startup failures by stage

WeWork has been posing as a tech company (albeit unsuccessfully) since its inception, and given their recent troubles, it’s a good time to step back and evaluate what makes a company tech. Today, tech = SaaS, and gross margins tell the story. Real software margins float anywhere from 70-90%, while WeWork’s sit at 20%. The truth is companies should be valued based on these margins, not whether or not they’re “tech.” 

🔥💰 VC backed startups fighting to gain traction inevitably live with the fear of running out of cash, and for good reason: 30% of polled founders said that insufficient capital led to their demise. The numbers show that founders could afford to be more conservative when raising funds, and that adhering to the conventional wisdom of targeting 12-18 months of runway between rounds has caused many failures. Most companies actually need at least 18-21 months of runway, and 35 months on the high end. 

🌾 🅰️ 🅱️ When segmenting these VC backed failures by stage (with failure defined as the inability to either raise a subsequent round or exit), we see that the farther a business progresses through the financing stages, the more likely they are to exit. This isn’t a huge surprise—mature businesses are more established and attractive for acquisition. But what does stick out is there is a considerable drop in the ability to raise a subsequent round from Seed (79.4%) to Series A (50%). Things get easier bit by bit from Series B and on (see below).  

🍝 Founders generally think about exiting their startups in two ways: building and selling the company for millions, or building and taking it public for billions. But they don’t have to strive for these “get rich quick” plays—an increasingly popular alternative is to build and extract cash from a business over time. Basecamp CEO Jason Fried is a big proponent of the idea and believes founders should be creating companies that are like mom and pop Italian restaurants: they have longevity, a sustainable business, and aren’t gunning to be the next Olive Garden.

😴 JotForm CEO Aytekin Tank has grown his customer base from 0 to 5m and continues to add 50k users a month, all without ever raising a dime of capital. Want to know how? He is selling something bigger than “boring forms”—he’s selling that Jotform makes your organization productive. That core narrative has been the catalyst for their growth. Intercom is another example of a company with a compelling narrative—that online business needs to be personal. Here’s how Intercom infuses that narrative into their business:  

  • Content: Intercom’s content team doesn’t write blog posts on how to send messages via Intercom Rather, they show readers how to write personalized messages that will engage their customers. 

  • Growth: Intercom avoids inhuman marketing tactics like spammy emails. They’re incredibly transparent with their marketing, think that “growth hacks” are bullshit, and there are no silver bullets to growth.

  • Customer Support: The head of product actively searches for team members who embody the narrative of making business personal. Intercom needs people who are enthusiastic about creating relationships, not just cashing a check.

🎥 In the newly released That Will Never Work, Netflix co-founder Marc Randolph shares lessons from his time working alongside Reed Hastings and their story of scaling the company. Randolph left Netflix in 2003, long before it grew to the massive streaming service it is today, but those early years were the most crucial. In an interview with Marker, he shared some insights from the book:

  • For 14 years Netflix was a DVD by mail company, and had little assurance the idea would ever actually work.

  • He isn’t sure what would have happened if Blockbuster went through with the purchase of Netflix in 2002, but feared they were unlikely to keep the original talent of the team, the core piece of Netflix’s success.

  • Randolph never saw the scale that Netflix has today coming, but as early as 1998 knew that they wouldn’t be a DVD by mail business and that streaming was the future.

  • He thinks too many people are getting into entrepreneurship for the wrong reasons, namely the glorification of Silicon Valley and the celebrity status the success can bring.

Get bought—not sold

We’re back with more from the SaaS CXO Summit, except this week, we’re taking things a step further and including a few of our favorite presentations. You can check them out here, and hear our favorite bits of the talks below. Cheers!

🏫 Founders should aim to have their businesses “bought, not sold,'' because your return is nearly always higher when interest is inbound. It’s just much more difficult to convince buyers of your value than it is to lead them to it, which is why PathFactory CEO Dev Ganesan suggests educating potential buyers from the get-go. He exited his 3 last companies to strategics and is clearly the guy to take tips from here—these are our favorite suggestions Ganesan had.

  • Map your ecosystem to understand who the key players are like corporates, investors, and even thought leaders. Buy-in from these influencers will garner the attention of buyers who have a deep understanding of the space.

  • When it comes to buyers, think quality, not quantity. There is no use in building a list of 500 buyers if there are all moonshots. Come up with a much smaller list of 10-15 real opportunities that could make sense.

  • Once you have identified the top buyers, look to build partnerships and integrations as a means to get your foot in the door. If the partnership goes well, there could always be potential for acquisition. 

