When Arunachalam Muruganantham decided he was going to do something about the fact that women in India can’t afford sanitary napkins, he went the extra mile: He wore his own for a week to figure out the best design.
When Arunachalam Muruganantham hit a wall in his research on creating a sanitary napkin for poor women, he decided to do what most men typically wouldn’t dream of. He wore one himself--for a whole week. Fashioning his own menstruating uterus by filling a bladder with goat’s blood, Muruganantham went about his life while wearing women’s underwear, occasionally squeezing the contraption to test out his latest iteration. It resulted in endless derision and almost destroyed his family. But no one is laughing at him anymore, as the sanitary napkin-making machine he went on to create is transforming the lives of rural women across India.
Right now, 88% of women in India resort to using dirty rags, newspapers, dried leaves, and even ashes during their periods, because they just can’t afford sanitary napkins, according to "Sanitation protection: Every Women’s Health Right," a study by AC Nielsen. Typically, girls who attain puberty in rural areas either miss school for a couple of days a month or simply drop out altogether. Muruganantham’s investigation into the matter began when he questioned his wife about why she was trying to furtively slip away with a rag. She responded by saying that buying sanitary napkins meant no milk for the family.
I thought, 'Why couldn’t I create a low-cost napkin for my wife?'
"When I saw these sanitary napkins, I thought 'Why couldn’t I create a low cost napkin for [my wife]?'" says Muruganantham. That thought kick-started a journey that led to him being called a psycho, a pervert, and even had him accused of dabbling in black magic.
He first tried to get his wife and sisters to test his hand-crafted napkins, but they refused. He tried to get female medical students to wear them and fill out feedback sheets, but no woman wanted to talk to a man about such a taboo topic. His wife, thinking his project was all an excuse to meet younger women, left him. After repeated unsuccessful research attempts, including wearing panties with his do-it-yourself uterus, he eventually hit upon the idea of distributing free napkins to the students and collecting the used ones for study. That was the last straw for his mother. When she encountered a storeroom full of bloody sanitary napkins, she left too.
Analyzing branded napkins at laboratories led to Muruganantham’s first breakthrough. "I found out that these napkins were made of cellulose derived from the bark of a tree," he said. A high school dropout, he taught himself English and pretended to be a millionaire to get U.S. manufacturers to send him samples of their raw material.
He taught himself English and pretended to be a millionaire to get U.S. manufacturers to send him samples of their raw material.
Demystifying the napkin was only the first step. Once he knew how to make them, he discovered that the machine necessary to convert the pine wood fiber into cellulose cost more than half a million U.S. dollars. It’s one of the reasons why only multinational giants such as Johnson & Johnson and Procter & Gamble have dominated the sanitary napkin making industry in India.
It took Muruganantham a little over four years to create a simpler version of the machine, but he eventually found a solution. Powered by electricity and foot pedals, the machine de-fibers the cellulose, compresses it into napkin form, seals it with non-woven fabrics, and finally sterilizes it with ultraviolet light. He can now make 1,000 napkins a day, which retail for about $.25 for a package of eight.
My vision is to make India a 100% napkin-using country.
Though he’s won numerous awards (and won his wife back) he doesn’t sell his product commercially. "It’s a service," he says. His company, Jayaashree Industries, helps rural women buy one of the $2,500 machines through NGOs, government loans, and rural self-help groups. "My vision is to make India a 100% napkin-using country," said Muruganantham at the INK conference in Jaipur. "We can create 1 million employment opportunities for rural women and expand the model to other developing nations." Today, there are about 600 machines deployed in 23 states across India and in a few countries abroad.
The machine and business model help create a win-win situation. A rural woman can be taught to make napkins on it in three hours. Running one of the machines employs four women in total, which creates income for rural women. Customers now have access to cheap sanitary napkins and can order customized napkins of varying thicknesses for their individual needs.
It is not an easy path, though. "Lack of awareness is the major reason, next to the apathy of NGO’s," says Sumathi Dharmalingam, a housewife who runs a napkin-making business based around the machine. According to her, rural women are clueless as to how to use them, think twice about spending even the small amount of money to buy a packet, and sadly have a devil-may-care attitude about their health. "When I caution them that they might have to have their uterus removed because of reproductive infections, they just say, 'So what? How long are we going to live anyway?'"
This is a guest post from James Slavet of venture firm Greylock Partners. Slavet’s investments include Coupons.com, Groupon, One Kings Lane and Redfin. Greylock Partners has invested in Facebook, LinkedIn and Pandora.
After years of leading teams and then, at Greylock, watching some of the best startup CEOs in the world, I’ve learned that the most important metrics are often ones you never read about on the income statement or in the financial press.
“If you can measure it, you can manage it” is a business saying that goes way back. Maybe it was Henry Ford who said that, or Peter Drucker? Regardless, most managers only measure outputs, not inputs, which is like telling a Little League team to score more runs, rather than actually explaining how to swing a bat and make contact with the ball. Similarly, most companies measure traffic, revenue or earnings, without considering how to improve the company at an atomic level: how to make a meeting better, or an engineer more productive.
Here are five metrics that great teams should measure:
Metric 1: Flow State Percentage
Jobs that require a lot of brainpower—software programming for instance—also demand deep concentration. You know that feeling when you’re “in the zone,” cranking on something. That is flow, a term coined by psychologist Mihaly Csikszentmihalyi. Unfortunately, most of us are constantly interrupted during the day with meetings, emails, texts, or colleagues who want to talk about stuff. These interruptions that move us out of “flow state” increase R&D cycle times and costs dramatically. Studies have shown that each time flow state is disrupted it takes fifteen minutes to get back into flow, if you can get back at all. And programmers who work in the top quartile of proper (ie uninterrupted) work environments are several times more productive than those who don’t.
Ideally programmers and other knowledge workers can spend 30% – 50% of their day in uninterrupted concentration. Most office environments don’t even come close. To get started, ask your engineers to track for a few days their personal flow state percentages: how many hours each day are they in flow, divided by the number of total hours they’re at the office. And then brainstorm ways that the team can move this number up. For example, perhaps there’s a little paper sign at each person’s desk that says “Go Away, I’m Cranking.” Or maybe you have a day where no meetings are allowed. Tom Demarco has written insightfully on the topic of flow.
Metric 2: The Anxiety-Boredom Continuum
Years ago, back when I was younger and cooler, I took a salsa class with my wife-to-be where the instructor said something that really stuck with me. He said that his goal was to keep all of his students in the pocket between boredom and anxiety – but closer to anxiety. In other words, we shouldn’t be so overwhelmed that we break down and give up, but we also shouldn’t be coasting either. He kept the rhythm fast enough so that we were challenged, but not so difficult that we lost the steps completely. And he kept tuning the difficulty level of the class to stretch but not break us.
This same anxiety-to-boredom continuum also applies to managing people. Star performers can get bored easily, and often function best when they’re expected to rise to great challenges. You want expectations to be high, but not completely overwhelming. With this in mind, check in with your employees periodically about where they are on this continuum, while also keeping an eye out for signs of where they stand. If they have low energy, or are showing up late and leaving early, they may be bored. If they’re responding to small setbacks with anger or frustration, or getting sick a lot, they may be pushing too hard.
Metric 3: Meeting Promoter Score
Most meetings suck. And they’re expensive: a one-hour meeting of six software engineers costs $1,000 at least. People who don’t have the authority to buy paperclips are allowed to call meetings every day that cost far more than that. Nobody tracks whether meetings are useful, or how they could get better. And all you have to do is ask.
I'm a managing editor at Forbes. I started as a reporter here in 1995 and worked as Midwest bureau chief and tech/health editor. Current opportunity is extending and improving our technology coverage and big franchise lists on Web, print and mobile. I'm blessed with an amazingly talented team of journalists, developers and statisticians. I do not kite-surf or glacier.
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It’s cold by the way. Winter finally arrived, I realised as I pondered SAP’s acquisition of SuccessFactors on the run into work. I can still feel the cold imbued from the run into the metal palmrest of my laptop as I write this.
