, a paid search agency located in Providence, Rhode Island. The company is focused on “putting the math behind advertising for data-driven, profitable results.”
Before we get into the interview, a bit of background - I have hired Soren’s team at Working Planet multiple times. I am admittedly biased, but I’d put it this way - Soren’s company is not just the best paid search agency that I’ve worked with other the years - they are the best agency of any sort that I’ve worked with.
All of that said, I am constantly getting questions around paid search management for start-ups and I continue to see significant challenges at this end of the market. Even further up market and in my past engagements with Working Planet, there are a number of challenges related to paid search management that I’ve felt first hand and still don’t see a great solution to. My intention with this interview is to ask Soren the toughest questions that I’ve had to grapple with as a marketer responsible for paid search performance, and to specifically get his take on how early stage start-ups can set themselves up for success with paid search.
Geoff Roberts: OK Soren, let’s do this. I’ve been thinking about these questions for a while now… I hope you’re ready. Why don’t you start though by giving us a brief background on the work you do at Working Planet.
Soren Ryherd: We build profitable customer acquisition programs using paid digital advertising. I say profitable as we are using our client's’ financial data to determine what to pay, or often not pay, in the digital advertising platforms we manage. Basically we’re doing the math behind the advertising and using that information to remove risk and increase return.
Geoff: Someone once told me... “Soren used to be a rocket scientist. Now he manages PPC campaigns.” Is there any truth to that? And if so, how did you make that transition?
Soren: My Co-founder and I met in graduate school where we were creating algorithms for processing satellite imagery. At that time I had a NASA Graduate Research Fellowship through Goddard Space Flight Center, so I spent a little time there, but they did not let me anywhere near the rockets! After graduate school we worked at separate start-ups and definitely caught the start-up bug. In 2003 we realized that CMOs were really struggling with the auction-based nature of media buying in Search and we knew that was a math problem we could solve in a way that would tie directly to their business success. We kicked the idea around and launched Working Planet two weeks later.
Geoff: What was your familiarity level with Google Adwords at that time?
Soren: This was 2003, and I was working as Head of Business Development for a web engineering company in Boston. We were building websites that “do stuff,” and a lot of our work with tech start-ups was in support of their advertising campaigns. I knew that Adwords was an auction, but I’d never run an Adwords campaign. But people were throwing their hands up, they had no idea what to do with this idea of an auction. And I said “This seems pretty straightforward, you pay what it’s worth.” We knew how to put the math behind this, and we knew we could learn everything else. So we basically just begged some friends to let us run their Adwords campaigns out of the gate, landed some clients, and started doing that.
Geoff: Let’s discuss paid search management for start-ups specifically. Most good paid search agencies have a minimum monthly ad spend that early stage start-ups simply can’t afford. At Working Planet that’s a minimum spend of about $20,000 per month. For a bootstrapped start-up that’s just starting to run its first customer acquisition programs, what options do they really have when it comes to responsibly managing their initial paid search programs?
Soren: It really is a tough question. It is hard to afford the hours to dedicate to a small campaign, but you need to invest the time to build something that can scale. I would say that the two pieces of advice I most often give to startups are, first, get your data collection nailed down before you start spending money. Good tracking is everything, but I often see startups rush to “try” advertising before they have the tools in place to measure performance. Secondly, know your business KPIs and use those as a lens for evaluating marketing performance. There is really no marketing metric that is good or bad without the context of financial performance.
Geoff: How should start-ups begin to think about the tools they’ll need in place to measure paid search performance? What’s a good starting place; how can they identify the tools they might need?
Soren: The first thing you need is some kind of conversion tracking. Everyone’s go-to there is Google Analytics, which has gotten better but which is problematic for us because it’s just aggregate data, it’s very difficult to get per user data out of it. So then people start looking at Conversion Ruler, which is our choice, or Mixpanel. People are just rushing to try advertising, people who aren’t used to thinking about performance based advertising often literally think that all is involved in digital marketing is just launching an ad, and everything happens automatically after that. So people start spending money with nothing in place, they’ll just say “let’s create this ad and target this audience and see what happens.” That’s usually just a waste of money.
Geoff: I personally see a huge gap in the market when it comes to paid search management for start-ups. The good agencies are out of reach price wise. Overseas agencies or freelancers with a lower minimum monthly spend tend to be pretenders rather than contenders. Software tools like Wordstream that automate the management of your spending are a step in the right direction, but tend to optimize for impressions and clicks more so than profitability. Even asking a smart, early employee to manage paid search spending is often problematic - if it’s not something that the person has done extensively in the past, it’s still so easy to burn though budget with these channels. I’m wondering aloud what the best solution for this end of the market might look like…
Soren: You are absolutely right, and most of the software tools out there don’t do much more than what you can do in AdWords or Facebook and often very expensive. What they are trying to solve is to ease management for people who don’t know the networks well, but they have dropped the view of financial performance in doing so. There are a few exceptions. Kissmetrics, for example, has done a great job of pushing financial data into the measurement tools, but that is just on the evaluation side. Meaning Kissmetrics doesn’t manage your bids or your ad campaigns for you, it just provides you the data that can give you the insight to do a good job in managing the campaigns.