  • Try retargeting potential buyers through channels like LinkedIn and Facebook with the same ads you would use for your target market. This is a clever way to keep your name top of mind without looking desperate.

🐝 While a bit of a buzzword, account-based marketing (ABM) is really just solid, strategic marketing based on understanding your ideal customer profile (ICP) then being ultra-targeted in how you reach them. And the stats tell the story: 91% of B2B marketers said ABM increased their ACV, and also upped their win rate by an average of 36%. Sigstr VP of Marketing Justin Keller has implemented his fair share of ABM campaigns and offered these thoughts on how to operationalize ABM.

  • Identifying your ICP will make or break a campaign. To do it right, look at your recent history of closed/won accounts and see what the common denominators are. 

  • When it comes to selecting accounts to target, have the marketing department select 20 targets, and sales narrow them down to 10. These numbers will depend on your ACV to an extent.

  • Build a content matrix that segments accounts by industry and person. This will make account alignment and landing page construction much easier.

  • Now that you’ve segmented accounts by industry and profile, take it a step further by determining the best way to engage each type of account (targeted ads, email, direct mail, phone/meeting, etc.).

🎏 Trendkite founder and CEO AJ Bruno knows all about High Velocity Sales. His sales team scaled the company from 0 to 25m in just four years, and all it cost him was his hair (his words, not ours!). Despite their enormous success ($225m exit in January), he had a hard time tracking his team’s performance and commissions, which led him to his current venture, Quota Path. 

While other technologies in sales enablement typically take a top-down sales approach, Bruno is flipping things with a bottom-up approach—targeting sales reps with a freemium model. The goal is to then move upmarket to managers, and eventually to the VP of sales who pay the big bucks. Looking back at his Trendkite days and early success with Quota Path, these were our three favorite takeaways.

  • It’s better to underhire than overhire, so don’t add reps to the team until it’s absolutely essential. This will avoid potential redundancies and hassle if growth isn’t linear (and it’s often not).

  • Be as honest, open, and genuine with your team as you possibly can. Yes, there are some things you can’t share, but the more transparent you are with employees, the more valued they will feel, and the harder they’ll work.

  • Spend 7-9 a.m. every morning (or even before if you’re an early bird) to organize your day so you can hit the ground running. Those two extra hours a day amount to 480 hours a year that you’re giving yourself.

Things Fall Apart at 5m ARR

At last week’s SaaS CXO Summit we heard Vista Equity talk about how “Things Fall Apart at 5m ARR” (that gripping title got us). The keynote was over an hour, so summarizing the presentation in 5-6 sentences is nearly impossible. But this one was too good not to include, so we’re doing a deeper dive here than our standard. Let us know what you think!

🗝️ Vista categorizes companies into four stages of ARR: 0-5m (startup), 5-10m (inflection point), 10-25m (scale), and 25m+ (mature). At that 5m ARR inflection point, scaling strategies which once worked no longer cut it, and founders will see lots of change—especially in these areas.

  1. Sales Efficiency: 3x spend ≠ 3x in growth anymore, and grabbing those first customers is easier than this next set will be. This is because the first group was made up of early adopters and visionaries, and the new crew will be less patient with your flaws. At this point, the CEO also needs to pass the baton to a new sales leader, which is likely to cause a dip in new business. Lastly, ramping up the sales team gets tricky because sourcing quality candidates is difficult, and natural attrition occurs in the process. 

  2. Retention: It’s easy to lean on net retention numbers because unless you’re in trouble, they should always look nicer than your gross churn. But it’s important to focus on gross as well because at 5m+ ARR, net churn will no longer be a sustainable growth lever. This is due to the law of large numbers—adding 15% net churn in revenue a year is much more obtainable at 1m ARR than at 5m, and will become even more difficult as you scale.

  3. Market: A lot of founders think that the bigger the TAM they show, the better perception investors will have. Or they create their own market quadrants, and convince themselves they don't have competitors in a massive market. Really, founders should be looking for their ICP (ideal customer profile), which falls far below TAM. 80% of efforts should be spent on the ICP at this stage, and significantly less on reaching aspirational customers. 

  4. Leadership: You’re always going to want employees who will be there for you and that you trust, but at the inflection point your headcount starts to rise and faces become less familiar. Your job as a leader will ultimately be to make the leap from being a great founder to being a great professional CEO. If you can prioritize the ultimate success of your company above your own personal goals, you’re well on your way.