The highlight of the weekend was Alexis Tsotsis’ faux-gonzoistic impression on TechCrunch. I say faux, because it has the attitude of gonzo journalism but not the style. From what I get of her article, if it’s not Apple or a startup, she’s not interested – and therefore the SAP acquisition of SuccessFactors is not worth reading about:
…you can never be too sure with these incredibly dull companies. I am too bored to Google it. In fact, I am literally bored to tears writing this, like I am seriously crying here in my local coffee shop and everyone is looking at me weird…
Really, this says a lot more about what’s wrong about TechCrunch, and actually the world as a whole. And so last night, I was discussing this point with a bunch of Enterprise Irregulars on Twitter. I’m going to disagree with Dennis Howlett (who used to be an Irregular), which is always a good way to start the morning.
@dahowlett: @applebyj giving idiots ANY play is plain dumb
Sameer Patel chimes in with a reminder that the Facebook acquisition of Gowalla – a FourSquare-style location based service, got much more airtime.
@sameerpatel: @applebyj @dahowlett not shocking. Most of yesterday tech meme led w/ reruns of Gowalla FB acquisition for an undisclosed sum vs a $3B buy.
And Frank Scavo got the feel of the enterprise community spot on:
@fscavo: I stopped reading TechCrunch years ago. @alexias’s recent post reminds me why. cc: @dahowlett @applebyj
But actually I think that Timo Elliott nailed it. Yes Timo, this is the real world.
@timoelliott: Strangely, this techcrunch post about the “boring” SAP acquisition made me very proud: techcrunch.com/2011/12/03/zzz… #dudethisistherealworld
And let’s just be reminded about how real this world is:
Facebook
SAP
Revenue
$4bn (estimated)
$12.46bn
Profit
$1bn (estimated)
$1.18bn
% of world’s transactions
Ermm?
65%
Users
800m
500m
Market Capitalization
$82bn
$72bn
If you compare Facebook even by their own metrics, they are still insignificant compared to the behemoth that is SAP. Billions of people interact with SAP on a day to day basis – every transaction with giants like Barclays Bank. 90% of the world’s beer is produced by SAP. And since SAP’s Chief Marketing Officer Jonathan Becher took the time to point it out, I’ll quote him:
@jbecher: @applebyj Amused by bit.ly/tFOK7J Don’t forget 65% of world’s televisions, 86% of athletic footwear, or 70% of world’s chocolate
Who says that SAP isn’t cool, with such accolades! And yet Facebook has the greater market capitalization. Why is this? High growth and cool factor. But Facebook has not proven that it has a sustainable market model.
Why does this mean there is something wrong with TechCrunch?
Well it strikes me that TechCrunch gets Consumer IT and is all over the topics that generate a lot of traffic, like Apple, Facebook and Google, and there’s nothing wrong with this. I do however think there’s two major areas where TC has a problem:
First, Founder and former co-editor Michael Arrington sold out to AOL then whined about their involvement. What amazes me here is first, his naivety, and second his desire for self-importance.
Second, it’s fine if you don’t understand Enterprise IT. But don’t whine about it being boring – because if you read Alexia’s article you will see that there are (currently) 99 comments, all of which criticise her and her journalism. Don’t write a crap piece of journalism and then follow it up with “I was just being honest” on Twitter – and then delete the Twitter post.
06/12/11 Correction – Alexia’s “I was just being honest” was in the comments area, not a Tweet. She didn’t delete it. My bad.
And what’s wrong with the world?
Well for my money SAP is possibly the most interesting technology firm in the world right now. I make my money out of the SAP industry so perhaps I would say that, but it’s also born out by facts.
They have the leading enterprise mobility platform, integrated back into an incredibly complex suite of software that covers 65% of the world’s business transactions. They are leading the world with in-memory technology.
And to add to that they have just made a major cloud acquisition, which might be the third dimension to prevent the risk of their becoming irrelevant in 5-10 years time.
What’s wrong with the world is that they are so focussed on Apple, Google and Facebook – with their over inflated IPOs and everything that comes with that. The world was not built on technology bubbles – it was built on hard work and honest money.
For a small number of lucky individuals there is a bubble with an IPO and a retirement salary. For everyone else, the world is a very tough place to live. My advice: stop being bored by the stuff which makes the world turn.
If you Google “entrepreneur” you get a lot of mindless cliches like “Think Big!” For me, being an “entrepreneur” doesn’t mean starting the next “Faceook”. Or even starting any business at all. It means finding the challenges you have in your ife, and determining creative ways to overcome those challenges. However, in this post I focus mostly on the issues that come up when you first start your company. These rules also apply if you are taking an entrepreneurial stance within a much larger company (which all employees should do).
(this is BS)
For me, I’ve started several businesses. As I’ve described in the rest of this blog, some have succeeded, many have failed. I’m invested in about 13 private companies. I’ve advised probably another 50 private companies. Along the way I’ve compiled a list of rules that have helped me deal with every aspect of being an entrepreneur in business and some in life.
[Btw, Claudia thinks I shouldn’t put this post up. This is going to be a chapter in a book I am self-publishing in a week or so: “How to be the Luckiest Man Alive”. But I’m trying to price the book for free on Kindle so why not? Plus, once I write something, I can’t help myself. I have to put it up.]
Here’s the real rules:
A) It’s not fun. I’m not going to explain why it’s not fun. These are rules. Not theories. I don’t need to prove them. But there’s a strong chance you can hate yourself throughout the process of being an entrepreneur. Keep sharp objects and pills away during your worst moments. And you will have them. If you are an entrepreneur and agree with me, please note this in the comments below.
B) Try not to hire people. You’ll have to hire people to expand your business. But it’s a good discipline to really question if you need each and every hire.
D) If you are offering a service, call it a product. Oracle did it. They claimed they had a database. But if you “bought” their database they would send in a team of consultants to help you “install” the database to fit your needs. In other words, for the first several years of their existence, they claimed to have a product but they really were a consulting company. Don’t forget this story. Products are valued higher than services.
E) It’s OK to fail. Start over. Hopefully before you run out of money. Hopefully before you take in investor money. Or, don’t worry about it. Come up with new ideas. Start over.
F) Be profitable. Try to be profitable immediately. This seems obvious but it isn’t. Try not to raise money. That money is expensive.
G) When raising money: if it’s not easy then your idea is probably incapable of raising money. If its easy, then take as much as possible. If its TOO easy, then sell your company (unless you are Twitter, etc).
(if its too easy, sell your company)
H) The same goes for selling your company. If it’s not easy, then you need to build more. Then sell. To sell your company, start getting in front of your acquirers a year in advance. Send them monthly updates describing your progress. Then, when they need a company like yours, your company is the first one that comes to mind.
I) Competition is good. It turns you into a killer. It helps you judge progress. It shows that other people value the space you are in. Your competitors are also your potential acquirors.
J) Don’t use a PR firm. Except maybe as a secretary. You are the PR for your company. You are your companys brand. You personally.
K) Communicate with everyone. Employees. Customers. Investors. All the time. Every day.
L) Do everything for your customers. This is very important. Get them girlfriends or boyfriends. Speak at their charities. Visit their parents for Thanksgiving. Help them find other firms to meet their needs. Even introduce them to your competitors if you think a competitor can help them or if you think you are about to be fired. Always think first, “What’s going to make my customer happy?”
M) Your customer is not a company. There’s a human there. What will make my human customer happy? Make him laugh. You want your customer to be happy.
N) Show up. Go to breakfast/lunch/dinner with customers. Treat.
O) History. Know the history of your customers in every way. Company history, personal history, marketing history, investing history, etc.
P) Micro-manage software development. Nobody knows your product better than you do. If you aren’t a technical person, learn how to be very specific in your product specification so that your programmers can’t say: “well you didn’t say that!”
Q) Hire local. You need to be able to see and talk to your programmers. Don’t outsource to India. I love India. But I won’t hire programmers from there while I’m living in the US.
R) Sleep. Don’t buy into the 20 hours a day entrepreneur myth. You need to sleep 8 hours a day to have a focused mind.
S) Exercise. Same as above. If you are unhealthy, your product will be unhealthy.
T) Emotionally Fit. DON’T have dating problems and software development problems at the same time. VCs will smell this all over you.
