Fred Wilson’s MBA Mondays

Thursday, April 17, 2014 | Entrepreneurship | Leave a comment

I’m sometimes asked for suggestions and ideas on blogs/books/articles to read, and one of the more frequent recommendations I make is Fred Wilson’s blog, in particular his MBA Monday’s series. Fred used to have a tool for managing the table of contents, however that has since been removed. This post is purely as list of shortcuts to make it easier for me to share Fred’s insights with others.

2010-01-25
How To Calculate A Return On Investment
2010-02-01
The Present Value Of Future Cash Flows
2010-02-08
The Time Value Of Money
2010-02-15
Compounding Interest
2010-02-22
Corporate Entities
2010-03-01
Piercing The Corporate Veil
2010-03-08
Accounting
2010-03-15
The Profit and Loss Statement
2010-03-22
The Balance Sheet
2010-03-29
Cash Flow
2010-04-05
Analyzing Financial Statements
2010-04-12
Key Business Metrics
2010-04-19
Price: Why Lower Isn’t Always Better
2010-04-26
Projections, Budgeting and Forecasting
2010-05-03
Scenarios
2010-05-10
Budgeting In A Small Early Stage Company
2010-05-24
Budgeting In A Growing Company
2010-05-31
Budgeting In A Large Company
2010-06-07
Forecasting
2010-06-14
Risk And Return
2010-06-21
Diversification
2010-06-28
Hedging
2010-07-05
Currency Risk In A Business
2010-07-12
Purchasing Power Parity
2010-07-19
Opportunity Costs
2010-07-26
Sunk Costs
2010-08-02
Off Balance Sheet Liabilities
2010-08-09
Enterprise Value and Market Value
2010-08-16
Bookings vs Revenues vs Collections
2010-08-23
Commission Plans
2010-08-30
What A CEO Does
2010-09-06
What A CEO Does (continued)
2010-09-13
Outsourcing
2010-09-20
Outsourcing vs Offshoring
2010-09-27
Employee Equity
2010-10-04
Employee Equity: Dilution
2010-10-11
Employee Equity: Appreciation
2010-10-18
Employee Equity: Options
2010-10-25
Employee Equity: The Liquidation Overhang
2010-11-01
Employee Equity: The Option Strike Price
2010-11-08
Employee Equity: Restricted Stock and RSUs
2010-11-15
Employee Equity: Vesting
2010-11-22
Employee Equity: How Much?
2010-11-29
Acquisition Finance
2010-12-06
M&A Fundamentals
2010-12-20
Buying and Selling Assets
2010-12-23
The MBA Mondays Curriculum
2010-12-27
Selling Your Company
2011-01-03
M&A Case Studies: ChiliSoft
2011-01-10
M&A Case Studies: WhatCounts
2011-01-17
M&A Case Studies: WhatCounts Sale Process
2011-01-24
M&A Case Studies: Feedburner
2011-01-31
M&A Issues: The Integration Plan
2011-02-01
MBA Mondays Everywhere
2011-02-07
M&A Issues: The Stay Package
2011-02-09
What A Management Team Does
2011-02-14
M&A Issues: Governmental Approvals
2011-02-16
MBA Tuesday
2011-02-21
M&A Issues: Breakup Fees
2011-02-28
M&A Issues: Reps, Warranties, Indemnities, and Escrows
2011-03-14
M&A Issues: Timing
2011-03-21
M&A Issues: Consideration
2011-03-28
No MBA Mondays Today
2011-04-04
M&A Issues: Price
2011-04-07
360 Reviews
2011-04-11
Margins
2011-04-18
Margins (continued)
2011-04-25
LTV > CPA
2011-05-02
Ordinary Income vs Capital Gains
2011-05-09
Competition – The Pros and Cons
2011-05-16
Financing Options For Small Tech Companies
2011-05-18
Sizing Option Pools In Connection With Financings
2011-05-23
Financing Options For Startups
2011-05-30
Financing Options: Friends and Family
2011-06-06
Financing Options: Contests/Prizes/Accelerator Programs
2011-06-13
Financing Options: Government Grants
2011-06-20
Financing Options: Customers
2011-06-27
Financing Options: Vendor Financing
2011-07-11
Financing Options: Convertible Debt
2011-07-18
Financing Options: Preferred Stock
2011-07-25
Financings Options: Venture Debt
2011-08-08
Financing Options: Capital Equipment Loans and Leases
2011-08-15
Financing Options: Bridge Loans
2011-08-22
Financing Options: Working Capital Financing
2011-08-29
Pricing A Follow-On Venture Investment
2011-09-05
Determining Valuation Multiples
2011-09-12
EBITDA
2011-09-19
Audio MBA Mondays
2011-09-26
MBA Mondays: Cap Tables
2011-10-03
Liquidation Analysis
2011-10-10
Liquidation Analysis (Continued)
2011-10-17
Revenue Based Financing
2011-10-24
VP Finance vs CFO
2011-10-31
VP Engineering Vs CTO
2011-11-07
A New MBA Mondays Series: Business Arcanery
2011-11-14
Business Arcanery: Going Concern
2011-11-21
Sustainability
2011-12-05
Burn Rate
2011-12-12
Burn Rates: How Much?
2011-12-19
How Much To Burn While Building Product
2011-12-26
Scaling The Management Team
2012-01-02
The Management Team – While Building Product
2012-01-09
The Management Team – While Building Usage
2012-01-16
The Management Team – While Building The Business
2012-01-23
The Management Team – Guest Post From Matt Blumberg
2012-01-30
The Management Team – Guest Post From JLM
2012-02-06
The Management Team – Guest Post From Phil Sugar
2012-02-13
The Management Team – Guest Post From Joel Spolsky
2012-02-20
The Management Team – Guest Post By Jerry Colonna
2012-02-27
MBA Mondays Series: The Board Of Directors
2012-03-05
The Board Of Directors: Role and Responsibilities
2012-03-12
The Board Of Directors – Selecting, Electing & Evolving
2012-03-17
Announcing MBA Mondays Live
2012-03-19
The Board Of Directors – The Board Chair
2012-03-26
The Board Of Directors: Board Chemistry
2012-04-02
The Board Of Directors: Board Meetings
2012-04-09
The Board Of Directors: Board Committees
2012-04-15
MBA Mondays Live: Employee Equity
2012-04-16
The Board of Directors: Guest Post From Scott Kurnit
2012-04-19
MBA Mondays Live: Employee Equity – Archive and Feedback
2012-04-23
The Board Of Directors: Guest Post From Matt Blumberg
2012-04-30
MBA Mondays: Where To Go Next?
2012-05-07
MBA Mondays Series: Human Capital
2012-05-14
MBA Mondays Series: People
2012-05-21
MBA Mondays: Culture And Fit
2012-05-27
Twilio’s Nine Things
2012-05-28
MBA Mondays: Where To Find Strong Talent
2012-06-04
MBA Mondays: Optimal Headcount At Various Stages
2012-06-11
MBA Mondays: Best Hiring Practices
2012-06-25
MBA Mondays: Retaining Your Employees
2012-07-02
MBA Mondays: Asking An Employee To Leave The Company
2012-07-09
MBA Mondays: Leveraging Your Partners To Grow And Develop Your Team
2012-07-16
MBA Mondays: Guest Post From Donna White
2012-07-23
MBA Mondays: Guest Post From Angela Baldonero
2012-07-30
MBA Mondays: Guest Post From Chad Dickerson
2012-08-06
MBA Mondays: Guest Post From Susan Loh
2012-08-07
How to Be in Business Forever: A Class On Sustainability
2012-08-13
MBA Mondays: Guest Post From Scott Kurnit
2012-08-20
MBA Mondays: Guest Post From Dr. Dana Ardi
2012-08-27
MBA Mondays: Accounting From The Archives
2012-09-03
MBA Mondays From The Archives: The Profit and Loss Statement
2012-09-10
MBA Mondays From The Archives: The Balance Sheet
2012-09-17
MBA Mondays From The Archives: Cash Flow
2012-09-24
MBA Mondays From The Archive: Analyzing Financial Statements
2012-10-01
How To Be In Business Forever: A Lesson In Sustainability
2012-10-08
How To Be In Business Forever: Week Two
2012-10-15
How To Be In Business Forever: Week Three
2012-10-22
How To Be In Business Forever: Week Four
2012-10-29
MBA Mondays: Sustainability Class Wrapup
2012-11-05
MBA Mondays: One More Thing On Sustainability Before We Move On
2012-11-12
MBA Mondays: Next Topics
2012-11-19
MBA Mondays: Revenue Models
2012-11-26
MBA Mondays: The Revenue Model Hackpad
2012-11-27
MBA Mondays: The Revenue Model Hackpad, Take Two
2012-12-03
MBA Mondays: Revenue Models
2012-12-10
MBA Mondays: Revenue Models – Advertising
2012-12-17
MBA Mondays: Revenue Models – Commerce
2012-12-24
No MBA Mondays This Week or Next
2013-01-07
MBA Mondays: Revenue Models – Subscriptions
2013-01-14
MBA Mondays: Revenue Models – Peer to Peer
2013-01-16
Guest Post: Startup Business Development 101
2013-01-21
MBA Mondays: Revenue Models – Transaction Processing
2013-01-28
MBA Mondays: Revenue Models – Licensing
2013-02-04
MBA Mondays: Revenue Models – Data
2013-02-11
MBA Mondays: Revenue Models – Mobile
2013-02-18
MBA Mondays: Revenue Models – Gaming
2013-03-04
Whither MBA Mondays?
2013-03-25
Revenue Traction Doesn’t Mean Product Market Fit
2013-04-08
Don’t Let A Good Crisis Go To Waste
2013-04-15
Tenacity And Persistence Pays Off
2013-04-22
You Are Working Too Hard And Not Getting Anywhere
2013-04-29
Because It’s Standard
2013-05-06
Great Entrepreneurs Will Listen To You But Will Follow Their Own Instincts
2013-05-13
You Can Do Too Much Due Diligence
2013-05-20
Success Has A Thousand Fathers
2013-06-02
Product > Strategy > Business Model
2013-06-03
MBA Mondays: Sales Leads On A Small Budget
2013-06-17
What Is Strategy?
2013-07-01
From The MBA Mondays Archive
2013-07-08
Startup Management
2013-08-01
A Table Of Contents for MBA Mondays
2013-08-05
Focus