📘 When the sales team is humming and quotas are being hit, people rarely stop to see if there are any issues lurking in the background. But the second goals are missed, it becomes priority numero uno to see what went wrong. To avoid the panic you’ll face in this situation, these are a few helpful questions to ask yourself. Having a sales playbook for rep onboarding, training, and development is one of the most important, along with looking at what percentage of your reps are hitting quota (they say 80%, we’d say a bit below there is alright).

🤖 As prospecting tools and sales AI continue to improve, sales reps have begun to wonder if their jobs will eventually be replaced. It’s a fair concern—automated sales tools like Drift are tailor-made to replace an SDR’s functionality. The big question remains: can these tools really do as good of a job as a human? We don’t think so. Establishing a human-to-human connection is essential in B2B sales. Even if you provide a knowledge base to answer all of the questions a potential customer might ask, it’s just not as appealing as being spoon-fed the answer by someone dedicated to helping you.

🎙️ We’re giving Drift a double feature this week—this time, it’s from their appearance on the SaaS Revolution Show (from the SaaStock crew). On the pod, Drift’s Cofounder and CTO Elias Torres shares tips for how to build company culture and finding and hiring top talent. Here’s your tl;dl (too long; didn’t listen):

  • Drift grew from 18 to 300 employees (~17x) in 4 years.

  • Culture always changes as you add employees, but one thing you can keep consistent is your leadership principles.

  • Leadership distilled company culture into 8 principles that they share with employees during onboarding—this gives insight into how they make decisions across the company at all levels. 

  • Elias’s first hire was a recruiter, he believes most companies fail because they can’t attract talent. 

  • Drift makes hiring decisions within 7 days. To make sure there aren’t too many cooks in the kitchen, only 6 of the 300 Drift employees have a say in the decisions.

  • Drift’s philosophy is to “fire fast,” but promise employees at least 90 days to improve if performance is lacking. 

  • Elias’s advice: remember that no success is overnight, solve for the customer, and have the courage to have ambitious goals.

When CEOs should let someone else captain the 🛳️; Warm intros are going 🥶; Don’t win your 1️⃣st customers with ads

Pssst, want to hear a Secret? They’re a platform for exclusive benefits and discounts on software like AWS, Airtable, and Freshworks. We’re using them to save cash on a number of SaaS deals (it’s 💯% free), and if you want to get in on the fun, just mention you’re coming from The SaaS Playbook! They’ll have your profile fast-tracked and auto-approved.

💉 Running Google and Facebook ads is in any SaaS marketer’s blood. But for the super early stage folks, it isn’t really the best way to get your first customers. You’re pre-product market fit, so even if your ads bring in customers, they will leak out as you continue to iterate on product and identify your ideal user. It shows a bit of a lack of resourcefulness because ads are far from cheap, and there are plenty of creative ways to scrap for customers that don’t cost a dime. At this infantile stage in your startup’s lifecycle, it’s ok to do things that don’t scale—manually recruit your customers and learn from them!

🚌 Online reviews are an increasingly popular way companies choose their SaaS vendors, with review sites like G2 Crowd, Trust Pilot, and Capterra acting as the platform. These can be great resources for buyers because they highlight key factors in your selection process and hopefully, offer honest assessments. They are also beneficial for sellers because they provide free placement to advertise your product. But if we could offer a word of advice for both parties...

  • Buyers—Fake reviews are an unfortunate reality, and pretty common for companies riding the struggle bus, so be on the lookout. If you’re serious about a product, take the time to demo it thoroughly.

  • Sellers—Seemingly trivial things like the design choices you make for your profile have a large impact on review scores. A lack of reviews (which is likely if your product is new), can also hurt your chances of being selected. 

🎩 Founders wear all the hats in the early days, including product. After all, they’re the ones closest to the problem that their business is attempting to solve, so who better to craft the solution? But as they scale, it will become too large of a task for one person, and the CEO’s focus will need to shift elsewhere. The best time to bring someone else in to run product is post-product market fit, when your engineering team is big enough to enact more changes. The CEO will also need to be mentally prepared to let someone else steer the roadmap—the toughest requirement to meet.

🛳️ Handing over the reins to your business is an even harder decision for a founder to make, but it’s a good question to ask: when is the right time to have someone else captain the ship? Every founder will view this differently. But often when the task extends beyond getting the business into growth, and you’re required to implement large internal structures to help the business run smoothly, many founders aren’t the best suited (or even interested) to lead. If you do decide to pass the baton, these steps can help create a smooth transition period for you and the team and set the new CEO up for success.