U) Pray. You need to. Be grateful where you are. And pray for success. You deserve it. Pray for the success of your customers. Heck, pray for the success of your competitors. The better they do, it means the market is getting bigger. And if one of them breaks out, they can buy you.
V) Buy your employees gifts. Massages. Tickets. Whatever. I always imagined that at the end of each day my young, lesbian employees (for some reason, most employees at my first company were lesbian) would be calling their parents and their mom and dad would ask them: “Hi honey! How was your day today?” And I wanted them to be able to say: “It was the best!” Invite customers to masseuse day.
W) Treat your employees like they are your children. They need boundaries. They need to be told “no!” sometimes. And sometimes you need to hit them in the face (ha ha, just kidding). But within boundaries, let them play.
X) Don’t be greedy pricing your product. If your product is good and you price it cheap, people will buy. Then you can price upgrades, future products, and future services more expensive. Which goes along with the next rule.
Y) Distribution is everything. Branding is everything. Get your name out there, whatever it takes. The best distribution is of course word of mouth, which is why your initial pricing doesn’t matter.
Z) Don’t kill yourself. It’s not worth it. Your employees need you. Your children or future children need you. It seems odd to include this in a post about entrepreneurship but we’re also taking about keeping it real. Most books or “rules” for entrepreneurs talk about things like “think big”, “go after your dreams”. But often dreams turn into nightmares. I’ll repeat it again. Don’t kill yourself. Call me if things get too stressful. Or more importantly, make sure you take proper medication
AA) Give employees structure. Let each employee know how his or her path to success can be achieved. All of them will either leave you or replace you eventually. That’s OK. Give them the guidelines how that might happen. Tell them how they can get rich by working for you.
BB) Fire employees immediately. If an employee gets “the disease” he needs to be fired. If they ask for more money all the time. If they bad mouth you to other employees. If you even think they are talking behind your back, fire them. The disease has no cure. And it’s very contagious. Show no mercy. Show the employee the door. There are no second chances because the disease is incurable.
CC) Make friends with your landlord. If you ever have to sell your company, believe it or not, you are going to need his signature (because there’s going to be a new lease owner)
DD) Only move offices if you are so packed in that employees are sharing desks and there’s no room for people to walk.
EE) Have killer parties. But use your personal money. Not company money. Invite employees, customers, and investors. It’s not the worst thing in the world to also invite off duty prostitutes or models.
FF) If an employee comes to you crying, close the door or take him or her out of the building. Sit with him until it stops. Listen to what he has to say. If someone is crying then there’s been a major communication breakdown somewhere in the company. Listen to what it is and fix it. Don’t get angry at the culprit’s. Just fix the problem.
(you don't want your employees to be sad.)
GG) At Christmas, donate money to every customer’s favorite charity. But not for investors or employees.
HH) Have lunch with your competitors. Listen and try not to talk. One competitor (Bill Markel from Interactive 8) once told me a story about how the CEO of Toys R Us returned his call. He was telling me this because I never returned Bill’s calls. Ok, Bill, lesson noted.
II) Ask advice a lot. Ask your customers advice on how you can be introduced into other parts of their company. Then they will help you. Because of the next rule…
JJ) Hire your customers. Or not. But always leave open the possibility. Let it always dangle in the air between you and them. They can get rich with you. Maybe. Possibly. If they play along. So play.
KK) On any demo or delivery, do one extra surprise thing that was not expected. Always add bells and whistles that the customer didn’t pay for.
LL) Understand the demographic changes that are changing the world. Where are marketing dollars flowing and can you be in the middle. What services do aging baby boomers need? Is the world running out of clean water? Are newspapers going to survive? Etc. Etc. Read every day to understand what is going on.
LLa) Don’t go to a lot of parties or “meetups” with other entrepreneurs. Work instead while they are partying.
MM) But, going along with the above rule, don’t listen to the doom and gloomers that are hogging the TV screen trying to tell you the world is over. They just want you to be scared so they can scoop up all the money.
NN) You have no more free time. In your free time you are thinking of new ideas for customers, new ideas for services to offer, new products.
OO) You have no more free time, part 2. In your free time, think of ideas for potential customers. Then send them emails: “I have 10 ideas for you. Would really like to show them to you. I think you will be blown away. Here’s five of them right now.”
OOa) Depressions, recessions, don’t matter. There’s $15 trillion in the economy. You’re allowed a piece of it:
PP) Talk. Tell everyone you ever knew what your company does. Your friends will help you find clients.
QQ) Always take someone with you to a meeting. You’re bad at following up. Because you have no free time. So, if you have another employee. Let them follow up. Plus, they will like to spend time with the boss. You’re going to be a mentor.
RR) If you are consumer focused: your advertisers are your customers. But always be thinking of new services for your consumers. Each new service has to make their life better. People’s lives are better if: they become healthier, richer, or have more sex. “Health” can be broadly defined.
SS) If your customers are advertisers: find sponsorship opportunities for them that drive customers straight into their arms. These are the most lucrative ad deals (see rule above). Ad inventory is a horrible business model. Sponsorships are better. Then you are talking to your customer.
TT) No friction. The harder it is for a consumer to sign up, the less consumers you will have. No confirmation emails, sign up forms, etc. The easier the better.
TTA) No fiction, part 2. If you are making a website, have as much content as you can on the front page. You don’t want people to have to click to a second or third page if you can avoid it. Stuff that first page with content. You aren’t Google. (And, 10 Unusual Things You Didn’t Know About Google)
UU) No friction, part 3. Say “yes” to any opportunity that gets you in a room with a big decision maker. Doesn’t matter if it costs you money.
VV) Sell your company two years before you sell it. Get in the offices of the potential buyers of your company and start updating them on your progress every month. Ask their advice on a regular basis in the guise of just an “industry catch-up”
WW) If you sell your company for stock, sell the stock as soon as you can. If you are selling your company for stock it means:
a. The market is such that lots of companies are being sold for stock.
b. AND, companies are using stock to buy other companies because they value their stock less than they value cash.
c. WHICH MEANS, that when everyone’s lockup period ends, EVERYONE will be selling stock across the country. So sell yours first.
XX) Ideas are worthless. If you have an idea worth pursuing, then just make it. You can build any website for cheap. Hire a programmer and make a demo. Get at least one person to sign up and use your service. If you want to make Facebook pages for plumbers, find one plumber who will give you $10 to make his Facebook page. Just do it.
YY) Don’t use a PR firm, part II. Set up a blog. Tell your personal stories (see “33 tips to being a better writer” ). Let the customer know you are human, approachable, and have a real vision as to why they need to use you. Become the voice for your industry, the advocate for your products. If you make skin care products, tell your customers every day how they can be even more beautiful than they currently are and have more sex than they are currently getting. Blog your way to PR success. Be honest and bloody.
ZZ) Don’t save the world. If your product sounds too good to be true, then you are a liar.
ZZa) Your company is always for sale.
AAA) Frame the first check. I’m staring at mine right now.
BBB) No free time, part 3. Pick a random customer. Find five ideas for them that have nothing to do with your business. Call them and say, “I’ve been thinking about you. Have you tried this?”
CCC) No resale deals. Nobody cares about reselling your service. Those are always bad deals.
DDD) Your lawyer or accountant is not going to introduce you to any of their other clients. Those meetings are always a waste of time.
EEE) Celebrate every success. Your employees need it. They need a massage also. Get a professional masseuse in every Friday afternoon. Nobody leaves a job where there is a masseuse.
FFF) Sell your first company. Don’t take any chances. You don’t need to be Mark Zuckerberg. Sell your first company as quick as you can. You now have money in the bank and a notch on your belt. Make a billion on your next company.
GGG) Pay your employees before you pay yourself.
HHH) Give equity to get the first customer. If you have no product yet and no money, then give equity to a good partner in exchange for them being a paying customer. Note: don’t blindly give equity. If you develop a product that someone asked for, don’t give them equity. Sell it to them. But if you want to get a big distribution partner whose funds can keep you going forever, then give equity to nail the deal.
III) Don’t worry about anyone stealing your ideas. Ideas are worthless anyway. It’s OK to steal something that’s worthless.
Question: You say no free time but you also say keep emotionally fit, physically fit, etc. How do I do this if I’m constantly thinking of ideas for old and potential customers?