Engineering Enterprise SaaS Pricing

Saturday, April 28, 2012 | Entrepreneurship, TribeHR | Leave a comment

I’m an advocate of data-driven decision-making, and so with TribeHR we spend a lot of time digging into our numbers, both from a business metrics perspective as well as from a product analytics perspective. When the question of product editions came up, we took a data-driven approach to the problem.

Why Make the Switch to Per-Seat Pricing in Enterprise SaaS

Note: if you’re already convinced you need to make the move to per-seat pricing, feel free to skip this part.

Many enterprise SaaS apps take a similar approach to what we did when we first started: pricing tiers that scale features and yet are closely related to the number of users that have access to the app. The problem with this approach is that it turns your customers’ decision into either a purely consumption-based decision, or an awkward consumption/feature decision, which leads to frustration.

In the first-case, a consumption decision is ultimately asking a customer to assign value to a quantity of a resource, and to determine how much they want to consume. In the case of beverage sizes, for example, it’s clear that the best “deal” is the largest, but I might balance my decision based on how thirsty I am.

As we increase our consumption, the price per ounce of beverage is increasingly attractive – many SaaS apps scale with the number of users available to a package, adding additional users in trenches at a larger and larger discount. Unforuntatley this approach overlooks a crucial factor – unlike a beverage, the number of users a customer has is a fixed requirement, not a preference. We have a specific number of users/employees – going for a smaller or larger size doesn’t apply.

At the same time, SaaS vendors often complicate the decision by adding in extra features to entice upgrades. These added features result in product versions where the consumption divisions feel like a poor fit, and features distract from the decision, ultimately leading to dissatisfaction.

This is the original TribeHR pricing – yes, we were doing it wrong. We scaled users, disk space, job postings and features. Confusion FTW!

In David Skok’s blog post on multi-axis pricing (which is a must read if you want to maximize revenues) he mentions that  “[multi-axis pricing] allows you to capture more of the revenue that your customers are willing to pay, without putting off smaller customers that are not able to pay high prices.” It’s this statement that is a key element in the concept – when defining the fence between pricing tiers, every customer should believe they have made the single right decision for themselves.

To apply this to our product as an example, letting the product scale on a per-user model ensures the company always has the exactly correct consumption billing, so there is no wastage. Furthermore, by scaling product benefits on a per-product edition, you let your customers make a decision on the features that’s uncompromised by the number of users they have.

You can see here that our new per-user pricing is offered in three editions – yes, we want people to buy the largest.

Benefit-Based Fences vs. Feature-Based Fences

When defining fences it’s very easy to fall into the trap of thinking about how much you feel your product is worth. The problem with this approach, is that you aren’t your customers, so ultimately what’s included in your editions ends up resembling something that looks like this:

 

I’ve actually seen entrepreneurs chart out their feature sets like this. Precise, but not savvy.

This happens when the product owner or developer gets locked in the trap of prescribing value to the amount of work they are performing, whereas they should be thinking about how much value the customer attributes to the editions. The most important note here is that your customers will perceive drastically different values than you will. It’s an immutable truth that you will be surprised by how your customers attribute value to the different components of your product.

When defining your fences, your goal shouldn’t be to distribute the cost of development among editions. Your goal should be to distribute customer value across the editions.

To do this, you need to segment your customers (and market) by value tiers. To give you a more concrete example, when defined the TribeHR pricing editions, after speaking to our customers we managed to identify the following value-sets and match them to our market positioning statements.

Edition 1 Edition 2 Edition 3
Save the HR Dept Time by helping them move to electronic record keeping, so that they can spend there time working on strategic issues, rather than simply pushing paper.Positioning Statement: Focus on What Matters Save the Company Time and Money by automating employee tasks that were previously manual, helping employees be more product and feel that the company values their timeand effort.Positioning Statements: Focus on What Matters and Build Better Teams Help the Company flourish and succeed, by helping employees be more productive and feel significantly more engaged. Drive cultural change and growth then leverage that culture to become a great company.Positioning Statements: Build Culture of Success, Build Better Teams, and Focus on What Matters

Once we were able to define our value sets, we could then move on to identifying which of our current customers fit into each segment.

Separate Customers Based on Data

The goal of separating our customers into the different segments was to give us enough information to find out how the different segments might use our product. When we first started the process, our instinctive reactions were to go down the list of our customers manually and segment them based on our knowledge of the individuals involved – we quickly realized this approach was both prone to error as well as completely unscalable. To overcome this challenge, we embarked on an extremely data-intensive journey.

First, we asked the question “How could we ideally figure out someone’s segment?” and in response identified 13 leading indicators, unique to our customer base. For example, if they customer had avoided adding their whole workforce into the system, they likely saw TribeHR as primarily a time-saver for the HR department and so were likely an Edition 1 customer. Similarly, if they had employees that contacted us directly or through social media channels, they likely have a culture of recognition and would be an Edition 3 customer.

We reduced these 13 indicators down to simply tests and measurements; each would contribute to the categorization of the company.  A small selection:

  • Ask for employee training: Edition 2 or Edition 3
  • < 100% employee coverage: Edition 1
  • Converted automatically: Edition 2
  • Inquired about discounts: Edition 1
  • High usage of social features by employees: Edition 3

To analyze our customer activity, we compiled data from our helpdesk (Zendesk), our CRM system (Salesforce), our in-app databases, and in some cases email history for specific questions. We then evaluated each customer programmatically and based on the results, assigned them an edition/segment.

Note: we could have taken several approaches including simple fuzzy logic, weighted factors for each test, or a rules-based engine. In the end, we opted for an extremely simple method of tracking “segment points” for each customer, and after checking each test, adding the appropriate segment point. This very linear approach might be sub-optimal, but it was very easy.

At the end of this process, we had a neatly segmented customer base  – an extremely useful data set.