In the end though, a startup really looking to scale should invest in digital optimization experience as early as possible. For most of our clients we are driving 50-95% of their customer acquisition and are arguably the most important factor in their success outside of product development.
Geoff: 50%-95%! I’m sure some people will balk at this, feeling that this is being overly reliant on paid advertising or that your clients’ marketing channels aren’t diversified enough. What would your response to that be?
Soren: The reason why this happens is we’re the safe haven. The financial optimization of the campaigns removes the risk from campaign management, making it very safe to invest in marketing. The financial outcome from that investment is very clear, very predictable. So when we can provide that level of reduction of risk and predictability, we get bigger budgets. It becomes a very safe place to invest in marketing compared to almost anything else they could do.
We’re managing across all paid digital. If someone had 95% of their acquisition in search, then the concern that you have of all of your eggs in one basket is very warranted. The diversification within digital is very important. I think what we’re also seeing is it’s easier and faster to execute with paid advertising, and to optimize to a financial outcome, than it is to with say content marketing, or SEO, or PR. It doesn’t mean companies shouldn’t do those things, they absolutely should, but it’s easier, safer, and more predictable when you look at paid digital. And that’s why we tend to end up with the lion’s share of the customer acquisition.
There’s also just more in that bucket than there used to be. There are channels that are moving into the bigger digital bucket now that just weren’t part of digital five years ago.
Geoff: Ongoing paid search management aside, it’s pretty common for start-ups to want to use Google Adwords or other paid channels to find validation for or initial traction for their product. The instantaneous, real world feedback that you can get from paid search is hugely valuable to start-ups in that way. What best practices, strategies, or guidance would you give to start-ups that want to use Google Adwords as a means to validate a market or idea?
Soren: First, unless you are testing messaging, DON’T test for “traction” until you have built your payment functionality. We’ve seen many companies “prove” their business model through free sign-ups only to have crickets chirp the second they ask for money. There are many valid ways to use digital advertising to help in the early validation stages of a start-up, including finding real customers to speak to in the MVP development process, determining key selling propositions to early users, and seeding test users into applications while in development. I would say the key is to be really explicit in what you want. The absolute worst goal is to “get exposure.” Getting exposure means that there are assumptions about the value of that exposure that you haven’t surfaced. Is this a euphemism for driving product demand? For getting investor attention? That doesn’t happen by magic and the most dangerous thing is to think that delivering ad impressions is in any way a goal.
Geoff: I recently installed Adroll on Outseta’s website so that I can start building an audience of visitors to run remarketing campaigns to. What other easy items represent low hanging fruit and are things start-ups can do now to set themselves up for success with paid online customer acquisition programs?
Soren: AdRoll retargeting is a very good move, but only leverages people being driven to your site from other initiatives. The first thing we would suggest is getting ads on your brand out there in Google and Bing (yes, really, Bing). Use your core value proposition and say something different than in your organic listing. Secondly, if you already have a customer list, there are many targeting options now for creating lookalike audiences which tend to work well. Another low-hanging opportunity is ads on your competitor brands in Google, although I will say that many startups are often reluctant to do this as they (usually mistakenly) think that by not doing this they are staying off the radar of the big guys. What we find is that if you are new, leveraging the brand equity of the existing big players works to your advantage.
Geoff: Let’s get into one of the biggest challenges I consistently see start-ups face with paid search programs - expectation setting with the C-suite. It’s very easy for paid search programs to be seen as a major expense - they are often one the of the biggest line items in a marketing budget, and at the outset campaigns almost never yield the desired results. Making these programs work is a process that takes commitment and quite a bit of iteration. How do you go about setting appropriate expectations with the C-suite in terms of what it will take find the value of paid search programs to their business? If you could get Founders, CFOs, etc to all sign an agreement outlining what expectations they should have when you start working together, what would it say specifically?
Soren: One of our biggest goals with any new client is to move digital advertising out of the cost column and to be seen as a profit center. But to do that, we have to connect the dots so that the C-suite knows that X dollars in yields Y dollars in profit - and they have a say in what X and Y look like. We think that the CFO should absolutely be in the conversation, and (I guess not too surprisingly) CFOs tend to be our best friends and internal champions.
One of the most important things to making profit-based campaigns work is having good targets, in terms of cost of acquisition. This is something we spend a lot of time on with our clients. If you just accept “Get us $100 leads” as a goal, you are never going to be well optimized, as all leads are not equal in value and should not be paid for equally, and, frankly, someone probably just made up the $100 number in the first place. Better targets are those that will truly raise profitability.
Geoff: Do you have any advice on how SaaS businesses should go about identifying a good CAC target?