🤝 Warm introductions are thought to lead to the best opportunities because there’s hope the introductee is legitimate. But when it comes to hiring or investment opportunities, there’s a bit of a problem with warm intros. Referrers are often introducing the people they know best, who in turn, have similar education, socioeconomic backgrounds, and values. If that’s what you’re looking for—ok. But you’re looking for a bit more diversity, you may need to reach beyond the classic warm intro.

🐊 The person in a meeting who’s able to convince everyone of their viewpoint isn’t always right, they’re often just the most persuasive! We’re not saying it’s better to be persuasive than it is to be right (hopefully you’re both), but Oren Klaff’s Pitch Anything is a great read to improve your selling. It centers on neuroeconomics, the study of how our brains make economic decisions. As you can guess, these decisions aren’t always made rationally, so appealing to people’s fight or flight oriented “croc brain” can be the best way to win them over.

The rise of subscription 💵; How much value VCs really add; When to ❌ poor fit customers...

It’s the spookiest month of the year, and we’re going beyond the spider web decorations by sharing some of the scariest, costliest startup failures in history that will make the hair on the back of your neck stand up. Our favorite part is the “goodbye” messages failed companies sent to their customers—basically the startup version of an obituary.

On the bright side, very few of these businesses were SaaS! 

🌠 When we think of subscription revenue, we think tech, but subscriptions aren’t just limited to software and IoT. Other sectors like manufacturing and business services have entered the chatroom, and play a part in the subscription economy’s 350% growth over the past 7.5 years. That’s 5x faster than both the S&P and US Retail sales over the same period (see Zuora’s graph below). Along with these new players, the biggest contributing factor to the meteoric growth is the introduction of usage based billing, which enables customers to pay only for what they need. Sectors that have adopted the pricing strategy are seeing lower churn rates (like SaaS), while those that haven’t are struggling (like Publishing).

📞 Every VC hopes to be a value-added investor, and provide advice, connections, and services to help their investments thrive. But how much do they really affect a company’s trajectory? Creandum Partner Carl Fritjofsson surveyed 98 VCs and 121 founders to see how each group perceived a VC’s impact on their investments, and found there is a bit of a disagreement—on a scale of 1-10, VCs scored their impact as a 7, while founders scored it as a 5.3. Important areas of impact like contact frequency (see below) were also heavily debated. What both sides could agree on: personal relationships and chemistry are the most important factors in choosing a partnership.

🚀 Part of the problem is that it’s hard to measure a VC’s impact on a company—there’s no time machine to see what the growth and ultimate outcome would have looked like without their involvement. During Ashley Mayer’s 11 years in Silicon Valley, she learned that team members in rapidly growing startups face this difficulty in attribution as well. Facebook COO Sheryl Sandberg famously said, “If you’re offered a seat on a rocket ship, don’t ask what seat! Just get on,” but when employees hop off that ship and onto the next gig, they may wonder if their work had a meaningful influence. You’re best off staying level headed, and not letting the “what if” bother you, or the superstardom go to your head.

🎅Some frustrating customers feel like they just aren’t worth the hassle. A popular strategy has been to let these clients go, and free up resources to expend on better fits. Now it seems companies are trying to retain all customers, even if they are a thorn in the company’s side. This trend has some people worrying that the pendulum has swung too far the other way. To make the tough decision whether to drop a customer, companies can map out customers based on profitability, strategic importance, and churn risk. Those who are slow to pay and abuse your support team’s time should also be put on the naughty list. If you are going to cut ties, make sure to do a face to face call, or something with more personal touch to avoid negative word of mouth.

🍬 Conducting bad customer research increases the likelihood of adding poor fit customers, and there is one commonly used approach you should avoid: the Piñata approach. This is when product researchers quietly ignore their insights in favor of gut feelings, and blindly swing at what they hope will work. Yes, sometimes they’ll luckily hit the right strategy and grab some metaphorical candy, but for the most part, this is a fruitless effort. Companies really should be taking more of a Sherlock Holmes approach, with great curiosity that takes signals from the macro, meso, and micro level into account.

Nir Eyal’s Hooked, takes a look at the psychological side of product experience, and how to create product forming habits. His model is a 4 step process (see below) that relies on the dopamine surge a user experiences when receiving a reward, and can literally be addicting.  Not every product has the potential to create a Facebook type of user dependency, but even marginally increasing the habit-forming nature of your product can improve LTV, pricing flexibility, and growth through network effects.

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