Mining our Activity Logs

To then gauge which features and elements to include in our various editions, we turned to our activity logs and calculated the frequency of customer actions. In a practical example, we would end up with observations such as:

On average, Administrators in Segment 1 post X new jobs per month, while Administrators in Segment 2 post Y jobs per month.

At the same time, we categorized all the actions we tracked into subject-area buckets so that we could take the analysis a bit futher. For example, we considered “Submitted a Vacation Request” and “Called in Sick” as independent actions, but both in the category of  “Time Off Management”. This resulted in data sets that looked like this:

You can see from the above list, that we had a very high level of usage in Performance Management events and a fairly low usage of “Customization” events, but that still event – editing a Custom Field Record was unusually high. By measuring both individual features as well as feature categories, we could gain useful insights about the high-level value individuals realized, as well as key features that could significantly impact the decision making process.

After performing this analysis for all three editions and segments, we could pull this all together into an interesting comparison. When visualizing the data as a collective (see below for a sample w/ sanitized numbers) it was easy to then pull out common levels of engagement.

When looking at the above data, some of the conclusions we could draw include comments like “Edition 3 customers spend more time customizing the app” and “Edition 1 and 2 customers maintain higher levels of engagement”.  Based on these conclusions, we began the process of categorizing our features – and we picked up some interesting insights.

By way of example, let me share with you one of our insights: in our original guess on editions, we had expected to include “Vacation Management” features in all three editions. Looking at our data, however, we were able to determine that although all three segments used our vacation features, our Segment 1 customers weren’t making any use of our custom time off types (in TribeHR you can add custom time off types like “Bereavement” or “Personal”). Based on this insight, we modified our vacation management features, and now only make custom types available to our two higher packages.

As a final cautionary note, one of the challenges we had early in the analysis was correcting data for confusing influences. For example, companies that attracted more job candidates would naturally have more comments in the system about those very candidates, which would artificially inflate how many comment events were tracked. In order to balance our conclusions, we modified some of our tests and frequency calculations to measure event frequency as ratio to other events. In the above example, we changed our algorithms to measure “comments per applicant per month” not just “total comments per month”. Similarly, we adjusted other measures to be “events per user per month” rather than just “total events per month”

After evaluating and calibrating all our measures, it became a simple task to distribute our feature set across editions.

Taking it Back to the Customer

Ultimately, this exercise is designed to build revenues by maximizing customer satisfaction with the product they choose. To make sure this happens, you’ll need to confirm that you segmented your customers properly, and then you’ll need to go through a price-definition exercise for each edition. Although I don’t cover the pricing question in this post (others have covered it much better than I) I can describe our validation work.

To validate our segmentation, we drew a random sample of customers and sent them a short survey email that followed this pattern:

Hi John, I hope you are doing well!

We are surveying a few people so that we may better understand customer needs.  I would very much appreciate it if you could take a moment to identify which of the following statements you identify most with.  If you have comments or questions, as always, please do not hesitate to pass them along!

1. Value statement from Edition 1
2. Value statement from Edition 2
3. Value statement from Edition 3

Thanks in advance for taking the time,

Donna

With this simple email, we were able to generate a 64% response rate within 24 hours.

When comparing the self-identified segmentation to our automated segmentation, we were originally surprised that we only had a 62% accuracy rate. When looking at the customer accounts where the results didn’t match, we were able to identify that the customers we had incorrectly segmented were each segmented primarily due to two specific indicators. Once we removed these indicators and re-ran the segmentation, we were able to raise the accuracy rating to 89%.

Although one could short-circuit the segmentation process by simply going straight to the survey, the benefit of first segmenting then verifying is that we now have a reliable set of indicators that we can use to identify prospects for up-sells (i.e. an account that shows Edition 3 indicators but is only subscribed to Edition 2) or identify accounts at risk of downgrading or churning.

Since rolling out the new pricing and feature set, we’ve been very happy with the results – although I can’t share the actual numbers, the metrics we watch to gauge success are:

  • Click-Through-Rate on our pricing page
  • Upgrades & Downgrades within pricing packages
  • Breadth of Feature Usage
  • Requests for Features to be moved between packages

Pulling it All Together

Looking back at the entire process, the entire journey took a little over 6 weeks to complete and involved very few customer concerns. I attribute this success, in a large-part, to the care we took in defining the new packages.

Finally, for those that just want the summary, here is the power-point version of engineering your price fencing in an enterprise SaaS product:

  1. Identify the value segments in your market
  2. Separate existing customers into the value segments
  3. Measure future usage of the segments to define feature sets
  4. Validate segmentation and establish price.
  5. Sell lots of software.

 

4 Must-Ask Questions When Hiring An Executive Into a Startup

Thursday, April 19, 2012 | Entrepreneurship | Leave a comment

As a Founder-CEO you’ll find yourself hiring-in expertise that you lack, and at some point you’ll have to hire your first executive – likely CFO, VP Marketing or VP Sales. When going through the process myself for the first time, although I had the benefit of exceptional advisers and mentors to prepare me, it was still an intense experience. These questions are my abridged version of hours of advisory sessions, interviews and recruiting processes planning. I selected these four particular questions because they were the most helpful to me as a founder in narrowing down our search. Furthermore, they challenged how I thought about hiring, and as a result they’ve better equip me as a CEO.

As you read these questions, be sure to adjust them to fit you and your business culture – although these questions worked for me (someone with a technical background and moderate entrepreneurial experience), they may not be the most provocative questions for you.  If you find variations that are more effective, please follow them instead.

Q1: How do I hope they ask to be compensated?

When hiring our first executive, I was fortunate enough to have extremely detailed market data for the new role in addition to the extensive experience offered by our investors. Because of this, it was a fairly academic exercise to place boundary conditions on the three compensation components: base salary, bonus, and equity. As you design compensation packages, an increase in one component typically implies a decrease in the others – as CEO you need to balance the mix such that the executive is fairly compensated, but the package is sustainable for the company. What you might not be prepared for, however, is how different candidate reactions and motivations might affect your impression of the candidate.

For me, I quickly learned that I preferred candidates that looked for a large outcome-based component to their compensation. The personal desire to tie their compensation to business metrics (e.g. a quarterly bonus based on conversion rates or sales numbers, or a stepped-up base salary tied to funding milestones) demonstrated a dedication to the business as well as an awareness that their value to the organization is directly linked to how well they can affect a material change in our business’s health. Although there are benefits to having a bonus-less compensation structure (less distraction, less administration, etc.), it quickly became clear that I was reacting more positively to candidates that were interested in tying their futures to the business performance.

Similarly, as I was expose to the many ways in which candidates valued equity compensation, the differences made a significant impact on my interest in the candidate. Some candidates inquired about the structure of the cap-table, and although this was expected, I found that I was reacting negatively to those candidates who did. The question communicated that they were more interested about how their compensation compared to others than they were about being compensated fairly. Similarly, although we had several candidates that were interested in a shorter vesting schedule, there was a subtle difference between those who were clearly hedging their bets in case of early-departure, and those who recognized that a reduced vesting period increased the likelihood of future ever-greening grants. It was this latter version that was the most compelling – it was a clear indication that the candidates had belief in the business, an interest in being involved for the long run, and an interest in delivering work that deserved increase equity compensation.

Finally, as we looked at our expected range of base-salary compensation, I quickly learned that I had a greater affinity with those candidates who expressed comfort with the lower-end of that range.  Although I respected and looked for candidates who could command a larger over-all compensation (we want to work with top-tier people), I learned that, as a founder, I needed someone who was sensitive to the fact that cash is a dear commodity in a startup and so was comfortable shifting a larger portion of their compensation out of their base and into bonuses. Although we’ll likely end up paying more in the long-term, as a founder it leaves me feeling that we’re much better aligned.

So, pulling these thoughts together, I quickly found that I was ideally interested in a candidate who wanted:

  • Significant performance-based bonus or milestone-based compensation
  • The opportunity to earn additional equity
  • Higher over-all compensation, but a lower base

Q2: Why will they suggest change?