Soren: Every company is going to have a different comfort level on cost of acquisition relative to predicted lifetime value. Some of that comfort is going to be based on their funding, and just available cash that they can put into marketing. Some of it is going to be how much data do they have to show the predictability of what they think lifetime value might look like. LTV has become a little less part of the discussion, surprisingly, as we look more at what are the predictable ways to raise MRR and manage cash flow effectively. So months to break even tends to come more into play relative to those things.
The higher value the customer and the more embedded the technology is in the client’s company, we tend to see bigger multiples in terms of months to break even - you might see something like one year or 18 months. When churn is a question, when LTV is a question, or if it’s just easier for companies to churn out of a technology, we’re probably going to see a lower target in terms of months to break even.
The great thing about digital is it’s not difficult to change your acquisition targets. You shouldn’t do it all the time, but you should be influenced by how the data matures over time. If you’re a SaaS client and you don’t have a churn issue, if you’re targeting 1-2, or 3 months to break even as your cost of acquisition target, you’re probably undervaluing the market. By a lot. Your LTV is so high compared to what you are willing to invest in that customer, that you’re really ceding opportunities to competitors at that point.
Geoff: So when expectations with the C-suite aren’t set appropriately, I see two things tend to happen. First, too little is actually spent month to month, meaning it takes a really long time to find which channels, bids, and campaigns can yield the results you are looking for. The company doesn’t see a big impact on their business after a few months, so they give up. The second is the company spends enough money, but doesn’t have the patience it takes to optimize the campaigns over time. After a couple of months of significant spending not yielding the desired results, the company throws up its hands and says “paid search just doesn’t work in our industry.” What’s your viewpoint - can paid search work in just about every industry?
Soren: Yes, but not always at scale, and not always immediately. All digital, and search is a great example, has volume that is top-loaded in the auction based on ad position. Every advertiser wants the volume and therefore top position. But often the math just doesn’t work to have your ad show up there, so you are losing money in volume. Optimization means learning over time how to value the audience appropriately based on the value they create. A lot of the time we are learning when not to spend money, or what needs to change in terms of conversion, close rates, and customer value in order to afford the advertising. The good news is that data and complexity help as we can find the audiences that work while attacking “the math” through testing and optimization to achieve scale.
Geoff: OK, so Working Planet talks a lot about “putting the math behind advertising,” about profitability, about “closed loop reporting.” Let’s talk about what this actually means for a SaaS company when it’s working properly. For me, the marketer, the coolest part of seeing this come to fruition was that each month our paid search spending would be a fixed cost - say we spent $20,000 on paid search programs in July. In each subsequent month when I looked at my month end report from Working Planet, I could see how much revenue that $20,000 in spending had actually generated. Because it’s SaaS the revenue realized number would grow each month, I could see exactly when we reached break even on any month’s paid search spend, and I could see the profitability of any month’s spending continue to grow thereafter. Of course as customers churned, you’d fold that in as well and would see that also impact the actual revenue that was realized. It’s incredibly powerful to have that level of understanding of the relationship between your spending and your profits. But let’s talk through what it takes to get there - proper lead source attribution, billing and cancellation information synced with CRM records, that sort of thing. Talk us through the integration and technical work that your clients need to understand and commit to to truly “close the loop.”
Soren: We use three buckets of data that, in combination, give us the ability to make good decisions on buying digital media. First, we have cost and targeting data from the ad networks like Google, Bing, Facebook, Twitter, LinkedIn, DSPs, etc. Second, we have multi-touch per-user tracking on our client’s site to measure engagement, and; Third, we have customer value data from our client’s CRM, Finance, or other internal systems. We work the “loop” both backwards from the customer value data to create our models, and forwards through the user engagement path to monitor performance by granular segment.
The client-side systems and data are always the wild card. While all we really need is the common “join” to marry the back-end data to the marketing data, we always find significant data gaps, multiple “systems of truth,” or missing revenue when we dig in. Inconsistent use of a CRM by the sales team is also a huge issue.
For SaaS clients, we are typically looking at a months-to-breakeven target that is related to growth of MRR. In some ways SaaS clients are easiest in that there is a built-in recognition that the investment in marketing does not occur in the same time period as revenue realization. This point is lost on a lot of companies that only take a “cash flow” view of in-month expenditures and revenues. This can cause real problems in evaluating performance so we try hard to introduce a cohort-based view of that investment and how it pays off over time.
Geoff: Let’s talk about tracking scripts and pixels - admittedly these have become sort of dirty words to me. In order to deliver on closed loop reporting, you need to add tracking scripts or pixels all over the place - website pages, lead capture forms, etc. Depending on the actual paid search network, or remarketing network, or social channel you are using, there seems to almost always be another tracking script that needs to be added somewhere. And all of this tracking work needs to happen consistently across different device types and different browsers.
I’ve enlisted the help of plenty of very technical people who have sort of poo-pooed how difficult this work could possibly be, only to find that it’s almost always more… finicky... than they initially expected. I’d go so far as to say that at times I felt like we even spent more time working on tracking scripts than on the campaigns themselves. Yes, there are tools out there like Google Tag Manager but frankly they don’t solve this problem. How do you think about this and address the pain that customers, including myself, have felt in this area?
