The Celebration of Failure

In the tech start-up community we love to celebrate failure, but there’s a difference between celebrating failure and simply learning from our mistakes.  It’s pretty much the only place in the world where you can win by losing.

Where Failure is Celebrated
Silicon Valley

Where Failure is Not Celebrated
Ferguson, MO
Afghanistan, Iraq, Syria,
Sony, Target, Home Depot and JP Morgan Chase
TSA screening
Any sport for the history of time
Any election ever for the history of time
Faulty airbags and ignitions
The stock market
Dating
Job interviews
In the bedroom
Hot water heaters
News reporting
Julliard
Starving artists
Parenting
Food safety
The box office
Air travel
Detroit


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The Return of the (Sales) King

elvis-the-king-is-dead-crTwenty (20) years ago at the dawn of the commercial internet the leading CEOs and entrepreneurs were sales driven. Everyone was scrambling to make sense of a new channel and virtually every existing business in the world seemed to have a natural place on the web. There were no expectations- not low expectations, literally no expectations, about how things should work. In some cases there was not even awareness that the Internet existed.

UI/UX, ecommerce, web sites, even email, it was all a giant greenfield and one of the biggest question was “is it safe to type in your credit card?” not “is it safe to use my real email address?”  (Note that the exact opposite is now true- you will put your credit card into random sites with impunity but fear entering your actual email into a form.)

Because these early heady days were the wild west, it was the sales driven leader that reigned for the first decade of the web- the Sales King. The sales CEO had to bring dollars online- ad dollars, commerce dollars, B2B dollars, IT dollars.  New ways to buy and deliver advertising, physical goods, services and software all demanded massive persuasion.

With product expectations all over the place, most of the time people were just thrilled (or skeptical) that they could perform the same terrestrial activities virtually. And advertisers came too, cautiously at first, lured by the promise of the web and then like a sea of wildebeests during migration. Everyone made it up as they went along and standards were slowly born.  Just like Betamax vs VHS, IAB ad units slowly took hold and credit card companies solved issues about fraud (mostly). Advertisers had no idea what to expect but quickly became enamored by the sexy promise of data, of tracking and of targeting and of ROI. The click through was born.

So for ten years we focused on revenue (not all of us and not exclusively), but those that could convince big brands and advertisers to move their budgets to the web prospered. Those that could help coax consumers to open their web wallets prospered. Those that could enable the first two execute prospered. And then following the dotcom crash of 2000 and recession in the early 2000s, things began to shift.

To be certain, as everyone panicked about the recession (or obliteration for many companies) and revenues cratered sales was the primary focus. But out of the ashes of 1.0 came a new set of CEOs and leaders who took a longer (slightly) view of the web. These leaders were the Web 2.0 CEOs and they were Product Kings. By building a great product, by focusing on UI and functionality like a hand crafted beer they would win customers over for the long run.  The best products would win, not just those with the best sales & marketing.

And the result was remarkable. A plethora of fresh, innovative companies elbowed onto center stage, buoyed by the acceptance of the web that the Sales Kings had forged. Across almost all facets of the web they focused on building great products, with elegant design and clean, simple UIs. As cloud computing became a reality, it was like pouring gasoline on a campfire for the Product Kings. When I started my first company there were two major considerations we always had to deal with: 1. How much did we have to pay Oracle for a DB license and 2. How much iron did we have in how much rackspace. But the cloud destroyed those constraints and enabled the smallest teams to stand up minimally viable products (MVPs) in days.

Today the cloud enables the creation of all types of companies. The cost of starting a company (launching a product) went from hundreds of thousands of dollars to tens of thousands to thousands (to less?). Cloud computing literally cut the cost of starting a company by two orders of magnitude. This had major ripples in the VC world that are still playing out, but that subject and its implications for return on capital, has been exhaustively covered by others

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Now, as we enter the third decade of the Internet, there is a new CEO King rising- the return of the Sales King as CEO. (we’ll go light on the LOTR references here). Here’s why:  with the dramatic decrease in product development time, the web is being *flooded* with an influx of new products, companies and “feature” companies. This is great for consumers and businesses, but it also means that there is fragmentation of mind share for both B2C and B2B. There is so much great stuff out there (and lots of mediocre too), that users don’t know which way to turn. The best product, the best UI, the best features- they don’t always win.  In fact it is the good-enough product with great sales and marketing that is now winning. And this is re-creating a new opportunity for the Sales King to forge a path.

Don’t construe this as arguing against product, I have come to innately understand that a good product is core to the success of any company and without it real success is impossible. Without good product you are doomed from the start but “if you build it they will come” is just not true. The sales organization with solid marketing as the proverbial “Crown Prince” is taking back power. This is particularly true because in a crowded field of look-a-like products and services, CEOs must drive their company above the noise. A case can be made that it is actually the marketing class that will become the ruling elite but it seems to me a good sales team can cover for weak marketing more than good marketing can cover for weak sales when it comes down to actually booking business.

And irony of ironies: for most companies this return to marketing means raising money- and in some cases lots of money. So even though the product driven capital needs have shrunk dramatically, the sales and marketing capital needs are sky rocketing. Let’s see how the next decade goes.

The king is dead, long live the king.


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SaaS Math Dollars in, Dollars Out

The most common SaaS metrics folks look at are:

MRR: Monthly Recurring Revenue (how much revenue is recurring from last month)
Bookings: The total contractual value closed last month (quarter; year)
LTV: Life Time Value (how much is a customer worth)
CAC: Customer Acquisition Cost (how much does it cost to win a new customer)
Churn: How long do your customers stay your customers
The most common ratio is: LTV/CAC: What is the value of a customer divided by the cost to acquire it.