I’m a very strong proponent of a “try before you buy” approach to hiring – get them in to not only meet the team, but also spend some time digging into your challenges. It’s a fairly straightforward process to pick out a few topics where you could benefit from some consulting help, without disclosing anything dangerously confidential. This process benefits the employer and the employee as they can evaluate the fit based on a more realistic data set and scenario. The inevitable outcome is that it’ll either become quite clear that the fit is poor, or the candidate will be able to offer insights along with clear recommendations for change.

And therein lies the rub – by virtue of hiring an executive that should “provide value” you are placing them in the situation where they have to recommend changes even if no changes are truly needed. Furthermore, because it’s often so easy to associate large changes with larger value, and because we’re asking new hires to ramp up so quickly, we’re actually incentivizing people to make large sweeping changes on inadequate information.

Bringing this back to hiring, although it is useful to have prospective hires work through some challenges with your team, by asking myself the question about why changes were being recommended, I was able to evaluate candidates in a new light.

Some of the answers I found included

They are trying to replicate past strategies in a different segment.

These changes are low-hanging fruit that would allow quick, incremental, improvement

They have honed in on my dissatisfaction in what we’ve done in this area and are mirroring me

I had challenges with each of these answers – they all spoke to someone with intelligence and aptitude, but they also highlighted what was essentially a shortcut. By the end of the process, I was looking for candidates who would elicit one specific answer to the question: they are recommending the change because they believe it is the best course of action for the company. This answer neatly accounts for the company’s strategic goals, current core business needs, available resources, and our priorities. For some challenges, tackling the low-hanging fruit would be a waste of time, for other challenges past playbooks would be irrelevant. Each situation is different, and to help identify candidates who would trigger the right answer, I started looking for candidates who:

  • Demonstrated a high level of preparation before any working sessions
  • Could identify as many elements in our current process that they wouldn’t change as elements they would change
  • Provided solutions and strategies that none of our team had already thought of and suggested
  • Took the time to learn as much about our business environment as possible before making any concrete changes

By looking at things through the lens of “why”, we were able to realize even higher value from working sessions during the recruiting process and were able to spend more time with candidates who were best-calibrated to our business needs and priorities.

Q3: Will our team follow them?

This question requires very little in the way of explanation of augmentation – either your team will follow your new hire or they won’t.

For us, although our original founding team was comprised of various levels of work and managerial experience, our first executive hire was our first experienced executive and as such would form the kernel of our executive team. Going forward, it would be important for me to stay well synchronized with this new executive, and to ensure that we could rely on each other to lead and execute when the other was absent. So that this would work, we were looking for rapport and respect – it was important that the team not only enjoy working with but also understand that he was operating with the full authority of an executive team member.

To accomplish this we had candidates spend time with us in roles where they were an authority figure (e.g. running a working session, as mentioned earlier) as well as spending time in more casual situations (e.g. out for a team lunch). To share our intent with the team in advance, we made it clear that while on the one hand we were actively recruiting candidates, at the same time we were trying to gauge fit. By framing the objective in advance, we could openly ask our team about how follow-worthy a candidate was. Once we finally narrowed things down to the final candidate, there are a strong consensus with everyone involved that not only was he fun to spend time with, but that he was a someone they could follow.

Although it’s not directly applicable to our experience, I’d like to contrast this process with one implemented by another startup friend – in his company they knew they were bringing in someone that was critical to the company, and rather than involving everyone in what could be a complicated process (the intent was to let the team focus on product, rather than on recruiting), they kept the entire process confidential till the offer had been signed and the person was starting. Within the first week it became clear that there were significant issues of confidence from within a development team – the end result was that several developers were let go soon after the executive started, the executive never really developed the trust of the rest of the organization, and he resigned six-months into his employ. My friend’s company is still running, but he now describes the process as a 12-month setback to his company’s growth.

Q4: Will we have each others backs?

This final question is easily the most important, and simultaneously the most difficult to answer; this question was as much about the candidate we were considering, as it was a question about myself.

I know that as our company experiences challenges, I’ll be relying on my executive team and they’ll be relying on me at all levels: employee relations, customer issues, product design, business metrics and even board conversations. When things are difficult, interpersonal relations are at their most vulnerable, and the worst thing that can happen is a VP undermining the CEO or the CEO undermining a VP – even if unintentionally.

I’ll share another example.

Another founder I know hired a VP Product to help with product vision and planning. Shortly after joining, during a planning session with the development team, the new VP mapped out a set of product features planned over the next quarter. Several developers were uncertain about the changes, and asked one of their more experienced team members to bring it up with the CEO, who used to be more involved in product design questions. The CEO, after listening to the concerns, agreed with the underlying uncertainty and essential said (I’m paraphrasing here), “Let me talk to him – I can explain things.” In one short statement, the CEO not only authorized his employees to circumvent the VP Product, but also destroyed any credibility the VP Product had in the space of product design.

This story isn’t unique. It can play out exactly the same if we replace “development team” with “the board” and imagine a director going straight to the VP Product, circumventing the CEO. In either scenario, it would have been a strictly better solution for the CEO or VP Product to back the others decision then follow-up privately with any concerns.

As we were hiring our first executive, it was crucially important to me that we bring on a candidate that I felt would have my back and whose back I knew I would have as well. Although it’s easy to make a call on the first, the latter proved to be the much meatier question, and one I’m glad I asked of myself.

Afterthoughts and Conclusions

Pulling this all together, while I hope the questions above will help you better evaluate potential candidates, I suspect they will also help you better understand your own thought processes and improve your relationship with your new executive team member.

If after reading this, you can think of any superb questions that have been left out, please let me know – I’d love to learn from your experience and I’m sure others would too. Here are my four again, in summary:

  1. How do I hope they will ask to be compensated?
  2. Why will they suggest change?
  3. Will our team follow them?
  4. Will we have each others backs?

As well, let me also leave you with a list of other materials I read during this recruiting process, that I found helpful.

Photo Credit: Alan Nakkash

The 3 Things Startup Founders Need to Know About HR

Monday, April 9, 2012 | TribeHR | Leave a comment

This post was originally posted to the Forbes CIO Network here: The 3 Things Startup Founders Need to Know About HR

Ask any startup CEO to rank their greatest challenges, and inevitably human resources makes the list.

For new ventures, a little preparation can mean the difference between creating a culture of success, or becoming completely bogged down by people problems at a time when you can least afford to make mistakes.

Unfortunately, simply recognizing HR challenges isn’t enough. Prioritizing is vital: there are too many to tackle on your own. Doing a good job at any one challenge costs you precious time and resources. Doing a good job at every challenge means sacrificing other core business operations with potentially catastrophic consequences.

Time is your greatest asset and you should value it that way. Think carefully about how to spend it. Before you attack a problem, ask yourself: Would I pay someone $1,500 per hour to solve this for me?

For common HR challenges like recruiting, development and project management, the answer should be a resounding “No.”  These are tactical issues that can be easily solved at a lower cost.

There are, however, three strategic HR issues that require your attention. If you fail to solve them, your business will fail. These challenges deserve the big bucks.

1. Personality Matters

Creating the right ‘mix’ of employees within your organization from Day 1 is key. Your staff needs to reflect the diversity of your customer base, rather than simply mirroring the personality type of the business founders.

To build a successful business, begin by understanding the personalities and personas of your customers. Marketing, customer support, sales and product management plans should be designed with total focus on your diverse customer base. Companies that lack diversity – both in the traditional sense, and in a diversity of personalities – will find it very difficult to accomplish this task.

Corporate culture needs to value respectful debate, conflicting voices and differing perspectives. Groupthink, a form of decision-making that involves little discussion or disagreement, can destroy you.

Founders need to self-examine; to learn about their own preferences and peculiarities; and to balance them by hiring a diversity of perspectives.

2. Be Transparent

Most startup founders I have encountered wonder how much information they should share with staff. They want employees to be informed about the business and have all of the information they need to work effectively, but are reluctant to share confidential information or to burden employees with excessive communication.

Employees want clarity from their leaders, but sharing for the sake of sharing is not productive. Be sure you are sharing information with intent – being transparent with irrelevant information leads to ambiguity and uncertainty.

Timing is equally important; be deliberate in the time you choose to share information. Information shared too early may cause employees to shift priorities too soon, and information shared too late may undermine employee confidence.