Soren: Well, first, I would not knock GTM as it solves a lot of the pain that we experience with scripts and pixels not being viewed as supported technology by our clients’ web teams. If you want data-driven optimization your only source is in fully utilizing all the scripts and pixels from all the networks, and not just your primary tracking tool.
A bigger issue is, in my opinion, in the limitations of tracking technology. We are a very technical data-driven shop, and our biggest “data challenge” is getting clients to buy into cross-channel behaviors. For example, 95% of engagement from a Twitter campaign will come from people who never click on the Twitter ad. Some clients still believe that if the click didn’t happen, the channel had no influence (and, conversely, “How do we buy more of this “Brand” traffic? That performs great!”). This is such an issue that we are now trying to report 100% of paid and non-paid engagement in all our reporting plus explicit testing to validate out-of-channel lift.
Geoff: Can you give me an example of how you validate out of channel lift with paid advertising campaigns?
Soren: With a start-up client that we’re working with right now, we knew we were getting significant out of channel lift from Facebook campaigns. It was very difficult to convince them of how much that might be - because it never involved a click on an ad it couldn’t be tied to Facebook specifically.
So we did some geographic tests where we used Texas as our test area, and Florida and Georgia as the control. We dramatically escalated Facebook advertising in Texas, and what we found was there was a 90%-100% lift above what we directly tracked to Facebook showing up in their brand and no-referrer traffic, meaning 45%-50% of all value from Facebook was being created without a click on an ad.
This allowed us to create a really good model for how we should think about cost of acquisition targets for tracked Facebook relative to the whole campaign. We then did a confirmation test using Colorado and Utah, and we found the exact same behavior. We were able to validate for the client that it wasn’t just 60% of their acquisition that was from the paid campaigns, but actually over 80% of their entire business that was being driven by their paid campaigns when you factored in the out of channel lift.
When you can nail down the math on this and predictably show that an outcome is going to exist, and you recalibrate that on an ongoing basis, what we find is people are going to give you an unlimited budget. One that’s limited only by their own limitations as an organization, which might be financial in which case a capped budget is appropriate. Otherwise it’s going to be restricted only by cost of acquisition targets relative to the competitiveness of the market.
Geoff: Beyond the mechanics typically associated with paid search management - keyword selection, bid optimization - talk to me about what else goes into optimizing paid search campaigns over time. What I’m getting at here is the client usually has to play an active role to truly allow your company to do it’s best work whether it’s customer research, feedback on new messaging directions to test, conversion optimization, etc.
Soren: The “math” we are solving for involves the entire engagement path, so we have always advised on page testing as one of the key additional areas where we can help scale. Last fall we launched a Conversion Design Service for a small monthly retainer that allows us to now build and deploy landing page tests as well, accelerating learning and optimization for clients that don’t have those resources in-house. Our clients are very involved in this as well, addressing other core factors in the equation through nurturing programs, lead response times, proper lead scoring, use of SDRs, and retention programs. Every gain in the entire acquisition/LTV chain makes it easier to scale the programs.
Geoff: If there was an idea or two that you could beat into the head of start-up Founders when it comes to paid search or digital advertising more broadly, what would it be?
Soren: This is a process of ongoing, continual improvement that will never end. That’s it, really. I guess if I were really hammering it home it is that what you are improving on is the ability to generate revenues and profits.
Geoff: Let’s end by tying this all back to Outseta for a moment. We are a platform play that competes in an ultra competitive market, across extremely crowded categories like CRM, email marketing, customer support, and subscription billing software. On top of that, the vast majority of our competitors in these categories are established or very well funded businesses. How can we possibly compete in paid search? How would you think about the role that paid search should play in our business, or the strategy/approach to paid search that might make the most sense for us?
Soren: Search is a media that serves up solutions to stated problems, so for search, you need to look at the many problems you are solving that people are searching on. However, many start-ups solve problems that exist, but are unstated or unsearched on because people can’t envision the solution exists (imagine selling a self-driving car before people knew this was technically feasible). In those cases, you need to create that awareness with media outside of search, but there are more options for that everyday in Paid Social, Display, Programmatic, Video and other platforms. For Outseta, like many SaaS start-ups, it will be a process of testing many varied potential audiences against their actual engagement in the sales process.
Geoff: That’s a wrap. Thanks for your time, Soren!
By Geoff Roberts 12 min read
Scott Brinker is the VP of Platform Ecosystem and Hubpot as well as Founder and Editor of Chiefmartec.com, the most widely read blog on the web focused exclusively on the intersection of marketing and technology. Today Scott is considered one of the preeminent thought leaders in the world when it comes to marketing technology. We caught up with Scott to get his take on what we’re building at Outseta and to learn how he thinks about the technology related challenges that start-ups often face.
Geoff Roberts (GR): Scott, for the sake of our readers tell us a little bit about who you are, what you do, and how marketing technology became such an important part of your professional life.
