This column is by angel investor and serial tech entrepreneur, Jeff Haynie
Appcelerator was not my first startup and certainly I hope not the last. We learned a ton from it and we made a lot of great decisions and certainly a share of bad ones — like all startups.
Here’s some of things I’d like to do different for my next startup and hopefully some lessons learned that you might find helpful. (Obviously, each startup is different so this isn’t a per se post mortem on Appcelerator itself, but does embody some things that I’ve learned and intend to do differently the next time around).
Every single startup monetizes differently — not only how and what they monetize, but when they monetize. At Appcelerator, we delayed monetization way too long using venture capital to extend the time to create a sustainable monetization engine for our business. We always had a plan for monetization but we waited way too long to get focused on it. We always struggled, even today, with what we call the reach vs. revenue conundrum.
I view the reach vs. revenue conundrum as a spectrum of options — on one end of the spectrum you have “reach” (market impact) and the other end you have “revenue” (monetization).
In a more traditional software model, you spend money to achieve market scale and drive (not at the expense of, but for the benefit of) monetization. This works well if done correctly. But it takes money (and lots of it) to reach market scale. It also takes time (often, a lot of it).
The freemium model, and variants of it, allow you to use virality and a good product to capture (what would otherwise cost money) market impact (reach). There are a ton of great examples of this and our own Titanium product was itself an example.
The conundrum that a lot of companies face, in fact most of them, is the balance between reach and revenue (or in another way to frame it: the conflict between the two). The further you maximize reach the harder it is to scale revenue — or at the very least, more friction is introduced in capturing it. In fact, the more successful you are in some ways, the more friction the system introduces. You also will fall into a series of traps as this happens — the biggest being the trap of “we aren’t monetizing all of this value”. This trap is dangerous as is with most hubris. You’ll find some saying things like “all these free people aren’t providing us any value” or “we have all of these people making money from our great product and not sharing in this value”. And, to a degree, it’s true. Thus the conundrum.
On the revenue side, the more you monetize the greater decay in reach and the more friction that gets introduced to the market impact side of the spectrum. Revenue means you need to introduce information “gates” (to aide in qualification, for example) or product “features” (which drive the user from free to paid), etc. And with each of these, you impact how quickly and easily you acquire new users. And with this friction, you will have a harder and harder time acquiring these users by virality and earned media and will be forced to use paid media and real marketing spend instead — driving up your customer acquisition cost (CAC) and changing the model entirely.
There is no right answer. However, one thing we seemed to have constantly learned is that you cannot charge (something, anything) too early, if you want to eventually have a business that is sustainable. Even if you have to risk reach in some regards.
Everyone loves something for free. Everyone will love you for it — especially if it’s a great product. That’s easy and it’s fun. Who wouldn’t want to use your super bad ass product that doesn’t cost anything and is amazing?
And the conundrum isn’t easier by focusing on revenue earlier. However, I would prefer to have fewer dedicated power users that get enough value and can’t live without it that they are willing to pay for it, than a lot of users that like it only on the condition that it’s always free. That won’t always make you the most popular startup but maybe you’ll be around when others fail.
The companies that seem to balance this the best are either companies where you are the product (Google, Facebook, Instagram, etc) or where you can get introduced to the product and use it for a while, but eventually need to buy the bigger, better product which costs money (Github, Slack, etc). But you must be deliberate early on — otherwise you risk not getting the correct value alignment (revenue) with your product/market fit.
There are so many different opinions on this one and I think I’ve seen both sides of this coin in my own startups over many years. And even during the Appcelerator tenure, there was a long period of time (between 2008–2012) where we went slow and then a period where we went too fast (2013–2014) and we almost went off the cliff. There is no right or wrong answer here — but clearly we didn’t always gearshift the way I would have liked in retrospect.
There are a ton of reasons why scaling slower is the correct strategy and plenty when it is the wrong one. For us, and likely in the future again, it was one where it is frankly very, very difficult to scale fast. At a startup, it’s close to impossible. You need a lot of things that are inherently a mismatch at a startup to make scaling fast work.