When employees have enough of the right information from the right source, the time and support they need to put the information into context, and the freedom to express their reactions and ask questions of their managers, only then are you properly leveraging transparency.

Effective managers put careful thought and consideration into determining the right level of sharing for their environment. And they follow up with a conscious, disciplined effort to sustain it as the company grows and changes.

3. Follow the “Why” Forward

Only a clear vision backed by a strong “why” can turn employees into rockstars.

Individuals work best when they can make decisions on their own; when they have the skills, knowledge and training necessary for their role; and when they understand the purpose of their job within the organization.

As a founder you are driven and passionate about your “why”, however as your company grows, you must rely on your team to represent the company to partners, customers and the community.

If they cannot explain why the company exists, or it’s greater calling, your message will never spread. Startup founders need to spend time making sure that their initial employees share their vision of a better future, empowering them to be effective flag-bearers.

A safe way to do this is to put as much attention and resources into managing your employees as you do into managing your customers. Employees should feel connected, important and valued.

Founders must articulate the company’s values and become a true champion for communicating its vision.

Imagine a business that can explain the better future it wants to create, with plans in place to support employees, with career roadmaps that have ample room for growth. Imagine a company where all employees understand the difference they are trying to make in the world every day they come in to work.

This is the why forward.

Most startup founders spend time with employees articulate what the company does and whom it does it for, but very few an articulate why the company is in this business.

When combined, aligned personalities, transparency and the why forward will powerfully motivate and engage employees. Their absence creates turmoil, distress, and dysfunction.

In the small, close-knit environment of a startup, internal disruption can be disastrous. Startup founders can’t afford to dwell on tactical HR issues. But they can’t afford to ignore strategic HR problems either. The time to build a culture of success is now.

Photo Credit: City of Olathe, KS

Life: Turning It Up to Eleven

Monday, January 23, 2012 | Entrepreneurship, TribeHR | Leave a comment

When working on a startup, it’s easy to get caught up in the day-to-day details and lose track of the things that are most important in life. Late in 2011 I had the opportunity to realize this – one could say that life completely blind-sided me and forced me to stop and smell the roses.

At the beginning of September we’d had our first official board meeting for TribeHR, and flush with positive energy and excitement, I had a schedule jam-packed with recruiting and business development meetings. Mid September I left for a trip to San Francisco to pursue a number of conversations and my wife, Xiaopu, took the opportunity to cash in a bit of vacation from work and join me. The blind-siding I mentioned earlier happened on Sep 22 when our water broke early and we were rushed to hospital. On Sep 26, at Good Samaritan Hospital in San Jose, our son Evan was born.

Working at a SaaS startup, I’ve conditioned myself to measure our stats rigorously. And Evan’s stats kept staring me in the face:

  • 26 weeks 2 days.
  • 1 lbs 8 oz.
  • 3536 km (2197 miles) from home.

Holy crap San Jose is far from Waterloo

It abruptly felt like our world had been completely changed. Was Evan going to be ok? What are the long-term implications? How are we going to manage a surprise 3-month stay in California? How will we cover the medical expenses?

It’s been four months since the initial scare, and although there have been moments of crisis and elation along the way, things are going well. Evan is home and doing extremely well and during this journey I’ve learned a lot. All platitudes and obvious lessons aside – here are a few things that stood out from this experience.

The Best Teams Improve Around Adversity

I’m involved in a number of volunteer and business organizations, and something that stood out from all my other experiences, was how well the TribeHR team pulled together. I can’t imagine the uncertainty I must have caused with my short email to them explaining “… an emergency has altered my plans and I’m going to be down here for a longer period of time,” but their ability to device processes and patterns around my absence was incredible. While I was spending most of my time in San Jose, they managed to help us win accolade after accolade after accolade after accolade. Any lesser team would have been hobbled, but these guys managed not only to lead critical events and hiring activities in my absence, but they managed to do it at an award-winning level.

Personal Touches Go Far

Conversations with potential investors and partners is part of my role – it was expected that I’d use some of my time in the Bay Area to connect with new partners and to follow up with investors. One person in particular, however, that stood out from the rest was Karan Mehandru of Trinity Ventures (@kmehandru) – not only did he make it clear that I could lean on him if my wife and I needed any help, but when he realized that we’d be stuck in San Jose for a prolonged period, he went so far as to invite us to his place for a BBQ and for Thanksgiving so that we’d feel more comfortable. That kind of consideration made a world of difference and is one of the major reasons that Karan is at the top of my list of valley VC’s that I’d want to work with.

Rewards Optimization Doesn’t Equal Customer Loyalty

Just before this incident occurred, I signed up for two customer loyalty programs to try and consolidate the travel expenses I was incurring: Hilton Honors and Enterprise Plus. When I realized that we were going to be stuck in San Jose for approx. 90 days, I thought to contact both rewards programs to see what options there were for more cost-effective options. My experiences couldn’t have been more different. Enterprise not only offered me the special rate for the local hospital, but also offered a free upgrade at a further discounted rate, and helped with scheduling our pick-ups and drop-offs. The care they showed had us rent a car from them for the duration of our stay.

Hilton Honors, on the other hand, couldn’t help me directly – their number is just a call center. Instead they suggested I contact the sales managers at two local Hilton properties. Of the two sales managers, neither returned my call, and the one that I did manage to reach was unsympathetic and kept telling me to go to their website as that’s where I could find their best rates. Over all, it was an experience that pushed me away and we spent our time at a different property.

Comparing the two, I realized that although both started with loyalty programs, they ended differently. I am loyal to Enterprise – I rent from them almost exclusively now. I am gaming Hilton – I stay there only when it’s convenient to take advantage of points optimizations – as soon as I encounter a different brand that has a better points program I’ll likely end up shifting.  The point I’ve taken away from this is that a loyalty or rewards program is still only as effective as the attitude of front-line staff.

So now, four months later, when the stats are looking much better (43 weeks, 6 lbs 11 oz, 0km from home, and we’ve learned excruciating lessons (like the value of travel insurance), I’m looking forward to joining the ranks of startup fathers that juggle their ventures with their families.

Wish me luck.

12 Rules for Using AngelList Like a Boss

Thursday, September 29, 2011 | Entrepreneurship, TribeHR | 5 Comments

A recent Huffington Post article on AngelList reminded me I need to finish this post – my apologies to those that expected me to post it months ago.

Leading a Workshop Like a Boss

There are some fantastic posts about how to get started on AngelList (one of my favourites is Brendan Baker‘s post How to Hustle with AngelList), but I haven’t seen as many written by entrepreneurs that have successfully used AngelList to raise money. Although I’m no expert on the fundraising process, I can say that we successfully used AngelList’s introductions to raise our round.

Here are the rules we set for ourselves as we went through the process.

Disclaimer: be sure to take these with a grain of salt – they worked for us, but might not work for everyone. Best of luck!

1. Before Posting – Find a lead investor

This is the first rule we decided on. It’s also the first rule that was shared with us by someone else. Over lunch this past March, Dan Martell shared this rule with me, and I’m giving it my +1. We didn’t want to post our profile until we could say that someone else thought we were a good investment. When we did post our profile, there was no money in hand yet, but we had verbal commitment from a local investor for $50k of the $500k we were trying to raise. It was meant to get us started, and it did. It made a big difference to our profile as it demonstrated that we had already been pitching and it became a conversation piece with several angels. For a few that reached out, the name and background of this investor were part of the opening conversations – I truly believe that they wouldn’t have reached out if we hadn’t been able to say we already had money committed.

2. Before Posting - Build a great website

This may sound like a flippant comment, but it was actually a critical component of our product and pitch.  A great product is a given, but some startups I’ve been around forget their public-facing content. We got our site to the point where we were receiving regular compliments before we posted our startup to AngelList, and it came in handy. When you put your profile up, the team that runs AngelList may send your profile out to investors that are a good fit – this was what happened for us. One of the recipients of the email blast saw the short email summary, visited our website, then gave us a call. This is important: they were persuaded to contact us based on a single paragraph in an email and the quality of our website. We wouldn’t be here if we didn’t have an awesome website.