Answer: It’s not easy or everyone would be rich.
Question: if I get really stressed about clients paying, how do I get sleep at night?
Answer: medication
Question: how do I cold-call clients?
Answer: email them. Email 40 of them. It’s OK if only 1 answers. Email 40 a day but make sure you have something of value to offer.
Question: how can I find cheap programmers or designers?
Answer: if you don’t know any and you want to be cheap: use scriptlance.com, elance.com, or craigslist. But don’t hire them if they are from another country. You need to communicate with them even if it costs more money.
Question: should I hire programmers?
Answer: first…freelance. Then hire.
Question: what if I build my product but I’m not getting customers?
Answer: develop a service loosely based on your product and offer that to customers. But I hope you didn’t make a product without talking to customers to begin with?
Question: I have the best idea in the world, but for it to work it requires a lot of people to already be using it. Like Twitter.
Answer: if you’re not baked into the Silicon Valley ecosystem, then find distribution and offer equity if you have to. Zuckerberg had Harvard. MySpace had the fans of all the local bands they set up with MySpace pages. I (in my own small way) had Thestreet.com when I set up Stockpickr.com. I also had 10 paying clients when i did my first successful business fulltime.
Question: I just lost my biggest customer and now I have to fire people. I’ve never done this before. How do I do it?
Answer: one on meetings. Be Kind. State the facts. Say you have to let people go and that everyone is hurting but you want to keep in touch because they are a great employee. It was an honor to work with them and when business comes back you hope you can convince them come back. Then ask them if they have any questions. Your reputation and the reputation of your company are on the line here. You want to be a good guy. But you want them out of your office within 15 minutes. It’s a termination, not a negotiation. This is one reason why it’s good to start with freelancers.
Question: I have a great idea. How do I attract VCs?
Answer: build the product. Get a customer. Get money from customer. Get more customers. Build more services in the product. Get VC. Chances are by this point, the VCs are calling you.
Question: I want to build a business day trading.
Answer: bad idea
Question: I want to start a business but don’t know what my passion is:
Answer: skip to the post: “How to be the luckiest person alive”. Do the Daily Practice. Within six months your life will be completely different.
Question: I want to leave my job but I’m scared.
Answer: same as above question. The Daily Practice turns you into a healthy Idea Machine. Plus luck will flow in from every direction.
Final rule: Things change. Every day. The title of this post, for instance, says “100 Rules”. But I gave about 70 rules (including the Q&A). Things change midway through. Be ready for it every day. In fact, every day figure out what you can change just slightly to shake things up and improve your product and company.
Throughout the rest of this blog I have examples, ideas, rules, etc. In fact, it adds up to a lot more than 100 rules. Many of the rules above are repeated in other posts ahead but use this post as a cheat sheet. If you can think of more rules for me, add them to the comments. I’ll try and put them in the upcoming book.
We have a portfolio company that will remain nameless that does something I want to call out as super awesome. Every board meeting, as homework after the meeting, they ask each board member to fill out a simple Google Form with two questions; three things we are doing well and three things we need to do better. They've been doing that every board meeting that I've been to.
They use this information as part of their continuous feedback loop to improve their management of the business and in turn improve the business. Based on their progress since our investment, I'd say it works pretty well.
This is one example of a larger theme I am noticing in our portfolio and the startup world at large. Companies are using simple web tools to get continuous feedback on their performance. They are using this kind of approach to do performance reviews of everyone in the organization, they are using this kind of approach to get feedback from their customers, and they are using this kind of approach to get feedback from their Board, investors, and advisors.
This makes a ton of sense. Startups are rapidly changing systems. If you use an annual review cycle, you aren't getting feedback at the same pace that you need to adapt and change the business. Doing this kind of thing continuously matches the frequency of the feedback loop with the frequency of the business.
I've written in the past about continuous deployment and how I have seen that work really well at some of our portfolio companies. Continuous feedback leverages many of the same principals and has many of the same advantages. If you haven't tried this approach, you might want to. From what I've seen, it works.
It’s very common for startup companies to have COO’s. So I know I’m getting myself into a bit of trouble by writing this. But …
Startups don’t need – shouldn’t have – COOs. I have this conversation with every startup that comes to see me and has a CEO & a COO. I think usually a COO title at a startup is an ego thing. You have two founders and it was agreed that one would get the CEO role so the other needs to call themselves president or COO.
But ask yourself, what does a COO actually do? In a mature company it’s often like a presidential chief of staff. They will often run all of the daily reports into them covering off for finance, sales, marketing, biz dev & HR. Many times they also pick up product and tech, too.
In an early stage start I believe it’s the CEO’s job to manage these functions. It’s pretty tough to convince me in a company of less than 50 people that the CEO can’t handle 6-8 direct reports to manage the various areas of the business.
Often times you find the CEO who really just likes to do product or tech. You can always spot these types because they can’t tell you what their revenue number for last month was or what their sales target is for next month. It’s actually not that uncommon for me to encounter this with young CEOs. What it tells me is that they’re not properly managing their business. They’re not allocating their time properly across all of the business functions, they’re favoring those that they like best.
Similarly I talk to CEOs who can’t do a sales pipeline review with me. They don’t know the details of the deals. They can’t name the key decision makers at their prospect, they can’t tell me who they’re competing against, etc. I once did due diligence on a potential investment where the CEO was projecting $9 million in sales for his next 12 months. His largest account was Coca Cola for which he was projecting $3 million alone. I asked him for a deep dive on the Coca Cola sales campaign and he said, “that ones’ not my deal.”
Ha. And I decided that his startup company was not MY deal.
CEO’s run things. They run their business. If they’re not running their business then perhaps the wrong person was picked as CEO or perhaps they need more mentorship / coaching to better allocate their time.
So what does a COO at a startup do if the CEO should be managing things?
Usually it’s a line function but they’ve been given a lofty title. Of course they “need” the title to convince customers, biz dev partners and VCs that they’re to be taken seriously. Sure.
I think it’s better to take the title of the job for which you will fulfill. If you’re running sales & marketing then why not VP, Sales & Marketing? If you run product then it’s easy – VP Product.
If the CEO is the “chief strategist” while the COO “runs the company” then I think it’s time for a coup d’état.
What harm having a COO or worse a president? Clarity for staff and decision making.
Like most everything in business I learned by making mistakes at my first company. I was the CEO of my startup and my co-founder was the president. None of our staff really knew what that meant but they knew that he was a co-founder and that he was, well, the president. So from time-to-time he would be talking with the product team about his vision and they would react unbeknownst to me. They were taking direction from the president. But I ran product management.
He liked to weigh in on biz dev deals. We had a VP of Biz Dev. We gave him conflicting view points. He wasn’t really supposed to meddle with these job functions, but as president and co-founder he kind of had the authority to do so. It took me a while to figure out this was going on and when I did I put an end to it.
Over the years I’ve talked to enough startup staff members at respective companies to know that this lack of clarity in decision making can be a real problem at many companies. It’s far more effective to check your ego at the door and align your job function(s) with your title.
When should a company get a COO then?
I’ve had this debate with some very successful VCs who are pro COO. They talk about freeing up the time of the CEO to think bigger picture and plan for the long haul. They talk about the need of the CEO to be chief evangelist, speak at conference, lead executive recruiting, etc. They say that having a COO allows the CEO to remover herself from the continual politics and personnel management that can be a drag on management time. I know this one as I’ve often said, the main job of a CEO is chief psychologist.
I can buy this argument as a company becomes bigger. I think when the company has the complexity of large customers, customer service & SLA management, well established sales processes, continual recruiting because you’re growing, constant press, etc. it may make sense to appoint a COO to handle more of the day-to-day management. I never chose to do that, but I could see how it would work for some.
We were never Google but we got as large as 120 staff and I never felt the need for a COO. I had an amazing CFO who helped me lead budgeting, planning, board reporting and legal matters. I had heads of sales, marketing, business development, product management, technology and customer service. We had team meetings where we discussed each other’s areas and I mostly stepped in when conflicts needed resolving. But at that stage of the company as we were approaching $20 million in sales I think, sure, a COO might have freed up my time a bit.