To scale really fast, you need a lot of well thought out processes and people that work well and know these processes well. By definition, startups work rarely well in conditions that are conducive to strict structure and also typically don’t have a ton of people that know the process even if they do. You’re almost always nearly single threaded in those areas (HR, IT, Finance, Operations, Recruiting, Training, etc) for a long time and you should be. When we went into hyper scale mode (meaning hiring a lot of people over short bursts of time) — all the things that worked great before become a huge tax and drain of your calories, instantly overnight.
How do you hire 50 people in the next two quarters when you’re only 40 people today? Those existing customers and existing roadmap? Forget it. You’ll turn 110% of your attention to internal things and all the stuff you’re good at becomes very secondary. All the things that you’re not yet good at or frankly don’t know how to do well (I mean as an organization, not individually) will come crashing down around you.
Let me give you some examples of what will happen.
We now need a recruiting team! We can’t hire 50 people and expect to only pay recruiting fees (holy crap, 20% of salaries times 50 are you insane?). If we have our own recruiting team, we need the LinkedIn recruiting tools too (50K we didn’t expect in the budget!). And a candidate tracking system. And a referral program. And with a recruiting team, we need all the hiring managers to do a better job at creating their job specs and we need to spend time with them talking through various potential candidates. And we also now need the dev team to spend time screening all of these candidates that the recruiting team sourced for us. And we need to make sure that the quality doesn’t go down so we need the head of R&D to also make sure to interview the people. But these devs are really really hard to get so we also need to make sure that the founders are part of the recruiting process as well — because we don’t want the quality to suffer — and we want to make sure that the candidates get a chance to hear the vision and get excited about the opportunity. So, hiring 50 people with any decent level of quality means you’ll need to screen interview likely 500–750 (at a minimum) candidates from a pool of several thousand. But our own internal recruiters are so busy we still need to use outside agencies at this pace too, oh no.
You get the picture at this point, right? You go from building a great product that you believe has product/market fit to becoming a full time staffing agency. And trust me, your product is much better and more interesting for everyone than being a crappy staffing agency.
Now, if you’re really successful, this problem is unavoidable. But the moment you go down this path at some reasonable scale, it’s hard to turn back and slow it all down. The unintended consequences that come from all of this rapid scale will put such an unimaginable burden on the company — the culture — even the best founders and boards will have a hard time controlling it.
My advice to myself (and to you) will be to be more patient. Grow a little slower (maybe a lot slower). Resist the urge to hyper-scale until you can no longer resist it. Try and find other ways to delay hiring and delay all the stuff that is required, if possible.
Obviously, each startup and each time scale of each startup is unique — so context is required. But my advice to myself is: take it slow, hoss. Rarely do markets and opportunities change so fast that you can’t catch up.
And the funny thing is, sometimes you’ll actually go a lot faster in the end, by going a little slower.
OK, burn less is really directly related to the first two — monetize earlier and scale slower. The faster you monetize and the slower you scale, the chances are you’re going to burn less.
Burn less is about optionality. And the one thing you want as a founder of a startup are options. You’re going to die much much faster because you ran out of options.
Options are really what it’s all about. Options give you a chance to control your own destiny. When the times get tough, if you have options, you can use them. Without optionality, you’re screwed.
Burn is more or less a indicator of your optionality. If you burn less and have more runway, you have options (or at least you can create options with enough time). If you burn more, you reduce your options while reducing how long you can exercise them.
And this is one of those things that it’s very easy to convince yourself otherwise. Spending money is fun!
I distinctly remember numerous times meeting with my founder friends and the measure of each other’s startup status was “headcount” — as if that was a phallic symbol of sort. As Biggie would say: more money, more problems.
And trust me, your board and investors will likely not agree with you. When you are nervous and want to go slower, they won’t always agree and will push you. Not everyone, but most. And it will always be much more fun to burn faster, not gonna lie. Burning less takes a tremendous amount of self-discipline and organizational priority and restraint. Trust me, when things are looking up and to the right, everyone around you, including your investors, will be saying “go go go”. But if you slip up, trust me, they won’t be there to agree that they themselves agreed and pushed you in that direction.