3. Before Posting - Complete a great pitch deck

The pitchdeck is important, not just because it provides investors with a description of your company, but also because it forces you to condense your business into a few slides. We went through a pitch coaching process with the Venture Services Program at Communitech. Although it was difficult and painful at times, it helped us figure out how to talk about our business in very succinct terms, and it gave us the chance to practice talking in terms that investors would care about. If you’re having trouble pulling your pitch deck together, feel free to drop me a line and I’d be happy to share ours with you as an example.

4. Before Posting - Collect your social proof

Update: 2012-06-06 – There are some great discussions happening about The Death of Social Proof…give this one special thought about what it means in your context. It’s an older answer, but informing the discussion is the Quora answer from Naval (from AngelList) to the question “Is social proof a rational approach to investment selection?“.

The value of social proof is described elsewhere, so I’ll skip trying to convince you. I am, however, offering the suggestion that documenting  your social proof  before you post to AngelList will help. . Yes, you’ll need to post your social proof to your AngelList profile, but you may also want to dole it out in chunks (see point 9 below), or share specific links with investors while you’re talking to them. Having your list prepared ahead of time will make that process easier, and it will help you keep it top of mind, which will elevate your confidence (not to mention providing anecdotes for your conversations with potential investors).

5. Before Posting - Acquire paying customers

I realize this is easier said than done, but if you have paying customers before you go raising money, it not only puts you in a much better position when it comes to discussing valuations, but it also piques investor interest and helps you calculate the myriad of statistics and numbers that you’ll need to share with potential investors. If you’re building an SaaS company, I suggest reading David Skok’s original blog post on SaaS metrics. Reading this post will help you understand how to prepare your numbers, which will also give you some thoughts on how to acquire the right type of customers. Also, if you time your customer acquisition right, you’ll be able to share numbers as part of your AngelList profile. Updating those numbers regularly also helps (again, see point 9).

6. Before Posting - Be helpful and connected

The last thing I set for myself was to make sure that when people looked us up (the founders in particular) that they would find rich social profiles on networks that offered opportunities to share expertise or thoughts. I don’t know if our investors made it as far as checking us out. I’m including it as a rule because we went through the effort. The networks I’d consider “knowledge-based” social networks include LinkedIn Answers, BrightJourney (formerly OnStartups Answers), Stack Overflow, Hacker News, Quora, etc. I’d been using BrightJourney for a while, so that was the profile I put energy into. Leading up to posting to AngelList, and even after I’d posted, I tried to be a frequent visitor and a helpful one on the site. Like I said, I’m not sure how effective this was (I’ll have to ask our investors on this) but my objective was to demonstrate that we have a capable team that actively learns and is happy to share lessons learned.

7. Before Posting – Build an investor profile/persona

There are many different types of investors on AngelList – it will save you a lot of time and stress if you can figure out the characteristics of the investor you’re looking for. For us, here is a summary of what we wanted:

Single high-tech startup in the HR space is seeking investors that want to build a big company rather than a quick-flip. The ideal partner has way more B2B SaaS marketing expertise than we do,a ridiculously successful track record of good investments/companies, and entrepreneurial experience. Bonus marks for investment experience in our industry and/or networks that could bring in key strategic partnerships. Personality-wise, we are looking for people we feel comfortable with – people we’d want to have a beer with and with whom we can chat about any problems that come up, be they business or personal.

Our profile won’t be a perfect fit for everyone, but by building it up-front, we were able to better qualify investors and be prepared to answer the inevitable question about what we were looking for.

8. After Posting – Aim for < 5 minute follow-ups

This one was the most challenging, although maybe the most impactful, of our self-imposed rules. Follow-up is exceptionally important, but it’s not a binary thing. A great follow-up to an inquiry will not only answer the person’s questions, but is also personalized and timely. When we thought about out target investors, we realized many of them might see a $20k angel investment as a small investment, thus might make impulsive decisions. To capitalize on that behaviour, we gave ourselves the goal of following up within 5 minutes of an inquiry – the idea being that if they are on our profile submitting an expression of interest, then they are thinking about us right now and may be more receptive. We also figured that if an investor was interested in our business model, they might also be looking at other startups with a similar profile, and we didn’t want to be the last one to follow up if they were submitting multiple contact forms.

9. After Posting - Show growth and progress

One of the neat things about AngelList is that it notifies people about the startups they follow whenever there is a change. We actually modified our product release schedule, as well as expected blog/media coverage, to ensure that we’d be able to show an ongoing pattern of buzz, activity, and customer growth throughout the entire time our profile was available. Then, every couple of days, I’d post the new content/change/coverage to our profile as a comment or update. There were several situations where I’d have a second call with an investor a week or two after our initial email exchange and have to clarify that our numbers or progress had been updated and he/she might need to update their records. The risk to this was that some people might be annoyed with information that felt out-of-date, but the upside was that it helped bring attention to the speed of change we were trying to maintain.

10. After Posting - Assume nothing’s been read

This was a surprise to us, and we had to shift our conversation pattern very quickly when we realized that a significant portion (memory tells me about 3/4) of the people that contacted us hadn’t looked at our deck or our documentation – they contacted us based on a cursory look into the AngelList profile, perhaps our website, and maybe our LinkedIn profiles. Once I changed my conversations to always start off with an introduction (letting them know they could tell me to skip over stuff) it greatly improved the quality of our chats. The phrase I used was:

If you’d like, I can kick things off with an overview. I know there may be overlap with what you’ve already read, but we’ve found that with things changing so quickly, it often helps when I run through the basics, incorporating recent changes, then let you tell me where you’d like us to spend more time. Would that work for you?

Only once during our fundraising did I have someone balk at the invitation, and that’s because he had just finished reading everything 5 minutes before, and had some very specific questions. For most others, it was a great way for them to catch up if they hadn’t spent the time to read our slide deck.

If you’re anything like me, it may feel a little insulting the first couple times an investor reaches out without first taking the time to read your material – I know I felt that way. However, once we started taking it as a compliment, things improved. We told ourselves “our pitch looked so hot that they had to contact us before finishing” and things became a heck of a lot easier :)

11. After Posting - Be awesome and be committed

Another way of saying this is “Promise High and Over Deliver” – we were looking for investors who would commit time and energy to us, so we needed to do the same. When investors asked us for specific information that we didn’t have, we committed to turning answers around quickly and with all possible bells and whistles. There were times when we had to change the product just to get the information the potential investors wanted – for example, we started making changes to our funnel to better record states and we changed our billing systems to gain better insights into our customers. Similarly, we’d go the extra mile whenever possible for conversations – we had calls before 6am ET to field calls from European contacts and calls at 10pm to field west-coast inquiries. We made custom power point decks to highlight key insights, we delivered numerous online demos and we travelled to other cities to meet in person to get to know various investors. These meetings were particularly important. According to one of the AngelList investors we spoke to, “Your AngelList profile sparked my curiosity but meeting you is what got me really interested in your vision.”

All these things placed a ridiculous toll on our schedules, sleep patterns and families, but they gave evidence to our commitment and dedication not just to the company, but also to finding the right investors.

12. After Posting - Be picky, respectful, and honest

I left this point to last, as it was a point that drove all the others. Going into this process we had clear investor profiles in mind (*cough* point 7 *cough*). It was a lot easier to manage our calls when we were honest with investors. We had several conversations with people that were clearly brilliant people, but didn’t quite fit our target profile – rather than being vague on our description, we were honest with them about what we were looking for, and offered to keep them in the loop. This saved us (and them) time. Similarly, once we had a couple of investors closing in on a commitment, we were open with everyone else to make sure we avoided a competitive bidding scenario. This avoided any conflicts, but also freed up our time to really work with the investors that we were primarily engaged with. At the end of the day, we really wanted investors we could trust, who respected us and were honest with us – we tried to set the stage by offering the same.

So there – 12 rules that we followed that helped us eventually close a $1M round from Matrix Partners. If these rules help you out – please let me know! If you find anything missing (or have something to add), please let me know in a comment, and if they fit, I’ll add them to the post.