Another strong but simple ratio that many overlook is Bookings/Spend. In order to calculate CAC you have to know how much you have spent. And sometimes counting new customers can be tricky, for instance at SnapApp we have many campaign customers who, while not the primary thrust of our sales and marketing efforts, generate real revenue and are some big names.  If a customers pays, disappears and then buys again it can throw off your CAC calculation and sometimes significantly (internally we handle this by simply deducting that revenue from the costs of customer acquisition, but not counting them as new customers).

But if you look at Bookings/Spend you get very simple math. We spent $100 this quarter and we signed $50 of bookings (1/2 = bad) or we spent $100 and signed $200 of bookings (2/1 = good). Run the complete metrics and they look like this:

  • Spend                                        $100
  • Customers                                $20
  • Rev/customer                          $10
  • LTV (2.5 cycles of revenue) $25
  • CAC                                            $5
  • LTV/CAC                                5.0x
  • Spend/Bookings                2.0x

While larger amounts for fewer customers will increase your CAC your ratios will remain constant. Depending how large your sales/marketing departments are 2x Bookings/Spend might be good enough (particularly if they are large) but if you have a large staff in other departements you might need 3x to cover costs.


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Lots has been written on SaaS math and how to manage it, what matters and what to watch.  You can read excellent content from David Skok, Joel York and lots and lots of others.  Without regurgitating their thinking what I really want to see is ONE NUMBER that tells us me exactly how a SaaS company is doing.  A single number that takes the temperature of the business.

Step 1- Isolating what metrics matter. We are going to focus on 3 numbers to derive the fomula:

  • LTV- Estimated Lifetime Value of a Customer [must know what a customer is worth]
  • CAC- Custom Acquisition Cost (fully loaded defined) [must know what it costs to get a customer]
  • NTM Revenue- Next Twelve Months of Revenue. [must know how fast you recover your cost]

Step 2- Ratios The two core ratios most often derived from the above are LTV/CAC and CAC/NTM Revenue.  The first tells you the ratio of your customer value to your customer cost and the second tells you how fast you recover your acquisition costs.  Rule of thumb you want to see LTV/CAC >3 and CAC/NTM <1 (meaning you make 3x your cost and recover your cost within the first year– which also has obvious cash flow implications).

Step 3- Metrics Mashup Let’s look at the ratio of the ratios in Step 2, that is how your fundamental value capture compares to how fast your recoop costs:

  • Value/Recovery Speed
  • (LTV/CAC) / (CAC/NTM)
  • Which any good freshman in high school will tell you is the same as: (LTV*NTM)/CAC^2).
  • One number to rule them all? let’s call it the “Tolkien Number”.
  • You want your Tolkien Number to be at least 4 and ideally 5+

Really interestingly, this reinforces what the best SaaS marketers know is that managing and decreasing your Customer Acquisition Cost is the single biggest factor in increasing your Tolkien Number and value maximizing your marketing and growth.  True, increasing your Lifetime Value  or the speed you get paid back on the the acquisition costs will help your Tolkien Number a lot- but the denominator is the square of your Customer Acquisition Costs so the bigger you costs your exponentially hurt yourself.  If your CAC goes up you pay the price (literally).

Step 4- Data validation & visualization

  • The chart below shows Tolkien Numbers while assuming your Customer Acquisition Cost is constant at 2- look how the LTV and NTM numbers impact your number (note that your Next Twelve Months revenue cannot exceed your LTV):

 

 

 

 

 

 

 

 

 

 

  • Now look at what happens to your Tolkien Number if you can’t charge people any more (LTV=fixed @ 6 and you can’t get paid any faster, say NTM=2) as CAC changes.  It gets crushed.

 

 

 

 

 

 

 

So the “Tolkien Number” gives a quick metric capturing the value of your Revenue, Speed and Costs- controlling these is all that matters.  Aim for at least 4 and crush it at 10.

 

 


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I Love Data, it’s the Finest Wine.

I love data– I can never get enough.  Data always tells a story.  Always.  Every time I see data I immediately put on my CSI hat (or when I was growing up it was Jack Klugman the irascible pathologist on Quincy M.E.).

Data is almost never complete it seldom tells the WHOLE story, but it is the science and my job is the art.

The art is to figure out what it does tell you and what it doesn’t tell you.  Trace the connectors; identify the threads; debunk causation; question correlation.  The hardest part is the best part- you don’t even know what you don’t know.  That is the “find a dinosaur bone and determine what they ate” challenge.  For me this is a very satisfying and rewarding experience- but for some it is frustrating and demotivating.  I love “figuring things out”;  solving problems and challenges that every set of data presents is like a new jigsaw puzzle to unfold.  But instead of ending up with great collage of cats, I drive revenue, conversions and effect change.  In startup life that is why we show up every day.


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Nurture vs Nature

Up In The AirKids are genetic missiles- you pack them full of chromosomes and launch them into the world. Your best you can do thereafter is to nudge their direction a modicum to the left, right or center. But they are pretty much going to be who they are going to be- you can’t make someone who is really ugly, beautiful or really dumb, smart or bent on self destruction, cautious. You do the best you can.

Start-ups are the opposite- they are sponges, they are chameleons. Better yet, they are gelatin. They have no natural or discernable flavors, they absorb from whatever is added to their composition. Start-ups are the quintessential nurture that become whatever and whomever you put in them. If you don’t like what you made- you can add more of what you are lacking, remove ingredients that didn’t work or rebalance the whole pie. It’s painful and can be hard but doable.

With a kid you grip it and rip it and hope to do the best with your genetic cocktail and shape him/her as you can. But with a start-up you pick the end game first and work backward carefully and slowly to build your baby.


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