For now, if you’re early stage, I’m not convinced. It isn’t something that would dissuade me from investing in a company, but I’d want to be very clear with the team what their respective roles were and make sure they were also very clear with their employees.
I think the best way to protect the ego of the rightly deserving status of non-CEO co-founders is to preserve the co-founder name in their title as is, “VP Product & Co-Founder” or “VP Sales & Co-Founder.” Your right place as a member of the team that was there at inception is protected while your functional role is crystal clear.
Over the course of this year, I’ve written a coupletimes about raising a potential round of venture financing for my company, SEOmoz. At last, the saga’s over, I’ve been released from terms of confidentiality and I can share the long, strange story of how I first rejected, was eventually persuaded, but ultimately failed to raise a second round of investment capital.
My hope is that by sharing, others can learn from our experience and possibly avoid some of the mistakes, pitfalls and pain we faced.
Raising money for a startup is an inherently risky proposition. You step up to the plate knowing that the odds are slim and that, for every story of success on TechCrunch, there’s two hundred companies pounding the street, getting nowhere. We went the opposite route – letting investors come to us (a strategy I wrote about last year). This is the story of that experience – being “pitched” by investors, the decision-making and negotiation processes and the end results.
Do We Really Want to Raise a Round?
In November of last year, 14 months after my previous failed attempt to raise capital, we started receiving inquiries from a variety of firms – venture capitalists and private/growth equity investors, asking if SEOmoz was interested in pursuing funding. My answer was always the same, and looked fairly similar to the email below:
Over the following months (Nov 2010 – April 2011) we hunkered down, focused on product, technology and marketing and grew the business, largely ignoring the possibility of outside funding.
In March of 2011, one particular investor (whom I’ll refer to through the rest of this post as “Neil”) reached out to us and was especially excited about the SEO/inbound marketing sector and SEOmoz in particular. He sent this email after our call:
It was flattering and exciting to feel this great level of interest in our business from an investor, and Neil wasn’t the only one, either. Here’s a list of the folks we talked to seriously (meaning more than just a single phone call or email) over the first 7 months of 2011:
• Bessemer Venture Partners
• GRP Partners
• Stripes Group
• Insight Ventures
• JMI Equity
• Level Equity
• Mayfield Capital
• Accel Partners
• Summit Partners
• NEA
• General Catalyst
• K1
• Industry Ventures
For the firms noted above, I’ll keep specifics of who we spoke to and how far we progressed private (as I did in my post on the 2009 experience) using pseudonyms.
The week of May 8th, I met with 3 investors in New York City and one in Boston. In preparation for these meetings, I tried to remind myself that money might not be the best thing for the company with a public blog post on the topic. I was focused on the goals of building relationships, sharing our trajectory and learning as much as possible about how others viewed our business and market.
Despite this bevvy of interest, my previous fundraising experience had left me gun-shy and reticent about committing. A week after the meetings in NYC, the Moz team had a serious chat about whether raising a round could have a serious, positive impact on the company. That discussion included a lot of back-and-forth, but the reasons we ultimately decided to test the waters more seriously included:
• Grow Engineering – For the first quarter of 2010, we had a mandate to grow the engineering team so we could improve our product faster. This proved incredibly difficult, as the much-reported tech talent wars in Seattle created a vacuum of big-data savvy SDEs. However, in Q2, our position shifted as we were able to significantly grow the engineering team – to a point where we had to slow hiring in order to keep payroll in line with our bootstrapped growth. While certainly a positive, this change meant that we were limited by cash in the bank for the first time in a while.
• Scale Data – Linkscape, Blogscape and our APIs cost ~$100K/month at the beginning of the year. In Q2, this cost had risen 30%+ and we foresaw a nearby time when it would double or more. In July of this year, those costs were, indeed, nearly $200K. We’ve gone from 40 virtual machines hosted on Amazon to 200+, and while we’re thrilled to see our metrics (mozRank, Domain Authority, et al) achieve widespread adoption, many of the heavy users employ our free API, leaving our revenue from other channels to support these costs. Long-term, we believe in free, open data as a way to grow the brand, the company and our revenue-producing channels (and it’s part of our core values to be as open and generous as possible with our data), but the cash limitations had finally become a point of frustration, and another reason to seek growth capital.
• Expand Facilities/Benefits/Team Happiness - The Moz offices can comfortably hold 45-50 people, but we realized that by Q3, we’d already be at that range. We also recognized that the aforementioned talent wars were pushing us to grow the range of benefits and space we provide to the team. Moz was named #6 on Seattle’s Best Places to Work, but we’re striving for #1, and we strongly believe that the better we can treat our team, the more amazing our output and results will be.
• Release New Products – Our big data projects have been challenging, but also incredibly rewarding, and we felt a strong drive to do more, faster. We want to produce marketing analytics beyond pure SEO, moving to field like social, content marketing, local and verticals (mobile, video, blogs, etc. – anything that sends traffic on the web organically). Some of those require heavy upfront investments in data sources, engineering and market research. One of the weird things I’ve found (which probably deserves a post of its own at some point) is that the larger your scale, the longer it takes to build product. You’d think that having 15 full-time engineers and a significant support team around them would mean faster development, but it doesn’t – the scale we need to support (nearly 14K paying customers and 250K+ users of our free products) for anything we release means far greater attention to architecture, reliability and quality then when we had two devs and 500 users.
• Invest in Marketing – Today, most of SEOmoz’s acquisition of new customers is through inbound/organic channels (~80%). We recognize there’s a lot of room for growth in both organic (content marketing, more community investment, SEO, social, etc) and in paid marketing. An investment here would allow us to take a longer view on customer payback period (the time until we recoup an investment in acquisition) and experiment in new channels, too.
• Provide Liquidity to Founders – Gillian founded the company that would become SEOmoz in 1981 and I’ve been working with her since 2001. As Gillian’s stepped aside from day-to-day responsibilities (post 2008) and taken on more of an external evangelism role, we all felt that giving her a more formal exit and liquidation path would be an ideal option. I also personally felt it was wise to take some money off the table.
I’d be remiss if I didn’t also mention another meeting in Boston – with Hubspot’s Dharmesh Shah. For the past few years, Dharmesh has been an amazing mentor to me, and someone whom I always turn to when big decisions like this appear. On the topic of funding, he gave clear, well-reasoned advice (and later, made that advice public). We met in May, just after my in-person meetings in New York, and noted that the combination of a great market for investment plus strong growth at the company made for excellent fundraising conditions.
Testing the Waters for a Large Financing Round…
Thus, in mid-May, when Neil asked to follow up with an in-person visit to our offices in Seattle, I sent the following email reply:
After that meeting in Seattle, things got hot and heavy. Neil wanted to do a deal and we began talking terms. It was at this point that our executive team and board of directors decided to take some steps to insure that we were making the right moves. These included:
• Meeting with and, hopefully, receiving offers from 2-3 of the other firms who had reached out to Moz to help test the waters on valuation and deal terms, and to make sure we had a partner and investor we loved.
• Deep-diving on Neil and his firm. We ended up speaking directly to folks at 2 of their portfolio companies, several people who worked with Neil in his previous roles and back-channeling to nearly half a dozen others who’d worked with him in one way or another through our network of contacts (both at Moz, and through Ignition Partners, our investors from 2007).
• Working hard on long-term, strategic planning for 2012 and beyond – what did we want to do, how much would it take, and where would the money be spent?
• Preparing a semi-formal slide deck to pitch the partnership at Ignition, as we wanted them to participate in the round as well. We also made a light version of this deck to send around to several folks in the field and help drum up any potential interest without being too forward or pushy.
• Investigating the fundraising market for self-service SaaS companies like ours by talking to as many recently funded entrepreneurs in the space as possible. Through this research, we hoped to get a good idea of what sorts of terms and valuation we should expect, and what was “market” (VC-speak for “normal”).
In mid-June, I made a trip to San Francisco, ostensibly to participate in SimplyHired’s SEO Meetup, but also for several Bay-Area meetings with VCs. Three of these turned into more serious discussions.