Resist the urge. Burn less. Burn less at the expense of growth and opportunity unless you cannot do it any longer.
One goal personal goal I have time next time around is to be within 2 quarters of cash-flow, break even. Very hard to do. One advantage is that you can always put on the brakes with minimal organizational and cash impact in this type of scenario. The market takes a deep dive or sales are a little bit slower? No problem — we put the brakes on to catch up and we re-evaluate again in a quarter.
Remember, you can always increase spending — that’s very easy. Reducing spending is very very hard and takes so much longer than you realize. Not only is it hard structurally in most organizations to go from having something they thought they needed — but in most startups, the single most expensive item is people. And trust me, decreasing headcount is the worst thing any organization has to go through. It will haunt you (if you have a soul) and your organization for much longer than you can imagine.
Automate and outsource everything.
OK, maybe not everything, but everything that is possible — which is a lot more than you probably think. We did a great job at Appcelerator with this — but we could have done better.
You’ll want to spend all your calories on things that you do best, different, uniquely and the thing that makes you and your business valuable. Trust me, that’s not your website (which of course, is not to say that’s not important). Sure, maybe your dev can do the corporate website by herself over the weekend much cheaper than finding an agency to do it or a contractor. Yeah, trust me, she’ll own it for much longer than you can imagine and it will become her second or third job that you didn’t want her to have. And it will seem and be cheaper (and maybe faster) in the short-term. But it will really cost you in so many areas.
Same with systems. Maybe one of your devs could just setup Gitlab on your own server and that’s a little bit cheaper than paying for the $7/month for a small plan at Github. But trust me, it’s not. It’s just not worth it.
Try and automate and outsource things that aren’t core to your mission. Keep your calories focused on activities that will create muscle — and don’t do anything (if you can avoid it) else.
Now, like other recommendations, this isn’t an absolute and sometimes this can conflict with “burn less”. But generally, if it seems cheaper in the short-term, make sure you consider the long term ROI and other non-financial metrics (such as distraction) when weighing your options here.
One of our core values at Appcelerator is “measure, iterate and improve” and this served us well. We are generally a data-driven organization.
But like all things, I think we could and should do better. And I want for measurement to be a core property of what is built from the beginning, not a bolt-on or afterthought later. We always have done of a good job of trying to understand what outcomes we desire before doing something, but measuring sometimes isn’t always “built-in” from the beginning.
Today, there exists a ton of systems that can really help you in this effort — things that weren’t readily available early on when we started. For example, one of my favorite tools we are now using is Chart Mogul. It’s a plug-n-play SaaS dashboard and it’s economical. And it just works. This is a great example of the types of systems that are easy to buy vs. build and that are worth putting in place at the very beginning.
My favorite quip in this area: “you can’t improve what you don’t measure”.
I’m always amazed at what we’ve been able to learn when we instrument something and then look at the data. It’s almost universally different than what we assumed it would be.
I believe all organizations in the digital world must be data-driven. That’s not to say that good judgment or decisions based on experience aren’t important too — it’s just recognizing that you must have a new set of capabilities to make the best decisions and you need them sooner rather than later in the process. It’s the difference between being proactive and reactive. And often that difference is what makes you or breaks you.
As in most things in life, context really matters and each organization and situation is different. What works for me might not work for you. Also, to make matters worse, things that work in a raging bull market aren’t necessarily supportable in a bear market.
For example, in a bear market you just can’t have enough money. When the 2008 crisis happened, we had a low burn rate and plenty of cash in the bank (enough to last us 18–24 months conservatively). I still went out and got Silicon Valley Bank to give me a $1M venture line, just in case. We never used it.
However, in a bull market, I’m not so sure having a huge war chest is always the right decision either because it can cause you to mismanage your business (inadvertently) and be sloppy (burn faster, grow faster, make stupid decisions you’d never make in most circumstances). But you need to understand your milestones and the macro environment and try and make good judgments about what’s right for you. I think if you use the recommendations above, you’ll have a better chance than most.
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