If you’d like to read more about raising money on AngelList, here some useful  posts I’ve referenced in the past:

Your Funnel is a Finite State Machine

Friday, September 23, 2011 | Entrepreneurship, TribeHR | 1 Comment

I’m of the opinion that the startup journey is really just the process of repeated work between “a-ha” moments of key insights. The faster we get to new insights, the better we are at ongoing improvement. I’m writing this post to describe an a-ha moment that happened early on (although earlier would have been better) in the lifecycle of TribeHR.

Exciting! An Arbitrary State Machine

To other engineers turned entrepreneurs: your customer acquisition funnel is a finite state machine.

This statement implies three specific premises:

  • your funnel can and should be modeled as a Finite State Machine (FSM)
  • your funnel FSM should map to explicit in-app states
  • investors care about the funnel state as much as (if not more) than anything else in your app

Your Funnel Should be Modeled

This point is best described in terms of my experiences with TribeHR:

When designing features within TribeHR, it was intuitive to think about our software in terms of moving objects through a series of states: a review was “in-progress”, “completed”, then “filed”; a vacation request was “pending review”, then “approved” or “rejected”. Similarly, the users of the system would also be moved through states – “employee”, “manager” or “admin” for example. When I thought about the marketing process, however, I treated “sales and marketing” as the entry point into the state machine – I saw it as the entry arrow rather than a separate series of states.

Because we didn’t start by planning our marketing and sales states, it was easy to rely on 3rd party services for our definitions. Unfortunately, implementing multiple services led to confusion. Some customers subscribed using PayPal, others paid through our payment gateway, and others found us via third-party app stores – each system had a different way of defining the state of a customer, so simple numbers like “how many customers are active” was a difficult thing to determine. This was compounded by our shift from a freemium model to a free-trial model earlier this year.

If we had clearly defined and tracked our states from the start (which we have since done) it would have been easier to map third-party terminology to our own, making analyses and improvements much easier. You can see the results of subsequent mapping in the diagram below:

Our Funnel as a Finite State Machine

As you can see, our entry state is “trialing”, thus the primary objective of our website is to convert visitors and leads into trialing users (our lead nurturing program is a state-machine still being designed). Once someone is trialling, they have two potential transitions: they can become either a paid “active” customer or an “abandoned” trial. Once someone becomes an active customer (and ideally remain one for a long time) they will exit the state only as a “cancelled” or “suspended” account. By clearly defining our states in the above format, we are now much better equipped to modify our messaging and features to optimize the experience. Before identifying the above state machine, we wasted a lot of time manually analyzing and identifying states, often on a case-by-case basis.

The “should” part of my assertion follows from my conversations with investors and advisors. I’d frequently be asked for information such as our conversion rate from trials to paid customers or our re-activation rate of suspended accounts – without a clear FSM, we’d have some accounts that occupied more than one state, which made answering these questions impossible. By defining our funnel/FSM we were then able to answer such questions with ease, which made a world of difference to our working relationship with investors and advisors.

If you haven’t defined your Funnel/FSM yet – do so. If you’re early-on in your startups, ot might not be perfect, but it will save you significant stress, time, and effort as you continue to work with mentors and investors. If it helps, put the model up on the wall at your office – it’ll keep it top of mind with your team.

Mapping to Explicit In-App States

Once you finalize your model, it’s critically important that you then track these states explicitly within you app. For example, if you offer a 15-day trial, during which users have to cancel or continue, it might be tempting to calculate “trialing” customers as those who are subscribed and whose date subscribed value is within the last 15 days. While this calculation might yield a correct result, formulating queries becomes significantly more complex when you can’t simply evaluate whether a field “state” is set to “trialing”.

These queries are important because as your company and customer base grow, you’ll need to generate reports and dashboards that highlight this information in near real-time. You’ll need to answer questions like what percentage of users that sign up for a trial convert to a paid customer, and how is it changing over time? As soon as you can answer that, you’ll then be asked to segment by lead source, user characteristic, or time window. For example how does that conversion rate over time vary according to lead source or engagement level?

To put it into an example, below are two examples of queries that would generate a summary of states of a single cohort from January 2011, assuming a 15-day trialing period. The first uses explicitly defined states, and the second assumes you calculate a real-time trial period, and simply delete records when they terminate their account.

Explicitly defined:

SELECT COUNT(state) AS total_users, state
  FROM users
    WHERE date_registered >= "2011-01-01" AND date_registered < "2011-02-01"
  GROUP BY state;

Calculated on the fly:

SELECT SELECT COUNT(state) AS total_users, IF(date_registered >
    DATE_SUB("2011-02-01" , INTERVAL 15 DAY); "TRIAL"; "ACTIVE") AS state
  FROM users
    WHERE date_registered >= "2011-01-01" AND date_registered < "2011-02-01"
  GROUP BY state;

As you can see, the query in the first is much easier to use and read, and it includes all states, whereas the second is challenging to use (even more challenging to modify if you have more states) and doesn’t track cancelled accounts.

By structuring your database such that the state is explicitly identifiable, you’ll be able to generate queries much more readily, which will then let you automate standard reports (like conversion and churn rates) for dash boarding, and will allow you to more easily connect business intelligence tools to your database. The ultimate goal is to let your business-oriented team members manipulate the data as readily as you can.

An added benefit of explicit states is that they act as assertions. Although it’s possible to determine that a customer is active by checking the date of their last successful payment, it’s much better to have an explicit “active” state as you can then run automated tests to verify that your assertions are true. Having a recurring task that iterates through your customer base to confirm that accounts with a most recent payment made within the last month are correctly identified as “active”, is a good way to follow monitoring-driven-development approaches. Any assertion errors can help identify critical flaws in your system.

Investors Care About the Funnel State

Although this may seem obvious, it still needs stating. The platitude what get’s measured gets done has a corollary – what we care about gets measured. Technical founders often measure and know details like server load, traffic metrics, lines of code and number of commits or push requests. Because we innately care about those tasks, we tend to measure and follow them. What can’t be over-emphasized is how much investors, advisors and partners will care about your funnel states. Below is a representative subset of the metrics we’ve been asked to report at our board meetings – you’ll notice that none of them are related to in-app usage or infrastructure performance:

  • Total # Of Customers (overall and by customer segments)
  • Visitor-to-Trial Conversion Rate (overall, and by lead source)
  • Trials-to-Active Conversion Rate (overall, and by lead source and by segment)
  • Churn Rate (overall and by lead source)
  • Customer Acquisition Cost (overall and by lead source)
  • Average Revenue per User (overall and by lead source)
  • Life Time Value (overall and by lead source)

Most of these numbers depend on measuring our customers’ states as well as various additional segments. Because our segments will vary frequently as we experiment and optimize with marketing campaigns, if we don’t have explicit (and easily determined) states, rapid iterations on our reporting become exceptionally difficult.

Investors and advisors will assume that you have infrastructure running smoothly – you don’t need to hammer home evidence of it, so skip on reporting the infrastructure stats I mentioned earlier. For them to provide valuable advice, however, they need to be able to understand and trust the business metrics I listed. If you can speak as confidently about your Funnel/FSM as you do your application, and if you can deliver transparency into the funnel by automating reports and dashboards, you’ll build your investors confidence and trust in you as an entrepreneur.

Bonus Reasons

As a bonus, here are a few cool things you can then do once you have this funnel modelled and embedded within your software:

  1. More easily build dashboards with tools like Geckoboard
  2. Delegate data-mining and analysis to non-technical staff, by tacking on BI tools like Qlickview
  3. Automate segmentation and lists for automated email campaigns and lead nurturing using Mailchimp, Performable, and others
  4. Simplify cohort analyses by customer segment

If you have a state machine for your funnel or customer base, especially if it deviates significantly from mine above, please share it in a comment or an email to me. It would be interesting to see what approaches others are taking.

The Best Time to be Running a Tech Company

Wednesday, July 27, 2011 | Entrepreneurship, Waterloo Region | Leave a comment

If you haven’t seen Ali Asaria‘s video on CBC yet, it’s worth watching. You can watch it here, but the best segment from it happens at 3:42 when Ali says:

“There’s no better time to be running a tech company & there’s no better place to be running it than from Waterloo”

I couldn’t agree more.