June was also when we started to feel a bit cocky. We were in active negotiations with Neil. We had multiple talks going with investors in the Bay Area, and almost every week, we had a ping from a new source reaching out to see if we were ready to start a conversation. I spoke to dozens of folks by phone and email and learned a lot more about the market – and those conversations gave me a lot of reasons to get excited. As in 2007, a lot of startups were reporting a very hot market for raising money. Valuations of several SaaS businesses I talked with were in the 6-10X revenue range (and those who raised in Q1/Q2 got valued on their 2011 estimated revenues)!
Narrowing Down the Field
Throughout the process, we’d been extra careful on the investors we engaged. We turned away one firm due to a bad experience we had with them in 2009 (email below).
This example wasn’t alone – we turned away another after talking to some of their portfolio companies and a company they’d look at but didn’t invest in and hearing about some questionable behavior.
Our biggest filter wasn’t deal terms or price, but cultural fit. We’d been warned many times against adding an investor who didn’t share our core values or who displayed any dishonest/manipulative tactics in our conversations. That ruled out a few folks, but also made us more excited about Neil, “Reggie” (an investor in California) and “Todd” (at another California-based firm).
One of my favorite emails in our process came from Reggie, who sent this just before their in-person visit to the Mozplex:
Adorable, right?! Sometimes, it’s the little stuff. Neil always asked about my grandmother in New Jersey (she had a rough fall, a concussion and spent a few weeks in hospitals, but is now nearly 100% and doing well). Todd wolfed down multiple helpings of phenomenal braised pork shoulder made by our systems engineer, David. Sarah and I dragged both Neil and Reggie to meals with both of our significant others.
But, the fundraising process certainly wasn’t all fun, and it did require a tremendous amount of work, particularly from Sarah, Moz’s COO, and from Jamie + Joanna on our marketing team, who held numerous calls with investors on a ton of membership acquisition/retention-related topics. Here’s a brief snippet of a weekend email thread that Sarah sent to Todd:
In June and July, the funding process probably entailed hundreds of combined hours of work on the part of our team – much of that was me, but plenty spread to other departments and functions. We knew this was a very big decision – one that would massively impact the future of the company – and thus, we wanted to be as diligent, thoughtful and cautious as possible.
By early July, we were down to four potentially serious investors. One decided against making an offer around the middle of the month. The others were Neil (from NY), Reggie (from CA) and Todd (also CA).
Closing the Deal
At the beginning of July, one of the investors made an offer at a $50mm pre-money valuation for a $25mm investment. Here’s my email reply:
That offer was subsequently raised to $65mm pre-money, which was matched by another firm (both Neil + Reggie). I was feeling pretty good about my negotiation skills, until a couple weeks later.
Todd was an early favorite of several Mozzers. At the end of his visit to our offices, I gave him a ride back to the airport (I borrowed Geraldine‘s only-slightly-dented 2003 Kia Spectra, since I don’t actually own a car). Near the end of the conversation, Todd noted that his firm “would have a tough time getting to $100mm” on our deal. I probably should have corrected him at that point (it would have been the TAGFEE thing to do), but I instead said something like “this isn’t entirely about the highest pre-money valuation; it’s about the right fit for us.” This would serve as a good example of why I shouldn’t try to “play the game.” A week later, after lots of back-and-forth, Todd noted that his firm simply couldn’t match our valuation expectations, and although interested, would be backing out.
I’m not sure if our strategy with Todd was a big misstep or a small one, nor whether they would have made an offer in the $60-$70mm range if they’d thought that was our target. I also don’t know why he thought we were offered those much higher numbers, nor what we should have done from there. We could have gone back and pushed on what they thought we wanted, but it seemed the time had passed (hard to describe why/how exactly).
We made our decision, sent a polite note to Reggie thanking him and another to Neil saying we were ready to move.
Pitching Ignition Partners
In addition to raising funds from an outside partner, we also wanted Ignition, who had put $1mm into the company in 2007 to participate in this next round. Their support would be helpful in making outside investors feel great about the deal, and would help us have more shared ownership among our board members.
Below is the pitch deck I used for Ignition (parts of this made it into the “light” version we sent to some other folks earlier in the process):
We’ve had a terrific relationship with Ignition over the years, and I continue to recommend them to startups of all kinds. As part of the “thank-you” for their support, Geraldine baked some cookie bars the night before our pitch meeting, which I brought to their offices and handed out prior to the presentation. I took a photo hoping that I’d be able to share it on the blog once the deal was done:
Note the delicious-looking baked goods on the table
Ignition confirmed, just after this meeting, that they’d love to participate in our next round, in whatever quantity made sense to the outside, lead investor. We were excited, and spent some serious time in July planning a comprehensive strategy around how to grow with the funding. We even started some conversations with other companies we were considering acquiring.
Neil brought several folks from his firm to our annual Mozcon in Seattle. On the last afternoon, we met to negotiate some final terms of the deal. It ended up looking like this:
• $24mm invested; $19mm from Neil and $5mm from Ignition
• $65mm pre-money valuation, $89mm post
• $18mm to SEOmoz’s balance sheet; $4.75mm to Gillian, $1.25mm to Rand
• No liquidation preference for Series B (Ignition has a 1X on the Series A)
• Straight preferred (meaning that the investor either gets their money out in a sale OR the percent of the company they own, but not both)
• New board would include myself and Sarah (our COO), Michelle (from Ignition, who’s been on our board since 2007) & Neil plus a new, outside member to be approved by all parties
• The CEO could only be replaced if ALL board members unanimously approved the new person
• A sale of the company for less than a 3X return to Neil’s firm could be vetoed by them
• All other terms very similar to our Series A deal
We felt really good around these terms, and although we recognized we likely could have gotten a higher pre-money valuation through a more intensive process, we decided not to take that path, reasoning that delay could cause a dip in the markets, and that we needed to concentrate on the business, not spend more time on fundraising.
On August 5th, we executed and entered a 30-day due diligence phase.
Then Things Got a Little Weird
Michelle was the first to note that something was “odd.” In a phone call with Neil, she heard him comment that they “needed to do more digging into the market.” In her opinion, this was very peculiar, as investors typically have a thesis and great quantities of diligence long before talking to companies, nevermind prior to a signed agreement. In fact, when Neil approached us, it had been under the auspices of excitement about the SEO/inbound marketing field. One of the things we liked best about them had been their strong belief, passion and knowledge about the SEO landscape. Questions about “market size” and “opportunity” at this stage seemed peculiar.
I shot Neil an email noting that we were a bit concerned. Here’s his reply:
We didn’t actually chat that night, but a few days later. On the call, he strongly disabused me of the idea that they’d pull out, noting that they had invested massive time and energy, multiple trips to Seattle, multiple people from their firm, considerable research and expense. One of the most memorable quotes from that conversation that stands out in my mind was “We never pull out after signing an LOI unless we find fraud or some other serious misrepresentation of what we already know.”
We set up a lunch date for the next week on a Friday, just prior to their planned, in-person diligence with our team the following Monday/Tuesday (when their legal, accounting and tech folks would be meeting with teams and execs to make sure all was in order).
One other item Neil mentioned in the call was our July numbers – we’d just closed out the month and sent them details a couple days prior. Neil noted that they were curious about why July’s revenue was off budget by ~$70K. I promised to follow up and provide details.
For reference, here’s our revenue numbers from January to July of 2011:
In December, our draft budget had us doing approximately $15K more in revenue in June and $70K more in revenue (both product – our only services revenue is events like Mozcon). However, we’d beaten revenue estimates from January – May and thus, were still ahead of our total revenue target by ~$35K for the year.
Nonetheless, given that June and July were slightly slower in growth of new PRO members (we grew approx. 7% in July vs. our projected 10%), Sarah revised our rolling forecast for the year, projecting that rather than hit $12.4mm (our previous rolling forecast given our higher-than-expected growth Jan-May), we’d instead be around $11.2mm unless growth in future months picked up again. Our model for the rolling forecast is fairly standard and fluctuations like this are fairly common. At one point earlier this year, the rolling forecast had us projecting nearly $14mm, and as low as $11mm.
We didn’t worry much about these numbers – for the past 4 years running SEOmoz, we’ve often see months that beat our targets and some that don’t. Certainly, a month where we expected 10% growth but only hit 7% was nothing shocking, particularly in a year where, even with the revised estimate, we’d be doubling revenue from 2010 (in which we did $5.7mm).