Scott Brinker (SB): Sure thing, Geoff. I’ve been in this industry for 20+ years now, but I became really fascinated by marketing technology as I saw two business functions that previously were very siloed start to collide - IT and marketing. As these functions started to intersect more and more, it became clear to me that there was very little knowledge shared or best practices around how these functions could support each other’s needs effectively. There’s no doubt that marketing teams today need to be staffed with technical resources, much more so than they did previously - I refer to these people as marketing technologists. So the merging of these two functions was really what gave birth to my blog, Chiefmartec.com.
GR: You are perhaps most well known for the infographics of the Martech landscape that you put together each year - over 5000 Martech vendors in 2017! How does this make you feel? Do you perceive this to be a problem? I’m curious, generally, how you think about this.
SB: That’s a good question. At the end of the day, there are both pros and cons to this. On one hand, there are simply so many options out there - the more than 5,000 marketing technology vendors that you mentioned - it’s overwhelming. There are simply so many options for any one category of marketing technology, that there’s a problem with over-saturation and it can be difficult to identify the technologies that your business actually needs. On the the other hand, marketers have access to more technology and tools than ever before. For pretty much any marketing touch point or need, it’s pretty likely that there’s a software tool out there that can fulfill your need. So the pro would simply be the accessibility of tools and the wide range of functionality that the marketing technology landscape now provides.
GR: Former SAP exec and new Marketo CEO Steve Lucas recently made the following comments…
“What’s crushing the marketer right now is that every time there’s a new consumer touch point, there’s a new point solution for it,” Lucas said. “It’s overwhelming the marketer.” The problem with that, he said, is that “you lose any context on who the customer is.”
What is your take on Steve’s comments, and what do you think will emerge as the solution to this problem over time?
SB: I agree with Steve’s comments, but I do think that there’s more than one path forward. We’ll see a couple of different types of solutions continue to emerge as we consider the challenge that comes from an ever growing number of consumer touch points.
The first is going to be the all encompassing platform play, much like what you’re working on at Outseta. There are other companies working on this sort of approach as well. The idea here is to build a single system that’s wide enough to cover all of the major touch points, or at least the most important ones. This has the advantage of companies only needing to pay one bill, only needing to work with one company for support.
The other route is continuing to integrate any number of point solutions that are more specialized and do one thing really, really well. There’s a growing number of companies that are either data warehouses, or pre-built system integrators, that allow you to effectively make use of data coming from disparate systems in a meaningful way.
GR: How do you think about the differences between solving these issues at an enterprise versus a start-up level? My own take - while the costs and number of point solutions that need to be integrated are all larger demands within an enterprise, the importance of solving these issues within a start-up may actually yield a bigger return. Start-ups don’t have dedicated resources to devote to this work, so it comes with an opportunity cost of technical co-founder time. They are also more cost sensitive than their enterprise counterparts, and the benefits of having a clearer understanding of their customers and business may be that much more beneficial in helping them find initial traction and scale their business successfully. What are your thoughts?
SB: I agree with you 100% with regards to their being a significant opportunity cost for start-ups. I don’t think the real issue for start-ups is the integration work associated with integrating a stack of point solutions. Most of that integration work isn’t terribly difficult, but it is work that needs to be thought through carefully. Which systems actually need to be integrated so that the data can be put to use in a meaningful way? How do you actually intend to use the data? What real world business process, or use case, or workflow are you trying to support? I think it’s most important that the real world use case is carefully considered so that you’re actually getting business value out of integrated and accessible data. At the end of the day start-ups are all about prioritization - there’s not enough time in the day to do everything. Start-ups are also going to be more resource constrained in terms of dollars, in terms of people, and in terms of time. If you can provide a single platform that saves start-ups time, then that’s very valuable.
It’s worth noting too though that start-ups have a huge advantage - they are starting from a blank slate. They have the opportunity to consider their needs and deliver a tech stack that they build to address those needs from the ground up. That’s huge. In almost any other business there are going to be legacy systems in place and an existing way of doing things. Not just from a technical perspective but also from a cultural or change management perspective that can be very, very challenging.
GR: So the concept for Outseta is to provide basic functionality across CRM, customer support and knowledge base, email marketing, subscription billing, and reporting - the basic functionality that SaaS start-ups need and nothing more. It’s a platform play, and we’re going wide rather than deep in any one area. This definitely flies in the face of “conventional” start-up wisdom, which often suggests that you do one thing very well, very deep. I’ve certainly heard this from many smart people whose opinions I trust - what’s your take?
SB: Everybody has heard the “do one thing and do it really well” mantra. You’re either choosing a high level of specialization, or less specialization with a broader reach of functionality. I don’t see either option as being correct, or more right, than the other - I think it’s simply a matter of approach and the strategy you are using to deliver value to whoever your customers might be. If your customers only need basic functionality across A,B,C,D, and E and you can deliver that to them in one platform that’s built well with these components integrated from the ground up, I’m all for it.
GR: Is reducing your technological footprint, within any company, an import thing to be thinking about in and of itself? Why or why not?