First, to set the stage, it’s great to be running a tech company anywhere – the number of tools that can be rapidly deployed to help get you off the ground is astounding, and there is investment money available for teams that can execute well. On the tool front,  in many ways it feels like you assemble a startup these days, rather the building one – tools like Google Apps, Mailchimp, Basecamp, Freshbooks, CloudBees and others make it supremely easy to build your company.  Note: I’ve included a great infographic on tools you might want to use at the bottom of this post. On the investment front, tools like AngelList and others make it easier to connect with potential investors, regardless of geography.

So with that out of the way, why Waterloo Region?

Core Network

The support network available here is second to none. The Communitech Venture Services Program is world-class (from the perspective of someone that’s been able to experience the quality of the mentorship first-hand) and other near-by programs, like those offered at MaRS (who just announced they’re expanding), are great institutional ways to help companies grow. These are complemented by a core network of individuals that are just as willing to help. The folks locally pulling together things like StartupCamp, DemoCamp, Founder Drinks and other similar events have helped any number of would-be entrepreneurs connect with people that have done it before. Our region is replete with experienced entrepreneurs that are willing to help. If you’re embarking on a new project, having a core network of people and organizations that are interested in helping you succeed is crucial, and our region is fortunate to have such a robust network.

Investment Money

Although there is a lot of truth behind the sentiment that there isn’t a lot of VC money available in Canada at the moment, what’s also similarly evident, is that more and more VC firms and Angel Investors from the US are looking north of the border for their investments. More specifically – they’re also looking at Waterloo Region. Investments into companies like Kik and TribeHR (full disclosure: I’m co-founder & CEO at TribeHR, and am unabashedly biased towards the company) and growth of offices like Google’s Kitchener Office are evidence of the decisions that are driving the buzz. Like Ali mentioned in his CBC interview – people are talking. People know that Waterloo is where things are happening, and that buzz is following real money coming into the area. In addition to outside money coming in, we have an increasingly active Angel Investment community – individual investors and organized groups (such as GTAN) are making it easier for startups that have early traction to speed things up.

Proximity to Universities

Anyone that knows me, knows that I’m not the biggest fan of how my University education made it difficult to pursue my entrepreneurial adventures, but in the intervening years things have changed significantly. On-campus programs like Velocity are helping students exercise their entrepreneurial muscles earlier than ever before, and I’m seeing more and more students take advantage of the opportunities afforded by networks I mentioned above. Go to StartupCamp or DemoCamp or attend a featured speaker or presentation put on by Communitech, and there is always a strong undergraduate representation. The opportunity for startups to bring on students in full time or part time roles is often over-looked: with one of the top engineering schools and one of the top business schools, we have our pick of the brightest and most entrepreneurial students in the country. I don’t mean to imply that they are less expensive to hire, rather I mean that they are often more open to experimenting and adapting to changing conditions, and with a 4-month co-op cycle, startups can iterate on projects and models more quickly than others. This is a strong strategic advantage that is often overlooked.

So yes, when I look around, this is definitely the best place and time to be running a tech company.

 

As I mentioned above – here is a great inforgraphic, courtesy of the folks at BestVendor, on which tools other startups are using.

Tool Search – Content Sharing / Collaboration

Wednesday, May 11, 2011 | CIGI, Web | 8 Comments

I’m looking for a tool – and I’m hoping that the magic of the interweb can help me find something. I’m working with a development team in Africa on a project for CIGI and we’re looking around for a new way to share content between the development teams. Here are some of the characteristics we’re looking for:

Social:  We’ve experimented with using Twitter (and similar tools) as a way to share links that we come across of, and although that works for our team in Canada, it hasn’t proven to be particularly useful for our African counterparts. We’re not online at the same time, and the internet connectivity issues there make Twitter clients painful for them. Also, linking to the content is a frustrating experience because of those same connectivity issues. We did, however, find a lot of value in the personal nature of the shared links – it was clear who it was from, and it could be easily directed at someone specifically.

Reader: The interface of a reader is a great interface, and both our teams currently use Google Reader, but we found that for the African team, it was less effective. Because of the internet connection issues, they are hesitant to open many articles at a time, so the speed of reading and linking it greatly hampered. The ability to follow a user has been nice, but non-optimal.

Off Line: I’ve been using InstaPaper for off-line reading, and find the interface particularly applicable to the internet connection issues. We’re going to give the social tools in Instapaper a try, but I’m not sure if it will be perfect (the need to mark for later reading, then to “like” it doesn’t feel like it’s going to be perfectly smooth)

Anyone have any suggestions for other tools that include a similar set of social offline blog reading?

How Chevy Won SXSWi

Tuesday, March 22, 2011 | Web | 3 Comments

I just came back from SXSWi, and the best way to describe it was mardi-gras for geeks. Although I had a blast and managed to fill my days with sessions, speakers, and productive meetings, what was most striking was the torrent of marketing activity going on. Yes, there were dozens of mobile place-based and group messaging apps launching (all of them seemed to be following the same strategy of having cute girls in branded tank-tops handing out post cards), and yes the big brands came out to play (e.g. Samsung, Pepsi, Microsoft, etc), however the clear winner in my mind was Chevrolet.

Using a big wide, generalizing brush, I’m going out on a limb that the goals of sponsorsing SXSW would be:

  • Connect your brand with the concepts of hip, savvy, technical, relevant, forward-thinking, etc
  • Get young, connected, social-media minded people to talk about your brand
  • Have people with disposable cash try your product, to intice them to buy

I’m sure there are other goals, but let’s start there, as I’d like to share how General Motors kicked ass on these fronts.

General Motors isn’t a brand that I’d normally associate with any of those adjectives above (connected, hip, etc) but the showed some keen insight in their execution at SXSW.

Vector 1: Get People To Try Your Product

Just outside the conference centre, GM had a “Drive a Chevy” setup, where you could exchange contact & demographic information for the right to drive any of the Chevy Cruze, Volt, Camaro, or Corvette. After filling out the forms, I was whisked off to the Volt line where I had all of 30 seconds to wait before getting into a vehicle. This car has one hell of a first impression - the interior is gorgeous, and as we drove off, I realized it had surprisingly good acceleration. From there I had the chance to shift over and give the new Camaro convertible a drive, and was similarly impressed. Finally, I capped the afternoon off by taking a new Corvette Convertible for a spin around Austin. All together, it was an incredible way for them to introduce their cars to me, and to really show of their new design approaches. All three vehicles were fantastic to drive, and now none of them would feel out-of-place in my garage ;)

Vector 2: Get People to Learn About & Talk About Your Product

Chevy offered a “Catch-a-Chevy” program where they had 30 Chevy Cruze’s driving people around town – essentially running a free cab service. The drivers new their cars, and didn’t hesitate to talk about the festival and the brand. This was reinforced by telling people about it through twitter and heavily broadcasting the #ChevySXSW hashtag. It worked incredibly well – people were lined up waiting for a drive, and it did a great job of teaching people about the the Cruze. Beyond that, people were telling their friends and other attendees about the free drives and about the test drives. Their placement (just outside the front doors) was excellent, and their use of social media reinforced the buzz.

Vector 3: Show Off Something Different & New

Cars, even electric cars, aren’t *that* new – what was pretty different, however, was the 360 Photo Boom with the Chevy Sonic. By placing about 30 digital SLRs on a circular boom, they could snap a pic of you from multiple angles. They then animated it much like was done in The Matrix. It was new, different, and shareable. Here’s mine.

Vector 4: Ease a Pain

They had a kick-ass charging lounge (all of the attendees were busy draining the batteries of their cell phones and laptops), and with the Catch a Chevy program, were resolving taxi dilemmas. Need I say more?

Put these efforts all together, and I found myself leaving SXSW with a much more positive impression of GM’s future, their design sense, their products, and their relevance to me. Before SXSW I don’t think I could have identified a manufacturer that “got it” when I thought of technology, social media, and experiential marketing.

Now, however, if someone asked me to pick one, I’d be pointing at Chevy. That’s why I think Chevy won SXSW.

JosephFung
web tech entrepreneur
waterloo region enthusiast
ninja in-training