Unfortunately, our new would-be-investors didn’t see things that way. Well… Maybe.
The following week (Tuesday, August 16th), VentureBeat wrote a story that SEOmoz had closed a $25mm funding. I quickly commented on the story and called the reporter. They fixed the piece a few hours later:
Ugh. Bad journalism.
I also got on the phone with Neil, but he didn’t seem overly concerned about the misinformation or the story. As far as I know, no one at Moz was responsible, and the misinformation made this seem incredibly unlikely. Given the numerous inaccuracies (our employee count, customer numbers, the description of what we do and more), I really have no idea who their source was, or why they published this piece without waiting for our confirmation or statement.
We went back to work on the diligence documents and preparation, a bit shaken and more than a little skeptical.
Two days later, the day before Neil and I were to meet for lunch, he sent an email indicating they were cancelling their in-person diligence in Seattle (planned for the following Monday/Tuesday) pending our meeting. I immediately assumed they were killing the deal, and emailed the Moz team to stop the work for the process on our end.
We met in New York and had lunch. I took notes:
I thought they were going to focus primarily on the growth we missed in July – despite knowing that it wasn’t a big deal from the long-term perspective of the business, it was nerve-wracking and hard-to-shake in those few days. But instead, we talked for nearly 2.5 hours about our market strategy, how we planned to expand our product, deliver more value, etc. Neil shared a lot of what they’d learned talking to CMOs, VPs of Marketing and SEO specialists at companies they knew. It was all pretty flattering, actually – I was shocked at how positive the feedback had been.
The only big concern he brought up from that research was that higher-up marketing executives still lack belief in SEO. One quote that I noted above was a VP who said “I know it’s irrational, but nobody can prove to me that we should spend more.” This lack of investment in SEO and inbound marketing compared to paid channels, despite the higher ROI and lower acquisition cost, is something every inbound professional fights against.
At the tail end of the conversation, Neil brought up their concerns around our July numbers. They asked whether we felt the month was “a blip or a softening of the market.” I explained that when we looked into it, we saw a few major drivers:
• June/July lacked major new product releases/improvements as we geared up for MozCon at the end of the month (where we had three big releases, including the new OpenSiteExplorer, one of our flagship products)
• We had turned off re-targeting ads for SEOmoz and OSE in late June as we switched providers and didn’t have it on again until early August. Re-targeting’s great for us, because we have such high organic traffic, and it brings those visitors back. Based on the May/June numbers, we likely lost between 5-10% of new memberships from this alone.
• May, June and July also didn’t feature as many upgrades and improvements to our performance marketing channels, primarily because we focused the team’s time on other projects, including, notably, calls, metrics requests and data dives related to fund raising.
• We put more attention and effort than intended on events – Mozcon and our Mozcations – and less on our funnel. We were definitely feeling a bit cocky thanks to our better-than-expected January-May.
• The team was distracted by fundraising. I actually didn’t use this explanation when talking to Neil (I think I felt ashamed of bringing it up – that it would make us look worse than the others), but it certainly played a part.
I also told Neil that, if it was very important to them, we could certainly hit the $12.4mm revenue target for the end of the year by focusing on short-term acquisition, but that it would come at the expense of longer-term projects, and we felt that was unwise and unwarranted.
The meeting wrapped up, and Neil promised me an update by Monday. Tuesday morning we got the call; no deal. They released us from the term sheet conditions including, generously, the associated NDA. I promised that in the blog post I’d write (the one you’re reading now), we’d keep their identity anonymous, “Dragnet-style.”
Why Did The Deal Fall Apart?
We have a few working theories, but don’t know for sure.
• What Neil Told Us – according to Neil, the sole reason for their exit was the softness in the June/July numbers. However, this is very hard for me to swallow. We literally missed growth in two months where we had a combined $1.8mm in revenue by $85K, and we were still technically ahead on the revenue projections for the year (by $35K).
• The VentureBeat Theory – one guess is that someone important and trusted by Neil contacted him following the VentureBeat story and advised them not to put money into us for one reason or another. This fits the timeline reasonably well, but they did seem nervous about the deal even prior to the story coming out.
• Market Timing – as anyone who follows the stock market knows, the beginning of August was a rocky period. It appears to have stabilized more recently, but it could certainly be that, as in 2008 when funding suddenly dried up, the market’s crashes took their toll on Neil’s confidence or that of their firm’s LPs (who said something like “don’t make a capital call right now.”)
• Something in the Research – it’s also possible that something they found during their diligence into the market spooked them, but they couldn’t or wouldn’t share it with us. It’s hard to imagine what it could be, or why they wouldn’t tell us, but I suppose anything’s possible.
I doubt we’ll ever know for sure, and that’s pretty frustrating. Last week, I sent the team this email:
The replies back were awesome. I won’t share them here, but they killed whatever doubts I might have harbored from Neil’s withdrawal. Working at SEOmoz just flat out rocks, and it’s because I’m surrounded by some of the best people ever to be assembled. Re-reading those emails now still brings an unmitigated smile to my face.
What Did We Learn? What Lessons Can Others Take Away?
The lessons from this process are challenging to compile, not only because it was such an inbound process, but because so much of the reasons for the final result are unknown. Nonetheless, I’ll try:
• Don’t Let Fundraising Distract You from What Really Matters – If I had this to do over again, a big part of me would still want to have the slower-than-expected growth in July to make sure we didn’t get a fairweather friend who didn’t really believe in the company onto the board, but I also know we could have been much more disciplined. Spending the team’s time not just on phone calls and webinars to walk investors through our numbers, but time researching, pulling metrics, re-inforcing market questions, etc. was a waste. We should have let the investors do more of the work and kept the team more focused on the mission at hand. If an investor really wants to be part of Moz, a few missing, non-standard business metrics aren’t going to change that.
• Inbound Interest is No Guarantee of Getting Funded – For some reason, I had this idea stuck in my head that if the company is being pitched to take funding by investors, the deal will be dramatically easier to do. This might be true, but “easier” doesn’t mean “in the bag.” Our first round did work largely this way – Michelle and Kelly pitched us, we said yes, money arrived. This time, Neil, Reggie, Todd and plenty of other reached out to us, pitched and at the end of the process, nada.
• Be Careful About How & Where Funding is Communicated – We tried to be cautious this time around, not wanting to get our team or ourselves too excited before money was in the bank. Nevertheless, we definitely started planning ahead a bit prematurely. The nights and weekends (and a few days, too) spent brainstorming and roadmapping an SEOmoz with another $18mm in cash was time we certainly could have spent on more productive, realistic goals.
• Be Excellent to Everyone, All the Time - I can definitely confirm that the world of venture capital and private/growth equity is a very tiny one, and that entrepreneurs, partners and service providers talk incessantly and vociferously about nearly every experience with an investor or company. If you’re in the startup world on any side of that equation, it pays to be a great human being and to treat everyone with respect (this is probably another full post worth writing at some point). We heard some not-so-great things about several potential investors, and it made us pull back pretty quickly. Folks in the Valley often talk about how “reputation is everything,” and this experience re-inforced that for me.
• Never, Ever Get Cocky – I have to admit that sometime around the end of June/beginning of July, I was starting to feel pretty good. A bunch of investors wanted to put a LOT of money into our company. We were beating revenue month after month. We turned away investors instead of the other way around. I tried to stay humble, stay hungry and not get overly excited about things, but the idea of having liquidity for my family, the ability to grow Moz in a new and exciting way and, yeah, the idea of finally having some personal savings were all dancing in my head.
• Remember What Really Matters – No matter how this VC story went, I’m an incredibly lucky member of the human race. The big stuff is going amazingly well. My grandmother, who had a fall back in May, has almost entirely recovered. I’m surrounded by people I love to work with, all of whom are excited to come into the office every day, investment or no. And I’m married to her:
Our Plans Going Forward
The best part about this otherwise frustrating result is that we didn’t end up signing a deal with a firm who didn’t truly believe in us, our market or our future. Despite our positive experiences with Neil from March – July, the last couple weeks clearly showed that he would have been a poor choice for our board of directors. Whatever caused the cold feet, it’s better now than after the investment, when a wrong choice could have made life unpleasant for everyone for many years to come.