SB: It’s definitely worth considering, but I think it’s most important to focus on what technology you need to help you achieve your business goals, whatever they may be. If you’re too worried about your technological footprint, you could end up with fewer tools, or not the right tools, that you really need to support your business objectives. The converse is true too - you can go way overboard and have all sorts of software that’s simply overkill for your needs. But again, if you can pay fewer bills and work with fewer vendors while still supporting your business needs appropriately more often than not that’s a good thing.
GR: How important is or isn’t delivering on a single, 360 degree view of your customer? It can certainly take companies a lot of time, effort, and money to get there - is it worth it, or is this an aspiration that’s not as important as it may seem?
SB: I think it’s very important if it’s delivering a view of your customer that’s actually useful in a real world setting. For example, it used to be that there was one marketing message that businesses pushed out to just about everybody. One of the things that marketing technology has really delivered is the ability to better segment and personalize your marketing messages to buyers with different characteristics, personas, etc. Say you want to use marketing automation to send different messages to different customer segments - you’re probably going to need your automation tool to be integrated with your CRM and have context on those different customer segments. There’s real value in having that context; that better, more complete understanding of the customer.
The flip side here is it’s easy to go overboard. There can be prospect or customer records with crazy amounts of detail, tracking every touch point imaginable, but if you’re not using that detail in any specific way then it’s just a longer, more detailed record than it needs to be. I would start by making a list of the data from different types of point solutions that most often has to be integrated to help support a business goal within a SaaS business.
GR: One thing we learned during our idea validation interviews is that start-ups solve for their immediate need - if they need to send an email campaign, they buy Mailchimp. If they need to start billing customers, they buy Recurly. They are not thinking at an early stage about buying a platform to solve multiple needs that they’ll have at some point in the future. From a go-to-market perspective, how would you solve for this?
SB: I don’t think there’s any one trick here, I would simply lay it out for them. You’ve worked in a number of SaaS start-ups before, and you’ve identified 5-6 needs that are common to most of these businesses. So the pitch becomes, “You only need functionality A today, but we know that you’re going to need B, C, D, and E in the near future. By working with us you’ll get functionality A today, but the rest of the functionality you need will be there for you whenever you’re ready behind the same login credentials.” This is a simpler solution and if it saves start-ups that ever valuable time, I think they’ll get it.
GR: Knowing what you now do about Outseta, tell me why you think our idea sucks. Or if you insist on being nice to us, what’s the biggest challenge you think we’ll face?
SB: I think the biggest challenge for you is simply going back to the size of the marketing technology landscape - these are so many good options out there across each of these categories. There’s some irony here in the sense that you’re offering a system that out-of-the-box should help more SaaS companies launch successfully. If they have a good business idea, the promise is your company can increase their odds of being successful and some portion of them will undoubtedly be in the marketing technology space!
GR: Now let’s flip it - what do you like about our idea? What concept excited you or do you think at least shows promise?
SB: All of the things we’ve talked about - I think it’s a simpler solution and if it can meet a start-ups basic needs, it will give them more time back to focus on other aspects of their business.
GR: I am personally of the belief that most companies understand the impact that well integrated and effectively used marketing technology can have on their business. They get it. But I do think that most companies tend to underestimate the resources, time, and costs associated with evaluating, buying, integrating, and maintaining their tech stack over time. How do you educate companies on what it will take to deliver on their vision, and what are the common traits you see in the companies that are most effectively leveraging and supporting their marketing technology?
SB: I think there’s really two things of note here. The first is the work associated with figuring out what business processes and campaigns you actually need your technology stack to support. There’s real strategic thinking that needs to be done here, and it tends to not be a one-off project - you’ll need your tech stack to support an ever changing set of business needs. I agree that most companies tend to underestimate their needs in this regard. The second is simply about the structure of modern marketing teams today. I’ve written a lot about the “Marketing Technologist” role, but I don’t think the structure of modern marketing teams has necessarily kept up the requirements of the marketing function in many businesses.
GR: What’s most exciting trend/characteristic/movement to you that’s happening in the Martech space right now? What gets you giddy thinking about what 2018 holds?
SB: There’s so much it’s hard to pinpoint any one thing. There are totally new types of customer touch points being created every day, like virtual reality experiences, just to give one example. Another huge one is just machine learning and data science tools making data not only accessible, but also highly useful to marketers with so much less effort than was required before. If you look across the various categories in my marketing landscape infographics, there’s exciting innovations happening just about everywhere.
GR: We’ve gotten pretty technical in this conversation - what’s something about Scott Brinker the person that those that know you only by professional reputation wouldn’t know or expect?
SB: I was a music major, which most people probably wouldn’t guess given how technical my job is today. But I think there’s an interesting parallel between orchestras and how businesses used to be run, versus how they are increasingly run today. In an orchestra there’s one person up front, coordinating the efforts of many musicians to deliver the final product. I see that increasingly as the old way of doing business. Today, I see a growing number of companies operating without that conductor, instead leveraging a number of small teams that are all focused on their own objectives. Think of this more a a jazz band, where everyone is doing their own thing but there’s enough structure there for it all to come together beautifully. I’ve always enjoyed that parallel and I think it’s true. I play keyboards and a bit of guitar today.
GR: Thanks, Scott!
By Geoff Roberts 2 min read
We’ve talked quite a bit on this blog about our desire to build a self managed organization. Self management depends heavily on transparency - everyone in the organization is enabled to make decisions, including spending company money, because everyone is operating with all of the information available. With that in mind we thought it would be both fun and appropriate to take a closer look at our expenses now that we’re six months into building Outseta. This exercise was a valuable checkpoint for our existing team, and let’s face it - we’d like to work with some of the people reading this post in the future - so we figured we’d start giving you access to all of the information available now.
The graph and breakdown of our spending shown above is from Mint.com. We’ve spent $4,702.85 to date. That includes $1,541.18 on “Food and Dining” - this is mostly Dave & Dimitris getting lunch together when they work from Dave’s house. The $178.88 spent on “Entertainment” was primarily a round of golf that the three of us played together when I was in Boston last.
Where this is most interesting (and hopefully valuable) to other SaaS start-ups is looking at what we’ve spent in the broad category of “Business Services.” It’s interesting to look at both the timing of these expenses, and the breakdown. Some highlights are below - they are listed in the order in which we first incurred an expense with each vendor.
My initial reaction to this table? It’s fairly remarkable how little overhead is needed to start a SaaS company. It’s worth noting that we’ve chosen to bootstrap the company, and have made a pretty concerted effort to keep expenses low to date. For example, we are all using computers we had purchased on our own and we are not yet paying ourselves at this stage (we are working for sweat equity).
Oh, and Dave and Dimitris really like Pure Cold Press in Brookline - they’ve eaten lunch there more than anywhere else (6 times!). They even brought me once the last time I was in Boston - good place.
We’ll circle back at the end of the year and publish a similar update focused on our total expenses in our first year of building Outseta.
By Geoff Roberts 9 min read
BJ Lackland is the CEO of Lighter Capital, a Seattle based company that provides revenue based financing to tech start-ups. Lighter Capital typically invests $50,000 to $2mm of growth capital into businesses without taking an equity stake in the company or a board seat.
Geoff Roberts (GR): Thanks for taking the time to chat with us BJ. The funding model that Lighter Capital uses is really interesting and might be a great alternative for our audience of early stage SaaS companies. Why don’t you start by walking us through how revenue based financing works?
BJ Lackland (BJ): Revenue based funding is an alternative to the typical model of angel or venture capital funding that’s so common in tech. This funding model allows companies to raise growth capital without giving up equity or a board seat, so entrepreneurs maintain control of their businesses. Companies agree to pay a percentage of their revenue on a monthly basis until they repay their loan, and the amount that they repay is capped. What this means in practice is if your company has a good month, you repay a little bit more. If your company has a bad month, the payment is less. Typically monthly payments are 2%-8% of monthly recurring revenue, and repayments are capped at 1.35x-2x of the amount invested in the business. Repayment typically occurs over a 3-5 year period.
GR: When I first heard of revenue based financing, an analogy was made to how funding is raised in Hollywood when it comes to making movies. How did the idea come about to leverage this model in the tech sector?
BJ: There a huge need in the tech sector for alternative funding sources. Traditionally, the only growth capital available is equity investments from angels and VCs. But raising VC money is incredibly time-consuming and it’s like strapping a rocket to your back - you’ll either shoot to the moon trying to make investors a 10x return or you’ll blow up halfway.
The vast majority blow up.
That just doesn’t fit a lot of companies and entrepreneurs. Lots are great business people who want to build companies to last. Or they want to put off an equity round until later. Or they don’t have 6 months to spend raising VC money. Either way, there’s a huge opportunity to provide capital that is non-dilutive and yet still aligned with the entrepreneur toward growth.
GR: What problems does this model solve when you consider the typical model of VC/Angel investment that’s been so prevalent in the tech sector?
BJ: This model solves several important problems. To start, the non-dilutive nature of the model means entrepreneurs don’t need to give up an equity stake in their business, or a board seat. The second is we allow companies to spend substantially less time on the fundraising process - this can become a huge distraction to early stage start-ups whose time is better spent building their business. I heard a statistic that it typically take a start-up something like 60 meetings and 40 pitches to raise $500,000 from angels or VC firms. We offer companies seeking funding an easy online application, and the funding process typically takes 3-4 weeks. Last but not least, with this model entrepreneurs don’t need to hit a “home run” or have some sort of liquidity event in order for the investment to be seen as a success. This model works much better for entrepreneurs who are looking to build a sustainable business.
GR: What do you look for in potential investments? What’s the profile of your typical investment?
BJ: There’s really three criteria that we look for in potential investments. The first is a monthly recurring revenue stream of at least $15,000 per month. We’re typically investing in businesses that have anywhere from $200,000 to $10mm in annual revenue. The second is high gross margins - at least above 50%, but more often than not above 80% which is fairly normal in SaaS businesses. Last but not least, we’re looking for an indication of stickiness - products that are providing sustainable value which is evident through low customer churn rates.