On the investment front – we’ve decided that attempting to raise a round of funding anytime in the next 6 months would be a mistake. We continue to receive calls from potential investors, but my message has shifted to “let’s maybe talk again next year.”
Personally, I feel burned. This is the second time in 3 years that I’ve gotten excited about raising a potential round of capital, and it turned out terribly both times. I’m not sure what I did wrong or what I should do differently next time. I also don’t know how we could have done more diligence on Neil or his firm – literally everyone we talked to raved about him; even the skeptical third-parties who went digging into their mutual contacts for us had great things to say.
Phone calls and meetings are one thing, but this wasted a massive chunk of our time, energy and emotion. Putting faith in the process in the future would be hard – if a deal can fall through this late, when we weren’t even pitching but got pitched… Well, I just don’t know. Everything about this feels wrong.
What I can say is that this experience makes me and the rest of the Moz team even more inspired and motivated to build an amazing company. We can’t help but feel passion for proving doubters and naysayers wrong. The greatest revenge is to execute like hell, bootstrap all the way, and do what we said we’d do – become Seattle’s next billion-dollar startup, and make the world of marketing a better place.
The benefits of customer and agile development and minimum features set are continuous customer feedback, rapid iteration and little wasted code. But over time if developers aren’t careful, code written to find early customers can become unwieldy, difficult to maintain and incapable of scaling. Ironically it becomes the antithesis of agile. And the magnitude of the problem increases exponentially with the success of the company. The logical solution? “Re-architect and re-write” the product.
For a company in a rapidly changing market, that’s usually the beginning of the end.
It Seems Logical I just had lunch (at my favorite Greek restaurant in Palo Alto forgetting it looked like a VC meetup) with a friend who was technical founder of his company and is now its chairman. He hired an operating exec as the CEO a few years ago. We caught up on how the company was doing (“very well, thank you, after five years, the company is now at a $50M run rate,”) but he wanted to talk about a problem that was on his mind. “As we’ve grown we’ve become less and less responsive to changing market and customer needs. While our revenue is looking good, we can be out of business in two years if we can’t keep up with our customer’s rapid shifts in platforms. Our CEO doesn’t have a technology background, but he’s frustrated he can’t get the new features and platforms he wants (Facebook, iPhone and Android, etc.) At the last board meeting our VP of engineering explained that the root of our problems was ‘our code has accumulated a ton of “technical debt,’ it’s really ugly code, and it’s not the way we would have done it today. He told the board that the only way to to deliver these changes is to re-write our product.” My friend added, “It sounds logical to the CEO so he’s about to approve the project.”
Shooting Yourself in the Head
“Well didn’t the board read him the riot act when they heard this?” I asked. “No,” my friend replied, sadly shaking his head, “the rest of the board said it sounded like a good idea.”
With a few more questions I learned that the code base, which had now grown large, still had vestiges of the original exploratory code written back in the early days when the company was in the discovery phase of Customer Development. Engineering designs made back then with the aim of figuring out the product were not the right designs for the company’s current task of expanding to new platforms.
I reminded my friend that I’ve never been an engineering manager so any advice I could give him was just from someone who had seen the movie before.
The Siren Song to CEO’s Who Aren’t Technical CEO’s face the “rewrite” problem at least once in their tenure. If they’re an operating exec brought in to replace a founding technical CEO, then it looks like an easy decision – just listen to your engineering VP compare the schedule for a rewrite (short) against the schedule of adapting the old code to the new purpose (long.) In reality this is a fools choice. The engineering team may know the difficulty and problems adapting the old code, but has no idea what difficulties and problems it will face writing a new code base.
A CEO who had lived through a debacle of a rewrite or understood the complexity of the code would know that with the original engineering team no longer there, the odds of making the old mistakes over again are high. Add to that introducing new mistakes that weren’t there the first time, Murphy’s law says that unbridled optimism will likely turn the 1-year rewrite into a multi-year project.
My observation was that the CEO and VP of Engineering were confusing cause and effect. The customers aren’t asking for new code. They are asking for new features and platforms –now. Customers couldn’t care less whether it was delivered via spaghetti code, alien spacecraft or a completely new product. While the code rewrite is going on, competitors who aren’t enamored with architectural purity will be adding features, platforms, customers and market share. The difference between being able to add them now versus a year or more in the future might be the difference between growing revenue and going out of business.
Who Wants to Work on The Old Product Perhaps the most dangerous side-effect of embarking on a code rewrite is that the decision condemns the old code before a viable alternative exists. Who is going to want to work on the old code with all its problems when the VP Engineering and CEO have declared the new code to be the future of the company? The old code is as good as dead the moment management introduces the word “rewrite.” As a consequence, the CEO has no fallback. If the VP Engineering’s schedule ends up taking four years instead of one year, there is no way to make incremental progress on the new features during that time.
What we have is a failure of imagination
I suggested that this looked like a failure of imagination in the VP of Engineering - made worse by a CEO who’s never lived through a code rewrite – and compounded by a board that also doesn’t get it and hasn’t challenged either of them for a creative solution.
My suggestion to my friend? Given how dynamic and competitive the market is, this move is a company-killer. The heuristic should be don’t rewrite the codebasein businesses where time to market is critical and customer needs shift rapidly.” Rewrites may make sense in markets where the competitive cycle time is long.
I suggest that he lay down on the tracks in front of this train at the board meeting. Force the CEO to articulate what features and platforms he needs by when, and what measures he has in place to manage schedule risk. Figure out whether a completely different engineering approach was possible. (Refactor only the modules for the features that were needed now? Rewrite the new platforms on a different code-base? Start a separate skunk works team for the new platforms? etc.)
Lessons Learned
Not all code rewrites are the same. When the market is stable and changes are infrequent, you may have time to rewrite.
When markets/customers/competitors are shifting rapidly, you don’t get to declare a “time-out” because your code is ugly.
This is when you need to understand 1) what problem are you solving (hint it’s not the code) and 2) how to creatively fix what’s needed.
Companies get hot. And investors start throwing money at them. Entrepreneurs get calls and emails all day long from investors wanting to invest. After a while, the entrepreneurs start to think that they should take the money. Not because they need it, but because they figure if people are throwing money at them, it's probably a good idea to take some.
Given that we are in the "throwing money at entrepreneurs" period in web investing, I thought I'd say a few things about this.
1) Don't take money you will never ever need. No matter what price and terms the money is offered, it has a cost. Money is never free. If you have absolutely no need for the money then don't take it.
2) Money lying around tends to get spent. It is a very hard mental exercise to sock away a bunch of money and forget about it. If you think you'll just raise the money and put it away for a rainy day, just know that will be hard to do. And if you have team members who have ideas about how to spend/invest it, it will be even harder.
3) If you need the money, then raise it now. I have not seen a better time to raise money for web startups since the late 90s.
4) If you don't need the money, but have some ideas about how you could put it to good use, then do some hard work on those use cases. Flesh them out. Size them up. Build a plan. Then raise the money and execute the plan.
5) If your company doesn't need the money, but you sure could use some, then think about selling some secondary shares. But don't sell a lot. Maybe 10-20% of your position. I've come to believe that entrepreneurs putting away some money to protect the downside is largely a good thing. It allows them to take bigger risks and play for more upside.
6) Do not let the fact that your competitors are raising money impact your decisions around fundraising. I have not seen one company beat another because they raised more money. Most of the time it is the other way around. The overfunded company loses most of the time.
7) Don't let this environment make you crazy. I understand the problem. We get calls and emails too. It is tempting to get caught up in the nutty market we are in. Focus on your business, your product, your team. Put all this stuff in perspective and don't let it take you mind off what matters. You need money to build a business but the money is a tool, the business is the mission. Focus on the mission.
The financial markets will come and go. Sometimes investors are focused on the downside. Other times they are focused on the upside. Right now it is the latter. But someday it will move to the former. That's how financial markets behave. End markets, the place all businesses get paid day in and out, don't whipsaw you like financial markets. Build a product and sell it to the end market and get profitable and create lasting sustainable value and you'll get to the pay window on your terms and your time frame.