GR: My understanding is your decision to invest in any particular company is based more on an algorithm and the financial performance/unit economics of the business than qualitative factors like strength of team, market opportunity, etc. Can you speak to the process you use in deciding whether or not to fund a business?
BJ: You’re completely correct. We’re really looking more at the financial performance of the company, the unit economics, and you know - is the company offering a basic, durable offering for the market? And certainly the management team is a piece - we want to be working with good people and good people are what drive good returns no matter what business you’re in. It’s not nearly as important to have an MBA from Stanford or Harvard; you don’t have to be fraternity brothers with a VC to get funding at all. We do background checks, we want to make sure the entrepreneurs understand their business well, that they can speak articulately about their business, that they have a good financial understanding of what’s going on when operating their business. What’s least important is are they going to go on to be the next Uber? I mean, we just don’t really care. We’re really focused on funding businesses that are solid, that are durable and are going to be around. And they’re able to scale up - one of the reasons we want to see high gross margins is we want to see that if they land a bunch of new customers they can scale this thing up from $2mm to $10mm in the next 4-5 years. If they do, this model makes a lot of sense for the entrepreneur.
GR: What have been some of Lighter’s most successful investments?
BJ: It’s interesting because when you think of successful investments for a VC fund it’s all about what was the multiple and what was the exit and was it a brand name? And we have a couple of those but by our very nature our upside is capped. For us as investors, sometimes the companies that do best with us aren’t exactly household names. The biggest brand name company that we’ve funded is probably Steelbrick. We funded them when it was 5 people, a virtual organization, and they were totally bootstrapped. The original entrepreneur brought in a new and highly experienced CEO, they raised a ton of money, and they ended up selling to Salesforce for $360mm. An incredibly great outcome for them. That’s probably the biggest name we’ve funded because of the big exit. MapAnything is another - they do geolocation on Salesforce and ServiceNow’s platforms and are growing like a weed. They also went on and raised a lot of VC money. But most of the companies we fund are small businesses that are well known in their niche industries.
GR: What involvement does Lighter Capital have with their portfolio companies post investment?
BJ: It really depends on the entrepreneur and what they want. The only thing they need to do is provide us with financial data and handle the payment. We try to make that light as possible, so we have software that attaches to their accounting software package so they can login to our portal and hit a button and do all the reporting. A lot of the businesses have a bookkeeper or a controller do that work. Aside from the reporting, where we are most helpful is planning out their financing, frankly. As opposed to a VC we don’t necessarily need to know the best VP of Sales candidate in healthcare tech in South Carolina. What we know is if you’re doing X million in revenue and have this kind of burn rate and this kind of growth rate, what kind of capital is available to you from which different sources? Whether it’s angels, VCs, banks, and probably how to introduce you to any of those sources. So we can help with strategy, mostly on the capital side. We’re also coming out with some BI tools for entrepreneurs - we’re learning more and more and more about what drives growth. For example, we can say what an acceptable churn rate is for a company with an ASP of $1,000 per year and we can share that information back with the companies so they can benchmark themselves and learn how to grow their businesses.
GR: This all sounds great, and I love the non-dilutive aspect of this model. But what are the disadvantages or downsides of this funding model? What happens with your investments that don’t do well? Who does this model not work well for?
BJ: We’re a creditor, we’re not equity so we get paid first. We’ll take a second position behind a bank, but we’re not equity so we get paid first if the business goes down and is not successful. That’s the legal side but we try to work with the entrepreneurs. The businesses we’re funding don’t have any hard assets so it never makes sense for us to go and try to force a liquidity event - there’s nothing to liquidate. Their real core assets are the fact that they have sticky, high margin revenue streams. And if things don’t go well hopefully they can cut their expenses and survive with a sticky high margin revenue stream and have enough money to keep the business alive and pay us back our principal. If we don’t get the full amount that we’re owed, we have to work with the companies to figure that out and we’re not always going to win. That’s the reason we have a large and diversified portfolio. We fund something like 10-12 business per month and funded 101 businesses last year. Our goal is instead of having what a VC might have - 10-20 highly concentrated positions - we’ve funded 160 businesses and accept the fact that with some portion of those we’re not going to get repaid.
GR: You spend much of your time with founders of early stage SaaS businesses… what technology related challenges do you see most frequently within these organizations?
BJ: I think the number one thing is finding good developers. That’s a key, and it’s hard in this market and you need to have the capital to do that. One thing that’s cool that you’re doing at Outseta is you’re simplifying a lot of the software offerings that SaaS start-ups need, and that’s going to save them a lot of money. Another thing is getting their product offering good enough to sustain customers. I’m sure you’re familiar with the lean start-up and the notion of minimum viable products, but the majority of our customers are B2B and they just need to get their products to a good enough place where they can not only attract but sustain customers without under serving their needs and having them go elsewhere.
BJ Lackland can be found on Linkedin, or on Twitter @bjlackland.